III. Performing Further Procedures and Obtaining Evidence (30–40%) Flashcards
What is the quick ratio formula?
Quick ratio = [Cash + Marketable securities + Accounts receivable] / Current liabilities
Is fraud by management considered a material weakness?
Fraud is also unauthorized management overrides. Therefore an indication of fraud by senior management also points to a material weakness in internal control.
When it comes to compliance with laws and regulations in a GAAS audit, what should the auditor state in their report?
That compliance with laws and regulations is the responsibility of management.
What sort of information is in a management rep letter? Would information about a client’s record retention period be included in a rep letter?
The rep letter is dated the same date as the audit report and includes all of the management representations made verbally and in writing to the auditor covering the audit period and subsequent events that may require disclosure in the audit report.
In some audit situations, other topics must be included in the representation letter. For example, should the audit disclose uncorrected misstatements, the representation letter must address whether management believes the effects of these misstatements are immaterial, individually and in the aggregate, to the F/S as a whole. However, there is no requirement that management provide rationale for leaving these misstatements uncorrected
Information about a client’s retention period wouldn’t be included as long as it meets legal and regulatory requirements. This sort of info will be in the audit work papers.
When should management disclose and accrue loss contingencies?
When the loss is both probable and estimable
When should management disclose but not accrue contingencies?
When the gain or loss is probable and not estimable or when the gain is probable and estimable.
How would an auditor test for overstatement of revenue?
You would start with the F/S and then go to the supporting records. Revenue must be earned before recognition. Sales are earned when items are shipped. So to test if something is overstated, you check first in the F/S and then trace to shipping docs
