Describe how “clearly trivial” is different from “not material.”
Clearly trivial means inconsequential, both individually and in the aggregate, and when judged by any criteria of size, nature, or circumstance (qualitatively as well as quantitatively)
The size of a misstatement is often evaluated in comparison to ________________?
A relative financial base such as
** net income
** gross sales
** gross margin
** total assets
** total liabilities
What are some of the qualitative characteristics that may cause an otherwise immaterial misstatement to be deemed material (don’t need to memorize all).
Affects trends in profitability
Affects the entity’s compliance with loan covenants, contracts, regulatory requirements
Increases management compensation
Indicates a pattern of management bias
Involves fraud or an illegal act
Are significant relative to the needs of users
Offset the effects of significant but different misstatements
Are costly to correct
Represent a risk that possible addl undetected misstatements could affect the auditor’s evaluation
What are some indications or areas of management bias?
INDICATIONS
Selective correction of misstatements brought to mgmts attention
The identification by mgmt of addl adjusting entries that offset misstatements accumulated by the auditor
AREAS
Bias in the selection and application of accting principles
Bias in accting estimates
The auditor should consider the ___________ effect of small, immaterial misstatements.
True / False: The auditor should communicate all misstatements during the audit with the appropriate level of management as soon as discovered.
False
The auditor should communicate all misstatements accumulated during the audit on a timely basis with the appropriate level of management.
Management has examined the misstatement per the auditor. What is the responsibility of the auditor following management’s review?
Perform addl audit procedures to determine whether or not misstatements remain
True / False: Mgmt refuses to correct some or all of the misstatements identified by the auditor. Although mgmt has reasonable explanations for not making the corrections, the auditor must only consider the quantitative impact of the misstatement.
False
The auditor should consider mgmt’s explanation when evaluating whether the FS as a whole are free from material misstatement.
True / False: The auditor is the final authority on whether or not to require mgmt to make corrections to material misstatements
False
Management is responsible for the FS and has the final decision
What should be included in the audit documentation with regard to material misstatements?
The amount below which misstatements are clearly trivial
All misstatements accumulated during the audit, and whether they have been corrected
For misstatements not corrected, the auditor’s conclusion as to whether or not they are material individually or in the aggregate.
What should be included in the audit documentation with regard to uncorrected misstatements?
The aggregate effect on the FS
The evaluation of whether materiality for that area has been exceeded
The effect of uncorrected misstatements on key ratios or trends
Compliance with legal, regulatory, or contractual requirements
True / False: Identification by the auditor of a material misstatement that would not have been detected by the entity’s internal control is an indicator of material weakness.
True
True / False: The existence of a material weakness in internal control indicates that the FS are materially misstated.
False
What are examples of deficiencies in the design of internal controls
Lack of segregation of duties
Lack of safeguarding of assets
Inadequate design of IT controls
Lack of appropriate qualifications or training of client personnel
Lack of monitoring of controls
Absence of an appropriate process to report control deficiencies
What are examples of deficiencies in the execution of properly designed internal controls
Employees don’t perform the control
Misrepresentation by client personnel to the auditor
Management override of controls
An observed deviation rate that exceeds the auditor’s expected rate
Failure of the information and communication component of internal control to provide complete, accurate, and timely information.
For the following, is the balance naturally a debit or credit? (1) assets, (2) liabilities, (3) stockholder’s equity, (4) sales, (5) expenses
(1) debit
(2) credit
(3) credit
(4) credit
(5) debit
Who owns the inventory the customer or the seller when the terms of sale are (1) FOB shipping point, (2) FOB destination.
(1) the customer owns the inventory (seller has sold the inventory) as soon as the inventory is in the truck
(2) the seller continues to own the inventory (not sold) until the truck arrives at and is accepted by the client.
What are the journal entries for inventory sold by the entity using a perpetual inventory system?
Each sale has the following:
Dr Cash or A/R
Cr Sales
******AND*****
Dr COGS
Cr Inventory
What are the journal entries for inventory sold by the entity using a periodic inventory system?
Each sale has the following:
Dr Cash or A/R
Cr Sales
****at the end of the period (not each sale) COGS is determined as follows
