Lec 15 Q3

Question 1

what is the equation for materiality

Answer 1

revenue
less: all expenses besides tax, extraordinary items, income tax expense
NIBT is then multiplied by 5-10% and then times 50-75% for performance materiality

Question 2

generally, confirmations for a/r are used for what assertion

Answer 2

existence

Question 3

confirmation for 0 balance a/r are used for what assertion

Answer 3

completeness

Question 4

should confirmation be used for all audits

Answer 4

no, it is suggested but it can be skipped if it is unfeasible in the case that there is a high volume and low price of the account

Question 5

what should be done if confirmations are not available

Answer 5

alternative procedures must be done and reasoning must be documented in case you are audited by CPAB

Question 6

what are the analytical procedures that can be used as substantive processes

Answer 6

• horizontal (year to year analysis)
• vertical (ratio)
• to budget
• to industry competition
• bad debt exp to gross sales
• # of days in A/R

Question 7

anal procedures at planning are

Answer 7

attention directing to identify riskier accounts

Question 8

anal procedures at conclusion are used to

Answer 8

measure if audited f/s are reasonable

Question 9

analysis when used as substantive procedure develops expectations t/f

Answer 9

true

Question 10

more precise expectations indicate what

Answer 10

have a better possibility of indicating misstatement

Question 11

the higher the knowledge of the auditor the ______

Answer 11

higher the quality of evidence provided by analysis

Question 11

describe the analysis done in the in class case with sales and expected returns

Answer 11

maximum estimated returns were calculated as a percentage of the total sales to indicate what the top amount was. this was then compared to what was actual recorded. thus the analytical estimate indicated the possibility of misstatement

Question 12

what is the difference between analytical procedures and reperformance/calculate

Answer 12

analytical is an estimate
reperform/calc is an exact calculation

Question 13

what features must auditors have in order to perform anal procedures as substantive

Answer 13

they must hold strong knowledge of the industry and business

Question 14

what are the three aspects that development of expectations is influenced by

Answer 14

• environmental stability - less stability, harder to develop expectations (inflation, raw materials prices, fuel prices)
• level of detail
• management discretion - items left to mgm discretion such as depreciation policies are harder to predict

Question 15

what is the highest quality data

Answer 15

external data

Question 16

inside data has what sort of bias

Answer 16

management bias

Question 17

what are the three levels of assurance from anal procedures and how good are the estimates

Answer 17

high probability of detection - precise estimates from quality data
medium prob of detection - reasonable estimates
low probability - low quality estimates that must be supplemented with high quality substantive tests

Question 18

what are the most important assertions for assets and a/r

Answer 18

existence and ownership

Question 19

the main substantive procedure for a/r is

Answer 19

confirmation

Question 20

what is the 30 days cut-off procedure

Answer 20

you select the last 30 days of sales transactions and first 30 days of sales transactions and match them to shipping documents

Question 21

cut-off is a subordinate of what

Answer 21

existence and completion

Question 22

what 2 procedures can be used for valuation of a/r and describe them

Answer 22

inquiry of management with use of CATs
testing of subsequent cash receipts and aging schedule

Question 23

what 2 procedures can be used for ownership of a/r and decribe them

Answer 23

inquire mgm if they have pledge or factored any a/r
examine the SEC meeting minutes for a/r pledging or factoring

Question 24

what are the 5 aspects of evaluating the results of confirmations

Answer 24

• reliability of response
• restrictions in cofirmation response - confirmation not returned as it was send and needs disclosing in notes
• unreliable response
• non-reponse or oral response
• expectation - if mailed, expect response in mail format

Question 25

what are the 7 aspects of assessing reliability of confirmations

Answer 25

• form of confirmation -/+
• blank or non-blank confirmation
• knowledgebility of 3rd party respondant
• competent, appropriate evidence provided
• obbjectivity/independance of third party
• paper or electronic response
• address is easy to verify

Question 26

bank confirmations are always

Answer 26

blank confirmations

Question 27

blank or non-blank confirmations are better and why

Answer 27

blank confirmations are better because non-blank can just be stamped at sent back

Question 28

what does the knowledgebility of 3rd parties have to do with confirmations and who should and shouldnt respond

Answer 28

response should come from an ar manager or clerk
responses from a jr employee or a VERY high level employee is a red flag because they likley dp not have the relevant knowledge

Question 29

what are the 4 options for alternative procedures if no answers are given bakc

Answer 29

• inspect of subsequent cash receipts - high q evidence proving valulation and existence
• inspect sales invoices - mid evidence since it is internal doc
• inspect supporting shipping doc - external shipping doc from currier thus high q
• inspect correspondence between client and hteur customer

Question 30

what are the 2 roll over procedures

Answer 30

• review of changes from date of confirmation to fye
• perform anal procedures for period between confirm date and fye

Question 31

what % of bank rec should be audited and why

Answer 31

100% because htey affect multiple of the client’s accounts and because a small difference can be the net of 2 big material differences - thus htere is no threshold

Question 32

what are ht e3 steps in bank rec

Answer 32

• confirm balance iwth bank through blank confirmation
• reperform/refoot
• vouch 100% of the items with supporting documents and obtain pure external cut-off bank statement

Question 33

what is a/r lapping and how is it done

Answer 33

manippulation of a/r to cover theft or fraud
done by applying the money paid towards a recent a/r to an older missapropriated a/r so no suspisctions are raised for the old a/r

Question 34

how can a/r lapping be found and stopped

Answer 34

inspect cheques, deposit slips, and accounts credits
look for customers credited for which no payment was received - (crediting old a/r when the initial paymetn has already been missapropriated)

Question 35

what is cheque kitting

Answer 35

the practice of obtaining an unauthorized loan with an inssuficient funds cheque used as collateral before the bank realizes

Question 36

how can cheque kitting be detected

Answer 36

review of interbank transfers

Question 37

what are the 2 mgm reporting objectives and which is for private and public

Answer 37

income minimization - for private companies
income maximization - for public companies

Question 38

what are the assertions at risk for public companies with income max

Answer 38

existence of assets
completeness of liabilities

Question 39

what are the assertions at risk for private companies with income min

Answer 39

completeness of assets
existence of liabilities

Question 40

when would a public company want to use inocme minimization

Answer 40

• union negotiations
• unwanted m&a or hostile takeover