Audit Programs Flashcards by Frank Smith

What are substantive procedures?

Tests designed to find material misstatements at a relevant assertion level

Can be tests of details for classes of transactions, account balances, and disclosures; also can be analytical procedures

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Which substantive procedures is the auditor always required to perform?

Reconciling financials (including notes) to accounting records

Examining journal entries (and other adjustments) made in preparing the financials

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What is a good mnemonic for different substantive tests?

CORVAIR

Confirm
Observe
Retrace
Vouch
Analytics
Inquire
Recompute

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How does the extent of substantive testing relate to the permissible level of detection risk?

Inversely related

E.g. if the permissible level of DR increases (because the RMM decreases), then less substantive testing needs to be done

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How does interim testing affect detection risk?

It increases the chance that misstatements at period-end won’t be detected, so it increases DR

Degree of increase depends on length of remaining period after interim audit

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What should an auditor do to decrease the risk resulting from an interim audit?

Perform more substantive procedures (and perhaps tests of controls) for the remaining period

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Can substantive audit evidence from a prior period be used in the current period?

Yes, though only if appropriate

Procedures should be done to show that it is still relevant

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What is an important consideration when planning the timing of audit procedures?

Coordinating them – performing related audit procedures in such a way that saves time and effort

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What is a mnemonic for remembering different types of audit evidence?

CADSCRIPT

Calculations
Analytics
Documents (authoritative)
Subsequent events
Client statements
Records (subsidiary)
Internal control
Physical evidence
Third-party statements

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What are some instances of authoritative documents?

Invoices, purchase orders, time cards, receiving reports

If third parties use or prepare the documents, or if they are formed under strong internal control, they are more reliable than otherwise

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What is a mnemonic for remembering different means to learn about subsequent events?

MIMI ACL

Management representation letter
Inquiry
Minutes
Interim financial statements

Asset/liability valuation
Cutoff
Legal letters

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What are examples of subsidiary records?

Subsidiary ledgers for different accounts, such as A/R and inventory

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What is a mnemonic for standardized audit procedures?

TRAFIC CIVICS

Trace
Reconcile
Analyze
Foot (column totals)
Inspect
Confirm

Consider entity/environment
Inquire
Vouching
Investigate for fraud
Count
Subsequent events

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What is the purpose of tracing?

Testing for completeness – whether all items/transactions are recorded in the financials

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What is the purpose of vouching?

Testing for existence/occurrence – whether all items/transactions mentioned in the financials actually exist/occurred

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What is the standard for auditing a financial statement’s fair value measurements (FVMs)?

SAS 101, “Auditing Fair Value Measurements & Disclosures”

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What is fair market value?

The price at which a given item can be transacted between knowledgeable, willing, and able buyers at arm’s length (i.e. not related or giving a special deal)

Usually market prices reveal FV, but other valuation methods can be used if prices aren’t available

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What is management responsible to do regarding FV?

Establish the process to determine FVMs and disclosures, including the valuation method and assumptions

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What are the auditor’s two main tasks regarding FVMs?

Understanding the entity’s process for calculating and disclosing FVMs, assessing the RMM

Ensuring whether the FVMs and disclosures conform with GAAP

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What are some different kinds of substantive tests for FVM?

testing management’s assumptions, valuation model, and/or underlying data
independently calculating FV
analyzing subsequent events and transactions

What are “significant assumptions” that management uses for FVM?

Assumptions which are:

material to FV
variable or uncertain
vulnerable to bias or misapplication

What is important for the auditor to remember when assessing management’s FV valuation model?

The auditor is not an appraiser, and is not tasked with finding a good FV. He simply discerns whether the model is appropriate.

How do subsequent events and transactions provide information on FV?

If the subsequent events involve the item in question, then they might provide a price (or some other data) reflecting the item’s FV at the balance-sheet date

What should the auditor obtain from management regarding FVM?

Written representations explaining the FVM process and assumptions

Once the auditor has learned of the FVM process, to whom should he report it?

Those charged with governance

What are the audit objectives for procedures done on an entity's cash?

To ensure: (1) good internal controls over cash (2) the existence of recorded cash (3) the completeness of cash records (4) proper financial disclosures for cash

What is kiting?

A form of embezzlement where a check is written from one account and deposited into another right at year-end, so that the deposit is recorded in the one but the withdrawal is not recorded in the other. The cash is thus overstated in the account from which the money is withdrawn, giving the embezzler more time to cover up missing cash.

What are the audit objectives for procedures done on accounts receivable?

Very similar to objectives for cash -- internal control, existence, and completeness -- but also whether A/R are presented at net realizable value

What is confirmation for accounts receivable?

Confirming with the debtor that he owes a particular amount for particular items Sometimes the debtor may not know the exact amount (e.g. gov't agencies), in which case the items are more informative for confirmation

Is the auditor required to do a confirmation of accounts receivable?

No, as it is technically optional But it is a "generally accepted auditing procedure," so if it's not done, the auditor must document why

What are two different ways to use a "positive form" for confirming accounts receivable?

(1) Filling in the assumed details for the A/R and asking whether it is correct (2) Leaving it blank and asking the debtor to fill in the details (2) ensures greater reliability but also generally involves fewer responses

What is the negative form of a confirmation request?

When customers are asked to respond only if they disagree with the stated balance

What is lapping?

A form of embezzlement where one customer's cash payment is stolen, then covered by the next customer's payment, which is then covered by the customer's payment after that, etc. The embezzler can possibly replace the stolen funds before the theft is noticed, or he might even write off a customer's A/R to cover for the cash permanently.

What are the audit objectives for procedures done on inventory?

(1) existence of inventory and entity's rights of ownership (2) correct pricing (3) correct quantity (4) correct valuation (5) adequate disclosure

Is the auditor required to physically observe the entity's inventory?

It is optional, but it is a generally accepted auditing procedure, so he must document why if he doesn't

What must an auditor do when a client counts his inventory or compares his inventory records with the physical count?

He must be present for the counts and/or observe the comparing This can be done during the period or at period-end, depending on the circumstances

Are tests of accounting records sufficient evidence for inventory?

No, the auditor should additionally observe some physical counting, apply tests to transactions, and/or review client procedures

What should the auditor do if inventory is held in a public warehouse?

He can simply accept the warehouse's confirmation if the amount is immaterial, but he must otherwise run procedures for the warehouse's reliability (or confirm the numbers himself)

What should the auditor do if the client uses an outside firm to count and price its inventory?

The auditor cannot simply take the firm's word, but must have procedures designed for its reliability and/or confirmation

What are the audit objectives for procedures done on fixed assets?

(1) adequate internal control (2) existence of assets and entity's rights of ownership (3) correct valuation (4) adequate disclosure

What are the audit objectives for procedures done on investments?

(1) adequate internal control (2) conformity with GAAP (3) adequate disclosure (4) whether losses in value are permanent or temporary (5) existence of securities

What would fail to constitute sufficient evidence for the value of a long-term investment in another company?

The investee company's unaudited financial statements If audited, they are sufficient evidence

What are the audit objectives for procedures done on accounts payable?

(1) adequate internal control (2) completeness (3) correct valuation (4) adequate disclosure

What are the audit objectives for procedures done on payroll?

(1) adequate internal control (2) existence of employees (3) correct valuation (4) adequate disclosure

What are the audit objectives for procedures done on long-term liabilities?

(1) adequate internal control (2) existence (3) valuation (esp. of interest expense) (4) adequate disclosure

What are the audit objectives for procedures done on stockholders' equity?

(1) adequate internal control (2) compliance with regulations (3) properly authorized and recorded transactions (4) adequate disclosure

What are the audit objectives for procedures regarding accounting estimates?

whether all estimates: (1) that are relevant to financials have been developed (2) are reasonable (3) conform to GAAP (4) are disclosed properly

What are some internal controls over accounting estimates?

(1) Management communication of need for estimates (2) Collection of data (3) Review and approval by appropriate authorities (4) Comparison with prior accounting estimates