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79 Cards in this Set
- Front
- Back
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What is the hierarchy of audit evidence (most reliable to least reliable)?
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AEIO
1. Auditor's direct knowledge 2. External evidence 3. Internal evidence 4. Oral |
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What are the standard auditing procedures?
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FIVE CARROT CARS
1. Footing, cross-footing, and recalculation 2. Inquiry 3. Vouching (directional testing) 4. Examination/Inspection 5. Confirmation 6. Analytical Procedures 7. Reperforamnce 8. Reconciliaition 9. Observation 10. Tracing (directional testing) 11. Cut-off review 12. Auditing related accounts simultaneously 13. Representation letter 14. Subsequent events review |
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What is the obective of substantive testing?
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To detect material misstatements in the financial statements
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What are the different types of audit evidence?
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1. Accounting records
2. Corroborating evidence 3. Evidence in electronic form |
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Corroborating evidence can be obtained through....?
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Observation inquiry and inspection
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PCAOB standards state that the relevance of audit evidence depends on...?
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1. The design of the audit procedures (test assertion directly, understatement and overstatement)
2. Timing of the audit procedure |
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What are two type of substantive procedures?
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Test of details
Substantive analytical procedures |
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What are tests of details?
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Used to gather evidence to support the account balances as reflected in the financial statements. Test of details are performed on ending balances, the details of the transaction or a combination of the two.
transactions, balances and disclosures |
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What are analytical procedures?
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Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data.
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When are analytical procedures most effective?
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When potential misstatements are not apparent from an examination of the detailed evidence or when such detail is unavailabale
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True or false?
Income statement accounts are more predictable and accounts with management discretion are less predictable. |
True
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What are the documentation requirements for substantive analytical procedures?
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1. Expectations
2. Factors in the development of the expectation 3. Results 4. Additional audit procedures performed 5. Results of such audit procedures |
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If a test starts in the financial statements, the proper assertion is most likely to be...?
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Existence
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If a test starts with source documents, the proper assertion is most likely to be...?
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Completenesss
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A confirmation requiring a parting agrees or disagrees with the information is called...?
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Positive confirmation
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A confirmation requiring a party to respond only if the party disagrees with the information is called...?
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Negative confirmation
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What does footing mean?
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adding down
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What does crossfooting mean?
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adding across
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What are the assertions relevant to account balances?
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CVER
Completeness Valuation, allocation and accuracy Existence and occurrence Rights and obligations |
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When auditing asset balances, the auditor generally focuses on...?
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Testing the existence assertion
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When auditing liability balances, the auditor generally focuses on...?
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Testing the completeness assertion
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What are the assertions relevant to transactions and events?
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COVEU
Completeness Cutt-Off Valuation, allocation, accuracy Existence and occurrence Understand-ability and classification |
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What are the assertions relevant to presentation and disclosure?
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CVRU
Completeness Valuation, allocation, and accuracy Rights and obligations Understand-ability and classficiation |
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What are the relevant assertions for 1) Account Balances 2) Transactions and Events and 3) Presentation and Disclosure?
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1. CVER
2. COVEU 3. CVRU |
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What are the financial statement assertions in accordance with PCAOB standards?
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CEO APROVeD
Completeness Existence Occurrence Allocation Presentation Rights Obligations Valuation E Disclosure PCAOB assertions are CEO APROVeD |
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What are the audit procedures for the completeness assertion?
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TAO
Tracing Analytical Review Observation |
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What are the audit procedures for the Cut-Off assertion?
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Cut-Off procedures - analyze transactions before and after the year end for proper accounting period recognitiion
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What are the audit procedures for the valuation, allocation, and accuracy assertion?
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IFIR
Inspection - documents supporting transactions Footing - schedules Independent recalculation Reconciliation |
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What are the audit procedures for the existence and occurrence assertion?
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COV
Confirmation - accounts with third parties Observation, inspection, an examination - assets/process Vouching |
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What are the audit procedures for the rights and obligations assertion?
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Inspection - documentation supporting transactions, inspections of contracts
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What are the audit procedures for the understand-ability and classification assertion?
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IRI
Inspection - documentation supporting transactions Review - disclosures are in-compliance with GAAP Inquiry of management |
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What are the different types of transaction cycles?
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1. Revenue
2. Expenditure 3. Inventory 4. Investments 5, Property, Plant and Equipment 6. Payroll and Personnel 7. Financing |
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Internal Controls should have what three elements?
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ARC
Authority Record keeping Custody |
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Describe the revenue cycle process
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Sales to Credit Department
Credit Department to Shipping, Billing, and Accounting |
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What are ideal safeguards for collection of cash receipts?
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Lock boxes
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Describe the revenue cycle collections process?
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Customer Check
Mail Room Cashier Accounts Receivable Accounting |
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When auditing the revenue cycle, which assertion is more important - existence or completeness?
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Existence because the risk that accounts receivable and sales will be overstated.
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What kind of positive confirmation provides a greater degree of assurance?
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Blank forms
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In regards to the expenditure cycle, what is the greatest concern?
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Understatement of expenses and liabilities - you must trace
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Paid vouchers are returned where?
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To the accounting department for posting of the payment and filing of the documents
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What three documents will Accounts Payable match in order to prepare and approve the payment voucher?
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Purchase Order
Receiving Report Vendor Invoice |
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When auditing accounts payable, which assertion is more important - completeness or existence?
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Completeness and accuracy because of understatement if a higher risk.
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What is one of the best methods to use against lapping?
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Lock box system
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What is one of the best ways to detect kiting?
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A transfer schedule comparing the dates checks are drawn (on the disbursing bank) to the dates check are deposited (in the receiving account)
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In regards to the inventory cycle, which duties should be separated?
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Purchasing
Receiving Warehouse Shipping |
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True or false? Observation of the beginning and ending physical inventory counts are a required generally accepted auditing procedure.
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True
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What do you do if the auditor is not present to observe the physical inventory?
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Use alternative procedures
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What items should the auditor remain alert for in regards to third party transactions?
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1. Compensating balance arrangments
2. Loan guarantees 3. Unusual, non-recurring transactions near year end 4. Transactions based on terms that differ significantly form market terms 5. Non-monetary exchnage |
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What is the purpose of a letter of inquiry to the client's attorney?
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To corroborate information provided by the client
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What is the formula for working capital?
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Current assets - Current liabilties
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What is the formula for current ratio?
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Current assets / current liabilities
ability to meet short-term obligations |
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What is the formula for the acid-test ratio?
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cash equivalents + marketable securities + AR / Current Liabilities
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What is the formula for the cash ratio?
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Cash equivalents + Marketable securities / current liabilities
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What is the formula for AR Turnover
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Net Credit Sales / Average Net Recievables
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What is the formula for the AR turnover in days
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365 / Receivable turnover
indicates the average number of days required to collect AR |
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What is the formula for inventory turnover?
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COGS / Average Inventory
measures how quickly inventory is sold |
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What is the formula for inventory turn-over in days?
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365 / Inventory Turnover
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What is the formula for the operating cycle?
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AR Turnover in Days + Inventory Turnover in Days
Indicates the number of days between acquisition of inventory and realization of cash from selling inventory |
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What is the formula for working capital turn-over
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sales / average working capital
indicates how effectively working capital is being used |
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What is the formula for total asset turnover?
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net sales / average total sales
Indicates how effectively a company uses its assets |
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What is the formula for accounts payable turn-over?
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COGS / Accounts Payable
Indicates the number of times trade payables turn-over in a given year |
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What is the formula for days in accounts payable
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Average AP / (COGS / 365)
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What is the formula for net profit margin
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net income / net sales
indicates the profit rate |
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What is the formula for return on assets?
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Net Income / Average total assets
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What is the formula for return on investment?
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Net Income + Interest Expense (1 - Tax Rate) / Average (Long Term Liabilities + Equity)
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What is the formual for return on common equity
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Net Income - Preferred dividends / Average common equity
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What is the formula for net operating margin percentage?
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Net operating income / Net sales
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What is the formula for gross profit margin percentage
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Gross profit margin / Net sales
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What is the formula for operating cash flow per share
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Operating cash flow / common sharers outstanding
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What is the formula for the degree of financial leverage?
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Earning before interest and taxes / Earnings before taxes
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What is the formula for earnings per share?
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Net Income - Preferred Dividends / Weighted Average Number of Common Shares Outstanding
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What is the formula for Price / earnings ratio?
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Market price per share / diluted earnings per share
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What is the formula for the dividend payout ratio?
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Dividends per common share / diluted earnings per share
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What is the formula for dividend yield?
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Dividends per common share / market price per common share
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What is the formula for the book value per common share?
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Total stockholders' equity - preferred stock / number of common shares outstanding
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What is the formula for Debt / Equity?
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Total Liabilities / Common Stockholders equity
indicates degree of protection to creditors in case of insolvency |
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What is the formula for the debt ratio?
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total liabilities / total assets
indicates how much of the assets are financed |
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What is the formula for times interest earned?
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earnings before taxes and interest / interest
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What is the formula for operating cash flow / total debt
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Operating cash flow / total debt
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