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audit ch5
Audit Planning and types of audit tests
| Question | Answer |
|---|---|
| Before Accepting a new client Auditors should | speak with previous auditors, find if there's any knowledge needed, find out about past problems, know company's financial position, look at Internal control report, Talk to management, find conflicts of interest, have enough staffing, need specialists |
| When deciding whether or not to retain a client auditors should | Evaluate Relation with management, do they listen, prior misstatements, conflicts of interest, direction of client, engagement risk, financial position, paid fees, enough staffing, partner availability, IC |
| Planning the Audit | Understand who the financial statement users are, obtain understanding with client engagement letter, staff the engagement, evaluate the need for outside specialists, consider role of internal audit function, create initial audit work program |
| planning the audit 2 | consider involvement of audit committee, preform preliminary analytical procedures, Document audit plan and prepare audit work programs |
| Audit Committees must -Sarbanes Oxley | Appoint CPA firm, determine audit fees, Oversee audit work, be independent of the audit client, Must have a financial expert, Open to confidential complaints by employees |
| Independent of the audit means | no compensation other than for being on the board, cannot be affiliated with audit client or subsidiary other than a board member |
| Engagement Letter | A written contract for the audit between the auditor and the client that identifies agreed upon services |
| Engagement letter includes | services to be rendered, responsibility for the financial statements, important dates for the audit, fees, signed by auditor and signed acceptance by client |
| Understand the client's business | need to understand risks of company and industry, may determine how transactions should be recorded(% of completion vs. completed contract), |
| Resources to understand client's business | trade journals, tour facility, read board minutes, attend conferences, talk with management |
| steps of risk assessment | ... |
| Types of audit tests | ... |
| Tests of controls | inquiry, inspection, observation, walk through, reperformance |
| All new customers buying on credit must be approved by the credit manager based on preestablished guidelines | Review sample of new credit applications for evidence of approval or rejection by the credit manager. Review the approval process to see if it matches the pre-established guidelines for both approved and rejected customers |
| The person who makes the bank deposits is separate from the person who reconciles the bank statements | observe who makes the bank deposits. Review the bank reconciliation, noting who completed it, compare the cash prelist to the bank deposit to the cash receipts journal to the bank reconciliation to the bank statement to make sure amounts match |
| Sustantive Procedures | Tests of details and transactions, analytical procedures |
| Tests of details and transactions | Tests for errors or fraud in individual transactions |
| Analytical procedures | Obtains evidential matter about particular assertions related to account balances or classes of transactions |
| test existence, accuracy, and cutoff of AR (test of detain acct balances) | Take a sample from the AR trial balance and vouch it to the sales invoice and the BOL matching the quantities, amounts, dates, and customer name and address |
| Test existence and accuracty of AR (test of detail account balances) | Send positive blank confirmations to the 100 largest customers and a sample of the remaining customers in order to cover 80% of the total accounts receivable balance. Send second confirmations to non-replies 2 weeks after the firsts. |
| Test Occurrence, accuracy, and cutoff of sales (substantive test of transactions) | Take a sample from the sales journal and vouch it to the sales invoice and the BOL matching the quantities, amounts, dates and customer name and address |
| Purpose of Preliminary Analytical Procedures | Used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures |
| Purpose of Substantive Analytical Procedures | Used to obtain evidential matter about particular assertions related to account balances or classes of transactions |
| Purpose of Final Analytical Procedures | Used as an overall review of the financial information in the final review stage of the audit. |
| Two Primary purposes of analytical procedures | Attention directing areas or accounts to focus testing; Reduce level of detail tests |
| Analytical Procedures | 1.compare client and the industry data 2. " "data with similar prior period data 3.""" with client-determined expected results 4.""" with auditor-determined expected results 5. """with expected results, using non-financial data |
| Common Analytical Procedures | compare balances, inventory turnover; obsolete inveentory, current ratio(ability to pay ST obligations), debt to equity(compliance with debt covenants), AR turnover(collectibility of receivables and information for allowance |
| Analytical procedures decision process | Develop an expectation, define a tolerable difference, compare the expectation to recorded amount |
| Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's | understanding as to the reasons for the change of auditors |
| A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in an | engagement letter |
| Miller Retailing maintains a staff of three full-time internal auditors who report directly to the audit committee. In planning to use the internal auditors to help in performing the audit, the independent auditor most likely will | place limited reliance on the work performed by the internal auditors |
| during the initial planning phase of an audit, a CPA most likely would | discuss the timing of the audit procedures with the client's management |
| When planning an audit, an auditor should | determine planning materiality for audit purposes |
| As generally conceived, the audit committee of a publicly held company should be made up of | members of the board of directors who are not officers or employees |
| an auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if | management fails to take the appropriate remedial action |
| an auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is | the same as that for errors and fraud |
| to help plan the nature, timing and extent of substantive procedures, preliminary analytical procedures should focus on | Enhancing the auditor's understanding of the client's business and of events that have occurred since the last audit date |
| the primary objective of final analytical procedures is to | assist the auditor in assessing the validity of the conclusions reached |
| for all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent | in the planning stage and review stage, not as a substantive test |
| the substantive analytical procedure known as trend analysis is best described by | the examination of changes in an account over time |
| the assurance bucket is filled with | test of controls, substantive analytical procedures, tests of details |
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