Procedures Flashcards
(8 cards)
(Revenue): Eric recorded the entire amount in revenue when the project was complete, but through discussion it was found that as at December 31, 2025, Eric only completed three of five milestones.
Risk: Risk that revenue is overstated because client was incorrectly using the completed control method rather than the percentage of completion method.
Assertion: Occurrence of revenues.
Procedure: Request a list of the projects started in the year that includes start and end dates. Filter for projects that have an end date of Dec 31, 2025. Trace the sales to the agreement, review the terms, and determine whether the POC method is appropriate. Recalculate the revenue earned at year-end and trace the sale to the GL to ensure that its been recorded appropriately.
(Leases): James recorded the payments as lease expense and initially was accounting for this as an operating lease. However, based on the agreement, it suggested to account for it as a finance lease.
Risk: There is a risk over where the lease is recorded in the GL because the client was recording the office furniture as an operating lease rather than a finance lease.
Assertion: Classification
Procedure: Obtain the general ledger for lease expense, and select a random sample of lease payments. From those, we obtain the lease agreements, analyze the terms in the agreement, and review against the criteria to determine whether any satisfied for a finance lease. Results should be compared to the accounting treatment used by management to ensure it was correct.
(Contingent Loss): Customer initiated a lawsuit against CSI for reputational damage. The lawyer believes it may be likely, but it is too soon to provide an estimate of the loss. Mark, controller at CSI was unsure what to do, so he did not record anything for this transaction.
Risk: There is a risk over the completeness of contingent losses and presentation of disclosures because this is a non-routine occurrence for CSI.
Assertion: Completeness & presentation
Procedure: Obtain a legal letter from CSI’s lawyer to inquire of all lawsuits and legal issues that have occurred in the year which may result in contingent losses. We should obtain the likelihood and an estimated amount of the loss from the lawyer. For the losses where an estimate can be made and loss is likely, we should confirm that the amounts have been appropriately accrued by management in the GL. For those losses that are likely but an estimate cannot be made, we should confirm that a disclosure has been made.
(Fx Loss): CSI received invoices in USD and used a daily spot rate exchange site to record the invoice in CAD. They were still unsure how to adjust their year-end payable balance.
Risk: The risk is understatement of foreign currency losses since it is new this year and CSI doesn’t know how to appropriately account for it.
Assertion: Completeness and accuracy
Procedure: Obtain the exchange rates at each invoice date and at the year-end date from the Bank of Canada. We should then be able to obtain copies of the invoices and multiply the balances by the exchange rates to get the USD balance translated to CAD. The difference between the clients FX loss and ours should be reconciled at year-end.
(Asset Impairment): CSI has a software that has outdated functions and there is no market for resale. Additionally, CSI replaced the software to a more reliable one, so they will no longer being using the outdated software. CSI was not aware that the old software was impaired and did not adjust for it.
Risk: The valuation of the capital asset might be overstated as the software is no longer in use and is potentially impaired as it was not written down.
Assertion: Valuation
Procedure: Request a listing of computer equipment and software and inquire with management whether any are no longer in use as an indicator of impairment. For those no longer in use, we should confirm with management whether there is an alternative use for the assets and should obtain the resale market value for these assets from a third-party source. We can then recalculate the recoverable amount for each asset group and determine the excess of carrying amount over recoverable amount. We should then confirm that any impairment losses identified have been appropriately recorded by management.
What are the income statement assertions?
Remember “COCCA”
- Completeness
- Occurrence
- Cut-off
- Classification
- Accuracy
What are the balance sheet assertions?
Remember “CERV”
- Completeness
- Existence
- Rights & obligations
- Valuation
- Presentation
What are some evidence gathering techniques for procedures?
Remember “CIIROAR”
- Confirmation
- Inquiry
- Inspection
- Reperformance
- Observe
- Analytical procedures
- Recalculate
