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4414 - Audit Final
Hillison
| Analytical Procedures | Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data … involving comparisons of recorded amounts … to expectations developed by the auditor |
| When do auditors use Analytical Procedures? | 1. Planning (Required) 2. Substantive Testing 3. Completion (Required) |
| Understanding the clients business and industry | Planning Primary Purpose |
| Assessing going concern | Planning secondary purpose Completion secondary purpose |
| Indicating possible misstatements (risks) | Planning primary purpose Completion primary purpose Substantive Testing secondary purpose |
| Reduce detailed tests | Planning secondary purpose Substantive Testing Primary Purpose |
| What factors increase the precision of the auditors’ expectation when performing analytical procedures? | Compare to prior year data Compare to client budget Compare to industry or other external data Compare to expected results using nonfinancial data Compare to auditor-determined expected results |
| What are the four types of evidence when testing internal controls? | Inquiry of entity personnel Observation of employees performing control processes Inspection of supporting documents Reperformance by tracing one or a few transactions through the accounting system from start to finish ("walkthrough") |
| Control Deficiencies | Exists if design or operations of controls does not permit company personnel to prevent or detect misstatements on a timely basis in the normal course of performing their assigned functions |
| Significant Deficiency | Exists if one or more control deficiencies exist that is less sever than a material weakness but important enough to merit attention by those responsible for oversight of the company's financial reporting |
| Material Weakness | Exists if a significant deficiency or a combination of significant deficiency results in a reasonable possibility that |
| Communication of internal control deficiencies | The auditor must communicate significant deficiencies and material weaknesses in writing to those charges with governance (usually audit committee and management) as soon as the auditor becomes aware of their existence |
| What are the tests of controls for the Sales and Collections Cycle? | Inquiry, Observation, Inspection, Reperformance |
| What audit assertions are performed in the Sales and Collections cycle? | Existence, Completeness, Accuracy/Valuation, Rights, and Presentation & Disclosure |
| What are the key control activities of the Sales and Collection Cycle? | Adequate Separation of Duties Proper Authorization (credit, shipping, and terms) Adequate Documents and Records Pre-numbered Documents (prevent missing and duplicate) Monthly Statements to Customers (external check) Internal Verification Procedures |
| What is the process for conformations of Accounts Receivable? | Confirmations are required, except when: * AR is immaterial * Confirmations are likely to be ineffective * Low inherent risk/control risk and other substantive evidence is available |
| What are positive confirmations? | communication addressed to the debtor requesting the recipient to confirm directly whether the balance as stated on the confirmation request is correct or incorrect |
| What are negative confirmations? | addressed to the debtor but requests a response only when the debtor disagrees with the stated amount |
| What are blank confirmations? | Type of positive confirmation that does not state the amount on the confirmation but requests the recipient to fill in the balance or furnish other information |
| What are invoice confirmations? | Type of positive confirmation in which an individual invoice is confirmed, rather than the consumer’s entire accounts receivable balance |
| When do alternative procedures need to be performed? | For accounts receivable, examining specific subsequent cash receipts (including matching such receipts with the actual items being paid), shipping documentation, or other client documentation providing evidence for the existence assertion |
| What assertions are used for Accounts Receivable? | Existence, Valuation, Cutoff |
| Who maintains control of the confirmations? | Auditor is responsible for mailing the confirmation outside of the clients office |
| What are the relative assertion risks (and their level of severity) for Sales? | Occurrence - High Completeness - Low Cutoff - High Accuracy - High Classification - Medium |
| What are the relative assertion risks (and their level of severity) for Accounts Receivable? | Existence - High Rights - Medium Completeness - Low Valuation - High |
| Auditors asses allowance for doubtful accounts by___? | detail tie-in of aged trial balance to general ledger |
| What are Test of Controls? | Test to see if the control is working/effective or not |
| What are Test of Transactions? | Test to see is the account balance is materially misstated |
| Representative Sampling | One in which the characteristics in the sample are approximately the same as those of the population The sampled items should be similar to the items not sampled Should be free from material selection bias |
| Attributes Sampling | When evaluating internal controls, the auditor's objective is to determine whether important control policies and procedures are functioning effectively to prevent or detect misstatements |
| What are the outcomes of attribute sampling? | Upper limit rate of deviation <= Tolerable rate of deviation = Rely on controls as planned Upper limit rate of deviation > Tolerable rate of deviation = Reduce planned reliance on controls |
| Variable Sampling | When performing substantive tests, the auditor's objective is to determine whether an account balance or class of transactions is recorded and presented in accordance with GAAP |
| What are the outcomes of variable sampling? | Upper limit on misstatements <= Tolerable Misstatement = Account balance is not misstated Upper limit on misstatements > Tolerable Misstatements = Account balance is misstated |
| What is the key difference between statistical and non-statistical sampling? | Statistical and non-statistical sampling methods are defined in terms of the method by which a sample is selected |
| What is statistical sampling and give three examples? | Statistical sampling uses the laws of probability to measure sampling risk 1) Simple random sample selection 2) Systematic sample selection 3) Sampling with probability proportional-to-size |
| What is non-statistical sampling and give three examples? | The auditor estimates sampling risk by using professional judgment rather than statistical techniques 1)Directed sample selection 2)Block selection 3)Haphazard selection |
| What factors affect sample size and what is the effect? | Population size - Direct Expected rate of deviation - Direct Tolerable rate of deviation - Inverse Allowable Sampling Risk - Inverse Population Variability - Direct |
| Disadvantages of Non-statistical Sampling | Provides no means of quantifying sampling risk and the representativeness of the sample is difficult to determine Sample may be larger than necessary or auditors may unknowingly accept a higher than acceptable degree of sampling risk |
| Advantages of Statistical Sampling | Allows auditors to measure and control sampling risk which helps: Design efficient samples Measure sufficiency of evidence Objectively evaluate sample results |
| What are the components of the fraud triangle? | Pressure Opportunity Rationalization |
| What are the components of the fraud triangle in misappropriation of assets? | P: financial obligations O: Inadequate internal controls R: I need it more than others |
| What are the components of the fraud triangle in fraudulent financial reporting? | P: Pressure to meet benchmarks O: poor internal controls R: "It's only this one time" |
| What is the purpose of the brainstorming session | To communicate with the audit team to see how everyone thinks, if the company would commit fraud, how would they do it? |
| What are the sources of information to assess fraud risk? | 1) Communications with audit team (brainstorming) 2) Inquiries with management in org 3) Evaluate fraud risk factors 4) Analytical procedures 5) Other information (risk assessment) |
| What are the sources of legal liability? | * Liability to Clients * Liability to 3rd Parties Under Common Law * Civil Liability under Statutory Law * Criminal Liability |
| What are the levels of negligence and their definition? | * Ordinary neg. - absence of reasonable care * Gross neg. - lack of even slight care * Constructive fraud - extreme or unusual neg. even though no intent * Fraud - knowledge and intent to deceive |
| What are common auditor defenses and definitions? | * Lack of Duty to Perform - no contract or existence of primary relationship * Contributory Neg. - the client's own actions * Nonneg. Performance - performed in accordance with GAAP * Absence of Casual Connection - loss was something other than f/s |
| Why do auditors typically settle out of court? | Cheaper and saves reputation |
| What is the difference between common law and statutory law? | Common Law: Law developed through court decisions Statutory Law: Laws passed by legislature/government units |
| What is the difference between third party primary beneficiary, foreseen user, and foreseeable user | Under Common Law: * third party primary beneficiary - sue for ordinary negligence * foreseen user - some courts allow to sue for ordinary negligence * foreseeable user - broader interpretation (very few allow to sue) |
| What are subsequent event and when do you need to make adjustments/disclose them? | * Events providing additional evidence about conditions that existed at balance sheet date - F/S adjusted * Events providing additional evidence about conditions that DID NOT exist at balance sheet date - NOT adjusted, may disclose |
| What are contingent liabilities and when do you need to make adjustments/disclose them? | Potential future obligations for an unknown amount * Slight chance - No disclose * Reasonably possible - Disclose * Probable - Adjust of estimable or disclose if not |
| How do auditors evaluate the going concern assumption? | * Analytical procedures * Knowledge gained about the client through audits * Discussions with management * Review and testing of management's plans |
| What are common going concern risk factors? | *Negative financial trends - recurring losses *Other indicators of potential financial difficulties - default loans * Internal matters - dependence on success of particular job * External matters - legal proceedings |
| What is the purpose/contents of a management representation letter | Purpose: Confirm and document oral representations made by the client Contents: 1) Responsibility for the f/s 2) Completeness of info 3) Recognition, measurement and disclosure 4) Subsequent events |
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