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22 Cards in this Set
- Front
- Back
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Why is Tolerable Misstatement double of what the Preliminary Judgment of Materiality is?
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1. It is very unlikely that each account is misstated by the maximum.
2. Even if there are material misstatements they usually offset, unless its a case of fraud. |
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What 3 conclusions/generalizations can be made about allocation of tolerable misstatement?
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a. often we allocate larger percentages to accounts that have lower importance to users.
b. areas that are difficult to audit are going to be allocated a relatively large allocation (due to large # of transactions) c. Areas that are easy to nail down/audit, why waste tolerable misstatement [on them]? d. Doesn't make sense to allocate any to a residual account= R/E-- b/c R/E is a function of all the other accounts. |
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If you see "x" as a tick mark, what can you conclude?
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you can conclude that it is a bad tick mark because x has more than one meaning. Which can be confusing on work papers.
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In you legend if you have a symbol that means is defined as nothing more than "tested"...
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"Tested" is very vague. Tested against what? Where was it traced to?
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Your work papers always always always need to reference other statements.
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'nuff said.
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What is the auditors attitude regarding fraud in the financial statements?
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The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest. (sas 99)
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can you give an overview of the extensive array of audit responsibilities presented by sas99?
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Basically, sas99 requires auditors to understand fraud; assess fraud risks; design audits to provide reasonable assurance of detecting management fraud and employee fraud that could have a material effect on financial statements; and report findings to management, directors, users of financial statements (sometimes), and outside agencies (under certain conditions).
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What should happen with frauds involving senior managers?
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Frauds involving senior managers are never inconsequential.
They should be reported (along with any frauds that cause material misstatement in the financial statements) directly to the entity's AUDIT COMMITTEE of its board of directors. All companies with securities traded on the exchanges (e.g., New York, American, NASDAQ) are required to have audit committees. |
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What are audit committees?
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Audit Committees are composed of independent, outside members of the board of directors (those not involved in the company's day-to-day operations) who can provide a buffer between the audit firm and management.
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Which items must be documented for proof of the fraud consideration process?
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1.discussions of engagement personnel.
2. Procedures to identify and assess risk. 3. specific risks identified and audit team responses 4. Explanation of why improper revenue recognition is not a risk. 5. Results of procedures regarding management override. 6. Other conditions causing auditors to believe that additional procedures are required. 7. Communications to management and those charged with governance, such as the audit committee. |
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What is SAS 54?
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Auditors' responsibility for illegal Acts
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Direct-effect illegal acts
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Produce direct and material effects on financial statement amounts (e.g., violations of tax laws and government contracting regulations for cost and revenue recognition), and they require the same assurance as errors and frauds;
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Indirect-effect illegal acts
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Refer to violations of laws and regulations that are far removed from financial statement effects (e.g., violations relating to insider securities trading, occupational health and safety, food and drug administration, environmental protection, and equal employment opportunity).
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What are some red flags for potential illegal acts?
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Unauthorized transactions
Government investigations Regulatory reports of violations payments to consultants, affiliates, or employees for unspecified services. Excessive sales commissions and agents' fees. Unusually large cash payments Unexplained payments to government officials Failure to file tax returns or to pay duties and fees. |
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What are your sources of information for:
Comparison of current-year account balances to balances of one or more comparable periods |
Financial account information for comparable period(s)
ex. Current year's Cost of Goods Sold compared to last year's balance |
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What are your sources of information for:
Comparison of the current-year account balances to anticipated results found in the company's budgets and forecasts |
Company budgets and forecasts
ex. current year's cost of Goods Sold compared to the company's budgeted amount |
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What are your sources of info for:
Evaluation of the relationships of current-year account balances to other current-year balances for conformity with predictable patterns based on the company's experience |
Financial relationships among accounts in the current period
ex. Days' sales in Inventory |
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What are the sources of information for:
Comparison of current-year account balances and financial relationships (e.g., ratios) with similar information for the industry in which the company operates |
Industry Statistics
Ex. Days' sales in Inventory compared to industry averages. |
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What are your sources of information for:
Study of the relationship of current-year account balances with relevant non-financial information (e.g., physical production statistics) |
Nonfinancial information, such as physical production statistics
ex. Days' sales in inventory compared to unfilled orders. |
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What are the 5 components of internal control?
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The 5 components of internal control are:
1.management's control environment 2.management's risk assessment 3.management's control procedures 4.management's monitoring 5.management's information and communication systems |
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6 paragraphs of the audit/opinion of internal controls:
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from p.187
1. Introductory paragraph 2. Scope paragraph 3. Definition paragraph 4. Inherent limitations paragraph 5. Opinion paragraph 6. Paragraph on financial statement report aka Reference paragraph. |
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ARC
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Authorization
Recording Custody If these duties aren't separated you're going to have a flood of problems. |
