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115 Cards in this Set
- Front
- Back
Management's Responsibility
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Prep & presentation of F/S in accordance w/applicable framework; Design, implementation, and maintenance of internal controls relevant to F/S presentation & provide auditor access to all necessary information needed
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Auditor's Responsibility
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Express opinion on F/S based on results of audit
Obtain reasonable assurance F/S free from material misstatement due to error or fraud |
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SAS
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Statements on Auditing Standards
issued by AICPA for audits of NON-issuers |
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AS
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Auditing Standards
issued by PCAOB for issuers |
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Unmodified Opinion
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Introductory Paragraph
MR. DIM AR.EPPORTS CRAME Opinion Paragraph Report on Other Legal & Regulatory Requirements |
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Introductory Paragraph
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Audit was performed & indicate individual financial statements that were audited
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Auditor's Responsibility Paragraph
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Express opinion on F/S based on audit; conducted in accordance with GAAS in US; require auditor to plan & perform audit to obtain reasonable assurance F/S free from MM; details of whats involved in performing audit & rationale for procedures selected & risk assessment; evidence obtained is sufficient & appropriate to provide basis for opinion
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Opinion Paragraph
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opinion regarding fair presentation of F/S in accordance w/applicable financial reporting framework
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Qualified Report
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"Except for"
GAAP---Material departure- accounting policy, F/S presentation, inadequate disclosure, unreasonable estimate GAAS--Material---insufficient evidence; scope limitation |
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Disclaimer
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No opinion expressed
Unable to obtain sufficient appropriate audit evidence on which to base opinion & auditor concludes possible effects of undetected misstatements could be both material & pervasive |
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Adverse
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F/S NOT presented fairly b/c mgmt. failed to follow GAAP
Misstatements individually/aggregate are both material & pervasive to F/S |
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Emphasis of Matter
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Referring to matter adequately disclosed;
important to users; AFTER opinion Going concern; Justified acctg change Special Purpose Framework |
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Other Matter Paragraph
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Matters other than presented/disclosed in F/S relevant to understanding audit
AFTER Opinion & Emphasis of Matter Restrict use of report prior F/S |
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Elements of Quality Control System
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HELP ME
Human Resources Engagement Acceptance Leadership Responsibilities Performance Monitoring (review) Ethical Requirements |
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NET varies based on:
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size, structure, complexity, and cost-benefit considerations
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Quality Control Standards vs GAAS
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Apply to all professional activities of firm's practice
Apply to individual audit engagements Failed QC <> Failed GAAS |
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Special Purpose Frameworks
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Cash Basis, Tax basis, regulatory basis, or contractual basis
OCBOA- Other Comprehensive Basis of Accounting |
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Compliance w/contractual agreements/regulatory requirements
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Negative assurance on compliance- restrict use of report
must have audited F/S "nothing came to auditor's attention" |
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Summary Financial Statements
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Unmodified or Adverse NOT qualified
Withdraw when report on F/S contains adverse/disclaimer |
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SSARS
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Statements on Standards for Accounting and Review Services
Govern Compilations & Reviews |
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Elements of Compilations & reviews
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3party relationship involving mgmt, acct, & users
Applicable financial reporting framework F/S or financial information Sufficient appropriate evidence (review) Written Communication/report |
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Engagement Letter
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Document of understanding with client regarding service being provided
Objectives & scope of engagement, limitations, Mgmt's & auditor's responsibilities |
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Compilation
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NO assurance
Independence not required--must be disclosed |
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General Understanding of Client's business
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STAFF
Staff qualifications, transactions types & frequency, accounting basis used, form of accounting records, F/S form and content |
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Compilation report
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Title, Addressee
Intro (CAR)- compiled NOT audited/reviewed MR. DIM AR. SOM (SSARS issued by AICPA objective to assist mgmt |
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Review
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Limited Assurance
Client Representation Letter from mgmt No tests of controls; NO assessment control risk Analytical procedures |
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Review Report
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Title, Addressee
Intro- AMISAD--Analytical procedures to mgmt.'s financial data & inquires of company mgmt, substantially less in scope than audit, doesn't express opinion MR. FI (fair presentation F/S; maintain I/C) AR.SALA (SSARS by AICPA; Limited Assurance) |
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Review of Interim Financial Info--Procedures
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U LIAR CPA
Understanding w/client (engagement letter) Learn entity's business & I/C Inquires of appropriate individuals (mgmt) Analytical Procedures Review minutes/financial info Client Rep letter from mgmt Professional judgment to evaluate results Auditor communicates |
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Comfort letter
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restricted use letter from accountant to named underwriter sent right before registration of client's securities
Positive assurance- CPAs independence & compliance Negative assurance- f/s not audited/review was performed on condensed unaudited interim f/s or capsule financial info |
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Attest Engagement Standards
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TIPPY----use SSAE
Training & proficiency, Independence, Performance/due professional care Professional knowledge of subject matter, Your belief as to whether assertion is capable of evaluation |
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Attest Fieldwork standards
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PA
Planning & Supervision Appropriate Sufficient Evidence |
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Attest Reporting Standards
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SSER
Subject matter of assertion disclose Significant reservations Express conclusion Restrict use of report (sometimes) |
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Agreed-upon Procedures
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NO ASSURANCE---IAMSURE
Independence; Agreement of parties on procedures, subject matter capable of consistent measurement, sufficiency of designated procedures, use of report restricted, client responsible for subject matter, engagements include summary of significant assumptions used for prospective f/s |
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Planning Stage
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Obtain knowledge of business & industry
Develop overall audit strategy Develop audit plan |
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Audit Strategy
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outlines scope of engagement, reporting objectives, timing of audit, required communications, factors that determine focus of audit
preliminary assessment of materiality & tolerable misstatement |
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Audit Plan
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based on audit strategy & outlines NET of procedures to performed during audit
--risk assessment procedures to be performed --planned further audit procedures |
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Substantive Procedures
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Detect misstatements- response to planned level of detection risk
-tests of details -substantive analytical procedures REQUIRED for all relevant assertions |
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Financial Statement Assertions
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COVER-U
Completeness CutOff Valuation, Allocation, & Accuracy Existence Rights & Obligations Understandability & Classification |
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Completeness
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Balances, Transactions, Disclosures
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Cutoff
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Transactions
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Valuation, Allocation, Accuracy
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Balances, Transactions, Disclosures
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Existence & occurrence
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Balances, Transactions
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Rights & Obligations
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Balances, Disclosures
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Understandability & Classification
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Disclosures
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PCAOB Financial Statement Assertions
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CEO APROVeD
Completeness, Existence, Occurrence, Allocation, Presentation, Rights, Obligations, Valuation, Disclosure |
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Audit Risk
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risk F/S materially misstated but opinion is not appropriately modified
= (IR X CR) X DR = RMM X DR |
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Risk of Material Misstatement
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IR X CR
risk that F/S are materially misstated |
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Inherent Risk
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Susceptibility of relevant assertion to material misstatement, assuming no related controls
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Control Risk
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Risk that controls fail to prevent/detect material misstatement in F/S assertion
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Detection Risk
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risk that the auditor doesn't detect material misstatement in a F/S assertion
Controlled by auditor by varying NET |
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Risk Assessment Tools
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Inquiries, Analytical procedures, observation & inspection, risk assessment discussion among audit team members
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Internal Control
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help company meet its objectives (reliable financial statements, effective/efficient operations, compliance w/laws/regulations)
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Components of Internal Control
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CRIME
Control Environment Risk Assessment- (mgmt.'s assessment) Information Systems Monitoring Existing Control Activities |
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Control Activities
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PAID TIPS
Prenumbering, Authorization of transactions, independent checks, documentation, timely & appropriate performance reviews, Information processing, Physical control, Segregation of duties |
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Segregation of Duties
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ARC- Authorization, Recordkeeping, Custody
COPAL- Control Group, Operators, Programmers, Analysts, Librarians |
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Tests of Controls
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evaluate operating effectiveness of controls
Inquiry, inspection, observation, reperformance |
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Audit Evidence Hierarchy
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AEIO
Auditor's knowledge, External evidence, internal evidence, oral evidence |
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Substantive Procedures
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tests of details
analytical procedures |
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Tests of Detail
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audit procedures applied to ending balances, details of transactions, or combination
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Analytical Procedures
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studying plausible relationships amond data & usually involves comparison of recorded amounts to auditor expectations
Comparisons & ratios Required during planning & final review more appropriate with predictable relationships |
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Tracing
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Test for completeness.
Start with source documents & trace to accounting records Identify understatement errors |
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Vouching
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Test for Existence
Start with accounting records and vouch backwards to original source documents Identify overstatement errors |
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Positive Confirmation
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party responds whether they agree/disagree w/information provided in request
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Negative Confirmation
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Parties respond only if disagree with information provided in request
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Standard Audit Procedures used
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FIVE CARROT CARS
Footing; Inquiry; Vouching; Examination Confirmation; Analytical Procedures; Reperformance; Reconciliation; Observation; Tracing Cutoff; Auditing Related Accounts; Rep Letter; Subsequent Events Review |
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Account Balances Main Assertions
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Completeness
Valuation, Allocation, Accuracy Existence Rights & Obligations |
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Transactions & Events Main Assertions
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Completeness
Cutoff Valuation, Allocation, Accuracy Existence Understandability |
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Disclosures Main Assertions
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Completeness
Valuation, Allocation, Accuracy Rights & Obligations Understandability |
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Completeness- Procedures
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Tracing, Analytical Review, Observation
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Valuation, Allocation, Accuracy Procedures
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Inspection, footing, independent recalculation , reconciliation
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Existence Procedures
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Confirmations, Observation, Inspection, Examination, Vouching
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Rights & Obligations Procedures
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Inspection
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Understandability Procedures
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Inspection, review, inquiry
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Lapping
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Using today's cash receipts to cover yesterday's theft
- inspect dates deposited vs receivable credited |
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Kiting
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Cash recorded in two places at once
-bank transfer schedule -dates deposited and recorded |
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Liquidity Ratios
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Working Capital
Current Ratio Acid Test Cash Ratio |
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Working Capital
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Current Assets - Current Liabilities
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Current Ratio
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Current Assets/Current Liabilities
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Acid Test
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Cash Equil + Marketable Sec. + AR
--------------------------------------------------- Current Liabilities |
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Activity Ratios
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AR Turnover
Inventory Turnover Operating Cycle Working Capital Turnover Total Asset Turnover Accounts Payable Turnover |
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Accounts Receivable Turnover
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Net Credit Sales/Avg Accounts Receivable
Days= 365/ AR Turnover |
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Inventory Turnover
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Cost of Goods Sold/Avg Inventory
Days = 365/Inventory Turnover |
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Operating Cycle
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AR Turnover Days + Inventory Turnover Days
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Working Capital Turnover
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Sales/Average Working Capital
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Total Asset Turnover
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Net Sales/Average Total Assets
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Accounts Payable Turnover
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Cost of Goods Sold/Average Accounts Payable
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Profitability Ratios
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Net Profit Margin
Return on Total Assets Return on Assets Return on Investment Return on Common Equity Net Operating Margin % Gross Profit Margin % |
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Net Profit Margin
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Net Income/Net Sales
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Return on Total Assets
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Net Income/Average Total Assets
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Return on Assets
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Net Profit Margin * Total Asset Turnover
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Return on Investment
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Net Income + Interest Exp (1-Tax Rate)
-------------------------------------------------------- Average(Long-term Liabilities + Equity) |
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Return on Common Equity
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Net Income - Preferred Dividends
-------------------------------------------------- Average Common Equity |
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Net Operating Margin %
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Net Operating Income/Net Sales
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Gross Profit Margin %
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Gross Profit Margin/Net Sales
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Sampling Risk
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sample is not representative of population & therefore auditor's conclusion will be incorrect
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Audit Risk
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Uncertainty inherent in applying audit procedures
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Attribute Sampling
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estimate a rate of occurrence (exception) of a specific characteristic
Internal Control testing Risk of Assesing Control risk too high/too low Deviations/errors |
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Risk of assessing control risk too high
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Overreliance (beta risk)
Sample indicates control is working but it is not Effectiveness problem |
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Risk of assessing control risk too low
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Underreliance (alpha risk)
Sample indicates control is not working when it is Efficiency problem |
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Variables Sampling
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Used to estimate a numerical quantity
Substantive Testing Risk of Incorrect Acceptance/Rejection Misstatements |
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Risk of Incorrect Acceptance
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Beta Risk- Effectiveness
Sample indicates balance is fairly stated when it isn't 5-10% risk; 90-95% confidence |
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Risk of Incorrect Rejection
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Alpha Risk- Efficiency
Sample indicates balance isn't fairly stated when it is |
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Factors Affecting Sample Size (attribute)
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Risk of assessing control risk low (inverse)
Tolerable Deviation Rate (inverse) Expected Deviation Rate- direct |
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Factors Affectign Sample Size (variable)
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Expected misstatement
Population Variability Assessed level of risk Tolerable Misstatement (inverse) Acceptable level of risk (inverse) |
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Mean Per Unit Sampling
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Sensitive to variability
Average value of items in sample to estimate the true value of population |
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Ratio Estimation
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Ratio of corrected values of items to book value
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Difference Estimation
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Average difference between corrected values and book values
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PPS Sampling
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hybrid method that uses attribute sampling theory to express conclusion in dollar amounts
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PPS Sampling Interval
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Tolerable Misstatement/Reliability factor
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PPS Sample Size
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Recorded Amount Population/Sampling Interval
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PPS Tainting
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Book value - Audited Value
-------------------------------------------- Book Value |
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PPS Projected Error
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Sample Interval * Tainting
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Nonissuers- Controls during audit
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Mgmt's responsibility to evaluate & address control deficiencies
Auditor's responsibility- evaluated control deficiencies become aware of during audit & repot significant/material weaknesses Disclaimer regarding internal control; 60 days after report release date |
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Purposes of Management Rep Letter
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Confirm representations given to auditor
Documetn continuing appropriateness of such representations Reduce Possibility of missunderstanding |
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Contents of Management Rep Letter
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Date- same as audit report; signed by CEO & CFO;
responsible for fair presentation F/S & DIM completeness of information; misstatements due to fraud/knowledge of actual/suspected fraud identified/suspected noncompliance w/laws uncorrected misstatments mgmt believes immaterial actual/possible litigation/claims related parties, subsequent events, acct est. reasonable |