AUD 4.08 - Misstatements and Internal Control Deficiencies

  1. 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)
  2. 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
  3. 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
  4. What are some indications or areas of management bias?
    • 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
  5. The auditor should consider the ___________ effect of small, immaterial misstatements.
  6. 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.
  7. 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
  8. 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.
  9. 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
  10. 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.
  11. 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
  12. 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.
  13. True / False: The existence of a material weakness in internal control indicates that the FS are materially misstated.
  14. 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
  15. 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.
  16. 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
  17. 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.
  18. 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
  19. 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
    • Beginning inventory +Purchases -ending inventory = COGS
    • Dr COGS
    • Cr Inventory
  20. Who owns the inventory when the client is the consignee?
    The consignor (the other company)
  21. Who owns the inventory when the client is the consignor?
    The client
  22. What are the 3 categories of misstatement that GAAS delineates?
    • Factual: actual item identified and calculated
    • Projected: based on sampling and then projected to A/R as a whole
    • Judgmental
Card Set
AUD 4.08 - Misstatements and Internal Control Deficiencies
Becker Review 2017