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96 Cards in this Set

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Confirmations test
Existence
When auditing A/R check for objective
Completeness
Allowance for doubtful accounts
check for valuation
Objective for A/P
Use what test?
Completeness
Out of period Test
0 balance confirmations
Ineffective Sample
sample is without deviations and is misrepresenting the population
Attribute Estimations
Looking for deviatons
5 sample selection techniques
Random
Stratified
Haphazard
Systematic
Blocking
Sample Size=
((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
Objective of Payroll audit
Completeness
Objective of Inventory
Existence
2 questions for employees
Can they count?
Do they know what they are counting?
i.e. is it broken or obsolete?
Pictures 16-4 and 18-5
What??
3 reasons auditors do not have to perform confirmations on client receivables
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
If an auditor does not receive a reply to a positive confirmation
call call call. Then examine subsequent cash receipts, duplicate sales invoices, and shipping documents
When can a client influence decisions by the auditor?
They can, however, a limitation may result in an adverse opinion
What are the key objectives of workpapers?
To leave a paper trail so someone who knows nothing about the audit can understand it. Evidence for proving due diligence
2 questions for employees
Can they count?
Do they know what they are counting?
i.e. is it broken or obsolete?
Pictures 16-4 and 18-5
What??
3 reasons auditors do not have to perform confirmations on client receivables
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
If an auditor does not receive a reply to a positive confirmation
call call call. Then examine subsequent cash receipts, duplicate sales invoices, and shipping documents
When can a client influence decisions by the auditor?
They can, however, a limitation may result in an adverse opinion
What are the key objectives of workpapers?
To leave a paper trail so someone who knows nothing about the audit can understand it. Evidence for proving due diligence
To find unrecorded liabilities
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
Telephone confirmations
Must be followed up in writing
Differences between A/R and A/P
Understatements and Overstatements
internally and externally created documents
When auditing dividends
Make sure they have been declared
Payroll Audit Procedures
Compare to previous year
Match with 941 remittances
Go to HR and recalculate
surprise payroll payoff
Payroll Audit Internal Control
Authorization, Separation of duties, independent checks on transactions, restrict access to assets
Documenting the Sales and Collection cycle
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
Processing Cash Receipts
Remittance advice
Prelisting of Cash Receipts- Person listing cash receieved who has no duty to post to general ledger- Bank
Understanding A/R IC
Flow charts
Inquiries w/ questionaire
walk through of sales
Key Controls of Sales
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
Lapping
Postponement of entries of cash receipts to conceal an existing shortage
Prepare proof of cash receipts
al recorded cash receipts are in the bank
Realizable Value
essential balance related audit objective because collectibility is a major financial item. periodic aging schedule,
nonsampling risk
risk that audit tests do not uncover existing exceptions in the sample
causes of nonsampling risk
auditor's failure to recognize exceptions
inappropriate or ineffective audit procedure
sampling risk
risk the auditor comes to the wrong conclusion because sample misrepresents the population
ways of controlling sampling risk
adjust sample size
use an appropriate method of seleting sample items
methods of sampling
statistical-using mathematical rules
nonstatistical
directed sample selection
deliberately select each nonprobabilistic
sample item based on judgement
ie large dollar coverage, items with high risk of misstatements
block sample selection
nonprobabilistic
blocks of transactions
haphazard selection
nonprobabilistic
selection without bias,
random
probabilistic
every combination has an equal chance of selection
Systematic selection
probabilistic
calculates an interval based on sample size
biased because first number is chosen
probability proportional to size
take a sample in which the probability of selecting any individual item is proportional to its recorded amount
stratified selection
divide the population into suvpopulations usually by dollar size and take larger samples from them
Methodology of designing tests of details of balances
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
business risks of a/r
risk outside risks that may affect balance
ie realizable value
3 major internal controls of a/r
controls that prevent or detect embezzlement
controls over cutoff
controls related to ada
relationship to sales and collection cycle
occurence of sales cycle affects existence of a/r
completeness affects completeness
most important test of detail of a/r
confirmation
test existence, accuracy
cutoff
important
obtained by using the number of the last shipping document and comparing against current and subsequent transactions
test for rights to a/r
review minutes, confirm with banks, debt contracts,
negative confirmation
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
confirmation sampling
stratification, including dollar size and time outstanding
when a/r differences have been resolved
reevaluate internal control
3 types of tests
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
why do auditors perform substantive tests of transactions
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
funcitions in the purchase cycle
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
vendor's statement
bank statement for vendors
trial balance
prepared from master file, shows current a/p
internal control of payment cycle
proper authorization of purchases
separation of asset custody from other functions
timely recording and independent review of transactions
authorization of payments
four important objectives of a/p
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
three important differences in acquisitions and payments cycle
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
Acquisitions of PPE are different because
1. few in period
2. material
2. kept and maintained in records for years
ppe
verify current period acqusitions
current year disposals
ending balance
depreciation expense
accumulated depr. balance
objectives of current year acquisition of ppe
existence,
completeness,
accuracy
classification
test of acquisition of ppe
vendor invoices
4 procedures for verifying disposal of ppe
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
objectives of verifying ending balance of ppe
existence
completeness
objective of depreciation expense
accuracy
prepaid expenses
analytical procedures are often sufficient
Payroll cycle
internal controls are effective for most companies
HR for payroll cycle
rate authorization form
deduction authorization form
personell records
controls of payroll
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
making sure payroll payment is correct
processed separately from other checks
bank rec
most important means to ferify payroll balance
tests of controls and substantive test
reasons for low risk of payroll misstatements
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
Key controls of payroll
separtion of duties
proper authorization
adequate documents and records
physical control over assets and records
independent checks on performance
payroll taxes
auditor must observe at least one form preparation
make sure they are timeily
If payroll affects inventory
extend procedures
tests for payroll
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
two objectives of payroll
1. accruals are stated correctly- accuracy
2. transactions are recorded in the proper period- cutoff
5 reason inventory is complex
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
6 functions of inventory cycle
process purchase orders
recieve materials
store materials
process goods
store finished goods
ship finished goods
inventory costing systems
job cost- costs are accumulated by individual jobs
process cost- accumulated by processes
5 activities in audit of inventory
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
Inventory price tests
used to verify that physical count quantities are correctly priced and compiled
recalculaitng PxQ, footing inventory summary, tracing totals to ledger
standard cost records
used to independently verifying inventory costs reasonableness
testing valuation of inventory
determine method
focus on larger dollar amounts
compare inventory to invoices
4 influential characteristics of capital acquisition cycle
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
tolerable misstatement of capital acquisition cycle
set low
notes payable objectives
completeness
accuracy
tests of n/p
verify schedule
equity objectives
completeness
occurrence
accuracy