AUD 4 - Audit Evidence Flashcards Preview

CPA AUDIT > AUD 4 - Audit Evidence > Flashcards

Flashcards in AUD 4 - Audit Evidence Deck (55):
1

What is Audit Evidence? (2)

Audit Evidence - all the information used by an auditor to form an opinion with respect to the fairness of financial statements. Audit evidence includes both:

  1. Accounting Records
  2. Corroborative Evidence

 

NOTE:  "Auditor is to obtain sufficient appropriate audit evidence from the 4 different sources in order to corroborate management's assertions (U-PERCV)"

2

What are the two types of Audit Evidence?

 

 

(Accounting Records & Corroborative Evidence)

Audit Evidence - all the information used by an auditor to form an opinion with respect to the fairness of financial statements. Audit evidence includes both:

  1. Accounting Records - checks, invoices, contracts, JEs, ledgers & other items that support the numbers & disclosures in the FS.
  2. Corroborative Evidence - evidence obtained by the auditor in the form of review of mgmt minutes, confirmations, bechmarks & other info obtained through inquiry, observations, & inspection of docs.

 

NOTE:  "Auditor is to obtain sufficient appropriate audit evidence from the 4 different sources in order to corroborate management's assertions (U-PERCV)"

3

Audit Evidence - Sufficiency

 

 

Based on? What kind of Evidence?

Sufficiency - relates to the quantity of audit evidence which is based on the auditor's judgment.

  • Must rely on evidence that is Persuasive rather than Conclusive Evidence 
  • Depends on I/C reliance - based on the acceptable level of Detection Risk****
  • Concerned with Cost/Benefit tradeoff

4

Audit Evidence - Appropriateness

 

Must be both? (2)

Appropriateness - relates to the measure of the quality of the audity evidence, including relevance & reliability in providing support for the conclusions on which the auditor's opinion is based.

  • Relevance - The audit evidence is relevant to management's assertions U-PERCV.
  • Reliability/Faithful Representation - Reliability of audit evidence is influenced by its source & nature. Persuasiveness of audit evidence is influenced by its source & nature
    1. Direct - Auditor developed, ex: inquiries/observation
    2. Outside -  Obtained from outside, ex: Bank Confirmations
    3. Outside/Inside - Prepared by outside but obtained from client, ex: Bank Statements
    4. Inside - Prepared by client, ex: client sales invoices

5

Audit Evidence - Appropriateness

 

Persuasiveness of audit evidence is based on what 4 sources?

Appropriateness - relates to the measure of the quality of the audity evidence, including relevance & reliability in providing support for the conclusions on which the auditor's opinion is based.

  • Relevance - The audit evidence is relevant to management's assertions U-PERCV.
  • Reliability/Faithful Representation - Persuasiveness of audit evidence is influenced by its source & nature
    1. Direct - Auditor developed, ex: inquiries/observation
    2. Outside -  Obtained from outside, ex: Bank Confirmations
    3. Outside/Inside - Prepared by outside but obtained from client, ex: Bank Statements
    4. Inside - Prepared by client, ex: client sales invoices

6

Management's Assertions (13)

(U-PERCV)

Management's Assertions are representations made by management in the financial statements being audited. 

  • Understandability & Classification - mgmt asserts that information is presented & Described Clearly & transactions/events have been recorded in the Proper Accounts.
  • Presentation & Disclosure - mgmt asserts that all accounts are pressented in the proper sections of the FS & all necessary informative disclosures have been made
  • Existance or Occurence - Mgmt asserts that all assets, liabilities, & equity interest listed on the BS exist, & disclosed transactions & events have been recorded occured & pertain to the entity. 
  • Rights & Obligations - mgmt asserts that it is the legal owner of all assets listed on the FS, & that liabilities represent legal obligations of the entity.
  • Completeness & Cutoff - mgmt asserts that ALL assets, liabilities, equity interest, transactions & events have been recorded & ALL disclosures have been included in the correct accounting period. 
  • Valuation, Allocation, & Accuracy - mgmt asserts that amounts are valued using a method in accordance w/ GAAP, & that revenues & expenses are allocated to the proper period. Example: Credit Approvals

7

The 13 Mgmt Assertions are grouped within what three main categories?

 

TESTED

 

 

(CPA-CO, RACE, RACU)

  1. Classes of Transactions & Events (CPA-CO)
    • Completeness
    • Period Cutoff
    • Accuracy
    • Classification
    • Occurence
  2. Account Balances @ YE (RACE)
    • Rights & Obligations
    • Allocation & Valuation
    • Completeness
    • Existence
  3. Presentation & Disclosure (RACU)
    • Rights & Obligations
    • Accuracy & Valuation
    • Completeness
    • Understandibility & Classification

8

Management's Assertions

 

Classes of Transactions & Events

(CPA-CO)

Five assertions designed to make certain that all relevant events & transactions have been properly summarized & reported on the FS consisting of (CPA-CO).

  1. Completeness - all transactions & events have been recorded.
  2. Period Cutoff - transactions & events have been recorded in the CORRECT accounting period.
  3. Accuracy - amounts have been recorded appropriately.
  4. Classification - transactions & events have been recorded in the proper accounts.
  5. Occurence - transactions & events that have been recorded have actually occurred & pertain to the entity.

9

Management's Assertions

 

Account Balances at Year-end

(RACE)

Four assertions designed to make certain that all assets, liabilities, & equity are properly recorded & fairly represented on the financial statement consisting of:

  1. Rights & Obligations - the entity holds or controls the rights to assets, & liabilities are the obligations of the entity.
  2. Allocation & Valuation - assets, liabilities, & equity interests are included at appropriate amounts. 
  3. Completeness - all assets, liabilities, & equity interests have been recorded.
  4. Existence - assets, liabilities & equity interests actually exist.

10

Management's Assertions

 

Presentation & Disclosures

(RACU)

Four assertions designed to make certain that all accounts are displayed in proper sections of the financial statements & all appropriate disclosures are provided consisting of:

  1. Rights/Obligations/Occurance - disclosed events & transactions have occurred & pertains to the entity.
  2. Accuracy & Valuation - information is disclosed fairly & are at appropriate amounts. 
  3. Completeness - all disclosures that should have been included have been included.
  4. Understandability & Classification - info is presented & described clearly.

11

What are the Audit Objective?

The auditor develops specific audit objectives in order to substantiate assertions that are material to the financial statement.

 

I-CORRIIA to verify U-PERCV

12

Audit Program

 

Desinged for what two reasons?

Audit Program (Audit Plan) - is a step by step list of audit procedures that emphasizes account balances, which is required for every GAAS audit. Designed for two reasons:

  1. The procedures will achieve specific audit objectives, which relate to management's assertions.
  2. Supports the auditor's conclusion.

 

NOTE: Using I-CORRIIA to test U-PERCV

13

Audit Procedures

 

When is it used? (3)

Auditing Procedures - are the actions taken (I-CORRIIA) by the auditor to obtain sufficient appropritate audit evidence on which the auditor's opinion is based.

 

Audit Procedues (acts to be performed) are used as:

  1. Risk Assessment Procedures (AIIO)
  2. Test of Controls (RIIO)
  3. Substantive Procedures (I-CORRIIA)

 

14

What is Substantative Testing?

 

What are the two types?

 

(TD3,AP)

Substantive Testing - when the auditor performs audit procedures (I-CORRIIA) to detect material mistatements through test of details & analytical procedures for all relevant assertions related to each material class of transactions, account balances, & disclosures. 

Two categories of Substantive Tests:

  1. Test of Details - refers to the tests designed to verify:
    • Account Balances
    • Transactions
    • Disclosures
      •  (I-CORRIIA)
  2. Analytical Procedures - study of data comparisons.
    • (I-CORRIIA)

15

I-CORRIIA

 

 

TESTED

Audit Procedures (acts to be performed) are used as risk assessment procedures, test of controls, & substantative procedures.

The following is a list of audit procedures: I-CORRIIA

  • Inquiry (written/oral inquiries)
  • Confirmations (A/R, bank stmts)
  • Observation (inventory count, of ctrl activities)
  • Recalculation (checking accuracy of docs/records)
  • Reperformance (reperforming aging A/R)
  • Inspection of Tangible Assets (inventory)
  • Inspection of Records/Documents
    • Tracing - Completeness
      • Source to Books
        • Ex: Comparing shipping documents to sales invoices.
    • Vouching - Existence/Occurence
      • Books to Source
        • Ex: Comparing invoices to shipping documents.
  • Analytical Procedures (study of data comparisons)

16

Analytical Procedures

Analytical Procedures - comparisons between amounts reported on the client's FS & the clients expectations developed from a combination of financial & non-financial information.

 

Analytical procedures may be performed at three different times during an audit: 

  1. Planning Phase (required)
  2. Substantive Test (optional)
  3. Overall Review (required)

17

Analytical Procedures - When is it used?

 

TESTED

 

 

(Planning,Sub Testing,Overall Review)

Analytical Procedures - comparisons between amounts reported on the client's FS & the clients expectations developed from a combination of financial & non-financial information.

 

Analytical procedures may be performed at three different times during an audit: 

  1. Planning Phase - Mandatory to identify amounts requiring more careful attention during the audit & is REQUIRED
    • Analytical procedures used in planning assist the auditor in identifying balances that represent specific risks.
  2. Substantive Test - To obtain evidence of amounts being materially correct & is OPTIONAL
    • Analytical procedures performed as substantive tests gather evidence from tests of details and can be useful in the detection of fraud.
  3. Overall Review - Mandatory to determine if aggregate numbers on financial statement appear to be reasonable & is REQUIRED
    • Analytical procedures performed in the review stage of an audit consist largely of evaluating the overall financial statement presentation and comparing it to the auditor’s expectations as to financial position, results of operations, and cash flows.
    • Generally performed by manager or partner who has comprehensive undertanding of the business.

 

NOTE:  Income Statement accounts are more predictable than those involving only Balance Sheet accounts, for Analytical Procedures. (TESTED)

18

What are the 3 Steps to Analytical Procedure?

(ICE)

The steps in the performance of an analytical procedure involve:

  1. First identifying accounts or relationships that have a reasonable degree of predictability; using the auditor’s knowledge of business, the client’s industry, and its way of doing business to develop an expectation;
  2. Comparing information reported by the entity to the auditor’s expectations
  3. Evaluating any significant differences to determine if they represent flaws in the development of expectations or potential misstatements.

19

What are the 5 basic types of comparisons that may be performed as Analytical Procedures?

 

 

(CRAFT)

There are five basic types of comparisons that may be performed as Analytical Procedures:

  1. Client vs. Industry - A client's financial data can be expected to have some plausible relationship to industry averages.
  2. Related Accounts - Certain accounts are closely associated with each other & have a range of expected relationships.
    • For example: interest exp divided by the avg level of notes, loans, & bonds payable during the year should reflect reasonable borrowing costs.
  3. Actual vs. Budget - Results during the year should have a plausible relationship to budgets, allowing for the inevitable variances. 
  4. Financial vs. Non-financial - certain non-financial measures are clearly associated with dollars of revenues or costs. 
    • For example: a number of passenger miles flown during the year should have a predictible relationship to airline revenues.
  5. This Year vs. Prior Period - in the absense of extreme changes in the company & w/ appropriate adjustments for normal growth, income statement accounts for the current period should be closely associated with previous years for the company.

20

Most Popular Ratios for Analytical Procedures

Current Ratio

Quick Ratio

Receivables Turnover Ratio

Inventory Turnover Ratio

Debt-Equity Ratio

Asset Turnover

Total Asset Turnover

Current Ratio = CA / CL

Quick Ratio = (Cash+AR+Securities) / CL

Receivables Turnover Ratio = Credit Sales / Avg A/R

Inventory Turnover Ratio = COGS / Avg Inventory

Debt-Equity Ratio = Total Liabilities / Stockholder's Equity

Asset Turnover = Net Sales / Avg Trade Receivables

Total Asset Turnover = Net Sales / Total Asset

21

Audit Risk

Audit Risk - the risk that the auditor gives the wrong opinion on the financial statements. (AR = IR x CR x DR)

  • RMM (Risk of Material Mistatement)
    • IR = Inherent Risk
    • CR = Control Risk
  • Detection Risk - the probability that the auditor's subtantive tests (TD/AP) won't detect material mistatements.

 

NOTE:  In order to reduce audit risk to an acceptably low level, the auditor should respond to the assessed level of risks in two ways, at the financial statement level & at the relevant assertion level.

22

To address RMM at the Financial Statement Level, some of the auditor's responses to reduce Audit Risk to an acceptably low level may include?

  • An increased need for professional skepticism.
  • Consider assigning more experienced staff.
  • Increase the level of supervision
  • Incorporate more unpredictability in the audit procedures
  • Adjust the nature, timing, & extent of further audit procedures such as shifting interim substantive testing to year end substantive testing when the control environment is weak.

23

The auditor should design & perform further audit procedures whose nature, timing, & extent are responsive to the assessed RMM at the Relevant Assertion Level. The aditor should consider?

  • The significance & probability that a material misstatement will occur.
  • The characteristics of the class of transactions, account balance, & disclosure involved.
  • The nature of the controls used (automated vs. manual)
  • Whether the auditor expects to test the operating effectiveness of the controls in preventing or detecting material misstatements. 

24

What are the two different types of  Audit Approach?

 

 

(TOB & TOT)

  1. Test of Balances
    • Many transactions, small dollar amounts
      • Cash,A/R,Inventory, A/P
  2. Test of Transactions
    • Few transactions, large dollar amounts
      • Investments, PPE, Bonds, Notes Payables, Stockholders Equity

25

Cash & Cash Equivalents - Audit Objectives

Audit Objectives for Cash & Cash Equivalents: (ToB)

  • Adequate I/C
  • Rights/Obligations - Cash is NOT restricted
  • Allocation/Valuation - Cash recorded in correct amt
  • Completeness - ALL cash included
  • Existence - Cash balances actually exists

 

  • Other Objectives
    • Standard Bank Confirmations - bank report balances of deposit & loan amounts
    • Bank Reconciliation
    • Bank Cutoff Statement
    • Kiting - attempt to overstate cash by showing deposit in current year & disbursement per books in subsequent year. 

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Inquire about compensating balance req's & restrictions
  • Existence or Occurrence
    • Bank confirms to verify balances
    • Count cash on hand
    • Prepare bank transfer schedule (to identify kiting)
  • Rights & Obligations
    • Bank confirms to verify account holder
    • Bank confirms to verify any restrictions
    • Review cutoffs (receipts/disbursements)
    • Review passbooks, bank statements
  • Completeness & Cutoff
    • Perform analytical procedures
    • Review bank reconciliation
    • Obtain bank cutoff statement to verify reconciling items on bank reconciliation
  • Valuation, Allocation, & Accuracy
    • Foot (adding) summary schedules
    • Reconcile summary schedules to GL
    • Test translation of any foreign currencies
    • Bank confirmations to verify balance
    • Review bank reconciliations to corroborate amounts
    • Obtain bank cutoff statement to verify amounts on the bank reconciliation
    • Observation of cash & cash equivalents on hand at balance sheet date

26

Standard Bank Confirmations

 

Includes what 3 important info?

 

 

TESTED

Standard Bank Confirmation will provide information about:

  1. Balances in all deposit accounts as of the BS date.
  2. Outstanding loan balances as of the BS date.
  3. Collateral agreements on loans.
    • ​​Including agreements to maintain compensating balances in the cash accounts

 

Correct! The primary purpose of the standard bank confirmation is to verify that the amount reported as cash (deposits) and loans are fairly stated on the financial statements.

27

What is Kiting?

 

How is Kiting discovered?

Kiting occurs when the disbursement per books occured after year-end, but the receipt occured before year-end. An attempt by the client to overstate the total cash in the bank accounts by reporting a receipt in the current period without reporting the equivalent disbursement.

  • To discover kiting activities, auditor will use an inter-bank transfer schedule.

28

Receivables - Audit Objectives

Audit Objectives for Receivables: (ToB)

  • Adequate I/C
  • Rights/Obligations - entity has legitimate claim to the A/R
  • Allocation/Valuation - receivables are presented at NRV
  • Completeness - ALL receivables are reported
  • Existence - receivables actually exists

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Inquire about pledging, discounting
    • Review loan agreements for pledging, factoring
  • Existence or Occurrence
    • A/R Confirmations
    • Vouch receivables by examining shipping docs, invs, credit memo. (​Tracing A/R from records to documentation)
  • Rights & Obligations
    • Review cutoffs (sales, cash receipts, sales returns)
    • Inquire about factoring of receivables
    • Tracing receivables to documentation of sales transactions
    • A/R Confirmations
  • Completeness & Cutoff (primary concern, NOT overstd)
    • Perform analytical procedures to evaluate the reasonableness of A/R; primary concern is that A/R is not overstated
    • Trace sales transactions to recorded A/R in the ledger
  • Valuation, Allocation, & Accuracy
    • Foot (adding) subsidiary ledger
    • Reconcile subsidiary ledger to GL
    • A/R confirmations
    • Review the process for estimating allowance for uncollectible accounts
    • Examine subsequent cash receipts
    • Credit checks of vendors (Credit ratings of customers to determine if the allowance for uncollectibles are sufficient)

29

What are the three types of A/R Confirmations?

 

 

(Positive,Negative,Blank)

  1. Negative Confirmations - Customer is asked to respond ONLY if amount is incorrect. (Low RMM)
    • No need to respond
    • Auditor does not expect request to be ignored
    • Low exception rate expected
    • "No news is good news"
    • For SMALL Balances
    • Implicit Evidence
  2. Positive Confirmations (RSVP) - Customer must respond to verify correctness of amount. (High RMM)
    • Need a response
    • For LARGE Balances
    • Explicit Evidence
  3. Blank Confirmations - Customer is asked to provide amount without being told value on client records (special form of positive confirmation) (High RMM)
    • For LARGE balance accounts
    • Active accounts
    • Delinquency
    • Expectation that customer will not pay attention to negative confirmations

30

What are the 6 general procedures when customer doesn't respond to positive or blank confirmations?

 

TESTED

  1. Send second confirmation.
  2. Ask the client to contact customer & request a response.
  3. Review cash receipts in subsequent periods.
  4. Inspect supporting documents.
    • Such as shipping documents for receivables
  5. Examine customer correspondence with client.
  6. Consider an Audit adjustment.

 

NOTE:  When reconciliation of aggregate balances to positive or bank confirmation reqeusts proved difficult, confirmation of single transactions (individual invoices) may be a suitable alternative.

31

Lapping of A/R

A fraud scheme in which an employee covers the theft of cash collected on account, by incorrectly posting subsequent collections to previously fraudulently misstated accounts such that the specific accounts that are misstated, changes as the collections are made. 

 

An attempt to cover theft of receivables collection by posting subsequent collection from another customer to that subsidiary account. (Is present due to the lack of Internal Control ARRC)

 

The substantive test by the auditor that is most likely to detect lapping involves a comparison of the dates on the checks deposited to the bank with the posting dates in the receivable records, since lapping will always require that "covering" payments be from a later collection. 

32

Inventories - Audit Objectives

Audit Objectives for Inventories: (ToB)

  • R&O - Inv is owned by entity
  • A&V - Quantities are correct & properly priced
  • Complete - All inventory is included
  • Existence - Inventory actually exists (primary concern)

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Inquire about pledging of A/R
    • Review purchase commitments
  • Existence or Occurrence (Primary Concern)
    • Confirmation of consigned inventory
    • Confirmation of inventory in warehouse
    • Observe physical count of inventory
  • Rights & Obligations
    • Review cutoffs (sales,returns,purchases,return)
    • Vouch inventories to purchase documents
    • Review consignement agreements to identify inventory not owned
  • Completeness & Cutoff
    • Perform analytical procedures
    • Evaluate inventory counting procedures to make certain that all inventory is counted
    • Tracing inventory counts to accounting records
    • Perform test of counts & compare with client's count
    • Account for all inventory tags & count sheets
  • Valuation, Allocation, & Accuracy
    • Foot (adding) & extend summary schedules
    • Reconcile summary schedules to GL
    • Verify that inventory counts match quantity in the accounting records
    • Evaluate/test obsolete & slow moving inventory for potential adjustment
    • Test inventory costing method (must be NRV)
    • Examine inventory quality (salable condition)

33

Current Liabilities - Audit Objective

Audit Objectives for Current Liabilities: (ToB)

  • R&O - Payables are legit obligations of the entity
  • A&V - Payables reported in appropriate amounts
  • Complete - ALL transactions are recorded 
  • Existence - Payables actually exists
  • Other objectives:
    • Liabilities are NOT Understated
    • Recompute Accruals
    • Search for unrecorded liabilities (@ YE)
    • Confirm even if zero balance

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Review purchase commitments
  • Existence or Occurrence
    • Confirmation
    • Inspect copies of notes & notes agreements
    • Vouch (examine POs, receiving reports, invoices)
      • Vouch to transaction documentation
  • Rights & Obligations
    • Review cutoffs (purchases, returns, disbursements)
    • Vouch payables to transaction documents
  • Completeness & Cutoff (PRIMARY CONCERN)
    • Perform analytical procedures to ensure current liabilities are NOT Understated
    • Trace subsequent payments to payables
    • Perform search for unrecorded payables (examine unrecorded invoices, receiving reports, POs)
    • Inquire of mgmt as to completeness
  • Valuation, Allocation, & Accuracy
    • Foot (adding) subsidiary ledgers
    • Reconcile subsidiary ledger to GL
    • For payroll, review year-end accrual
    • Recalculate interest expense (if any)
    • Recalculate other accrued liabilities

34

Contingent Liabilities

 

Loss vs. Gain

Contingent Liabilities - A gain or loss that may occur in the future as a result of an existing condition. Two types:

  • Loss Contingencies
    • Remote - slight chance of occuring
      • Do NOT Disclose
      • Do NOT Accrue
    • Reasonably Possible - >Remote, less than Probable
      • Disclose
      • Do NOT Accrue
    • Probable - Likely to Occur
      • If Amount NOT Estimable
        • Disclose
        • Do NOT Accrue
      • If Amount IS Estimable
        • Disclose & Accrue
  • Gain Contingencies
    • Only Disclose & Accrue WHEN IT occurs

35

Investment in Securities & Derivatives - Audit Objectives

Audit Objectives for Investments: (ToT)

  • Adequate I/C
  • R&O - Entity owns investments (Primary Concern)
  • A&V - Investment is reported at appropriate amount
  • Complete - All investments are reported
  • Existence - Investments exist

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Inquire about pledging
    • Review loan agreements for pledging
    • Review management's classification of securities
      • Trading, AFS, Held to Maturity
    • Inquire about derivatives to understand the economic substance
  • Existence or Occurrence
    • Confirmation of securities held by 3rd parties
    • Inspect & count securities (physically observe)
    • Vouch (to available documentation)
      • Vouch to acquisition documentation
    • Reconcile to interest & dividends received
  • Rights & Obligations (by Confirms & Observation)
    • Confirms - Verify w/ independent custodians
    • Observation - Auditor will perform a count of securities that are held by the client
    • Inspect agreements
    • Review cutoffs (examine transactions at YE)
  • Completeness & Cutoff
    • Perform analytical procedures
    • Reconcile dividends rec'd to published records
    • Review of board minutes
  • Valuation, Allocation, & Accuracy
    • Foot (adding) summary schedules
    • Reconcile summary schedules to GL
    • Test amortization of premiums & discounts
    • Determine the market value for trading & AFS securities
    • Review audited FS of major investees

36

PP&E Fixed Assets - Audit Objectives

Audit Objectives for PPE & Fixed Assets: (ToT)

  • R&O - Fixed assets are owned by entity
  • A&V - Assets are properly valued, including proper capitalization of costs, depreciation & amortization, impairments
  • Complete - ALL fixed assets are included
  • Existence - Assets actually exists

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Inquire about liens & restrictions
    • Review loan agreements for liens & restrictions
  • Existence or Occurrence
    • Observe the actual fixed assets
    • Inspect & Observe additions
    • Vouch additions
    • Review any leases for property accounting
      • Capital vs Operating lease
    • Perform search for unrecorded retirements
  • Rights & Obligations
    • Review minutes for approval of additions of PPE
    • Vouch additions to purchase documents
  • Completeness & Cutoff
    • Perform analytical procedures
    • Vouch major entries to repairs & maint expense
      • Observe fixed assets & trace additions to accounting records.
  • Valuation, Allocation, & Accuracy
    • Foot (adding) summary schedules
    • Inspect purchase documents
    • Reconcile summary schedules to GL
    • Determine if there is an indication of impairment
    • Recalculate Depreciation/Amortization

37

Long-Term Debt - Audit Objectives

Audit Objectives for Long Term Debt: (ToT)

  • R&O - debit is obligation of entity
  • A&V - debt is recorded at appropriate amount
  • Completeness - ALL debt recorded
  • Existence - debt actually exists

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Inquire about pledging of assets
    • Review debt agreements for pledging & events causing default
  • Existence or Occurrence
    • Confirmation
    • Inspect copies of notes/notes agreements
    • Vouch receipt of funds (and payment) to bank account & cash receipts journal
    • Vouch LT Debt to loan documentations
  • Rights & Obligations
    • Review cutoffs (examine transactions @ YE)
    • Review minutes for proper authorization of debts
    • Vouch liabilities to loan documentation
  • Completeness & Cutoff
    • Perform analytical procedures
    • Inquire of mgmt as to completeness
    • Review bank confirmations for unrecorded debt
    • Obtain confirmations from creditors
    • Review of board minutes of debt authorizations
    • Obtain letter from attorney
  • Valuation, Allocation, & Accuracy
    • Foot (adding) summary schedules
    • Reconcile summary schedules to GL
    • Trace to transaction document/subsequent payments
    • Vouch entries to account
    • Recalculate interest expense & accrued interest

 

NOTE: Classification is the most important issue in connection with the assertion of Disclosure & Presentation. 

  • Note pay vs. Bond pay vs. Lease liabilities

38

Stockholder's Equity - Audit Objectives

Audit Objectives for Stockholder's Equity: (ToT)

  • Common Stock, Preferred Stock, Treasury Stock, R/E, Dividends, Comperehensive Income
  • Objectives
    • Adequacy of I/C
    • Transactions properly authorized & comply w/ regs
    • Transactions recorded in conformity w/ GAAP
    • Adequately disclosed in the FS

 

  • Presentation & Disclosure
    • Review disclosures for compliance w/ GAAP
    • Review info on stock options, dividend restrictions
  • Existence or Occurrence
    • Confirmation w/ registrar & transfer agent
    • Inspect stock certificate book
    • Vouch capital stock entries
  • Rights & Obligations
    • Review minutes for proper authorization
    • Inquire of legal counsel on legal issues
    • Review Articles of Incorporation & bylaws for propriety of equity securities
  • Completeness & Cutoff
    • Perform analytical procedures
    • Inspect treasury stock certificates
  • Valuation, Allocation, & Accuracy
    • Foot (adding) summary schedules
    • Agree amounts to GL
    • Vouch dividend payments
    • Vouch all entries to retained earnings
    • Recalculate treasury transactions

 

NOTE: The primary concern w/ respect to retained earnings is that any restrictions on the use of it for the pmt of dividends is disclosed.

39

What is Audit Documentation?

 

Should enable the auditor to understand what 3 facts?

Audit Documentation refers to the working papers developed during the course of the audit. Audit documentation should be sufficient to enable an experienced audit to understand:

  1. The nature, timing, & extent of the audit procedures performed to comply w/GAAS & applicable legal/regulatory requirements.
  2. The results of the audit procedures performed, & audit evidence obtained.
  3. Significant findings or issues arising during the audit, conclusions reached, & significant professional judgments made in reaching those conclusions.

 

NOTE:  Audit documentation should include a written audit program for every audit.

 

FS > Working TB > Lead Schedule > Supporing Docs

40

Audit Documentation

 

When is the documentation completion period?

How long must Audit Documentation be kept?

Audit documentation should also be sufficient to:

  • Documentation completion period is 60 days following the report release date.
    • 45 Days for PCAOB Audit

 

  • Retention Period:
    • Non-Public = 5 years
    • Public = 7 years

 

  • Audit documentation is the property of the auditor & is confidential.

41

Audit Documentation

 

Current File vs. Permanent File

Current File - Current year audit information only.

  • Audit Program
  • Lead Schedules
  • Working Trial Balance
  • Bank Reconciliations
  • Confirmation Files

 

Permanent File - Long term audit information.

  • Board Minutes
  • Debt Agreements
  • Articles of Incorporation
  • Internal Control Flow Charts
  • Leases
  • Depreciation Schedule
  • Analyses of Equity Accounts

42

Audit Documentation

 

Working Trial Balance

Lead Schedules

Supporting Schedules

FS > Working TB > Lead Schedule > Supporing Docs

 

Working Trial Balance - a listing of ledger accounts with CY & YE balances, with colums for adjusting & reclassifying entries as well as for final balances for CY. 

 

Lead Schedules - schedules that summarize like accounts, the total of which is transferred to the working trial balance. 

 

Supporting schedules - provides the detail that makes up each of the major components that are indicated on the lead schedules.

43

What are the Weaknesses & Deficiencies that can be found in Audit Workpapers?

(CCHIT-F)

 

TESTED

In analyzing working paper for weaknesses, examine the following:

  • Comment on Exception - comments in the body of the working paper may refer to unusual circumstances. Make sure each exceptional item has been resolved & documented.
  • Conclusions - closing comments at the bottom of the working paper should be reviewed to ensure they are consistent with the information in the audit documentation. They are usually wrong.
  • Heading - the name of client, title of working papers, & audit year should all be included.
  • Initials - each person who prepares or reviews a working paper should initial it.
  • Tickmarks (symbols) - symbols used as a reference or as a legend. Be sure each symbol is defined in the legend.
  • Foot (adding) - check the mathemadical accuracy of the schedule.

44

The auditor is required to document significant Audit Finding & Issues including? (4)

  1. Matters involving selection accounting principles & related disclosures.
  2. Results of procedures that indicate the possibility of material misstatements & require modification of the auditing procedures.
  3. Circumstances that caused the auditor significant difficulty in applying audit procedures.
  4. Other findings that could result in modification of the auditor's report.

45

Audit Documentation must ALWAYS Include? (6)

Audit documentation is the principal support for the auditor's report, at minimum it must include the following:

  • An Audit Program that details the procedures to be performed during the engagement
  • A client representation letter (obtained from mgmt at the conclusiong of field work)
  • Documentation of the auditor's understanding of the Internal Control
  • Documentation of the assessed level of control risk
  • Reconciliation of accounting records w/ FS
  • Proof that sufficient evidence having been obtained to support the auditor's opinion on the FS

46

PCAOB Audit Standard 3

Audit Documentation Requirements

(Engagement Completion Document [2])

 

 

 

Under the PCAOB, most audit documentations are identical to those required by GAAS, but AS#3 specifically added the requirement of the preparation of an Engagement Completion Document, which will include:

  • All information necessary to understand the significant findings & issues
  • Cross-references, as appropriate, to other available supporting documents

 

Other important requirements:

  • Documentation completion period is 45 days (not 60) following the report release date
  • Audit Documentation must be retained for 7 years.

47

Management Representation Letter (5)

  • Mgmt Letter is REQUIRED, purpose is to emphasize management's responsibility for the finacial statement
    • Prep of FS
    • DIM of I/C
  • U-PERCV is included in the letter
  • Dated, no earlier than the audit report date
  • Signed by CEO/CFO/Governance
  • Scope Limitation if NOT Received

 

Correct!  Management’s representation letter is designed to provide management’s reaffirmation of information that was provided to the auditor in relation to the engagement supporting the assertions in the financial statements.  It does not replace other audit procedures or relate to assertions other than those in the financial statements.  It applies through the date on which the field work is complete, which is generally the date of the report, which should also be the date of the representation letter.

48

A management representation letter is written representation from management which affirms? (4)

A management representation letter is written representation from management which affirms:

  • the fair presentation of the financial statements and management's responsibility for them,
  • the completeness of all information provided to the auditor and in the financial statements,
  • representations relating to recognition, measurement, and disclosure (including the absence of knowledge of fraud or suspected fraud), and
  • information concerning subsequent events.

 

NOTE:  The representation letter is one of the required audit procedures. Refusal of management to provide a representation letter is considered a scope limitation and requires qualification of the auditor's opinion.

49

Letter of Audit Inquiry (4)

(Attorney's Letter)

The auditor will also obtain a letter from each attorney with which the client did business relevant to any litigation, claims, or assessments with which the client may have been involved.

  • Asks about any Litigation, Claims & Assessments
  • Includes Corroborate Information
  • Scope Limitation if NOT received
    • Results in a qualified or disclaimer of opinion
  • Management requests the inquiry, but the letter should be MAILED TO the Auditor. (TESTED)

50

Related Parties

 

What is the primary concern?

What 4 transactions suggests it is a Related Party transaction?

When a company has engaged in significant transactions with related parties, the auditor's primary concern is proper Disclosure & Presentation. 

 

Transactions that suggest involvement w/ related parties includes:

  1. Loans at zero or unusually low interest rates.
  2. Sales at prices at above or below fair market value.
  3. Large, non-recurring transactions occuring very close to the balance sheet date.
  4. Loan guarantees.

51

Subsequent Events

 

(Type 1, Type 2)

Subsequent Events - are events occuring during the time inverval between the balance sheet date & report date.

  • Type 1 - some events provide evidence of conditions existing at the balance sheet date that require adjustments.

  • Type 2 - some events that do not affect the balance sheet, as the condition did NOT exist at the balance sheet date, but still represent important information that should be Disclosed.

52

Specialists

 

What are 3 considerations regarding a Specialist's work?

 

TESTED

Auditor must be cautious about the references to the work of a specialist in the audit report. 

  1. Auditor must understand the methods & assumptions underlying the specialist's work, & must be able to evaluate the results of that work.
  2. Auditor must condsider the specialist's Competence & Objectivity (Independence) .
  3. The auditor MUST NOT REFER to the specialist's in the audit report if it contains an unmodified opinion. (TESTED)

53

When should an Auditor refer to a specialist in the Audit Report?

The auditor should not refer to the work or findings of a specialist in an audit report with an unmodified opinion. If, however, the auditor modifies the report (issues a modified opinion) and wishes to facilitate an understanding of the emphasis-of-matter or other-matter paragraph or the reason for the qualification, the work of the specialist may be mentioned.

 

The only time the auditor should refer to the work or findings of a specialist in the audit report would be if reference to the specialist's findings clarifies an emphasis-of-matter or other-matter paragraph (such as for an unusually important subsequent event) or facilitates an understanding of a departure from an unmodified opinion.

54

Use of Internal Auditor

 

(Objectivity & Competence)

The external auditor will have to evaluate the objectivity & competence of internal auditors & the internal audit funciton  in determining whether or not internal auditors can provide direct assistance to the auditor in performing audit procedures.

 

Internal Audit Objectivity

  • Internal auditors should be free of bias or conflicts of interests, & whether they are subject to the undue influence of thers such that the professional judgment of internal auditors may be overridden or otherwise affected.

Internal Audit Competence

  • External Auditor will evaluate the knowledge & skills of the internal audit fuction
  • When appropriate, indivudual internal auditors, to determine if they are sufficient to enable the internal auditors to perform dilgently with the appropriate level of quality. 

55

What are 3 areas where the Internal Auditor can assist the External Auditor?

  1. Gaining an Understanding of the Internal Control Structure - Internal Auditor will be a source of information about the structure. 
  2. Testing Control - The internal auditor can obtain evidence for review by the external auditor. 
  3. Substantive Testing - The internal auditor can pull appropriate documents & assist the external auditor in locating assets to prove their existence.