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ACCT 425 > Lec 11 & 12 > Flashcards

Lec 11 & 12 Flashcards

1
Q

what is the definition of internal control

A

the process designed by those in charge with governance to provide reasonable assurance about the achievement of the entity’s objectives

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2
Q

what are the entity’s objective

A

reliable financial reporting, effective and efficient operations, compliance with laws and regulations

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3
Q

what is the auditor and management responsible in regard to internal control

A

auditors are responsible for understanding, evaluating, and assessing existing internal controls
management is responsible for establishing and maintaining a system of internal controls

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4
Q

what are the six categories of misstatements

A
  • recording invalid transactions - validity
  • valid transactions are omitted - completeness issue
  • unauthorized transactions are executed - issues with authorization
  • transaction amounts are inaccurate - issue with accuracy
  • transactions are classified incorrectly - issues with classification
  • transactions are recorded in incorrect period - issues with proper period
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5
Q

how are control objectives linked to the 6 types of misstatements

A

they are designed in order to prevent misstatements

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6
Q

what do internal control objectives correspond with

A

management assertions

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7
Q

what is the primary reason for evaluating internal control

A

to give auditors a basis in determining the nature, timing and extent of the audit program - in short combined or substantive approach

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8
Q

describe the implications if the internal controls are assessed to be weak on nature, timing and extent

A

nature - tests that are consider higher quality need to be conducted - this will increase cost
timing - testing will need to take place closer to year end - delay and increase cost
extent - more testing will need to be done - increase cost

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9
Q

if controls are good, what sort of cheaper testing can be used

A

analytical procedures. better controls means better data, meaning more reliable results from the analysis

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10
Q

how are sample sizes affected when controls are weak

A

they need to be bigger

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11
Q

What is the credit manager control for A/r and what objective and assertion is it related to

A

a credit manager checks the customers credit worthiness before allowing a sale on account - this is linked with valuation and authorization

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12
Q

what is an example of substantive tests for valuation for A/R

A

examine subsequent collections - meaning looking at what has been collected 30 days after year end

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13
Q

how is the subsequent collections test altered if controls are good or bad

A

weak controls require 25% of the collections be examined
strong controls require 10% of collections be examined

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14
Q

what are the steps in risks assessment and audit procedures (9 step decision tree)

A

1 - understand business, f/s, and risk
2 - identify inherent risk of f/s assertions
3 - asses risk,magnitudes to identify if misstatements could occur
4 - identify the controls specific to inherently risky accounts
5a - if controls are weak or absent consider control risk
7a - can be reason to withdraw from audit engagement or develop a revised audit program that gathers sufficient audit evidence
5b & 6- tests reveal that controls related to significant risks are strong
7b - if controls are reduce risk to a satisfactory low level, develop a revised audit plan that provides sufficient appropriate audit evidence
8 - continue with substantive audit procedures
9 - if necessary revise audit program based on findings and perform new procedures
10 - evaluate audit and let management know about any weaknesses they can improve on

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15
Q

what type of controls do auditors test and define them

A

key controls. these are controls come from the 5 components of internal control and are important in accomplishing management control objectives

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16
Q

what does the design and operation of key controls do

A

helps prevent and detect material misstatement due to fraud or error

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17
Q

what are the 6 internal control objectives

A

validity, completeness, authorization, accuracy, classification, proper period

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18
Q

what are control objectives analogous with

A

they are analogous to management assertions when it comes to controls

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19
Q

validity corresponds with what assertions

A

existence and ownership

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20
Q

completeness corresponds with what assertions

A

completeness, and ownership

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21
Q

authorization corresponds with what assertions

A

existence, valuation and ownership

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22
Q

accuracy corresponds with what assertions

A

valuation

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23
Q

classification corresponds with what assertions

A

valuation and presentation and disclosure

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24
Q

proper period corresponds with what assertions

A

existence, completeness, ownership and presentation

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25
Q

if control assessment reveals that controls are good for authorization, what is the impact on substantive tests

A

less substantive tests done on existence, valuation and ownership

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26
Q

what are the 6 steps in the a/r and sales cycle

A
  • customer places order (external doc)
  • credit approval by manager - (if not approved sell in cash)
  • sales order is generated (internal dic and prenumbered)
  • shipping document (bill of lading and packing slip) and invoice
  • post on a/r subledger and sales journal
  • post on gl
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27
Q

how to test for validity objective in ar cycle

A

chose sample from sales journal and vouch to the external customer document

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28
Q

how to test authorizing objective in ar cycle

A

check if the sales invoices come from the client’s authorized price list and when the customer authorizes the sale on account

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29
Q

how to test accuracy in ar cycle

A

recalculate taxes and total in the sales invoice

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30
Q

how to test proper period in ar cycle

A

check the date of the shipment and ensure it belongs to the current accounting/fiscal period on the packing slip

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31
Q

how to test completeness objective in ar cycle

A

gain a sample from the sales order and trace it to the sales journal with the block sampling method

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32
Q

for completeness, why do we use the sales order and nor the customers order for the tracing

A

not all customers orders pass credit manager and become numbered sales orders

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33
Q

how do we test classification objective in ar cycle

A

when doing tracing testing for completeness, we inevitably will be testing for classification as we ensure that the sales orders have been placed in the sales journal

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34
Q

how many times are sales journals and ar subs posted to general ledger and how many of these should be test

A

posted 12 times a year and 3/12 should be tested

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35
Q

in the ar cycle, vouching helps which which ic objectives

A

validity, authrization, accuracy, and proper period

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36
Q

when doing tracing on the a/r cycle, what ic objectives are tested

A

completeness and classification

37
Q

how important is the dollar amount in ic testing

A

dollar amount is irrelevant as we do not care by how much it is off, we care about whether the internal control is working or not

38
Q

what are dual-purpose tests

A

test that test both control and substantive procedures

39
Q

internal control steps

A
  • obtain understaiding of relevant controls
  • evaluate design effectiveness of controls
  • assess control risk
  • identify and asses risk of material misstatement - looking at high inherent risk account and identifying controls
  • design tests of controls
  • test controls
  • evaluate results
  • if risks have changed, go back and redesign procedure
  • if you find risk, make management aware of it
40
Q

what is a method of understadning the internla control

A

a walkthrough, which is a type of observation - needs to be done early on in the audit

41
Q

what does it mean to evaluate design effectiveness

A

assess whether financial statements are auditable and if control seems too poor to test

42
Q

what do we test when assessing control risk, strengths or weaknesses, and why not the other

A

we test strengths, which is the controls that should prevent, detect or correct errors. we do no test weaknesses because they exist when there is a lack of controls and theres no point in testing something not there

43
Q

what does it mean to design tests for controls

A

gather evidence about design during understanding phase

44
Q

what are control tests classified as

A

audit procedures that test effectiveness of controls - specific evidence must be obtained about the effectiveness of controls throughout the period

45
Q

what are the two parts for testing controls

A
  • identify data population from which sample is drawn from
  • select items corresponding with standard or items that agree with info in another population
46
Q

population of relevant source documents to F/S or other reports is testing what objective and assertion

A

completeness and completeness

47
Q

F/S other other staatemtns being vouched to population of relevant source documents is testing what objective and assertion

A

validity and existence

48
Q

example of testing controls through observation

A

test segregation of duties

49
Q

exmaple of testing controls through reperfromance

A

recal discounts

50
Q

exmaple of testing controls through inspection

A

looking for managers initial on document

51
Q

t/f, some tests rely on dumenttion while other have none

A

true, testing for segregation of duties will leave to paper evidence

52
Q

reponse to increased risk

A
  • assign more experined staff
  • increase supoervision
  • make audit procedure less predctable
  • add more audit procedures
53
Q

what do audit standards reuquire of auditors in terms of finding wekanessess

A

the auditor must report hte weakness to an approporaite level of management in a management letter

54
Q

why are management final closing entries risky and what can be done

A

they are risky because management might be enclined to override controls. more susbtantive testing is needed

55
Q

internal control tests are done to help determine audit program. what three important things are in the audit program

A

nature, timing and exten of audit program and procedures

56
Q

what would be the effect on nature, extent and timing if controls based on risk assessment are found to be weak

A

nature - more substantive testing done
timing - tests done closer to year end and not interim date
extent - sample sizes are bigger
overall this causes increase in prices and delays

57
Q

what are the tree phases of evaluating internal control

A

1- understand teh control system and think of “what could go wrong”
2- asses control risks indentify strengths and weaknesses in accounting I/S
3- Testing controls and look at how audit procedures are used to ensure control objectives are being met

58
Q

what are the controls relevant to an audit

A

the controls that might directly on indirectly lead to misstatment

59
Q

what are the six categories of misstatment

A

validity
completeness
authorization
accuracy
proper period
classification

60
Q

what is vallidity and give an example

A

invalid transactions recorded
fictiscious sales recorded to fake customers
related to existence

61
Q

what is completeness and give an example

A

have all vallid transactions been posted
ship to customer but not recorded
related to compleetness

62
Q

what is authorization and give an example

A

unathirized transactions occurring
order not approved for credit was shipped
related to ownership

63
Q

what is accuracy and give an example

A

transaction amount innacurate
shipment left with inacurate qunatity or dollar amount
related to valution

64
Q

what is classification and give an example

A

transactions classified incorrectly
sale of building recorded as sale revenue
presentation issue

65
Q

what is proper period and give an example

A

transaction recorded in wrong period
shipment made in january had sale recorded in december
related to cutoff exitance/completeness

66
Q

A/R proceudre is to select 75 samples and send possitive conf for. what is the nature, timing and extent

A

confirmation, interim date, 75 samples

67
Q

a/r procedure is to compare trial balance to previous period and look for big changes and vouch to suporting doc (bill of lading and invoice)

A

analytical procedures and vouching, ye, all samples that are above the threshold

68
Q

a/r procedure is to select invoices for the last 5 days of year and vouch for sales date on on bill of lading

A

vouching, ye, sales in last 5 days

69
Q

a/r procedure is to send positive confirmation for 0 balance ar

A

confirmation, ye, all 0 bal samples

70
Q

a/r procedure is to select bill of lading in last 5 days and trace to invoice

A

tracing, ye, all sales last 5 days

71
Q

what does it mean for substantive testing if control objectives are strong

A

less substantive testing needs to be done

72
Q

what assertions do all hte objectives relate to

A

validity - exitence, ownerhsip
completeness - completeness, ownership
authrirty - existence, valuation, ownership
accuracy - valuation
classification - valuaiton and presentation
proper period - all but valuation

73
Q

what are application controls

A

controls that address hte objectives related to input, processing and output of accouting data

74
Q

what are examples of general procedures

A
  • capable personel
  • perromance reviews
  • seperation of duties
  • supervision
  • controlled access
  • periodic comparison
  • it controls
75
Q

application controls examples

A
  • revenue/receeivables/receipt
  • payables/purchase/payment
  • production and payroll
  • investment and finance
76
Q

what shows the understanding of i/c

A

documenttaionn through questionaires, narratives and flowcharts

77
Q

what documenttaion method do regualtors prefer

A

flowcharts

78
Q

what are the 7 steps in auditing i/c

A
  • obtain understainfing
  • evaluate design effectiveness
  • assess control risk
  • identify and asses risk of material misstatement
  • design controls tests
  • conduct test of controls
  • evaluate results
79
Q

what is done in the obtianing understanding step

A

i/c need to be understood sufficiently to plan examination and assess risk
done through questionaires, narratives, flowcharts, walkthroughs, enquiries
understanding contorl environment is cruscial

80
Q

what is done in evaluating desing effectieness stage

A

evalaute wheather f/s are auditable
controls should not be tested if htey are weak and underealibale

81
Q

what is done in teh assessing control risk step

A

use ARM to categorize CR - assess only control strenghts
examination of control environament, accuotnign system and procedures leads to 3 conclusions
- low cr - combines approach
- low cr - substantive approach
- high cr - substantive

82
Q

what is done in the assesment of RMM

A

assess assertions and f/s

83
Q

what is done in the desing step

A

determine required degree of comapliace
determine how well controls functioned during current fiscal year

84
Q

what is done in the test of control step

A

data population is identified
action be taken to gather evidence

85
Q

what are options for testing

A

vouching - statement o source doc
tracing - source doc to statment
observation - test segreagaiton of duties
inspection - look for managment initial on doc

86
Q

what feature should samples have

A

they should span the entire peirod

87
Q

what is done in evalauting results stage

A

if test conlusion support desing, keep CR
if test conclude differently, change CR

88
Q

what does increased cr mean

A

more testing, more staff, more skepticism, more evidence, more supervision, less predictable tests

89
Q

if deficiencies in control are found what must be done

A

should be voiced to management in the management letter and should change the audit procedure in order to do more substantive tests

ACCT 425 (21 decks)

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