1. Objectives of Internal Control in Production/Manufacturing Cycle
    • Resources obtained and used recorded timely
    • Transfers of finished goods recorded timely
    • Related expenditures are appropriately classified
    • Access to inventory restricted
    • Comparison of actual inventory to recorded amounts
  2. Records Controls in Manufacturing Cycle
    • Pre-numbered purchase orders
    • Pre-numbered receivers
    • Consider perpetual inventory system for high dollar items
    • Adequate support for general ledger accounts
  3. Comparison Controls in Manufacturing Cycle
    • Actual inventory to recorded inventory
    • Underlying accounting records to general ledger
  4. Segregation of Duties in Manufacturing Cycle
    • Separate authorization, bookkeeping (recording), and custody of inventory
    • Sales returns should be counted by receiving clerk and a receiver prepared
  5. Internal Control Objectives in Investing/Financing Cycle
    • Transactions recorded in accordance with management's authorization
    • Investment assets reasonably secure from loss
    • Supporting detailed records maintained and compared to general ledger
    • Management approves adjusting journal entries
  6. Objectives of Internal Controls in Fixed Assets Cycle
    • Transactions recorded in accordance with management's authorization
    • Estimates used to record depreciation, etc. are reasonable
    • Appropriate property insurance in force
    • Supporting details records properly maintained
    • Management approves adjusting journal entries
  7. Access Controls in Manufacturing Cycle
    Access to physical inventory and to inventory records and documents limited to authorized personnel
  8. Execution of Transaction Controls in Manufacturing Cycles
    • Acquisition and distribution of inventory in accordance with management's authorization
    • Should establish general approval of transactions with specified limits and require specific approval for amounts over limits
    • Any adjusting entries approved by management
  9. Comparisons in Payroll Cycle
    Payroll checks to payroll register
  10. Access Controls in the Payroll System
    • Access to personnel files limited to authorized personnel
    • Access to payroll checks limited to authorized personnel
    • Personnel with access to payroll checks should be bonded
  11. Execution of Transactions Controls in Payroll Cycle
    • Payroll should be authorized by responsible official
    • Computations verified by independent person
    • Overtime payments approved by management
    • Payroll for management appropriately reviewed and approved
  12. Segregation of Duties in the Payroll Cycle
    Following activities should be performed by different people:

    • Establishing and maintaining employee files
    • Timekeeping
    • Payroll preparation
    • Check distribution
    • Reconciling payroll bank account
  13. Records Controls in Payroll Cycle
    • Maintain current and accurate payroll information
    • Pre-numbered payroll checks
    • Separate bank account for payroll transactions
  14. Nature of Procedures
    What procedures to perform
  15. Component of Audit Risk Model Auditor Controls
    Detection Risk
  16. When to perform procedures (interim vs. final)
    Timing of Procedures
  17. Types of Substantive Tests
    Tests of Details

    • a. Tests of Ending Balances
    • b. Tests of Transactions
  18. Extent of Procedures
    How large the samples should be
  19. Three Purposes of Analytical Procedures
    • Required in audit planning
    • Useful as a form of substantive evidence
    • Required as a final review
  20. Two Broad Categories of Audit Evidence
    • Underlying accounting data
    • Corroborating information
  21. Valuation or Allocation
    That the dollar amounts attributed to the elements of the company's financial statements are appropriate and in accordance with GAAP
  22. Presentation and Disclosure
    That the presentation of the financial statements and the footnote disclosures are appropriate and in accordance with GAAP
  23. Existence/Occurrence
    That the recorded transactions are valid economic events of the period in which they are reported
  24. Three General Rules about Competence of Evidence
    • Evidence based on direct personal knowledge is better than that obtained indirectly
    • Independent outside sources are more reliable than the client
    • Evidence obtained under strong internal controls is better than that obtained under weak controls
  25. Interim Procedure Considerations
    • May increase detection risk
    • If not testing controls, consider if substantive tests alone sufficient
    • Should consider potential for misstatement in remaining period
  26. General Sufficiency of Evidence
    Evidence is usually persuasive rather than compelling
  27. Five Main Management Assertions
    • Existence/Occurrence
    • Completeness
    • Rights and Obligations
    • Valuation or Allocation
    • Presentation and Disclosure
  28. Rights and Obligations
    That the company has all the rights associated with its reported assets and all the obligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed
  29. Work Normally Performed at Interim
    • Planning
    • Study and evaluation of internal control
    • Substantive tests of transactions
  30. Completeness
    That there are no omissions of transactions that should have been reported
  31. Buzzwords to Use in Preparing Audit Programs
    • Observe
    • Inquire
    • Confirm
    • Inspect
    • Agree (trace or vouch)
    • Recalculate and trace
    • Read
    • Scan
    • Perform analytical procedures
  32. Factors Affecting Quantity, Type, and Content of Audit Documentation
    • Nature of engagement
    • Financial statements under examination
    • Type of audit report
    • Nature and condition of client's records
    • Assessment of control risk
    • Experience and skills of audit team
  33. Correspondence File
    Where letters (and email messages) to and from clients are organized so that the audit team can conveniently review communications related to each client organization
  34. Purposes of Audit Documentation
    • Provides the principal support for the auditor's report
    • To document work was adequately planned and supervised
    • To document internal control was reviewed and evaluated as necessary
    • That a reasonable basis for the opinion exists
    • To assist in controlling the audit
  35. Report File
    Where prior years' audit reports and management letters are organized (by client) so that the audit team can conveniently review formal reports previously issued for each client
  36. Types of Files in Audit Documentation
    • Permanent file
    • Current year audit file
    • Bulk file
    • Correspondence file
    • Report file
  37. Audit Documentation Custody Issues
    • Audit documentation is the auditor's property subject to client confidentiality considerations
    • The auditor should safeguard the audit documentation and establish a formal retention policy
  38. Bulk File
    Where documentation that is too voluminous can be stored
  39. Permanent File
    Contains documentation of matters having on-going audit significance
  40. Receivable Confirmation Alternative Procedures
    Verifying subsequent cash receipts
  41. Types of Confirmations
    • Positive
    • Negative
  42. When to Use Negative Confirmations
    • Large number of small accounts
    • Control risk is low
    • Recipients are expected pay attention to request
  43. When to Use Positive Confirmations
    When individual accounts are large
  44. Positive Confirmations
    Where a response is requested whether or not the other party agrees with the client's recorded amount
  45. Negative Confirmations
    Where a response is only requested in the event of disagreement
  46. Payables Confirmations Alternative Procedures
    Verify subsequent cash disbursements as payments on the account
  47. Basic auditor responsibility for estimates
    Evaluate reasonableness of any significant accounting estimates
  48. Key factors and assumptions used in evaluating the reasonableness of an estimate
    Significant to the accounting estimate, sensitive to variations, deviations from historical patterns, subjective and susceptible to misstatement and bias
  49. Factors that affect the risk of material misstatement related to estimates
    1) Complexity and subjectivity of process involved; 2) Availability and reliability of data involved; 3) Number, significance, and uncertainty of assumptions involved
  50. Audit Procedures for Accounting Estimates
    • Inquire of personnel to obtain understanding of how estimate developed
    • Review and test management processes
    • Develop an independent expectation for corroboration
    • Review subsequent events for additional evidence
  51. Two approaches to evaluate reasonableness
    1) Review and test process used by management to develop estimate; OR 2) Develop an independent expectation
  52. Fair value
    The amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale
  53. Audit process relating to fair value and disclosures
    1) Obtain understanding of entity's process for determining fair value measurements and disclosures; 2) Evaluate whether fair value measurements and disclosures conform to GAAP and that methods used are consistently and appropriately applied
  54. Auditor's objective regarding fair value and disclosures
    To provide reasonable assurance that fair value measurements and disclosures comply with GAAP
  55. Best evidence of fair value
    Published price quotations in an active market
  56. Management responsibility
    Responsibility for the financial statements, including the fair value measurements and disclosures, which are inherently imprecise
Card Set
Auditing 3