A3 Flashcards
(31 cards)
Inquiries auditors should make of management with respect to fraud
How management communicates to its employees its view on acceptable business practices
Whether management is aware of any fraud or allegations of fraud
Whether there are any particular business segments with a higher risk of fraud
Process for identifying/responding to fraud risk
Whether company has entered into any significant unusual transactions
Conditions identified during fieldwork that increase risk of fraud
Discrepancies in accounting records
Conflicting or missing evidence
Disagreements between auditor and management
Accounting policies inconsistent with widely recognized industry practices
Frequent changes in accounting estimates that don’t result from changing circumstances
Tolerating code of conduct violations
Auditor responses to fraud risk
Assign appropriate personnel to engagement and determine appropriate level of supervision
Evaluate management selection of accounting principles
Incorporate unpredictability in selecting audit procedures
Alter nature/extent/timing of audit procedures
Examine JE adjustments, especially unusual JEs
Review accounting estimates for biases
Evaluate business purpose for significant unusual transactions
Rationalization risk factors
Management’s disregard for internal controls
Management knows of significant deficiencies but fails to correct them
Management is overly agressive in meeting financial goals
Audit risk definition
The risk that the auditor issue an unmodified opinion on financial statements that are materially misstated
Types of misstatements
Factual- no doubt they are incorrect
Judgemental- Incorrect accounting estimates by management
Projected- Auditor’s best estimate of a misstatement in a population based on misstatement percentage identified in a sample
Assertion level risk
Risks that relate to specific transactions, account balances, or disclosures at the assertion level, rather than the financial statements as whole
If interim substantive tests are performed, what addtional procedures should be performed at year-end?
Substantive analytical procedures for period interim date
Tests of details for activity in period after interim date
Reconciliation of prior year-end balances to interim balances
Information that indicates possible noncompliance with laws and regulations
Large payments made to cash, bearers, cashier’s checks, transfer funds
Being forced to discontinue operations in a foreign country
Items that indicate possible related party transactions
Compensating balance arrangement
Loan guarantees
Unusual, nonrecurring transactions near year end
Transactions based on terms significantly different than market terms
Nonmonetary exchanges
Audit procedures to identify contingencies/litigation
Obtain letter of inquiry from client’s attorney
Inquire of management
Review minutes of BOD and stockholder meetings
Review invoices and correspondences from lawyers
Review contracts, loan agreements, leases from taxing authorities
Audit procedures to identify related parties
Evaluate company procedures for accounting for related party transactions
Asking management for a list of related parties
Review company filing’s with SEC
Review material transactions
Review prior year’s audit documentation
The relevance of audit evidence depends on (PCAOB)
Whether the audit procedure is designed to test assertion directly
Whether the audit procedure is designed to test for understatement or overstatement
Timing of audit procedure
Corroborating evidence
Gives validity to recorded accounting data
Minutes of meetings
Confirmations
Analyst’s reports
Data about competitors
Information obtained through observation, inquiry, inspection
Steps of designing and performing analytical procedures
- Determine procedures suitable for testing the assertion.
- Evaluate reliability of the data.
- Develop an expectation of recorded amounts based on prior periods and forecasts.
- Perform analytical procedures and compare results with expectations.
- Investigate any significant differences.
Purpose of analytical procedures in each audit phase
Planning- To assist auditor in understanding the business environment and alert auditor to problem areas
Substantive procedures- To obtain audit evience about management assertions
Final review- To evaluate overall financial statement presentation, assess conclusions reached, and determine whether adequate evidence has been gathered
Examples of analytical procedures
Comparing inventory balances to recent sales activities.
Comparing loan balances, interest rates with interest expense recorded
Factors in an auditor’s decision to apply analytical procedures as substantive tests on data
Nature of assertion- I/S accounts, no apparent misstatement
Predictability/plausibility of data relationship- not subject to management discretion
Availability/reliability of data- External vs internal source
Precision of expectation
Methods used to develop auditor’s expectation- trend, ratio, or regression analysis
Reconciliation audit procedure
Comparing financial amounts from two independent sources for agreement.
Ex. Cash per books with cash per bank, physical inventory count with perpetual inventory records
Walkthough audit procedure
Questioning entity personnel about their understanding of entity’s policies and procedures.
Can include a combination of inquiry, observation, inspection of relevant documentation, recalculation, reporformance
Reperformance
Auditor independently performs procedures or controls that were originally performed as part of an entity’s internal control.
Ex. Creating an aging of certain A/R accounts based on company’s aging policies
Liquidity ratios
Current ratio
Quick ratio
Activity ratios
A/R, A/P, Asset and Inventory turnover
Days sales in A/R, A/P, Inventory
Cash conversion cycle
Profitability Ratios
Profit margin
Gross Profit margin
Return on Assets, Sales, Equity
Operating cash flow
