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21 Cards in this Set
- Front
- Back
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Persuasiveness |
1. Internally generate (invoice, minutes) - least persuasive because can be manipulated -only used to show that client converted info into F/S 2. Externally generated (bank statements) - fairly persuasive but could be manipulated as held by client, -scans are less persuasive 3. Externally generated evidence sent directly to the auditor (bank rec, expert valuations) - most persuasive (cannot be altered but still can have errors) |
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Evidence Gathering Procedures (as opposed to types of evidence) |
1. Inspection - examine records, documents, physical assets 2. Observation - watch a procedure -no other way of establishing process, only shows process at the time 3. Enquiry - asking questions -understand client, put pieces together 4. Confirmation - request information from a 3rd party 5. Recalculation - check math 6. Re-performance - reperform activities done by client -often used to check effectiveness of controls 7. Analytical review - evaluate financial info through analysis of relationships between financial and non financial (expected price X avg occupancy) |
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Permanent vs current file |
-permanent: information that applies to more than one audit (address, location, LT contracts) -current: information that applies to current audit (minutes, correspondence) |
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Audit Sampling |
-used when numerous transactions that need to be tested -Firms employ combo of statistical and non statistical for evidence --statistical: random selection and probability, stratification --non-statistical - cheaper and select based on judgement (haphazard, systematic, block, judgement) |
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Tests of controls |
-assess effectiveness -If CR is low will need to check substantively to confirm conclusion -if true, can reduce reliance on substantive procedures Substantive Procedures mainly about $ -test transactions -test balances -anaytical procedures Test of controls NOT about dollars -do not include recalculation and analytical processes -inspect documents -observe processes -enquire -re-perform to test controls |
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Common Test of controls procedures |
-inspection of documents for evidence of authorization and review -observation of clients doing tasks -enquiry about how tasks are performed -re-perform control procedures (purposefully making errors) |
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Substantive Procedures |
-auditor is looking for evidence to support the I/S and B/S assertions -higher risk of material misstatement means higher use of procedures to gather evidence Examples - I/S -existence: sending A/R confirmations (confirmation) -completeness - floor to sheet count test completeness of inventory (re-performance) -rights and obligations - verify that assets belong to client (inspection) -valuation and allocation - examine older A/R (inspection) Examples - B/S -occurrence - trace payroll expenses to supporting documents - test occurence of payroll expense (re-performance) -Completeness - trace invoice to ledger - test completeness of sales (re-performance) -accuracy - recalculate interest expense (recalculate) -cut-off - inspect shipping document date (inspection) -classification - review general ledger for appropriate classification - test (re-performance) |
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Nature, Timing and Extent of Audit Testing (not covered?) |
-nature: purpose and procedures -timing: when procedures are performed --low risk perform at interim --high risk, perform at year end -extent: quantity of evidence --low CR, test more control timeliness -near year end is better -full year better than month |
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Internal Controls |
Ensures: -reliable financial reporting -effectiveness and efficiency of operations -compliance with applicable laws and regulations |
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7 Internal Control Objectives |
1. Real - ensure no fake transactions 2. Recorded - prevent omissions of transactions 3. Values - ensure correct amounts 4. Classified - ensure correct accounts 5. Summarized - ensure totals are proper 6. Posted - ensure totals are transferred to general ledger 7. Timely - ensure transactions have been recorded in the correct period |
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Internal control limitatoins |
-human error -ineffective understanding of purpose -collusion to avoid control -disable or override software -management decisions about the nature and extent of controls implemented |
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Entity-level controls |
1. Control Environment - sets tone, attitude and awareness of entity for controls -communicate integrity and values -commitment to competence -participation of BOD -HR policies, assignment of authority -audit committee 2. Risk assessment processes - identify and analyze relevant risks in preparing financial statements -business risks (change in accounting standards increase errors, restructure weakens segregation) -estimate significance of risk and likelihood to occur -focus on operational effectiveness unlike auditor (interrupted supply, hedging for currencies) 3. Information Systems for reporting and communication - initiate, record, process, resolve transactions. Process to override, bypass, transfer of info -information system used -communication of fraud 4. Control Activities-policies to help ensure management directives are carried out (list on another slide) 5. Monitoring controls - assess quality of internal controls (internal audit function is good example) -how they remedy dificiencies |
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Transaction Level Control Activities (to detect and prevent) |
1. Performance Reviews - actual vs budget -review journal entries with supporting documents 2. Information Processing - check accuracy, completeness and authorization -application controls prevent transactions from occurring that should not 3. Authorization controls - who can approve transactions -authorization is required over hiring and firing and purchase of goods -passwords 4. Account reconciliations -done by someone independent and knowledgeable 5. Physical controls - safeguards to assets, periodic counting and comparisons 6. Segregation of incompatible duties - eliminate ability to perpetrate and hide fraud or errors -three duties to segregate --custody of assets --authorization and approval of transactions --recording or reporting of transactions -ex/ mail opener who prepares list of cheques should not make deposit |
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Test of controls |
-gain detailed understanding of internal controls for combined strategy -only test controls that are critical to audit opinion -determine extent --low CR = more testing --control used often = more testing --related controls being tested = less testing --reason to believe control did not work = more testing |
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Techniques for Testing Controls |
1. Inspect documents to ensure they are reviewed 2. Inspect documents to ensure they are approved 3. Inspect of physical evidence (is related documents attached) 4. Enquiry of client personnel on processes 5. Observe client performing control 6. reformance of control (recalculate AFDA estimate) |
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Small Companies and Internal Controls |
-difficult to implement internal controls -not enough employees to segregate duties -heavy reliance on manager (but this means manager can easily identify misstatements) |
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Documentatation |
-auditor will document purpose, internal controls selected for testing and tests performed and results -document deviations Forms of documenting controls 1) Narratives: used for simple controls - auditor describes each steps of transaction 2) Flowcharts: useful for more complex controls 3) Combination: narrative explains chart 4) Checklists and preformatted questionnaires - helps identify most common controls that should be present. Useful for less experienced |
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Addressing internal control weaknesses |
-management letter - addresses weak or missing controls |
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Sales Process |
-focus on existence and accuracy due to fear of overstating sales 1. accept and process orders -control: application only allows orders to be processed for customers with existing credit 2. Authorize credit (credit check for A/R-sales) -control: staff should not approve credit and accept orders (they could boost sales) -example controls: review authorization of credit, review credit limit 3.Ship goods -shipping should not be done by the person who approved the order -access to shipping area is limited to authorized personnel 4. Invoice Customers -orders all have sequential numbers to avoid fictitious invoices 5. Record Sales and trade receivables -invoice date cannot be changed without approval -send A/R statements regularly to fix discrepancies 6. Process cash receipts (collect cash) -person receiving cash should not also record the cash collections -prelist all incoming cash and compare to amount received 7. Write off uncollectible accounts for bad debts Always match sales order, shipping document and invoice to ensure no mistakes or fraud |
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Payroll Process |
-risk is overstatement as employees will ensure there is no understatement 1.Hiring of personnel -there should be a personnel file with all information -control: only authorized employees added to payroll to avoid fake employees 2. Timekeeping -control: manager approves hours worked so employees dont get paid for hours not worked 3. Compilation of the payroll (send hours to payroll department) -payroll should be reviewed by manager for accuracy 4. Payroll Processing (pay) -person in charge of hiring should not also be able to pay employees |
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Purchase cycle |
-most concerned with understating expenses (completeness) 1. Requisition (request good needed) -pre-numbered requisition -control: limits by level of authority 2.Purchasing -copy of purchase order sent to A/P -control: inventory count 3. Receiving -someone counts and inspects then documents on a receiving report. receival report sent to accounting -should not use purchase order as might count blind 4. Invoice processing -A/P processes invoice (compare purchase order, receiving report with invoice terms) -stamp as paid 5.Record purchases and payables -control: reconciliations between subsidiary ledger and general ledger to avoid errors 6. Disbursements -should be signed by two authorized individauls Same check between purchase order, receiving report and invoice |
