A-4 Performing Further Procedures, Forming Conclusions, and communications Flashcards
(78 cards)
1
Q
M-1 Revenue cycle
What are the phases of an ?
A
- Engagement Acceptance
- Assess Risk and Plan Response
- Perform Procedures and Obtain evidence
- Form Conclusion
- Reporting
2
Q
M1 Revenue cycle
What are the audit procedures to test the completeness assertion?
A
- Trace up from source documents to FS
- Perform Analytical review
- Observation of process and procedures
3
Q
M1 Revenue cycle
What are the audit procedures to test the cutoff assertion?
A
- Analyze transactions before and after year for proper accounting recognition.
4
Q
M1 Revenue cycle
What are the audit procedures to test the Valuation, Allocations and Accuracy assertion?
A
- Inspection of documentation
- Footing and cross-footing
- Independent recalculation
- Reconciliation
5
Q
M1 Revenue cycle
What are the audit procedures to test Existence and Occurrence assertion?
A
- Confirmation of accounts
- Inspections and examination of assets and procedures
- Vouching down from FS to source document.
6
Q
M1 Revenue cycle
What are the audit procedures to test Rights and Obligations assertion?
A
- Inspections of documentation
- Confirmation of accounts
7
Q
M1 Revenue cycle
What are the audit procedures to test Understandability of Presentation and Classification assertion?
A
- Inspection of documents
- Review of related disclosures for compliance with GAAP
- Inquiry of management regarding disclosures
8
Q
M1 Revenue cycle
What is the difference between a positive and negative confirmation?
A
Positive confirmation request the customer to respond if they agree or not with the account balance, while negative confirmation request to only respond if disagree with the balance.
9
Q
M1 Revenue cycle
When tracing invoices to shipping documents this would provide evidence of?
A
Sales billed to customers were actually shipped
10
Q
M1 Revenue cycle
When tracing shipping documents to invoices this would provide evidence of?
A
When examining shipping documents to sales invoices we testing the completeness assertion to verify:
1. Shipments were properly billed
11
Q
M1 Revenue cycle
What is the most likely procedure and auditor would use to test the effectiveness of control?
A
- Observe the Company’s employee prepare a schedule of past due AR.
12
Q
M1 Revenue cycle
What evidence would provide a shipping document?
A
That the sales actually occurred
13
Q
M1 Revenue cycle
How are sales tested for understatements (Completeness)?
A
By tracing up from the shipping documents to the sales invoices and sales journal
14
Q
M1 Revenue cycle
How are sales tested for Overstatements (Existence)?
A
By Vouching down from Sales invoice to shipping documents.
15
Q
M1 Revenue cycle
In order to test whether all goods that were ordered were shipped an auditor would?
A
Trace the customer purchase order to shipping documents.
16
Q
M1 Revenue cycle
When would it be best to use a negative request form of account receivables?
A
- When controls risk is low
- Many small balances in the population
- Consideration by the customer is likely.
17
Q
M1 Revenue cycle
If confirmations of account receivables is received electronically what would an auditor must do to follow GAAS?
A
- All electronic confirmations mut be verified with the sender by calling them directly.
18
Q
M1 Revenue cycle
When there is unreturned positive confirmations what would be the steps that an auditors most likely would follow?
A
- Send a second confirmation of account receivables
- Request management to contact the customer to respond to the confirmation request.
19
Q
M2 Expenditure cycle
What are the typical activities performed by the vouchers payable department?
A
- Matching receiving report with purchase order
- Verify mathematical accuracy of the vendors invoice
- Approved vouchers by an authorized person
20
Q
M2 Expenditure cycle
Who should control the disbursements of checks and remittance advices?
A
The last person who signs the check which is usually an employee in the treasury department.
21
Q
M2 Expenditure cycle
How a purchase order is initiated, verified and paid?
A
- Purchasing department - Responsible for preparing purchase order and negotiate terms.
- Receiving department - Responsible for inspecting the goods.
- Account payable department - Responsible for matching the purchase order, receiving reports, vendors invoice
- Treasury department - Responsible for making the payment
22
Q
M2 Expenditure cycle
For effective internal control the accounts payable department should?
A
- Match the vendors invoice with the receiving report and the purchase order.
- Recalculate the vendor’s invoice.
23
Q
M2 Expenditure cycle
When returning nonconforming goods to a vendor the purchasing department sends to the accounting department a document called?
A
Debit Memo. A debit memo is used to reduce accounts payables.
Note that credit memo is generally used to reduce accounts receivables
24
Q
M2 Expenditure cycle
To assure that each voucher payment is submitted for payment once the auditor would examine a paid voucher and verify that?
A
- Each voucher is stamped as “Paid” by the check signer.
- The check signer review and cancel the voucher packet to avoid to be presented a second time for payment.
25
M2 Expenditure cycle
What procedure would an auditor performed to search for unrecorded trade liabilities?
Review a sample of cash disbursements subsequent to year end to determined whether the payables related to the prior period have been included accounts payables.
26
M2 Expenditure cycle
To determine the completeness of accounts payable an auditor would perform which type of substantive procedure?
The auditor would review the receiving reports and the purchasing order.
27
M2 Expenditure cycle
When using confirmations to obtain evidence about completeness an auditor would use which population?
The population of vendors with whom the entity has previously done business.
28
M3 Cash cycle
What is a bank cutoff statement (Transactions after 10 -15 days) after the year end i used for?
To agree the bank reconciliation of outstanding check and deposits in transit at year end to the bank cuttoff statements
29
M3 Cash cycle
What are frequent kiting effects?
High level of deposits and low average balance
30
M3 Cash cycle
What is kiting?
A fraudulent practice where a check is drawn on one bank account and deposited into another without recording the disbursement, exploiting the delay (float) in check processing to create artificial bank balances.
🔍 Key Signs: High deposits, low collected balances, frequent interbank transfers, and mismatched transaction dates.
31
M3 Cash cycle
For the most effective internal control regarding bank statements who should received directly and review the bank statements?
The internal controller
32
M3 Cash cycle
What does a standard bank confirmation request?
1. Bank balances
2. loan balances
3. Contingent liabilities
33
M3 Cash cycle
The primary evidence for year end cash balance is?
Bank reconciliations
34
M4 Inventory cycle
To validate the existence an auditor would trace (vouch) down?
From the inventory listings to inventory tags and auditors count sheet.
35
M4 Inventory cycle
What is one of the most reliable procedure for an auditor to perform to test the existence assertion of inventory?
Observe a physical inventory count
36
M4 Inventory cycle
What is the audit procedure used to test the completeness assertion?
Trace up from the physical items counted to the inventory listings or from the tag of inventories to the inventory listings. "Trace from the source document to the listings"
37
M4 Inventory cycle
When would an auditor decide not to perform a physical inventory count?
When inventory recorded using the perpetual inventory system and the client constantly performs inventory physical counts.
38
M5- Investment cycle
What would be an effective control to assure proper custody of assets if the company does not hire custodial services?
Have 2 individuals with join control and no access to record keeping to have access to a safety deposit box.
39
M5- Investment cycle
After performing a count of negotiable security what is normally included in the count worksheet?
An acknowledgement by the client that the investments were returned intact.
40
M5- Investment cycle
The use of analytical procedures for long term investments is aimed to test which assertion and P&L account?
Completeness of the recorded investment income. Remember the analytical procedures would yield more persuasive evidence for P&L than BS.
41
M5- Investment cycle
What are assertions are tested when the auditor send confirmations to a custodian?
1.Existence
2. Rights and obligations
42
M5- Investment cycle
How would an auditor test the reasonableness of dividend income received from its investments?
1. Dividend record books produce by investment advisory services "Moody's dividend record"
43
M5- Investment cycle
What procedures would an auditor perform on derivative instruments for hedging purposes?
Examine contracts for risk exposure and possible losses to be recorded on the P&L.
44
M6- Other transaction cycles (PP&E)
What would be the procedure that an auditor would perform to search for unrecorded retirements?
1. The auditor would vouch a sample of assets from the ledger to clients facility.
45
M6- Other transaction cycles (PP&E)
Tracing the serial number of an equipment to subledger is a form testing which assertion?
1. Completeness
46
M6- Other transaction cycles (PP&E)
When an auditor is examining the repairs and maintenance accounts its testing for which assertion?
Its testing for completeness of assets additions to assure that asset that should have been capitalized are not expensed.
47
M6- Other transaction cycles (Payroll)
The purpose of segregating duties between hiring and distributing payroll checks is to separate functions related
Authorization of transactions and custody of related assets (Note that check are consider assets of the company).
48
M6- Other transaction cycles (Payroll)
An auditor would normally test internal controls occurrence assertion for payroll transactions by performing?
1. Inquiry with management
2. Observe segregation of duties for personnel responsibilities and payroll disbursements.
49
M6- Other transaction cycles (Payroll)
An internal control weakness in the entity's internal control related to payroll is evident when?
The employee that distributes the payroll checks returns unclaimed payroll checks to the payroll department. Note that the payroll department has access to record keeping and could easily make a fraud using the checks. "Check are considered assets" and therefore they could be misappropriated.
50
M6- Other transaction cycles (Payroll)
To test controls related to the existence of payroll transactions the sample unit used to obtain a sample would be?
The Payroll registry entry.
51
M6- Other transaction cycles (Financing)
In examining long term debt an auditor should perform procedure to ensure compliance with?
1. Debt covenants.
52
M6- Other transaction cycles (Financing)
When a company uses a third party registrant to maintain the record keeping of the company's stock the auditor should?
Confirm the number of shares issued and outstanding.
53
M7- Misstatements Discovered During and Audit
Per PCAOB what are qualitative standards that should be considering when evaluating materiality for uncorrected misstatements?
1. Effects of misclassification of accounts
2. Significance of the misstatement relative to the need of the users
3. The cost of the correction
54
M7- Misstatements Discovered During and Audit
How should an auditor document the errors identified during the audit that in aggregate are not material?
1. Document the errors in the summary of uncorrected errors
2. Document the conclusion that the errors do not cause the FS to be misstated.
55
M7- Misstatements Discovered During and Audit
When considering whether a misstatement is material the auditor should assess 2 factors.
1. Quantitative factor ( Misstatement greater than Materiality)
2. Quantitative factor (examples)
- Misstatement that would alter the compliance with debt covenants
- Change on financial ratios to increase performance of the company.
- Related party transactions despite that they don't exceed the levels of materiality. This transaction usually could have favorable terms from those that would have occur in a transaction at arms length.
56
M7- Misstatements Discovered During and Audit
When evaluating the effects of uncorrected misstatements the auditor should consider the impact of?
1. Prior year uncorrected misstatement on the current year and
2. Current year misstatement on the prior year.
57
M8- Written representations
The date of the management rep letter should coincide with which date?
The Auditor's report
58
M8- Written representations
What is the objective of the management representation letter?
To reduce the possibility of a misunderstanding that management is responsible for the preparation and fair presentation of the FS in accordance with GAAP.
59
M8- Written representations
Management representation letter should be sing by ?
1. CEO/President
2. CFO
60
M8- Written representations
How is the representation letter used in the audit as evidence?
It complements other auditing procedures that have been performed during the audit.
61
M8- Written representations
Management representation may be limited to matters that are material, but materiality limits does not apply to?
1. Management acknowledgement of its responsibility of the FS
2. Availability of financial records
3. Availability of boards and stockholders minutes.
4. Instance of Fraud committed by Management or its employees regardless if the fraud is immaterial.
62
M8- Written representations
What are the responsibilities of management that must be stated in the management representation letter?
1. Management acknowledges it responsibility for the preparation and fair presentation of the FS in accordance with GAAP.
2. Management acknowledge its responsibility for design and implementation of controls to detect errors or fraud .
63
M8- Written representations
What are the most likely matter to disclosed in a management representation letter?
1. Compensations of balances and other arrangements involving restrictions on cash has been disclosed.
2. There are no subsequent events that have occurred after the balance sheet date that would require a adjustments or disclosures in the FS.
3. Statement that all known litigations and claims have been accounted for and disclosed.
64
M9- Communications with management and those charged with governance
What should the auditors letter include when communicating control significant deficiencies with management?
1. Indicate that the purpose of the audit is to report on the financial statements and to provide an opinion on internal controls.
2. Include a definition of a material weakness and significant deficiency
3. include a restriction paragraph for use of management solely.
65
M9- Communications with management and those charged with governance
What are typical communications that the auditor must communicates with those charged with governance?
1. Disagreement with management whether these are resolved or not.
2. Significant errors discovered whether these are corrected or uncorrected.
3. Conclusion about the reasonableness of management sensitive accounting estimates
4. The level of responsibility assumed by the auditor.
66
M9- Communications with management and those charged with governance
What should be communicated with the BOD regarding the planned scope and timing of the audit ?
1. Potential use of internal audit staff
2. Factors affecting materiality
3. Planned approach toward internal control
DO not communicate the the nature and timing of the potential audit procedures otherwise we will be making the audit too predictable.
67
M9- Communications with management and those charged with governance
What is the responsibility of the audit committee?
The audit committee assist the BOD to oversight the Company.
68
M9- Communications with management and those charged with governance
What should an auditor consider in assessing a control deficiency to be a significant deficiency?
1. Likelihood that the control will fail to prevent or detect a misstatement.
2. The magnitude of the misstatement that could result from the deficiency.
69
M9- Communications with management and those charged with governance
What would be consider a deficiency in design of a control?
1. Insufficient control consciousness
2. Incorrect segregation of duties (i.e Employee receives cash payment from customer and is also responsible to reconcile the AR subledger). Incorrect segregation of duties occurs when an employee has any of the both combinations of responsibilities below:
1.Authorization
2. Custody of assets
3. Record keeping
70
M9- Communications with management and those charged with governance
List from less severe to more severe how internal controls deficiency should be classified?
1. Deficiency
2. Significant deficiency
3. Material weakness
71
M9- Communications with management and those charged with governance
What characteristic those a material weakness have?
1. The magnitude of control deficiency is MATERIAL
2. Reasonable possibility exist that a MATERIAL deficiency or a combination of deficiencies would not be prevented or detected.
72
M9- Communications with management and those charged with governance
An auditors communication of internal control should be address to ?
Management and those charged with governance
73
M9- Communications with management and those charged with governance
How should uncorrected prior year significant deficiencies be communicated to those charged with governance?
It should be communicated in writing during current audit referencing the previous date of the communication. Note that regardless of whether the significant deficiency is consider a material weakness this should be communicated again.
74
M9- Communications with management and those charged with governance
When is an auditor required to communicate significant deficiencies and material weakness to those charge with governance?
The auditor needs to communicate in writing to both the management team and those charged with governances the significant deficiencies identified during the audit 60 days after the report release date. Regardless of whether this significant deficiencies have been corrected.
75
M9- Communications with management and those charged with governance
How are material weakness and significant deficiencies different from each other?
All material weakness are significant deficiencies, but not all significant deficiencies are material weakness
76
M9- Communications with management and those charged with governance
What is the responsibility of the auditors in regards to communicating with those charge with governance significant deficiencies and material weakness.
An auditor must communicate both significant deficiencies and material weakness.
77
M9- Communications with management and those charged with governance
What is an inappropriate communication from the auditor to those charge with governance is?
Communicate that no significant deficiencies exist in internal control that would affect the financial statements.
78
M9- Communications with management and those charged with governance
What is the responsibility of the auditor in regards to reporting significant deficiencies and material weakness to those charge with governance?
The auditor is only responsible to communicate the significant deficiencies identified during the audit, but the auditor is NOT RESPONSIBLE to search for significant deficiencies in internal controls.
