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96 Cards in this Set
- Front
- Back
Confirmations test
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Existence
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When auditing A/R check for objective
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Completeness
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Allowance for doubtful accounts
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check for valuation
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Objective for A/P
Use what test? |
Completeness
Out of period Test 0 balance confirmations |
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Ineffective Sample
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sample is without deviations and is misrepresenting the population
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Attribute Estimations
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Looking for deviatons
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5 sample selection techniques
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Random
Stratified Haphazard Systematic Blocking |
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Sample Size=
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((S*U*N)/A)^2
S=Standard Deviation U=Standard Normal Deviations for Desired risk of Incorrect rejection A=Allowance for Sampling Risk N= Population Size |
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Objective of Payroll audit
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Completeness
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Objective of Inventory
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Existence
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2 questions for employees
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Can they count?
Do they know what they are counting? i.e. is it broken or obsolete? |
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Pictures 16-4 and 18-5
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What??
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3 reasons auditors do not have to perform confirmations on client receivables
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1. When a/r is immaterial--cash and credit are mainly used
2. When auditors consider confirmations ineffective due to inadequate or unreliable response rates i.e. hospitals & gov't 3. When combined inherent and control risk are so low that other evidence is sufficient |
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If an auditor does not receive a reply to a positive confirmation
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call call call. Then examine subsequent cash receipts, duplicate sales invoices, and shipping documents
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When can a client influence decisions by the auditor?
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They can, however, a limitation may result in an adverse opinion
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What are the key objectives of workpapers?
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To leave a paper trail so someone who knows nothing about the audit can understand it. Evidence for proving due diligence
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2 questions for employees
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Can they count?
Do they know what they are counting? i.e. is it broken or obsolete? |
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Pictures 16-4 and 18-5
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What??
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3 reasons auditors do not have to perform confirmations on client receivables
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1. When a/r is immaterial--cash and credit are mainly used
2. When auditors consider confirmations ineffective due to inadequate or unreliable response rates i.e. hospitals & gov't 3. When combined inherent and control risk are so low that other evidence is sufficient |
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If an auditor does not receive a reply to a positive confirmation
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call call call. Then examine subsequent cash receipts, duplicate sales invoices, and shipping documents
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When can a client influence decisions by the auditor?
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They can, however, a limitation may result in an adverse opinion
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What are the key objectives of workpapers?
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To leave a paper trail so someone who knows nothing about the audit can understand it. Evidence for proving due diligence
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To find unrecorded liabilities
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1. examine documents for subsequent cash disbursements
2. examine vendors statements that show a balance to track missing or improperly valued accounts 3. send confirmations to vendors 4. examine transactions close to cutoff date |
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Telephone confirmations
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Must be followed up in writing
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Differences between A/R and A/P
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Understatements and Overstatements
internally and externally created documents |
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When auditing dividends
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Make sure they have been declared
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Payroll Audit Procedures
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Compare to previous year
Match with 941 remittances Go to HR and recalculate surprise payroll payoff |
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Payroll Audit Internal Control
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Authorization, Separation of duties, independent checks on transactions, restrict access to assets
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Documenting the Sales and Collection cycle
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Customer Order- Request by customer for merch
Sales order- document to communicate the desc., q, and info for cust. also used in credit auth. Shipping Document- shows completeness, ocurrence, & accuracy Sales Invoice- Sales Transaction File- All sales transactions for a period Sales Journal A/R Master File- Subsidiary ledger A/R Trial Balance |
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Processing Cash Receipts
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Remittance advice
Prelisting of Cash Receipts- Person listing cash receieved who has no duty to post to general ledger- Bank |
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Understanding A/R IC
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Flow charts
Inquiries w/ questionaire walk through of sales |
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Key Controls of Sales
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Separation of duties
Proper Authorization- credit, shipping, prices i.e. shipping terms, freight, discounts Adequate Documents and Records Prenumbered Documents Monthly Statements Internal Verification Procedures- i.e checking prenumbered documents, accuracy of document preparation |
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Lapping
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Postponement of entries of cash receipts to conceal an existing shortage
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Prepare proof of cash receipts
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al recorded cash receipts are in the bank
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Realizable Value
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essential balance related audit objective because collectibility is a major financial item. periodic aging schedule,
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nonsampling risk
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risk that audit tests do not uncover existing exceptions in the sample
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causes of nonsampling risk
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auditor's failure to recognize exceptions
inappropriate or ineffective audit procedure |
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sampling risk
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risk the auditor comes to the wrong conclusion because sample misrepresents the population
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ways of controlling sampling risk
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adjust sample size
use an appropriate method of seleting sample items |
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methods of sampling
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statistical-using mathematical rules
nonstatistical |
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directed sample selection
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deliberately select each nonprobabilistic
sample item based on judgement ie large dollar coverage, items with high risk of misstatements |
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block sample selection
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nonprobabilistic
blocks of transactions |
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haphazard selection
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nonprobabilistic
selection without bias, |
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random
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probabilistic
every combination has an equal chance of selection |
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Systematic selection
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probabilistic
calculates an interval based on sample size biased because first number is chosen |
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probability proportional to size
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take a sample in which the probability of selecting any individual item is proportional to its recorded amount
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stratified selection
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divide the population into suvpopulations usually by dollar size and take larger samples from them
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Methodology of designing tests of details of balances
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1. id business risks of account
2. set tolerable misstatements= and assess inherent risk 3. assess control risk 4. design and perform substantive test of controls and transactions 5. analytics 6. tests of details |
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business risks of a/r
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risk outside risks that may affect balance
ie realizable value |
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3 major internal controls of a/r
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controls that prevent or detect embezzlement
controls over cutoff controls related to ada |
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relationship to sales and collection cycle
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occurence of sales cycle affects existence of a/r
completeness affects completeness |
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most important test of detail of a/r
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confirmation
test existence, accuracy |
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cutoff
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important
obtained by using the number of the last shipping document and comparing against current and subsequent transactions |
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test for rights to a/r
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review minutes, confirm with banks, debt contracts,
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negative confirmation
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can be used when:
1. many small accounts 2. combined control and inherent risk is low 3. response rates to previous year's positive confirmations was high |
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confirmation sampling
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stratification, including dollar size and time outstanding
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when a/r differences have been resolved
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reevaluate internal control
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3 types of tests
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tests of controls- the operating effectiveness of controls
substantive tests of transactions- effectiveness of controls, monetary correctness of transactions in accounting system tests of details of balances- whether the dollar amounts of accounts are materially misstated |
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why do auditors perform substantive tests of transactions
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to determine whether the exception rate is sufficiently low
to reduce assessed conrol risk and thereby reduce tests of details of balances to conclude that the control is operating effectively |
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funcitions in the purchase cycle
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purchase requisition- request goods and services by authorized employee
purchase order- document to order goods and services receiving report vendor's invoice voucher- include documents of an acquisitions |
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vendor's statement
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bank statement for vendors
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trial balance
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prepared from master file, shows current a/p
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internal control of payment cycle
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proper authorization of purchases
separation of asset custody from other functions timely recording and independent review of transactions authorization of payments |
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four important objectives of a/p
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1. occurrence- recorded acquisitions are for goods and svcs received
2. completeness- existing acquisitions are recorded 3. Accuracy- acquisitions are accurately recorded 4. classification- acquisitions are accurately recorded |
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three important differences in acquisitions and payments cycle
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1. large number of accounts involved (IS and BS), misclassification is high
2. transactions require much more judgement- reduce tolerable exception rate 3. dollar amounts of individual transactions cover wide range- segregate large dollar items and test on 100% basis |
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Acquisitions of PPE are different because
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1. few in period
2. material 2. kept and maintained in records for years |
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ppe
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verify current period acqusitions
current year disposals ending balance depreciation expense accumulated depr. balance |
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objectives of current year acquisition of ppe
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existence,
completeness, accuracy classification |
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test of acquisition of ppe
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vendor invoices
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4 procedures for verifying disposal of ppe
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1. review whether newly acquired assets replace old ones
2. analyze gains and losses on the disposal and misc income for receipts of the assets 3. review plant modificaions and chanfes in product line, property taxes, or inseurance coverage for indications of deletions of equipment 4. make inquiries of management and production personnel about the possibility of the disposal of assets |
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objectives of verifying ending balance of ppe
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existence
completeness |
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objective of depreciation expense
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accuracy
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prepaid expenses
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analytical procedures are often sufficient
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Payroll cycle
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internal controls are effective for most companies
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HR for payroll cycle
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rate authorization form
deduction authorization form personell records |
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controls of payroll
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time cards
job time ticket- indicates which jobs an employe worked on during a given time payroll transaction file- all payroll transactions processed in a period |
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making sure payroll payment is correct
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processed separately from other checks
bank rec |
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most important means to ferify payroll balance
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tests of controls and substantive test
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reasons for low risk of payroll misstatements
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employees are likely to complain to management if they are underpaid
transactions are typically uniform and uncomplicated transactions are subject to audit by gov't for taxes |
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Key controls of payroll
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separtion of duties
proper authorization adequate documents and records physical control over assets and records independent checks on performance |
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payroll taxes
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auditor must observe at least one form preparation
make sure they are timeily |
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If payroll affects inventory
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extend procedures
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tests for payroll
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test for nonexistent employees- suprise payroll payoff, trace selected transactions to hr documents, compare names on cancelled checks to time cads and other records
tests for fraudulent hours- difficult to discover, reconcile total hours paid to independent record of hours worked, observe employee clocking in more than once |
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two objectives of payroll
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1. accruals are stated correctly- accuracy
2. transactions are recorded in the proper period- cutoff |
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5 reason inventory is complex
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largest account on balance sheet
in different locations making control and counting difficult diverse inventory items make them difficult to count and value valuation is difficult with obsolescence and manufacturing costs must be allocated several acceptable caluation methods |
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6 functions of inventory cycle
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process purchase orders
recieve materials store materials process goods store finished goods ship finished goods |
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inventory costing systems
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job cost- costs are accumulated by individual jobs
process cost- accumulated by processes |
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5 activities in audit of inventory
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1. acquire and record raw materials and overhead
2. transfer assets and costs 3. ship goods and record revenue 4. physically observe inventory 5. price and compile inventory |
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Inventory price tests
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used to verify that physical count quantities are correctly priced and compiled
recalculaitng PxQ, footing inventory summary, tracing totals to ledger |
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standard cost records
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used to independently verifying inventory costs reasonableness
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testing valuation of inventory
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determine method
focus on larger dollar amounts compare inventory to invoices |
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4 influential characteristics of capital acquisition cycle
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1. relatively few but highly material transactions
2. exclusionor misstatement of one transaction can be material 3. legal relationship exists between the entity and holder of stock, bond 4. a direct relationship exists between the interest and dividends account and debt and equity |
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tolerable misstatement of capital acquisition cycle
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set low
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notes payable objectives
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completeness
accuracy |
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tests of n/p
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verify schedule
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equity objectives
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completeness
occurrence accuracy |