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Flashcards in Audit 4 Deck (30):
1

Audit evidence is gathered throughout the audit (objective of substantive testing: detect material misstatements in F/S)

S-ubstantive procedures
O-ther audit procedures
R-isk assessment procedures
T-est of controls

2

Types of audit evidence

A-ccounting records
C-orroborating evidence(obtained through Observation, Inquiry, and Inspection)
E-lectronic: Evidence in Electronic Form

3

Types of Analytical Procedures

Comparisons of Financial data

Ratio Analysis

4

Steps in designing analytical procedures

1. Determine procedures suitable for testing assertions
2. Determine reliability of data
3. Perform analytical procedures and compare the results
4. Investigate the significant differences

5

Analytical procedures are More & Less reliable

More-I/S accounts are more predictable

Less-Accounts with management discretion are less predictable

6

Documentation required for Substantive Analytical Procedures

F-actors considered
E-xpectation of the auditor
A-dditional audit procedures performed
R-esults of such analytical procedures

7

Audit Terminology

F-oot (add down), crossfooting (add across), and recalculation-verify mathematical accuracy
I-nquiry-requesting info both internally and externally
V¬-ouching
E-xamination/Inspection

C-onfirmation-specific type of inquiry from external 3rd parties
A-nalytical Procedures=look for unusual items
R-eperformance
R-econciliation
O-bservation
T-racing

C-utoff Review
A-uditing related Accounts Simultaneously
R-epresentation Letter=conclusion of fieldwork
S-ubsequent Events review

8

Account Balances Assertions

C-ompleteness (all assets, liabilities and equity interests that should have been recorded have been)
V-aluation, Allocation, and Accuracy (amounts fairly and appropriately made, as well as adjustments)
E-xistence and Occurrence
R-ights and Obligations

9

Transactions and Events Assertions

C-ompleteness
cutOff
V-aluation, Allocation, and Accuracy
E-xistence(B/S) and Occurrence(I/S)
U-nderstandability and Classification (recorded in the proper accounts)

10

Presentation and Disclosure Assertion

C-ompleteness
V-aluation, Allocation, and Accuracy
R-ights and Obligations, and Occurrence (Disclose events and transactions that have occurred and pertain to the entity)
U-nderstandability (of the footnotes only) and Classification=clearly expressed)

11

Positive confirmations is best for

L-arge $ amounts
E-xpected errors/disputes
W-eak IC

12

Negative confirmations are used when

L-ow risk
E-xpect customer attention
S-mall balances

13

The accounting department (accounts payable) has 3 functions

R-ecord the payable
A-pprove the invoice for payment
P-ayment: Record the payment after it is approved by the Treasurer

14

Risk reduced by segregation of duties

A-uthority
R-ecordkeeping
C-ustody

15

7 cycles of auditing

P-P&E: acquisitions and disposals, and related depreciation expense
I-nventory: Perpetual, physical, and manufacturing
P-ayroll and personnel: payroll and personnel functions
E-xpenditure: purchases, payables, and cash disbursements
R-evenue: sales revenues, receivables, and cash receipts

I-nvestments: investments in debt and equity and the income received from investments
&
F-inancing: debt and equity financing, repayments, interest expense, and dividends

16

The following functions of the Inventory cycle should be segregated

W-arehouse
R-eceiving
A
P-urchasing
S-hipping

17

Dual testing of inventory observation

O-bserving the performance of management’s count procedures
T-est counts get performed
I-nspecting the inventory to ascertain its Existence and Condition
E-valuating management’s Instructions and Procedures for the inventory count

18

3 things to look for in PP&E retirements

T-axes: Company does not pay taxes on unknown property
I-nsure: Company does not/cannot insure an asset they don’t have
T-our plant/inquire

19

Related Parties may include

A-ffiliates: Reporting entity’s affiliates
M-embers of their immediate families
O-wners(Principle)

20

May indicate a related party transaction

C-ompensating balance arrangement
L-oan Guarantees
U-nusual, nonrecurring transactions near year-end
N-onmonetary exchanges
T-ransactions based on terms that differ significantly from market terms

21

Significant related party transactions outside of the normal course of the entity’s business, auditor should?

T-erms of the transactions
R-ational(Business) of the transaction
A-ccounted for(Transactions)
D-isclosed(Transactions)
E

22

Identifications of previously unidentified or undisclosed related party or significant related party transactions

1. Communicate the information to the other members of the engagement team
2. Request management to identify all transactions with the newly identified related parties
3. Inquire why IC failed, and disclosure of the related party relationships or transactions.
4. Perform appropriate substantive procedures
5. Reconsider the risk of other related party transactions
6. Evaluate the audit implications if management purposefully did not disclose related party transactions.

23

Auditor’s responsibility with estimates

P-olicies and Practices assessment: Assess management’s written policies and practices regarding the development and use of estimates

G-AAP: Ensure estimates conform to GAAP
R-easonable: Determine that the accounting estimates are reasonable
U-ncertainty: Evaluate the degree of estimation uncertainty
V-erify that all material misstatements have been developed
E

24

Fair value must comply with

P-ast track record of estimates is accurate
I-ndustry: Appropriate in relation to industry
C-hanges: Justify any changes in approach
C-onsistent method with prior period

25

Auditor’s responsibility for FV

C-ontrols (Understand) that are relevant
A-ssess the risk of material misstatement of FV measurements
P-rocess(Understand)
E-valuate the sufficiency, competency, and consistency of evidence obtained

26

PCAOB standards state that auditor’s evaluation of audit results should include evaluation of the following

1. Result of the AP performed during the overall review of the F/S
2.Misstatements/uncorrected misstatements found during the audit
3. Qualitative aspects of the companies practices
4. Conditions related to fraud risk
5. Presentation/disclosures of the F/S
6. Sufficiency and appropriateness of the audit evidence obtained

27

The auditor must evaluate the materiality of all misstatements found during the audit

QUALITATIVE conditions

A-pproaches materiality in the aggregate
P-rior period misstatements
E-ffects both individually and in the aggregate of misstatements
S-ize of misstatement

28

Documentation Requirements for misstatements

T-rivial Amount below which misstatements are clearly trivial
A-ll misstatements accumulated during the audit and whether they have been corrected
U-ncorrected: Summary/conclusion/basis of uncorrected misstatements

29

Audit documentation for 2nd review partner (sign-offs)

C-ompleted: date work was completed
R-eviewed(Who)
O
P-erformed(Who)
D-ate of review

30

A significant engagement deficiency exists when?

F-ailed to obtain sufficient appropriate evidence
I-nappropriate conclusion
N-ot appropriate report for the circumstances
I-ndependent NOT