Deck 6 Flashcards
Audit procedures for investments properly valued at Balance Sheet date-
Determine if Impairments in the price of investments are properly recorded (valuation and allocation assertion)
Audit procedures for how AR represents all amounts owed to the entity at the balance sheet date-
Perform sales cut off to obtain assurance on sales transactions and corresponding entries for inventories and cogs are recorded in the same period.
AR are properly described and presented in the F/S-
Review AR trial balance for amounts due from officers and employees.
Explanations for Inventory turnover increased from prior year-
Items shipped on consignment recorded as sales (both sales and A/R would be overstated, and inventory would be understated).
Credit memo for merchandise returned were not recorded, inventory would be understated, COGS would be overstated.
Year-end purchase of inventory were understated.
Explanations for A/R turnover decreased from prior year-
Items shipped on consignment recorded as sales - both sales and A/R would be overstated (increase in A/R would be proportionally higher than increase in sales making the ratio to decrease)
Credit memo for merchandise returned were not recorded - both A/R and sales would be overstated.
Larger percentage of sales occurred during the last month of the year as compared to prior year - ending A/R would be higher.
Explanations for Allowances for credit losses increased from prior year, but allowances for credit losses as a percentage of A/R decreased from prior year-
When the ratio decreased- either, allowances decreased or A/R increased.Items shipped on consignment recorded as sales - A/R would be overstated.
Credit memo for merchandise returned were not recorded - A/R would be overstated.
Larger percentage of sales occurred during the last month of the year as compared to prior year - ending A/R would be higher also decreasing the ratio.
Explanations for Operating Income increased from prior year although the entity was less profitable than prior year-
If operating income increased but net income decreased, it should be increase in either non-operating expenses- interest income or income taxes.
Increase in income tax rate or if short term debt is refinanced with long term debt with higher interest rate.
Explanations for gross margin percentage was unchanged from prior year although gross margin increased from prior year-
If gross margin percentage remained the same while the gross margin increased, both sales and cost of sales must have increased proportionately during the period.
Appropriate review questions for - A/R
Repairs & Maintenance expense, Long term debt?
A/R- has there been proper cut off of sales transactions?
Repairs & Maintenance expense- please provide annual operating budget for comparison with recorded operating expenses.
Long term debt- are there assets that have been pledged as collateral?
Sample tests of controls procedures are intended to provide a basis for an auditor to conclude whether-
Control procedures are operating effectively and can be relied upon.
Which I/C procedures would the entity most likely use to assist the completeness assertion of long term investments?
Which would provide evidence of completeness of amount recorded as investments in securities in the B/S?
Internal auditor compares evidence of securities owned (broker advices) with recorded investments to ensure all investments are included in F/S.
Testing subsequent transactions for evidence of settlement.
Reading F/S disclosures helps to determine if required information is disclosed but not identify any missing.
Performing an audit of I/C over F/R that is integrated with a financial statement audit -
includes tests of controls to meet objectives of financial st audit and audit of I/C over F/R.
which procedure an auditor would lease likely perform to test accuracy assertion of interest expense?
reviewing minutes of meeting of BOD.
analytical procedures to perform- compare current year exp w/prior year, compare interest exp with avg o/s debt of the year.
tests of details to perform- recalculate interest expense, send confirmations to creditors to verify interest , vouch debt to original loan doc to verify int rate.
In an integrated audit, auditor finds a combination of control deficiencies that have a reasonable possibility of causing a material misstatement on F/S. what opinion is issued?
A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement in F/S will not be prevented, or detected and corrected, on a timely basis.
When a material weakness is present, auditors will issue an adverse opinion.
In the audit of an issuer, the auditor identified a single material weakness in internal
control over financial reporting but was unable to obtain reasonable assurance about
whether the financial statements were fairly stated in all material respects. The auditor
has decided not to withdraw from the engagement. Which of the following opinions
should the auditor issue on internal control over financial reporting?
Adverse opinion.
When testing controls, the auditor would most likely test transaction details to-
Evaluate whether internal control procedures are operating effectively. (and can be relied to reduce the amount of substantive testing required to detect RMM)
How to obtain completeness assertion of A/P?
Completeness of long term debt?
Tracing subsequent payments to amounts included in A/P listing tests completeness.
Tracing items included in A/P listing to subsequent payment - tests existence.
sending confirmation to sample vendor tests existence.
Review minutes of board of directors meetings. Reviewing minutes is one way to verify if bonds payable/ notes payable/other obligations are approved at these meetings. Tracing sample loans to subsequent payments verifies existence and accuracy.
