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55 Cards in this Set

  • Front
  • Back
Five categories of financial statement assertions?
1. Completeness
2. Obligations & Rights
3. Valuation or Allocation
4. Existence of Occurrence
5. Statement Presentation & Disclosure
What is completeness?
Deals with whether all accounts and all transactions that should be presented in the financial statements are included and whether all transactions that should be recorded in the accounts actually are.
What is Obligations & Rights?
Concerns whether, at a given date, recorded assets indeed represent rights of the entity and liabilities represent obligations.
What is valuation or allocation?
Deals with whether assets and liabilities are properly valued and whether revenues and expenses are allocated appropriately between periods.
What is Existence or Occurrence?
Deals with whether assets or liabilities exist as of a financial statement date and whether recorded transactions did occur during a reporting period.
What is Statement Presentation & Disclosure?
Concerns the proper classification, description, and disclosure in the financial statements (including footnotes).
While the external auditor maintains independence, the internal auditor maintains what?
What is the quick ratio?
(Cash + Mktble Securities + Net Receivables) / Current Liabilities
What is A/R Turnover?
(Net Credit Sales) / (Avg Net Receivable)
What is Inventory Turnover?
COGS / Avg Inventory
What is net operating margin percentage?
(Operating Income / Sales), exp as a %
What is the current ratio?
Current Assets / Current Liabilities
What is Gross Margin Percentage?
Gross Margin / Sales (exp as a %)
What is total asset turnover?
Sales / Total Assets
What is times interest earned?
EBIT / Intereset
What is Total Debt to Equity Percentage?
Total Liabilities / Owners Equity, exp as a %
After determining that a related party transaction has occured, what should an auditor do?
the auditor should obtain an understanding of the business purpose of the transactions.
Should evidential matter be more convincing or persuasive?
What is the best way to obtain audit evidence concerning segregation of duties?
Observing employees as they apply control procedures
What is the best way to obtain audit evidence concerning segregation of duties?
Observing employees as they apply control procedures
Can analytical procedures alone provide an appropriate level of assurance for some assertions?
Who is the primary source of information to be reported about litigation, claims and assessments?
Client's management
-since the events or conditions that should be considered in the financial accounting for and reporting of litigation, claims, and assessments are matters within the direct knowledge and, often, control of management of an entity, management is the primary source of information about such matters
What is involved in the Planning phase of the audit?
-reading PY workpapers
-reading up on industry
-identify material items
-identify items that have a high risk of material misstatement
What is involved in Step 2 of the Audit Phase - Review Internal Control?
Understand the IC design in place to ensure that all transactions are:
- initialized
- authorized / approved
- executed
- recorded
What is involved in Step 3 of the Audit Phase - Evaluate Internal Control?
-preliminary assessment of IC risk
-control risk = risk that IC is not functioning well
What is involved in Step 4 of the Audit Phase - Consider evidence to justify further redution of assessed control risk?
self explanatory
What is involved in Step 5 of the Audit Phase - Determine NET?
NET = Nature, Extent, Timing of Substantive Tests
- final assessment of control risk, needed to plan the rest of the audit and determine NET
What is involved in Step 6 of the Audit Phase - Performing Substantive Test?
Self explanatory
What is involved in Step 7 of the Audit Phase - Write audit report?
self explanatory
What are the 4 Tests of Controls?
2. Inquiry
3. Inspection
4. Reperform procedures
What are the 2 types of Substantive tests?
Analytics and Tests of Details
What do they mean by "sufficient" evidential matter?
-not as high as beyond ALL doubt
-not as high as convincing
-consider materiality and inherent risk
The most persuasive evidence is generated and circulated how?
Externally generated and externally circulated
Ex: Bank cutoff statement - comes from bank to auditor 30 days after YE
What is the lowest level of persuasive evidence?
Internally generated and internally circulated
Ex: Client PO, Receiving Report
What is meant by "competent" evidence?
-valid (more assurance from evidence gathered under strong IC than under weak IC, more from external than internal)
-relevant (related to audit purpose)
What are the 2 types of A/R confirms?
Positive and Negative
Explain positive confirmations.
-theoretically preferred
-customers must respond on whether or not they agree with the balance
-if no response, auditor follows up
-response rate not better
Explain negative confirmations
-customer only responds if they disagree
-many accounts with small balances
-strong IC (low control risk)
-few suspected disputed accts
Why are Positive Confirmations theoretically preferred?
Because the customer has to respond whether or not they agree, so if they dont respond, auditor has to follow up and call them or check sub-cash.
-not because of response rate
When are Positive Confirms used?
Small number of receivables with large balances
-weak IC
-many suspected disputed accts
When would you use Negative Confirms?
Customer responds only if they disagree
- many accounts with small balances
- strong IC (low CR)
- few suspected disputed accounts
Who mails confirms? Whats the return address?
The auditor mails it, return address to auditor, even though on client letterhead
What are the 5 Management Assertions?
Statement Presentation/Disclosure
What is the Cutoff/Completeness assertion?
-R&E, A&L all recorded in proper period
-no transactions have been ommitted
What is the Ownership rights/Obligations assertion?
Rights to the assets, and obligations to the liabilities
What is the Valuation / Allocation assertion?
All A&L, R&E have been properly valued in the F/S, and proper allocation among acctng periods
What is the Existence/Occurrence assertion?
That assets do exist, transactions did occur
What is the Statement P&D Assertion?
is everything classified properly, proper disclosures
Who owns the workpapers?
What are Type I Subsequent event?
Conditions did exist at BS date
Requires adjustment to FS

- lawsuit settled on Jan 15 for a client with a year end of 12/31
What are Type II Subsequent Events?
Conditions did not exist at BS date
-dont make adjustment but make a footnote because it should be disclosed

-fire on Feb 18 for a 12/31 year end
How do you find subsequent events?
Look for a "MIRACL"

-Mgmt rep letter (address sub evs)
-Inquire about significant changes in common stock and LT debt
-Read minutes of meetings, interin FS
-Asset or liability valuation (investigate significant changes)
-Legal letter concerning litigation
If you are testing for existence or occurrence,what procedure would you most likely do?
When auditing A/P, an auditor's procedures would most likely focus primarily on what assertion?
What is a subsequent event?
Event that occurs after BS date but before issue audit report and client issues F/S