Inherent limitations of internal control
C – Collision
O - Overriding by management (required to test in every audit)
C – Cost
C – Competence
O – Obsolescence (change in Operations or Size)
The functions of control in regards to RMM?
- Preventing before misstatement occurs (most effective)
- Detecting & Correcting after Misstatement occurs (less Expensive to implement, But could detect Too late)
What does the revenue cycle consists of?
Sales, Billings, and collections
(Sales revenue / Accounts receivable / Cash receipts)
Bill of lading
Shipping document that signed by the carrier accepting goods from the shipping clerk
Managements Financial statement assertions
U – Understandability & Classification
P – Presentation & Disclosure
E – Existence or Occurrence (Vouching)
R – Rights & Obligations
C – Completeness (tracing) & Cutoff
V – Valuation, Allocation, & Accuracy
Segregation of duties In the revenue cycle for authorization
Segregate Authorizing sales on Account & Authorizing credits to AR (discounts, returns, alllowances, write offs)
*neither should have access to cash
What does the spending cycle Consists of?
- Purchases / AP / Cash disbursements
(Ordering, Receiving, and Paying)
Source to book
Book to source
Which department should have The quantity Blocked out on the P.O.?
- Verify everything supposed to get
Common Auditing procedures for Spending cycle
P – Physical Controls
R – Recording
A – Authorization
I - Independent checks (Inventory counts)
S – Segregation of Duties (inquiry & Observation)
E – Evaluate Performance
Individuals with authority to approve vouchers for payment Should not have ? (Spending Cycle)
Access to unused Purchase Orders
What are the different departments n the personnel cycle?
1. Personnel (H/R) – Authorization (hire, fire, pay rates)
2. Payroll – recording (calculate pay)
3. Treasurer – Custody (sign/distribute checks & cash)
4. Controller – Comparison (bank rec.)
How does a service organization's Auditor report assist the user auditor? (payroll outsourcing)
- the audit report Will assist in gaining understanding of the internalControl structure (design)
- Report is not considered a basis for determining the effectiveness (substance)
- NO DIVISION OF RESPONSIBILITY & NO REFERENCE
What does the investing and financing Cycle consists of?
-Transactions involving acquisition and disposal of assets other than inventory
- Transactions with creditors and shareholders
What would the Auditor do if there Very few transactions in investing and financing Cycle?
Test of Transactions
- Most efficient to ignore the internal control structure
- Assess RMM HIGH
- Reduce Detection risk by performing excessive substantive test
What was the Auditor do if A large number of transactions occurred investing and financing cycle?
Test of balance
- Most efficient To rely on the Internal Control structure (TOC)
- Testing controls to determine the effectiveness
- Assess RMM LOW
- Accept higher DR by Performing only limited sub tests
What are Derivatives required to be reported at?
Fair value (Sub Procedures)
FV Hedge (I/S)
CF Hedge (IOC)
What does the PP&E cycle consists of?
Acquisitions, Disposals, and Depreciation expense
- Existence (vouching)
- Completeness (tracing)
What are some of the objectives PP&E?
- Verify EXISTENCE (by vouching) from records to physical assets (ID Unrecorded DISPOSALS)
- Verify COMPLETENESS (by tracing) from physical assets to records (ID Unrecorded ACQUISITIONS)
What does the production and conversion cycle deal with?
Manufacturing operations (Similar to purchasing and spending cycle with mfg goods)
- difficulty with RM to WIP to Fin Goods
What are the steps to prepare ICQ/Narrative?
USE PRAISE (2 yes/no questions for each letter)
1. What cycle are you in?
2. Key Controls (ARCCS)
3. For Each document
- PPN? (Preprinted, pre-numbered, Numerical sequence)
- Information on the document?
- Send copies to whom?
For Issuers and Non-Issuers, When does a opinion on Internal control apply?
Issuers – all PCAOB audits ('audited' specific date)
Non-Issuers – Attestation Engagement ('examined' specific date OR period of time)
*F/S Audits for Non-Issuers (disclaimer of opinion on I/C) (GAAS)
Under Attestation standards, what may the auditor of non-issuers report on in regards to internal control?
- Effectiveness of the entities internal control
- Management assertion regarding the effectiveness of internal Control
Under PCAOB, What may the auditor of issuers report on in Regards to internal control?
Management assertion regarding the effectiveness of ICFR (on a specific date)
Under GAAS, What is the auditor Required to communicate In regards to the non-issuers internal control?
- significant Deficiencies and Material Weaknesses in Internal control (SD required for Report to be Issued)
- Purpose: F/S audit, not assurance on I/C Effectiveness
- Indicating No opinion (disclaimer)
- Consideration of Internal control was NOT Designed to ID ALL SD & MW
- Definition of MW & SD
- ID which matters are MW and which are SD (ALL MATTERS including previously ID/not corrected)
- LTD USE statement
* No later than 60 days after the report Release Date
When the DESIGN and OPERATION of a control does not allow management or employees (in normal course of performing assigned functions) to prevent, or detect and correct misstatements, on a timely basis
Deficiency in design
1. Not put into place
2. put in place But not designed to mitigate the risk it was intended to address
Deficiencies in operation
Well-designed control is not operating
Individual lacks Authority or ability to perform Control effectively
Reasonable possibility of Material misstatement Will Not be prevented, detected, and corrected on timely basis