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Exam 2 Flashcards

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1
Q

audit sampling

A

The application of an audit procedure to less than 100 percent of the items for the purpose of evaluating some characteristic of the balance or class.

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2
Q

sampling risk

A

The possibility that a properly drawn sample may not be representative of the underlying population. The auditor may thus form a different conclusion

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3
Q

procedures that use sampling

A

Inspection of tangible assets (e.g., inventory)- not easy to look at all inventory
Inspection of records or documents- thousands of contracts
Confirmations- have people confirm that the amount of money they owe is correct
Reperformance- auditor redoes a calculation

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4
Q

procedures that do not use sampling

A 
(Easy to look at entire populations)
Analytical procedures- using regression
Scanning
Inquiry- ask questions about everything
Observation- easy to observe all people
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5
Q

advantages of statistical sampling

A

Plans an efficient sample- gives exact sample size needed

Objective way to determine whether there is enough evidence and whether it is right or wrong

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6
Q

Disadvantages of statistical sampling

A

Costly to train auditors
Requires semi-random method to draw sample
Selecting items to be tested

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7
Q

systematic sampling formula

A

in population/ # in desired sample size = sampling interval

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8
Q

haphazard selection

A

Made without any special reason for including or excluding an item.
Cannot be used in statistical sampling, because it is not based on defined probability concepts.

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9
Q

attribute sampling

A

Testing controls for effectiveness

Primarily used to assess control risk, by conducting tests of controls

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10
Q

attributes sampling examples

A

Credit only given to only to authorized customers.
Billing department verification of agreement of sales invoice prices with authorized prices.
Purchase department approval of purchase requisitions.

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11
Q

Variables sampling

A

Estimating dollar amounts or quantities—primarily to limit detection risk by conducting substantive testing
Ex. Tests of inventory quantities and amounts.

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12
Q

Tolerable deviation rate

A

The maximum rate of deviations from the control policy that an auditor could accept without altering the planned assessed level of control risk.

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13
Q

Tests of Controls Sampling Steps

A 
Determine the objective
Define deviation conditions
Define population
Specify risk of assessing control risk too low and tolerable deviation rate.
Estimate population deviation rate
Determine sample size
Select the sample
Perform the sampling plan
Evaluate sample results
Document sampling procedure
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14
Q

probability proportional to size

A

Population is the individual dollars of the population book value
Uses stratification- 3rd dollar- customer 2, 8th dollar- customer 3

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15
Q

Advantages of PPS sampling

A

Smaller sample sizes than classical sampling
Automatically results in a stratified sample
Sample can be designed and sample selection can begin prior to availability of entire population..
Easier to apply- everyone has a semi-random sample

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16
Q

Disadvantages of PPS sampling

A

Accounts with zero balances.
Accounts with negative balances.
Accounts are understated.

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17
Q

projected misstatement

A

The most likely amount of any misstatement in a population

Upper limit on misstatements

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18
Q

Calculating upper limit on misstatements

A

projected misstatement +
basic precision +
incremental allowance (for projected misstatements)

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19
Q

Calculate basic precision

A

Reliability Factor x Sampling Interval

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20
Q

Calculate incremental allowance

A

(Reliability factor Increment - 1) x projected misstatement

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21
Q

Calculate projected misstatement

A

((Book Value - Audited Value)/ Book value) * projected sampling interval

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22
Q

imprest account

A

balance maintained at a fixed amount; i.e. petty cash

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23
Q

internal control guidelines for cash

A

Do not permit any one employee to handle a transaction from beginning to end.
Separate cash handling from recordkeeping.
Centralize receiving of cash to the extent possible.
Record cash receipts on a timely basis.
Encourage customers to obtain cash receipts and observe cash register totals.
Deposit cash receipts daily.
Make all disbursements by check (except for petty cash items).
Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash.
Forecast expected cash receipts and disbursements and investigate variances.

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24
Q

Common substantive tests for cash

A

Trial balance

Confirmations- paper or email sent out to financial institutions

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25
trial balance
Obtain analysis of cash balances and reconcile to the general ledger. Client should be checking their cash balances, tying up documents.
26
bank reconciliations will only record _______
differences between bank statements and financial statements
27
Bank statement balance 8/31-9/30 reconciliation
Balance 8/31 +Deposits -Checks and Charges =Balance 9/30
28
Bank balance 8/31- Book balance 8/31 reconciliation
``` Balance 8/31 + Deposits in transit 8/31 - Outstanding checks 8/31 + Bank service charge August -Interest earned August =Book balance 8/31 ```
29
purpose of a bank reconciliation
Existence of cash
30
bank cut off statement
A bank statement for the first 7-10 business days following the end of the client's fiscal year. Includes cancelled checks, credit memos etc. Tie all amounts from bank rec to cut off statements Make sure that outstanding checks and deposits did show up
31
3 rules for counting cash on hand
1. All cash from client needs to be in the same place 2. More than one auditor needs to count the cash 3. Someone who works for the client must be there
32
kiting
Using the "float period" to count the cash in two or more accounts Moving money around from bank accounts to inflate the bank balance
33
Clues to kiting
1. Frequent Deposits and Checks in same round amounts to same banks. 2. Money goes into an account and leaves a day or two later 3. Large deposits on Fridays, weekends, bank holidays- largest float period 4. High deposits – low average balances
34
When should revenue be recorded?
When title passes from seller to buyer
35
Eight common methods for committing financial statement fraud
Early revenue recognition- most common Holding the books open past the accounting period Fictitious sales-overstatement in A/R as well Failure to record returns Fraud in the percentage of completion method. Related party transactions Overstating receivables and inventory Liability and expenses omissions.
36
Audit objective of: Obtain aged listing of receivables and reconcile to ledgers
Valuation
37
Audit objective of: | Inspect notes on hand and confirm those not on hand.
Existence, Rights
38
Audit objective of: Confirm receivables with debtors
Existence, Rights, Valuation
39
Audit objective of: | Review year-end cutoff of sales transactions.
Existence, Rights, Completeness
40
Audit objective of: Perform analytical procedures
Existence, Rights, Completeness
41
Audit objective of: Verify interest earned on notes receivable, recalculation
Existence, Rights, Completeness
42
Audit objective of: Investigate the existence of pledges receivables and receivables from related parties
Presentation and Disclosure
43
Audit objective of: Evaluate the business purpose of significant and unusual sales transactions
Existence, Rights, Valuation, | Presentation and Disclosure
44
lapping
A person who collects payments for a company pockets it, then applying the payment from another customers account, and so on. Eventually the last payment from a customer just gets written off
45
Ways to detect lapping
Compare details of bank deposit slips with the details of credits to customer accounts. Compare names on checks to deposits in A/R Accounts receivable confirmations—emphasize accounts written off and exceptions Call customers to confirm when they paid Analytical Procedures — e.g., Receivable turnover Average time and balances go up. Bookkeeping system
46
Anderson embezzled from her company's account and at year-end she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. What would be effective in detecting the fraud?
Comparison of bank cut off statements from cash receipts and disbursements journals
47
What criteria have to be true to use a negative conformation letter?
Risk of material misstatements is low Low number of accounts with low balances No reason to believe the auditor just won't respond
48
Alternate procedures if no response from positive confirmation
Send a second letter out Find cash payment from customer sometime after year end Build portfolio of documents such as sales invoices, shipping documents. Treat it as an overstatement of receivables.
49
What assertion are confirmations concerned with?
Existence
50
Importance of auditing inventory
Inventory is material to the financial statements. It is related to COGS and indirectly related to revenue. Fraud risk is pretty high. Valuing inventory involves a lot of subjectivity and estimates.
51
Audit approach to inventory
Overstate inventory
52
Audit challenges and procedures
Problem identifying quality- audit specialist Use of geometric computations- audit specialist Accuracy of scales- Examine certification Measurement of volume- climb tanks Quantity measurement estimation- aerial photos Movement uncontrollable- animals- use chutes
53
Auditing inventory steps
Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold. Obtain an understanding of internal control Assess the risks of material misstatement and design further audit procedures Perform tests of controls Perform substantive procedures
54
Audit objective: Obtain listings of inventory and reconcile to ledgers
Existence, occurrence, rights
55
Audit objective: Evaluate the client’s planning of inventory
Existence, Occurrence, Rights, Completeness, Valuation, Cutoff
56
Audit objective: Observe the taking of inventory
Existence, Occurrence, Rights, Completeness, Valuation, Cutoff
57
Audit objective: Inventory cutoff
Existence, Occurrence, Rights, Completeness, Valuation, Cutoff
58
Audit objective: Obtain a copy of the completed physical inventory and test its accuracy
Existence, Occurrence, Rights, Completeness, Valuation, Cutoff
59
Audit objective: Evaluate the bases and methods of inventory pricing. Test the pricing of inventories.
Valuation
60
Audit objective: Perform analytical procedures
Existence, Rights, Completeness, Valuation, Accuracy
61
Audit objective: Determine whether any inventories have been pledged
Valuation, Presentation, Disclosure
62
Audit objective: Evaluate financial statement presentation and disclosure
Presentation and Disclosure
63
Planning of client's physical inventory
Who is going to do the counts? -- Client or a Professional Inventory Services Co.? Dates of counts Adequate written instructions Inventory tags to keep track of counting Business shuts down while inventory counting is going on Set near balance sheet date
64
Auditor inventory observation process
Review physical layout Observe client’s team as they take inventory Watch for any movement of inventory Observe tag control procedures Take test counts Note how the “tagging” process affects the Existence and Completeness Assertions Write memo
65
2 types of audit sampling
Attributes- tests of controls | Variables- substantive tests
66
Two types of variables sampling
Classical | Probability proportion to size
67
Sample deviation rate
of deviations found/ sample size
68
Internal control over inventory documents
``` Purchase requisitions Purchase orders Receiving Reports Material Requisitions Production Orders Move Tickets Time Tickets Shipping Documents Bill of Lading ```
69
Grant Thornton tips for detecting inventory fraud
Test count high value items and sample low value items Do not follow a pattern or advise client ahead of time of what locations will be audited Be alert for inventory not used in a while Be skeptical in large differences in test counts
70
Inventory turnover
COGS/average inventory | Tests for inventory obsolescence
71
Substantive procedures: Inventory includes in inventory records does not exist
Observe client’s physical inventory count Confirm inventory held by others on consignment Vouch items on inventory listing to inventory count tags. Analytical procedures. Compare inventory turnover and gross margin to budget and previous periods and discuss differences with client personnel.
72
Substantive procedures: The entity records inventory that is owned by other parties
Inquire whether any inventory is on consignment. Inquire whether inventory has been pledges as collateral or security. Inspect loans and other agreements for the use of inventory as collateral.
73
Substantive procedures: Inventory that should have been recorded has been omitted from the inventory account.
* Trace inventory subsidiary accounts to inventory control account. * Observe physical inventory to ensure all items were counted. * Trace test inventory counts to inventory subsidiary accounts and control account.
74
Substantive procedures: Inventory is included in the financial statements at incorrect amounts
Perform lower-of-cost-or-NRV. Review cost of goods sold calculations. Trace inventory cost to standard costs or purchase invoices. Inquire whether any inventory is obsolete or unsalable. Analytical procedures. Compare inventory turnover and gross margin budget and previous periods and discuss differences with client personnel.
75
Accounts payable audit
Best check is to look for who the cash is going out to and any liabilities associated with that are recorded as of the balance sheet date.
76
Voucher system
Cover sheet for a packet of documents that clients should compile for something they purchased. Voucher includes purchase order, receiving report, and vendor invoice. Method for internal control over cash disbursements
77
When do we confirm accounts payable?
Bad internal control 2. Bad financial position 3. When some vendors don't send monthly statements

Audit (5 decks)

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