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42 Cards in this Set
- Front
- Back
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what info helps auditor evaluate the materiality of misstatements? |
-size of misstatement -effects of uncorrected misstatements -consider risk that undetected misstatments could cause going over materiality level |
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Misstatements are likely to be considered material if they... |
-affect trends in profitability -affect entity's compliance -increase management compensation -can be objectively determined -affect segment info -misclassify between account balances -significant to user's needs -could have future material effect -costly to correct |
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Misstatement documentation requirements |
-amount below which misstatements are "clearly trivial" -all misstatements found during audit and whether they have been corrected -conclusion about whether uncorrected misstatements are material |
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Final Review - consideration of whether... |
-work has been performed in accordance with applicable laws -significant findings or issues that need further consideration -appropriate consultations have been documented -nature/extent/timing of work performed is appropriate -work performed supports conclusion -evidence obtained is sufficient and appropriate -objectives of engagement have been achieved |
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Final Review - Documentation Requirements |
-who performed work & when -who reviewed aucit documentation & date |
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Engagement Quality Review Process |
-evaluate significant judgments related to planning -evaluate team's assessment of and responses to significant risks -evaluate significant judgments about materiality, misstatements, and IC issues -review evaluation of independence -ensure no unresolved matters -review FS & management's letter -read other info to be filed with SEC -evaluate contentious matters -evaluate communications -evaluate whether engagement documentation shows that team responded appropriately to significant risks |
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Concurring Approval |
when engagement quality reviewer approves issuance only if there are no significant engagement deficiencies |
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significant engagement deficiency exists when... |
-team failed to obtain sufficient appropriate evidence -team reached inappropriate conclusion -report is not appropriate -firm is not independent |
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5 Financial Ratio classifications |
1. Liquidity 2. Activity 3. Profitability 4. Investor 5. LT Debt-Paying Ability |
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Liquidity ratio classification - 4 main ratios |
measures firm's ST ability to pay maturing obligations 1. Working Capital 2. Current Ratio 3. Acid-Test Ratio 4. Cash Ratio |
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Acid-Test Ratio |
Liquidity Ratio (Cash Equivalents + Marketable Securities + AR) / Current Liabilities |
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Cash Ratio |
Liquidity Ratio (Cash Equivalents + Marketable Securities) / Current Liabilities |
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Activity ratio classification - 9 main ratios |
measures how effectively entity is using its assets 1. AR Turnover 2. AR Turnover in Days 3. Inventory Turnover 4. Inventory Turnover in Days 5. Operating Cycle 6. Working Capital Turnover 7. Total Asset Turnover 8. AP Turnover 9. Days in AP |
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AR Turnover |
Activity Ratio net credit sales / avg net receivables |
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AR Turnover in Days |
Activity Ratio avg net receivables / (net credit sales / 365) |
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Inventory Turnover |
Activity Ratio COGS / avg inventory |
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Inventory Turnover in Days |
Activity Ratio avg inventory / (COGS / 365) |
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Operating Cycle |
Activity Ratio AR Turnover in Days + Inventory Turnover in Days |
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Working Capital Turnover |
Activity Ratio sales / avg working capital |
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Total Asset Turnover |
Activity Ratio net sales / avg total assets |
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AP Turnover |
Activity Ratio purchases / avg AP |
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Days in AP |
Activity Ratio avg AP / (purchases / 365) |
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Profitability ratio classification - 7 main ratios |
measure financial performance of an enterprise for a given time period 1. Net Profit Margin 2. Return on Total Assets 3. Return on Investment 4. Return on Common Equity 5. Net Operating Margin % 6. Gross Profit Margin % 7. Operating Cash Flows per share |
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Net Profit Margin |
Profitability Ratio net income / net sales |
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Return on Assets |
Profitability Ratio net income / avg total assets or (NI / net sales) * (net sales / avg total assets) |
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Return on Investment |
Profitability Ratio (NI + int exp * (1-tax rate) ) / (avg LT liabilities + equity) |
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Return on Common Equity |
Profitability Ratio (NI - preferred dividends) / avg common equity |
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Net Operating Margin % |
Profitability Ratio Net Operating Income / Net Sales |
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Gross (Profit) Margin % |
Profitability Ratio profit margin / net sales |
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Operating cash flow per share |
Profitability Ratio operating CF / common shares outstanding |
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Investor ratio classification - 6 main ratios |
measures that are of interest to investors 1. Degrees of Financial Leverage 2. EPS 3. Price/Earnings Ratio 4. Dividend Payout Ratio 5. Dividend Yield 6. BV per share |
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Degrees of Financial Leverage |
Investor Ratio EBIT / earnings before taxes |
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EPS |
Investor Ratio (NI - pref dividends) / WA # shares outstanding |
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P/E Ratio |
Investor Ratio market price per share / diluted EPS |
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Dividend Payout Ratio |
Investor Ratio dividends per common share / diluted EPS |
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Dividend Yield |
Investor Ratio dividends per common share / market price per common share |
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BV per share |
Investor Ratio (total stockholders' equity - preferred stock) / # common shares outstanding |
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LT Debt Paying Ability ratio classification - 4 main ratios |
1. Debt/Equity 2. Debt 3. Times Interest Earned 4. Operating CF / Total Debt |
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Debt/Equity Ratio |
LT Debt Paying Ability total liabilities / common stockholders' equity |
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Debt Ratio |
LT Debt Paying Ability total liabilities / total assets |
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TIE Ratio |
LT Debt Paying Ability EBIT / interest |
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Operating CF / Total Debt |
LT Debt Paying Ability operating CF / total debt |
