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Flashcards in Week 11 Deck (15):
1

Timing of Tests

Q2
Control Testing
- Understanding of IC
- Walkthroughs
- Entity-level controls

Between Q3 and Q4
Control Testing
- Transactional Control Testing
- Some Substantive Testing

After Q4
Sub. Testing
- Complete Substantive Testing
- Complete audit

2

Substantive Testing: 2 primary types

Test of Details
- Key Item
- Representative
- Other

Analytical Procedures

3

Test of Details: Vouching vs. Tracing

Vouching: Tests existence and occurrence assertions
Accounting Records to External Supporting Documents

Tracing: Tests completeness assertion
External Supporting Documents to Accounting Records

4

Test of Details - Types

Key Item
- Select material items for “coverage”
Representative
- Remaining pop individually unimportant but significant in total
- 3 common sampling strategies: representative, variables estimation, attribute
Other
- Test mathematical accuracy of PBC schedules
- Confirmations
- Tie-in of supporting ledgers
- Cut-off & classification
- Inspect the physical existence of items

5

Typically at or near year-end, exceptions include:

Accounts that accumulate transactions
Control testing confirms a strong control system
General audit procedures:
- Read BOD minutes, Legal Correspondence
- Examine provision methodologies/assumptions
- Evaluate Internal Control Work

6

Differs from business to business

Small
- Physical cash on hand
- Few internal controls
- Usually one source – no electronic forms of cash

Large
- No physical cash on hand
- Robust internal controls
- Lots of sources
Debit & credit card
Withdrawals (PAP)
Electronic Funds Transfer
- Lockboxes
- Process outsourced

7

Illustration of Audit Process for Cash
Procedures to Understand Client & Cycles

Cash

Test of Controls
Primarily completed in other cycles
Independent bank reconciliations

Analytical Procedures
Not significant due to the 100% verification

Test of Details
Bank confirmations
Cut-off bank statement

8

Illustration of Audit Process for AR
Procedures to Understand Client & Cycles

Accounts Receivable

Test of Controls
Usually tested as part of the Sales & Cash Receipts cycles
SOD & Bad debt policies are important
Concerned about lapping

Analytical Procedures
Minimal due to confirmations
Will want explanations of large variations

Test of Details
A/R confirmations
Subsequent cash receipts

9

3 types of confirmations

Positive
Negative
Blank

10

Positive

DEFINITION
Requests confirmation that balance is correct and letter be returned.

RELIABILITY
Good – can follow up with alternative procedures

RESPONSE RATE
Reasonable

EXPENSE
Higher

WHEN
Individual large balances
Few debtors
Don’t suspect fraud or error

11

Negative

DEFINITION
Requests confirmation only when balance is not correct.

RELIABILITY
Questionable

RESPONSE RATE
Not required

EXPENSE
Low

WHEN
RMM is low
Pop is small balances & similar
Expect due care & few exceptions

12

Blank

DEFINITION
Requests that the balance be filled in and letter be returned.

RELIABILITY
Highest

RESPONSE RATE
Low

EXPENSE
Higher

WHEN
Concern is overstatement such as accounts payable

13

AR Valuation

Audit Procedures:
Examine changes – volume sales, credit policy (TOC of credit approvals), economy, etc.
Examine client’s method for determining the allowance
Discuss with the credit manager the likelihood of collecting older accounts
Examine subsequent cash receipts on these accounts and evaluate the collectability

Bad Debt Expense is residual value

14

Illustration of Audit Process
Procedures to Understand Client & Cycles

Inventory

Test of Controls
Vary widely from business to business
Physical and recording of costs
Key control is inventory count

Analytical Procedures
Similar importance to other cycles
Can minimize test of details

Test of Details
#1 Audit objective is: existence
Attend inventory count to reperform & observe

15

Rank by Risk of Inventory

Cars
Diamonds
Crude Oil
Leather Coats
Chemicals for Ink
CD/ DVDs
Home Appliances
Furniture