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Auditing > Auditing 3 > Flashcards

Auditing 3 Flashcards

Exam 4

1
Q

Flows of transactions and information processing activities.

A

1) The accounting records, specific accounts in the financial statements, and other supporting records relating to the flows of information in the information system.
2) The financial reporting process used to prepare the entity’s financial statements, including disclosures.
3) The tool, software and applications, including the IT environment, used in the financial reporting process.

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2
Q

Response to Risk of Material Misstatements

A

1) Auditors gather Audit Evidence to respond to the risk of material misstatements.

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3
Q

Audit evidence is obtained by the following.

A

1) Test operating effectiveness of controls
2) Perform substantive procedures.

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4
Q

Operating Effectiveness of Control

A

1) Auditors perform procedures to determine if the controls are preventing and detecting material misstatements.

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5
Q

Integrated audits require?

A

Test the operating effectiveness for all controls that address risks of material misstatements.

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6
Q

Hierarchy of Control Tests

A

1) Inquiry of Client Personnel
2) Observation of the control activity being performed
3) Inspection of relevant documentation
4) Reperformance of the control activity.

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7
Q

Information used by Control Operator?

A

1) The information needs to be relevant and reliable
2) Specifically, information need to be complete and accurate.

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8
Q

What is a Substantive Procedure?

A

1) Procedures performed to respond to risk of material misstatement
2) Performed to detect material misstatements in account balances and class of transactions.

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9
Q

Substantive Procedures

A

1) Inquiry, Observation, inspection of tangible assets, inspection of documents, confirmation with third parties, recalculation, reperformance, analytical procedures.

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10
Q

Information by substantive procedures?

A

1) Information needs to relevant and reliable as well as complete and accurate.

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11
Q

Information used in performing substantive procedures?

A

1) Reconciliations
2) Detailed listing i.e history of sales returns.

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12
Q

Sampling

A

Application of audit procedures to less than 100% of items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class of transactions or the operating effectiveness of a control.

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13
Q

What item is selected for testing??

A

“Sampling unit”

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14
Q

Sampling Risk

A

The risk that the auditor’s conclusion based on a sample might be different for the conclusion that would have been reached if audit procedures were applied to the entire population of items.

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15
Q

Statistical Sampling

A

1) Selection of sample items is random which the allows for a representative sample of the population.
2) Allows auditors to measures sampling risk.
3) Higher confidence on concluding on the overall population characteristics.

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16
Q

Nonstatistical Sampling

A

1) Selection of sample items is based on auditor judgement and not a random selection
2) Does not allow the auditors to statistically measure sampling risk
3) Requires auditors to increase the sample size in order to evaluate the characteristics of the population making up a balance or class of transactions.

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17
Q

Confirmation

A

1) Procedure the involves direct correspondence with third parties requesting a response to verify information included in the confirmation.
2) Responds to confirmations can provide audit evidence regarding the existence, rights and obligations, completeness and accuracy of account balances or transactions.
3) Unless requested in the confirmation, evidence regarding the completeness assertions is not provided upon receiving a confirmation.

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18
Q

Cash

A

1) Auditors often consider whether cash is significant account.

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19
Q

What causes an account balance or class of transactions to be considered significant?

A

Contains an identified risk of material misstatement at the assertion level.

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20
Q

Determination of whether to identify and account balance or class of transactions as significant?

A

Inherent risk.

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21
Q

What do auditors do to determine the inherent risk of an account balance or class of transaction?

A

Evaluate the inherent risk factors impacting the account balance or class of transaction.

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22
Q

What would be inherent risk factors to consider for assessing the inherent risk of cash?

A

1) Volume of activity
2) Susceptibility to misstatement due to error or fraud
3) Size and composition of account

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23
Q

What would an auditor be required to understand and evaluate if an entity’s cash balance was identified as a significant account?

A

1) Recall control components Information Systems and Communications.
2) Understand the flow of transactions and other aspects of the information to discover significant account balances and classes of transactions.

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24
Q

Reports, Documents, and Data files used to Audit the Cash Account

A

1) Checks, ACH payments, wire transfers
2) Remittance advice
3) Deposit Slips
4) Remittance reports
5) Cash receipts journal
6) Cash disbursements Journell
7) Bank statements
8) Canceled checks
9) Bank reconciliations

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25
Q

Cash Receipts: Process Activities

A

1) Receive check and remittance advice in mail or an ACH payment
2) Prepare remittance listing
3) Enter total from remittance listing in cash receipts journal
4) Prepare deposit slip and deposit cash receipts in bank

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26
Q

Cutoff Bank Statement

A

A bank statement that includes the activity subsequent to an entity’s year end

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27
Q

Audit Procedures performed on a bank reconciliation?

A

Balance per bank
Add deposits in transit
Subtract outstanding checks
Inspect bank credit/debit memo and test for reasonableness.
Balance per books

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28
Q

Bank Reconciliation: Add deposits-in-transit

A

Trace to cash receipts journal
Vouch to Cutoff bank statement

29
Q

Bank Reconciliation: Balance per bank

A

1) Confirm: directly with bank
2) Agree amount to ending balance in bank statement
3) A cutoff bank statement: Is the bank statement that includes the activity subsequent to year end.

30
Q

Bank Reconciliation: Subtract Outstanding Checks

A

Vouch to cash disbursements Cutoff Bank Statement
Add/ Subtract other Debit/Credit memos.

31
Q

Confirmation of Bank Balances

A

Sending a request to an entity’s bank is the most effective procedures to determine the existence and accuracy of cash account balances.

32
Q

Electronic Confirmation Requests

A

1) Most banks now only complete confirmation requests electronically through a third part intermediary
2) Can improve the control of both delivery and receipts of the confirmation request
3) Allowed by professional auditing standards.
4) Used to confirm deposit balances and loan balances
5) Also, can be used to request information about contingent liabilities and secured transactions
5) Attorney’s letters.

33
Q

What is the most important question to ask?

A

What could go wrong?

34
Q

What is auditor’s responsibility for testing significant accounts or classes of transactions?

A

Understanding the flow of transactions and other aspects of the information- processing activities for significant account balances and classes of transactions.

35
Q

Response to risk of material misstatements?

A

Test of operating effectiveness of identified controls, as appropriate.
Substantive audit procedures to address the identified risks of material misstatement.

36
Q

Process Risk Points

A

The points in a process where a risk of misstatement could occur

37
Q

What describes process risk points?

A

Where and How a misstatement could occur.

38
Q

When does process risk points occur?

A

When information and data moves from the initiation of the transactions until it is recorded in the financial statements.

39
Q

ESMEE

A

Data, entered, stored, manipulated, exchanged, and extracted.

40
Q

Who establishes controls?

A

Management

41
Q

Process Owner

A

Individual who is responsible for initiating, processing and recording transactions.

42
Q

Control Operator

A

Individual who performs specific actions to mitigate risk of misstatements that are introduced during the process.

43
Q

Control Attributes

A

The specific procedures performed by the control operator that make-up the control activity and are important to the design of the control.
The parts of the control that addresses the risks that the control is intended to address.

44
Q

How do you design an identified control?

A

The nature of control-> Manuel vs. Automated
The type of control-> Detective vs. Preventative
Frequency of the control operation-> Recurring, Daily, Weekly, Monthly

45
Q

What questions does a control operator ask while performing a control activity.

A

Is the information relevant to the objective of the control?
Is the information reliable? Free from error, or biased.
Is the information complete and accurate?

46
Q

Response to Risk of Material Misstatements?

A

Auditors gather Audit Evidence to respond to the risk of material misstatements.

47
Q

Procedures used to operating effectiveness of controls.?

A

Hierarchy of the types of control tests from the least persuasive to the most persuasive type of evidence.

48
Q

Type of Persuasive Evidence

A

Inquiry of client personnel
Observation of the control activity being performed.
Inspection of relevant documentation.
Reperformance of the control activity.

49
Q

Substantive Audit Procedures?

A

Procedures performed to respond to risk of material misstatement.
Performed to detect material misstatements in account balances and classes of transactions.
Test of Details.
Substantive analytical procedures.

50
Q

Inquiry

A

Procedure that involves the collection of verbal evidence from third party and management.

51
Q

Observation

A

Procedure that involves watching management perform its tasks. Usually done the same time as inquiry.

52
Q

Inspection of Tangible Assets?

A

Procedure that can involve observing and/ or counting tangible assets. (Existence and Valuation)

53
Q

Inspection of Documents

A

Procedure that involves examining documents prepared by third parties or company personnel..

54
Q

Vouching

A

Inspecting documentation of transactions that are already recorded in the entity’s financial records.
-> Existence/ Occurrence -> Accuracy -> Rights

55
Q

Tracing

A

Inspecting source documentation and following its processing to recording in the financial records.
-> Completeness

56
Q

Scanning

A

Involves reviewing documentation to identify unusual transactions for additional follow-up.

57
Q

Confirmation

A

Procedure that involves direct correspondence with third parties requesting a response to verify information included in the confirmation.

58
Q

Recalculation & Reperformance

A

Procedures that provide audit evidence over the accuracy of calculations or controls performed by company personnel.

59
Q

Analytical Procedures

A

Procedures that evaluate financial statement accounts by developing expectations of what an account balance should be..

60
Q

Procedures to perform to audit cash balances..

A

Understand the flow transactions and other aspects of the information-processing activities for cash transactions.

61
Q

Cash reconciliations performed by management.

A

Cash reconciliations are often a control activity performed by management.
Inspect activity subsequent to the “as of” reconciliation date to determine if the reconciling items are appropriate.
Obtain a cutoff bank statement.

62
Q

Integrated Audits Require?

A

An auditor to issue an opinion on the effectiveness of internal control over financial reporting..

63
Q

What must auditors for integrated audits do?

A

Auditors must test the operating effectiveness for all controls that address risks of material misstatements.

64
Q

How to test an auditor?

A

Auditors should be tested by the completeness and accuracy of information used in substantive procedures.

65
Q

What procedures would an auditor perform to gain an understanding of the flow of transactions and information processing activities?

A

Inquiry, Observation, Inspection of an Entity Narrative, Prepare a Flowchart.

66
Q

Bank Reconciliation: Balance Per Books

A

Foot (Recalculate)-> The entire reconciliation for mathematical accuracy.
Trace-> The amount to the trial balance.

67
Q

ZBA-Zero Balance

A

A zero-balance account is a business checking account that maintains a zero balance at the end of each day.
-Payroll, petty cash and different department needs.

68
Q

Benefits if Maintaining Zero Balance

A

-> Centralized cash with flexibility
->Limited Errors
-> Reduced fraud risk

69
Q

What are disadvantages of ZBA?

A

-> Limited Control
-> Reconciliation is still required= Your business will still need to track and regularly reconcile every streamlined ZBA transaction.
-> Structure is needed. Having multiple accounts may become complicated, so you will need to implement a structure and an administrative process that keeps everything straight for your business.

Auditing (3 decks)

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