A4 - Performing Further Procedures, Forming Conclusions, and Communications Flashcards
(21 cards)
Does that cutoff assertion apply to balance sheet accounts, income statement accounts, or both?
The cutoff assertion applies mainly to income statement accounts (I.e. sales are made in the proper period), NOT balance sheet accounts.
Completeness, valuation, existence, rights & obligations, and understandability of presentation all apply to AR.
Does the rights & obligations assertion apply to balance sheet accounts, income statement accounts, or both?
The rights and obligations assertion applies mainly to balance sheet accounts NOT income statement accounts. The assertions that apply to income statement accounts are as follows:
Completeness, cutoff, valuation, existence, & understandability of presentation.
Are customer confirmations used for testing completeness of AR or existence of AR?
They are used mainly for testing existence of AR. This is because the customer is considered a “source document,” so this is tracing back from the financial statements.
What should an auditor evaluate pertaining to the appropriate disclosure of hedges?
- Disclosure of hedge features and risk exposure
- Recognition of gains & losses
- Fair value measurement and valuation methods
- Completeness & accuracy of disclosures
- No mandatory communication to governance
If an auditor suspects that PP&E acquisitions are too low, what is a common mistake to look for?
Failure to capitalize.
Oftentimes, if PP&E acquisitions have been understated, the reason is due to a client’s failure to capitalize items, and instead expensing them to accounts like Repairs & Maintenance.
An auditor’s examination of long-term debt often includes…
Analysis of correlating interest expense recorded for the period. This provides evidence of the reasonableness of the interest expense balance.
What is the primary responsibility of a bank acting as a registrar of capital stock?
To verify that stock is issued only with the proper authorization.
Is a contingency (unresolved lawsuit) that is reasonably possible to result in a loss and can be estimated booked, disclosed, or both?
- Contingencies that are probable & estimable are booked and disclosed.
- Contingencies that are reasonably possible are disclosed but not booked.
- Contingecies that are remotely possible are ignored.
When a major customer with an outstanding receivable files for bankruptcy, what is the journal entry?
Dr. Credit loss expense & Cr. Allowance for credit losses
When the account is actually written down, the entry would be:
Dr. Allowance for credit losses & Cr. Accounts Receivable
Are compensating balance requirements a required disclosure related to cash in the financial statements?
Yes. Compensating balance requirements (minimum deposit a borrower must maintain in a bank account to secure a loan or line of credit) are a required disclosure.
What is a bill of lading?
It is basically a document that communicates shipping logistics & proof of shipment between the seller and the party delivering the good.
The bill of lading is often used by auditors to verify shipping terms and dates.
Are basic deficiencies required to be communicated to those charged with governance?
No. If they are not significant or material, they are required to be communicated orally or in writing to management, but not to governance.
Do the requirements for communicating material weaknesses & significant deficiencies differ between issuers and non-issuers?
Yes. They should both be communicated to management and governance in writing, but should be more timely and formal for issuers. Non-issuers must communicate within 60 days of the report release date.
Can material weaknesses and significant deficiencies be communicated prior to audit completion and/or by the report release date?
Yes. It is recommended that, in audits of nonissuers, significant deficiencies & material weaknesses be communicated to the client by the report release date, but a 60-day window is allowed after the report is released.
In an audit of a non-issuer, is the auditor required to search for significant deficiencies in internal control?
If the audit is an ICFR (integrated audit), then yes. If the audit is just a financial statement audit, then no.
What is a reasonableness test?
An audit procedure where two or more fields are compared to check for consistency.
Ex. Comparing an individual’s overtime hours to an average in a comparable prior period to check for “reasonableness” of the current period.
What are some ways to safeguard securities held as investments?
- access requires signatures & presence of two designated individuals
- use of independent custodians or trust companies
- periodic independent reconciliation
- segregation of duties
- etc
What is a security count worksheet?
A worksheet used by the auditor that details type of security counted, quantity counted, & identifying details. It will also include an acknowledgment by a client representative that the securities were returned intact after the count.
What are the four categories of information typically included in management’s representation letter?
1) financial statements
2) completeness
3) recognition, measurement, and disclosure
4) subsequent events
If a control deficiency that is not significant has been communicated already in a prior year’s audit of a non-issuer, and management has not corrected it due to cost constraints, should it be communicated again?
No. Control deficiencies that are not significant only need to be communicated once to management.
Note: if the audit is of an issuer, then all control deficiencies should be communicated each year in writing no matter how significant.
Should an auditor consider both the likelihood and magnitude of a potential misstatement when making a judgment regarding whether a control deficiency is a significant deficiency?
Yes. The auditor should consider both of these in their consideration of both significant deficiencies and material weaknesses.
