Auditing Procedures Quiz
108 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which of the following is NOT a major item on a bank reconciliation?

  • Deposits in transit
  • Cash receipts
  • Inventory valuation (correct)
  • Outstanding checks

Type 1 subsequent events require an adjustment to financial statements.

True (A)

What should an auditor obtain to verify cash receipts and cash disbursements during an audit?

Internal control documentation and bank confirmations

The auditor asks attorneys for information about pending or threatened litigation, including the probability of an unfavorable _____ for the client.

<p>outcome</p> Signup and view all the answers

Match the following types of subsequent events with their descriptions:

<p>Type 1 = Event that requires adjustment to financial statements Type 2 = Event that does not require adjustments Pending litigation = Existence of uncertainties that may affect financial outcomes Cash reconciliation = Involves tracing cash balances to general ledger</p> Signup and view all the answers

Which procedure is used to trace deposit in transit during a bank reconciliation?

<p>Trace to the cutoff bank statement (D)</p> Signup and view all the answers

Cash balances are only affected by internal controls related to cash receipts.

<p>False (B)</p> Signup and view all the answers

List one item that an auditor should check when testing a bank reconciliation.

<p>Outstanding checks or deposits in transit</p> Signup and view all the answers

Which section is NOT included in the major sections of a private company audit report?

<p>Revenue projections (C)</p> Signup and view all the answers

The ASB audit report includes a reference to Internal Control over Financial Reporting (ICFR).

<p>False (B)</p> Signup and view all the answers

What must the title of an independent audit report include?

<p>The term 'independent'</p> Signup and view all the answers

A clean opinion for a PCAOB audit is referred to as ______, while an ASB audit uses the term ______.

<p>unqualified, unmodified</p> Signup and view all the answers

Match the audit report sections with their descriptions:

<p>Opinion Section = Expresses the auditor's conclusion on the financial statements Basis for Opinion = Explains the reasoning behind the auditor's opinion Management's Responsibility = Outlines the duties of management regarding the financial statements Signature = The auditor's confirmation of the report's authenticity</p> Signup and view all the answers

What is the primary purpose of sending a legal letter to attorneys?

<p>To obtain information about litigation, assessments, and claims (B)</p> Signup and view all the answers

Type 1 subsequent events require no adjustments to the financial statements.

<p>False (B)</p> Signup and view all the answers

What is one method auditors use to identify subsequent events?

<p>Inquiring with management</p> Signup and view all the answers

A Type 2 subsequent event arises after the date of the __________.

<p>financial statements</p> Signup and view all the answers

Match the type of subsequent events with their descriptions:

<p>Type 1 = Requires adjustment to financial statements Type 2 = No adjustment but disclosure is necessary if important Type 1 example = A legal judgment made before the reporting date Type 2 example = Purchase of another company after the reporting date</p> Signup and view all the answers

What is the primary purpose of a cutoff bank statement?

<p>To trace checks and deposits for accuracy (D)</p> Signup and view all the answers

Lapping is when cash is stolen after it is recorded on the company’s books.

<p>False (B)</p> Signup and view all the answers

What are the key assertions in inventory management?

<p>Existence, valuation, rights and obligations, completeness</p> Signup and view all the answers

What should be avoided when tagging inventory?

<p>Double tagging items (A)</p> Signup and view all the answers

Conducting regular __________ of physical inventory helps compare it with perpetual records.

<p>counts</p> Signup and view all the answers

Consignment inventory should be mixed with regular inventory during counts.

<p>False (B)</p> Signup and view all the answers

What is a contingent liability?

<p>An existing condition involving uncertainty about a possible loss that will be resolved by a future event.</p> Signup and view all the answers

Match the following terms with their descriptions:

<p>Kiting = Transferring funds between accounts and recording improperly Cycle counts = Counting a portion of inventory on a rotating basis Proof of cash = Reconciles cash transactions between records and the bank Lapping = Stealing cash before it is recorded</p> Signup and view all the answers

When evaluating inventory, it is important to watch for __________ items.

<p>damaged</p> Signup and view all the answers

Which type of fraud involves moving money around to cover cash shortages?

<p>Lapping (C)</p> Signup and view all the answers

Match the type of contingent liability with its description:

<p>Probable = Future event likely to occur Reasonably possible = Chances of event occurring are more than remote but less than likely Remote = Chance of event occurring is slight Pending litigation = Legal action that has been initiated but is not yet resolved</p> Signup and view all the answers

Cycle counts are performed only at the end of the fiscal year.

<p>False (B)</p> Signup and view all the answers

What is the purpose of comparing physical counts to perpetual records?

<p>To ensure completeness of inventory records</p> Signup and view all the answers

Which of the following is an example of a contingent liability?

<p>Pending litigation (C)</p> Signup and view all the answers

Legal letters are sent to attorneys to discuss a client's case.

<p>False (B)</p> Signup and view all the answers

The process of __________ involves obtaining and verifying the costs of inventory items.

<p>inventory price testing</p> Signup and view all the answers

What should be examined to test for contingent liabilities?

<p>Contracts, loan agreements, and correspondence from government agencies.</p> Signup and view all the answers

Which of the following activities supports the existence assertion in inventory management?

<p>Cycle counts (A)</p> Signup and view all the answers

To obtain information about contingent liabilities, one should inquire with __________.

<p>management</p> Signup and view all the answers

Which document is typically obtained to confirm contingent liabilities?

<p>Legal letter (B)</p> Signup and view all the answers

What type of audit report is referred to as an 'unqualified' report?

<p>Public company (D)</p> Signup and view all the answers

The ASB audit report includes a reference to internal control over financial reporting.

<p>False (B)</p> Signup and view all the answers

What is the main purpose of an emphasis of matter paragraph in an audit report?

<p>To add explanatory language for circumstances that require additional explanation.</p> Signup and view all the answers

An auditor may issue a _______ opinion if financial statements are not in conformity with GAAP.

<p>qualified</p> Signup and view all the answers

A compilation engagement provides a reasonable level of assurance.

<p>False (B)</p> Signup and view all the answers

During an audit, what must the auditor do concerning other documents containing financial statements?

<p>Read other information and consider its consistency with the audited financial statements.</p> Signup and view all the answers

Critical audit matters are required in _______ audit reports.

<p>PCAOB</p> Signup and view all the answers

Match the following concepts with their correct definitions:

<p>Compilation = No level of assurance, using client source documents Review = Limited level of assurance with analytical procedures Audit = Reasonable level of assurance with substantive testing Qualified Opinion = Opinion issued when FS materially affected by GAAP departure</p> Signup and view all the answers

What is a potential outcome if there is a scope limitation during an audit?

<p>Disclaimer (A)</p> Signup and view all the answers

All significant transactions must always be disclosed in a financial audit report.

<p>True (A)</p> Signup and view all the answers

What is a primary difference between a compilation and a review engagement?

<p>A compilation provides no assurance, while a review engagement provides limited assurance.</p> Signup and view all the answers

In PCAOB reporting, the title must include the terms _______ and independent.

<p>registered</p> Signup and view all the answers

What type of opinion is issued if the auditor is not independent?

<p>Disclaimer (A)</p> Signup and view all the answers

Which procedure is used to audit inventory costing?

<p>Recalculate average cost and verify with purchase documents (C)</p> Signup and view all the answers

An auditor should observe that inventory is counted multiple times to ensure accuracy.

<p>False (B)</p> Signup and view all the answers

List one procedure an auditor might use to search for unrecorded liabilities.

<p>Obtain a listing of payments made after the balance sheet date.</p> Signup and view all the answers

During the inventory count, the auditor must determine that goods received during the count are properly __________.

<p>segregated</p> Signup and view all the answers

Match the inventory procedures with their descriptions:

<p>Inventory price testing = Verifying cost of inventory item Test counts = Tracing quantities to final count Segregation of inventory = Ensuring consignment items are marked Observing inventory plan = Scrutinizing client employees' adherence</p> Signup and view all the answers

Which of the following is NOT a procedure during the count of the entity's physical inventory?

<p>Count every item multiple times (B)</p> Signup and view all the answers

An auditor should perform inventory price testing by obtaining a sample of inventory items and verifying their cost.

<p>True (A)</p> Signup and view all the answers

What is one item an auditor should be alert for during the physical inventory count?

<p>Empty containers or hollow squares.</p> Signup and view all the answers

What is the primary purpose of obtaining a management representation letter?

<p>To corroborate significant oral representations made by management during the audit (C)</p> Signup and view all the answers

A management representation letter is signed by the Chief Information Officer (CIO).

<p>False (B)</p> Signup and view all the answers

What types of analysis are performed during the final stage of an audit?

<p>Final analytical procedures and review of corrected and uncorrected misstatements.</p> Signup and view all the answers

A scope limitation may lead an auditor to issue a __________ opinion.

<p>qualified</p> Signup and view all the answers

Which of the following procedures is NOT typically performed near the end of an audit?

<p>Select audit team members (C)</p> Signup and view all the answers

Match the following situations with the corresponding audit opinion:

<p>Scope limitation = Qualified opinion or disclaimer Non-conformity with GAAP = Qualified opinion or adverse opinion Auditor not independent = Disclaimer</p> Signup and view all the answers

Pervasiveness refers to how materiality affects specific elements rather than the overall financial statements.

<p>False (B)</p> Signup and view all the answers

How does an auditor determine the effect of materiality on an opinion rendered?

<p>By judging whether the item's effects are confined to specific elements or are pervasive across the financial statements.</p> Signup and view all the answers

What is the primary purpose of a legal letter sent to attorneys?

<p>To gather information about litigation, assessments, and claims (C)</p> Signup and view all the answers

What is an example of a Type 1 subsequent event?

<p>A court ruling on a pending lawsuit that occurred before the financial statement date.</p> Signup and view all the answers

The auditor verifies the outcomes of litigation by inquiring with the client's _______.

<p>legal counsel</p> Signup and view all the answers

Match the following types of subsequent events with their characteristics:

<p>Type 1 = Event occurred before the financial statements date Type 2 = Event occurred after the financial statements date</p> Signup and view all the answers

What is the primary purpose of a proof of cash?

<p>To reconcile cash transactions between accounting records and the bank (A)</p> Signup and view all the answers

Kiting involves stealing cash before it is recorded in the company’s books.

<p>False (B)</p> Signup and view all the answers

What is one way to test for lapping during an audit?

<p>Analyze cash receipts and payments for unusual patterns.</p> Signup and view all the answers

The process of _______ involves regularly comparing perpetual records with actual inventory.

<p>cycle counts</p> Signup and view all the answers

Which assertion is primarily tested through regular counts of physical inventory?

<p>Existence (C)</p> Signup and view all the answers

Auditors should observe that all merchandise is counted once and only once during the _______.

<p>inventory count</p> Signup and view all the answers

Conducting regular reviews of obsolete inventory is part of the valuation assertion for inventory.

<p>True (A)</p> Signup and view all the answers

What is the key assertion that pertains to the legal rights of ownership over inventory?

<p>Rights and obligations</p> Signup and view all the answers

What should an auditor do to check for unusual items on a cutoff bank statement?

<p>Scan for unusual transactions (C)</p> Signup and view all the answers

What is the primary purpose of internal controls in the revenue process?

<p>To prevent revenue manipulation (A)</p> Signup and view all the answers

All cash receipts transactions recorded have occurred is an assertion related to authorization.

<p>False (B)</p> Signup and view all the answers

Name one procedural step involved in understanding a client's revenue process.

<p>Conduct analytical procedures</p> Signup and view all the answers

The ________ process is essential to ensuring the accuracy of accounts receivable.

<p>confirmation</p> Signup and view all the answers

Match the assertion with its description:

<p>Occurrence = Transactions recorded have occurred and pertain to the entity Completeness = All transactions that should have been recorded have been recorded Authorization = All transactions are properly authorized Accuracy = Amounts relating to transactions have been recorded appropriately</p> Signup and view all the answers

Which of the following types of fraud is related to bid rigging?

<p>Illegally influencing a bidding process (D)</p> Signup and view all the answers

The bank reconciliation process helps identify potential fraud and theft of cash.

<p>True (A)</p> Signup and view all the answers

What are two methods auditors use to test the occurrence assertion?

<p>Vouching entries and reviewing segregation of duties</p> Signup and view all the answers

A major control over cash is ensuring __________ of duties in cash handling processes.

<p>segregation</p> Signup and view all the answers

Match the internal control activity with its purpose:

<p>Restrictive endorsement of checks = Indicates which checks are approved for cashing Electronic funds transfer = Ensures timely deposit of cash Preparation of pre-list of mail receipts = Documents all cash received Independently verifying cash receipts = Provides an additional layer of security</p> Signup and view all the answers

If an auditor identifies a high-risk material misstatement in revenue, what will they likely do?

<p>Perform more extensive substantive procedures (B)</p> Signup and view all the answers

All tests of controls must be performed at year-end.

<p>False (B)</p> Signup and view all the answers

State one common control used in the cash disbursements process.

<p>Examination of cancelled checks for authorized signatures</p> Signup and view all the answers

The main goal of accrued liabilities testing is to detect significant __________ obligations.

<p>unrecorded</p> Signup and view all the answers

What is classified as a 'probably' contingent liability?

<p>Future event likely to occur (C)</p> Signup and view all the answers

What should an auditor inquire about to identify slow moving inventory items?

<p>Employees</p> Signup and view all the answers

A liability should be disclosed if it is deemed __________ possible.

<p>reasonably</p> Signup and view all the answers

Match the following contingent liability types with their descriptions:

<p>Probable = Must be shown as a liability and disclosed Reasonably Possible = Should disclose it Remote = Slight chance of occurrence Litigation = Pending or threatened legal action</p> Signup and view all the answers

Which item indicates a need for the auditor's special attention during inventory counts?

<p>Empty containers (B)</p> Signup and view all the answers

The presence of damaged and obsolete inventory items should not affect the auditing process.

<p>False (B)</p> Signup and view all the answers

When should an auditor review contracts and government correspondence for contingent liabilities?

<p>During the audit testing phase</p> Signup and view all the answers

Attorneys cannot discuss a client's case without __________ from the client.

<p>permission</p> Signup and view all the answers

Which document should be confirmed to assess contingent liabilities?

<p>Legal letters (D)</p> Signup and view all the answers

Reviewing purchase documents to match inventory price is primarily concerned with which assertion?

<p>Valuation (D)</p> Signup and view all the answers

Reviewing subsequent payments after year-end is related to the assertion of existence.

<p>False (B)</p> Signup and view all the answers

What assertion is associated with reviewing cash receipts during an audit?

<p>Existence</p> Signup and view all the answers

The circumstances under which an auditor may change their opinion for an audit report are often related to the __________ of the financial statements.

<p>fair presentation</p> Signup and view all the answers

Match the following audit procedures with their associated assertions:

<p>Reviewing cash receipts = Existence Reviewing subsequent payments = Completeness Matching inventory price with purchase documents = Valuation Examining cutoff procedures = Accuracy</p> Signup and view all the answers

Flashcards

Audit Report Sections (Private Company)

The audit report for private companies includes sections like title (must include "independent"), address, opinion, basis for opinion, management responsibility, signature, and date.

Audit Report Differences (Public vs. Private)

Public company (PCAOB) audits require an unqualified opinion and include a discussion of Internal Control over Financial Reporting (ICFR), while private company (ASB) audits have an unmodified opinion and no ICFR discussion. Critical audit matters (CAMs) are required for both types of audits.

Audit Opinion

Auditor's judgment on whether the financial statements fairly present the company's financial position.

Critical Audit Matters (CAMs)

Significant findings during the audit requiring specific disclosure in a public company audit report and are optional for private audits.

Signup and view all the flashcards

Financial Statement Disclosures

Information in financial statements crucial for users to understand the financial position and performance of a business.

Signup and view all the flashcards

Bank Reconciliation Testing

Procedures to verify the accuracy of a bank reconciliation, involving tracing balances, confirming with banks, and reviewing cutoff statements.

Signup and view all the flashcards

Cash, Revenue, and Purchases/Payables Audits

Interconnected audits focusing on internal controls impacting cash, revenue, and purchasing/payables. Cash controls affect revenue and purchase processes.

Signup and view all the flashcards

Inventory, Revenue, and Purchases/Payables Audits

Linked audits where inventory controls affect purchases and sales, traced through documentation to confirm existence, valuation, and accuracy.

Signup and view all the flashcards

Litigation and Financial Statements

Auditors need information from attorneys about pending/threatened litigation to understand potential financial statement uncertainties.

Signup and view all the flashcards

Subsequent Events (Type 1)

Events after the financial statement date that provide evidence of conditions existing at that date, requiring adjustments.

Signup and view all the flashcards

Subsequent Events (Type 2)

Post-statement-date events revealing conditions arising after the report date, requiring no adjustments.

Signup and view all the flashcards

Reconciliation Major Items

Key components of a bank reconciliation – outstanding checks, deposits in transit, cash receipts, cash disbursements.

Signup and view all the flashcards

Bank Confirmation

Obtaining direct confirmation from banks about the balance held by a client, as part of auditing the bank balance and reconciliation.

Signup and view all the flashcards

Cutoff Bank Statement

A bank statement covering the period after the balance sheet date, used to verify transactions near the balance sheet date.

Signup and view all the flashcards

Proof of Cash

A procedure used when fraud risk is high, reconciling cash receipts and disbursements between accounting records and the bank.

Signup and view all the flashcards

Lapping

Fraudulent activity where cash is stolen before recording, concealing the theft by applying receipts from other customer accounts.

Signup and view all the flashcards

Kiting

Fraudulent activity where cash is stolen after recording, transferring funds between accounts and recording it improperly across different reporting periods.

Signup and view all the flashcards

Cycle Counts

Regular counts of a portion of inventory throughout the year, comparing to perpetual records to find discrepancies.

Signup and view all the flashcards

Inventory Observation

Auditor's scrutiny of client employees' inventory counting procedures to ensure accuracy and completeness during a physical inventory count.

Signup and view all the flashcards

Existence Assertion

Assurance that recorded inventory exists physically.

Signup and view all the flashcards

Valuation Assertion

Assurance that inventory is valued correctly, considering factors like obsolescence and costs.

Signup and view all the flashcards

Completeness Assertion

Assurance that all inventory is recorded in the accounting records.

Signup and view all the flashcards

Rights and Obligations Assertion

Assurance that the company has legal ownership and control over its inventory, including consignment inventory.

Signup and view all the flashcards

Legal Letter

An audit inquiry sent to attorneys to gather information about litigation, assessments, and claims.

Signup and view all the flashcards

Type 1 Subsequent Event

An event that provides evidence of conditions existing at the financial statement date, requiring an adjustment.

Signup and view all the flashcards

Type 2 Subsequent Event

Evidence of conditions arising after the financial statement date. No adjustments but disclosure is needed if important.

Signup and view all the flashcards

Audit for Subsequent Events

Involves understanding how management identifies events, interviewing management, reviewing meeting minutes, interim financials, and other records.

Signup and view all the flashcards

Legal Counsel Inquiry

Part of auditing; involves asking legal counsel about litigation, claims, and assessments during subsequent event analysis.

Signup and view all the flashcards

Inventory Tagging

Ensuring inventory items are uniquely and accurately identified to avoid double-counting.

Signup and view all the flashcards

Contingent Liability Tests

Auditing procedures to identify potential future losses from uncertain events, such as lawsuits or product defects.

Signup and view all the flashcards

Probable Contingent Liability

A contingent liability that is likely to occur, requiring disclosure on financial statements.

Signup and view all the flashcards

Reasonably Possible Contingent Liability

A contingent liability with a possibility of occurrence, requiring disclosure.

Signup and view all the flashcards

Remote Contingent Liability

A contingent liability with a very low chance of occurrence, not requiring disclosure.

Signup and view all the flashcards

Inventory Test Counts

Verifying the accuracy and completeness of physical inventory counts.

Signup and view all the flashcards

Empty Containers/Hollow Squares

Finding empty inventory locations that may be missed during physical inventory counts.

Signup and view all the flashcards

Management Representation Letter

A document from management confirming the accuracy and completeness of information about contingent liabilities.

Signup and view all the flashcards

Consignment Inventory

Items held by the company for another party, requiring separate identification and accounting.

Signup and view all the flashcards

Standard Audit Report (PCAOB)

Audit report issued for public companies, emphasizing the Registered and Independent status of the auditor, including a section on the audit of internal controls.

Signup and view all the flashcards

Standard Audit Report (ASB)

Audit report issued for private companies, emphasizing independence of the auditor.

Signup and view all the flashcards

Emphasis of Matter Paragraph

Additional paragraph in an audit report highlighting significant, but not necessarily material situations that aren't misstatements. Often includes unusual circumstances or uncertainties.

Signup and view all the flashcards

Scope Limitation

Inability of the auditor to obtain sufficient appropriate audit evidence concerning a particular matter, leading to possible qualified opinion or disclaimer.

Signup and view all the flashcards

GAAP Departure

Financial statements not following Generally Accepted Accounting Principles (GAAP).

Signup and view all the flashcards

Qualified Opinion

Audit opinion indicating a material misstatement or scope limitation that is not pervasive, limiting the auditor's ability to express an unqualified opinion.

Signup and view all the flashcards

Adverse Opinion

Audit opinion indicating material misstatements of the financial statements are pervasive.

Signup and view all the flashcards

Disclaimer of Opinion

Audit opinion stating the auditor cannot express an opinion due to a significant scope limitation or lack of independence.

Signup and view all the flashcards

Compilation Engagement

Financial statement presentation without any assurance of accuracy, commonly used for small businesses lacking accounting expertise.

Signup and view all the flashcards

Review Engagement

Attestation service providing limited assurance that the financial statements are free of material misstatements.

Signup and view all the flashcards

Materiality

Magnitude of misstatement that could influence the economic decisions of users.

Signup and view all the flashcards

Pervasive Effect

Misstatement affecting the financial statements as a whole, not just specific elements.

Signup and view all the flashcards

Critical Audit Matters

Matters requiring explanation in the audit report where significant judgments and uncertainties were used.

Signup and view all the flashcards

Independence

Auditor's obligation to be free from any relationship that could inappropriately influence their objectivity.

Signup and view all the flashcards

Internal Control over Financial Reporting (ICFR)

Process implemented by a company to ensure reliable financial reporting.

Signup and view all the flashcards

Unrecorded Liabilities

Liabilities that should have been recorded but were not. This may occur due to oversight, timing issues, or intentional misrepresentation.

Signup and view all the flashcards

Auditing Inventory Costing

Examining the accuracy of inventory costs by verifying purchase documents, recalculating costs, and assessing labor and overhead components.

Signup and view all the flashcards

Inventory Observation During Count

Auditor's active observation of the inventory counting process, ensuring proper procedures and controls are in place.

Signup and view all the flashcards

Test Counts in Inventory

Spot checks of counted inventory items to verify accuracy and completeness. This includes tracing counts from inventory tags to counting sheets and vice versa.

Signup and view all the flashcards

Last Receiving/Shipping Documents

Identifying the final documents for goods received and shipped during the inventory count. This helps determine if late arrivals are appropriately included.

Signup and view all the flashcards

Damaged/Obsolete Inventory

An auditor's attention to inventory items that are outdated, unusable, or have lost value, as these impact the accurate valuation of inventory.

Signup and view all the flashcards

Slow-Moving Inventory

Items in inventory that are not selling well and could indicate overstocking, pricing issues, or market changes.

Signup and view all the flashcards

Representation Letter

A formal written statement from management, confirming important information provided to the auditor during the audit. It helps the auditor corroborate oral representations made by management and is obtained near the end of the audit.

Signup and view all the flashcards

Final Audit Procedures

These are procedures performed at the end of an audit to ensure completeness and reliability of audit findings, including final analytical procedures, reevaluation of materiality and risk assessment, reviewing uncorrected misstatements, considering going concerns, and obtaining the management representation letter.

Signup and view all the flashcards

Modified Audit Opinion

An audit opinion that is different from an unqualified (unmodified) opinion, issued when the auditor identifies material misstatements in the financial statements or limitations in the scope of their work.

Signup and view all the flashcards

Pervasiveness

A misstatement that affects the financial statements as a whole and is not limited to specific elements, accounts, or items.

Signup and view all the flashcards

Revenue Process: Initial Audit Planning

Understanding the client's revenue process, including transactions, balances, entity environment, and conducting analytical procedures to assess inherent risks associated with revenue process assertions.

Signup and view all the flashcards

Revenue Process: Internal Controls Evaluation

Understanding the client's internal controls, including entity-level controls, transaction flow, and identifying weaknesses and related controls. This helps auditors evaluate the effectiveness of controls for credit sales, cash receipts, sale adjustments, and accounts receivable.

Signup and view all the flashcards

Revenue Process: Tests of Controls

Performing tests of controls at an interim date to assess their effectiveness based on the preliminary audit strategy. This could include examining documentation or observing control activities.

Signup and view all the flashcards

Revenue Process: Substantive Procedures

The actual procedures used to collect and evaluate evidence about the client's financial statements. These procedures are designed to detect material misstatements in the financial statements. The nature, timing, and extent of these procedures depend on the assessed risk.

Signup and view all the flashcards

Sales Cutoff

The process of ensuring that revenue transactions are recorded in the correct accounting period.

Signup and view all the flashcards

Occurrence Assertion (Revenue)

Verifying that all recorded revenue transactions actually happened and belong to the company.

Signup and view all the flashcards

Completeness Assertion (Revenue)

Ensuring that all revenue transactions that should have been recorded were actually recorded.

Signup and view all the flashcards

Authorization Assertion (Revenue)

Confirming that all revenue transactions were properly approved.

Signup and view all the flashcards

Accuracy Assertion (Revenue)

Verifying that the amounts and other information related to revenue transactions are correct.

Signup and view all the flashcards

Cutoff Assertion (Revenue)

Making sure that revenue transactions are recorded in the correct accounting period based on their dates.

Signup and view all the flashcards

Classification Assertion (Revenue)

Ensuring that revenue transactions are recorded in the correct accounts.

Signup and view all the flashcards

Accounts Receivable Confirmation

A direct communication with a client's customers to verify the accuracy of accounts receivable balances.

Signup and view all the flashcards

Purchases Process: Internal Controls Evaluation

Understanding the client's internal controls for purchases, cash disbursements, purchase adjustments, and accounts payable.

Signup and view all the flashcards

Occurrence Assertion (Purchases)

Verifying that all recorded purchase transactions actually occurred and belong to the company.

Signup and view all the flashcards

Contingent Liability

A potential future loss that depends on the outcome of an uncertain event. It can be probable, reasonably possible, or remote.

Signup and view all the flashcards

Test Count: Sheet to Floor

Verifying inventory counts by tracing quantities from counting sheets to the actual physical inventory on the floor.

Signup and view all the flashcards

Test Count: Floor to Sheet

Verifying inventory counts by tracing quantities from the physical inventory on the floor to the counting sheets.

Signup and view all the flashcards

Subsequent Events

Events that occur after the financial statement date but before the audit report is issued. Some require adjustments, while others need disclosure.

Signup and view all the flashcards

Audit Procedures for Completeness

Procedures designed to ensure that all transactions and balances that should be included in the financial statements are actually present and recorded.

Signup and view all the flashcards

Audit Procedures for Existence

Procedures designed to verify that recorded assets and liabilities actually exist. This involves examining documentation and potentially physically inspecting assets.

Signup and view all the flashcards

Audit Procedures for Valuation

Procedures designed to ensure that assets and liabilities are recorded at their appropriate values, considering factors like obsolescence and cost.

Signup and view all the flashcards

Change in Audit Opinion

An auditor may change their opinion on the fairness of financial statements if they discover significant misstatements or limitations in the scope of their work.

Signup and view all the flashcards

Study Notes

Audit Procedures for Unrecorded Liabilities

  • Obtain a listing of payments made after the balance sheet date up to the current date.
  • Select payment items for testing and supporting documents.
  • Review documents to determine the correct recording time period based on service or shipment dates.
  • Determine if liabilities were recorded in the correct period.
  • Review unpaid/open invoices during fieldwork for the same period.

Auditing Inventory Costing

  • Obtain a detailed listing of inventory and select a sample for testing.
  • For the sample, obtain original purchase documents to verify costs.
  • Recalculate average inventory cost and compare it to the listed costs.
  • Recalculate finished goods costs by assessing labor and overhead components.

Physical Inventory Procedures

  • Scrutinize client employees' inventory counting procedures.
  • Ensure all inventory items are counted only once. (e.g., don't double-tag)
  • Verify proper control of count media (e.g., compilation sheets, inventory tags).
  • Perform test counts to verify floor-to-sheet vs. sheet-to-floor quantities.
  • Check for empty containers or hollow squares to identify potential omissions.
  • Verify segregation of goods received during the count.
  • Inquire about slow-moving and damaged/obsolete inventory.
  • Ensure consignment inventory is properly separated and marked.
  • Count locations outside the entity or confirm with those locations.
  • Examine consignment agreements or contracts.

Bank Reconciliation Testing

  • Major items on a bank reconciliation include outstanding checks.
  • Auditors might test the reconciliation by:
    • Foot the reconciliation and outstanding check listing.
    • Trace book balances to the general ledger.
    • Obtain bank confirmations and trace bank balances to the reconciliation.
    • Obtain cutoff bank statements.
    • Trace deposit in transit, outstanding checks and other reconciling items to cutoff bank statements.

Relationships Between Audit Areas

  • Cash, revenue, and purchases/payables audits are related because cash balances are affected by internal controls related to cash receipts and disbursements.
  • Tracing documentation decreasing inventory (i.e. sales) provides evidence for existence, values, and accuracy of sales.
  • These audits help ensure accuracy of entries and proper recording of transactions.

Litigation Information

  • Auditors request information from attorneys about pending or threatened litigation.
  • This includes existence of uncertainties, time period of legal action, probability of unfavorable outcomes, and estimation of potential losses.

Subsequent Events

  • Type 1 subsequent events provide evidence of conditions existing at the balance sheet date and require adjustments to the financial statements.
  • Type 2 subsequent events provide evidence of conditions arising after the balance sheet date and do not require adjustments.

Auditor's Representation Letter

  • Auditors obtain this letter from management to corroborate significant oral representations.
  • It serves as evidence, but not the sole evidence, supporting audit findings.

Audit Procedures at Completion

  • Final analytical procedures are performed.
  • Materiality and risk assessment are re-evaluated.
  • Corrected and uncorrected misstatements are reviewed.
  • Procedures for fraud risk are examined.
  • Going concern considerations are considered.
  • Final work papers are reviewed.
  • Management representation letter is obtained.
  • Report is issued along with possible management comment or letters.

Revenue and AR Process

  • Understand the client's revenue process.
  • Assess inherent risks related to the process.
  • Understand client controls for revenue cycle.
  • Perform tests of controls.
  • Perform substantive tests.
  • Understand areas where revenue can be manipulated
    • consignment sales
    • rights and returns
    • bill and hold transactions
  • Revenue and cash receipt process initiate, receive, and record credit sales.
  • The software matches customer and sales orders with customer master file. Software matches sales order amounts with credit authorization.

Purchasing and AP Process

  • Similar to revenue but understand the client's purchasing process instead of revenue
  • Understand controls for purchasing and AP
  • Perform tests of controls
  • Perform analytical procedures
  • Understand areas where purchasing and AP can be manipulated

Audit Procedures for Cash

  • Trace a sample of remittance advices to the cash receipts journal and deposit splits.
  • Examine check endorsements for authorization.
  • Foot remittance advices and deposit slips to cash receipts journal and bank statements.
  • Compare recording dates to deposit dates.
  • Observe cash on hand at year-end and trace to deposits.
  • Trace cash receipts journal entries to the general ledger.
  • Check for authorized signatures on cancelled checks.

Audit Procedures for Accounts Payable

  • Obtain a listing of payments made after the balance sheet date.
  • Select items for testing and obtain supporting documentation.
  • Determine the correct recording time period based on service or shipment dates.
  • Review unpaid/open invoices in fieldwork.
  • Examine for unrecorded payables.

Bank Reconciliation

  • Obtain bank confirmation.
  • Compare the confirming balance with the balance per books.
  • Investigate unusual items detected during the bank reconciliation.
  • Test for lapping or kiting.

Major Sections of an Audit Report

  • Major sections of private company reports include title, address, opinion section, basis for opinion, management's responsibility paragraph, signature, and date.
  • Private company reports don't include reference to ICFR.
  • Public company reports do include reference to ICFR.

Types of Audit Reports

  • Unmodified audit reports are issued when the financial statements are fairly presented in accordance with GAAP and there are no material misstatements.
  • Qualified reports are issued when there are limitations in the scope of the audit but not so severe that the auditor cannot express an opinion.
  • Adverse reports are issued when the financial statements are materially misstated or not fairly presented.
  • Disclaimer of opinion reports are issued when the scope of the audit is severely limited, preventing the auditor from expressing an opinion.

Audit Procedures for Contingent Liabilities

  • Inquire with management.
  • Review correspondence with and invoices from attorneys.
  • Obtain a legal letter and management representation letter to confirm contingent liabilities.

Management Representation Letter

  • Serves as evidence of representations made by management and confirms other material issues.
  • This is used when there are significant oral representations made by management.

Differences Between Compilation, Review, and Audit

  • A compilation provides no assurance, a review limited assurance, and an audit reasonable assurance.
  • Different types of client engagements require specific procedures and levels of review.
  • Compilations, primarily for smaller entities, are based on client-provided information.

Procedures for Evaluating Significant Accounting Policies and Estimates

  • Determine whether significant accounting policies and estimates are appropriate in the context of the financial reporting framework.
  • Understand the policies and methods used to develop estimates.
  • Assess the reasonableness of estimates for reasonableness.
    • Evaluate consistency with prior periods.
    • Obtain support from adequate documentation and evidence.

Other Audit Procedures

  • Review any quantitative and qualitative factors from the effect of uncorrected misstatements.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Audit Final Exam Review Questions PDF
Final Exam Review ACTG 460 PDF

Description

Test your knowledge on various auditing procedures including unrecorded liabilities, inventory costing, and physical inventory practices. This quiz covers essential steps and considerations auditors must take into account during auditing processes.

More Like This

Substantive Procedures in Auditing
10 questions

Substantive Procedures in Auditing

FaithfulObsidian6876 avatar
FaithfulObsidian6876
Analytical Procedures in Auditing Planning
18 questions

Analytical Procedures in Auditing Planning

PamperedConsonance avatar
PamperedConsonance
Auditing Procedures and Internal Control Concepts
45 questions

Auditing Procedures and Internal Control Concepts

GleefulAqua2071 avatar
GleefulAqua2071
Auditing Confirmation Procedures Quiz
48 questions

Auditing Confirmation Procedures Quiz

HealthfulEuphoria898 avatar
HealthfulEuphoria898
Use Quizgecko on...
Browser
Open
Browser
Browser