Auditing 4

  1. Client's Lawyer Inquiries
    • Auditor may submit list of pending matters or ask lawyer to prepare list
    • Lawyer should inform auditor about any omitted asserted claims
    • Lawyer should inform management of unasserted claims probable to be asserted with a reasonable possibility of an unfavorable outcome
  2. Purpose of lawyers' letters
    To corroborate management's responses to auditor inquiries about legal contingencies
  3. Audit Procedures for Legal Contingencies
    • Inquiry of management
    • Identify significant lawyers
    • Review board minutes
    • Send an attorney letter to significant lawyers
  4. Effect of limitation in lawyer's response
    Scope limitation sufficient to prevent unqualified opinion
  5. Unasserted claims and litigation
    Entity has exposure to litigation but has received no official filing and has no knowledge of anyone's intention to sue
  6. Characteristics of Management Representation Letters
    • Addressed to auditors
    • Signed by at least the CEO and CFO
    • Same date as auditor's report
  7. Contents of management representations letters
    Documentation of verbal responses regarding: 1) financial statements; 2) completeness of information; 3) recognition, measurement, and disclosure; 4) subsequent events; 5) other industry or company-specific circumstances
  8. Effect of unwillingness to sign the management representations letter
    Scope limitation probably resulting in disclaimer or withdrawal
  9. Periods covered in managements representation letters
    All periods included in audit report
  10. Procedures to Test Valuation and Allocation
    • Verify mathematical accuracy
    • Recalculate account balances
    • Trace to subsequent cash receipts and disbursements
    • Review client's estimates for reasonableness
  11. Procedures to Test Existence/Occurrence
    • Confirmation
    • Observation
    • Vouch to underlying documents
  12. Procedures to Test Completeness
    • Cutoff tests
    • Analytical procedures
  13. Procedure to Test Rights and Obligations
    • Inquire of applicable client personnel
    • Examine authorization of transactions (for unusual stipulations)
  14. Procedures to audit related party transactions
    1) Obtain understanding of business purpose of transaction; 2) Determine if transaction authorized by board of directors; 3) Examine reasonableness of amounts to be disclosed
  15. Auditor objective regarding transactions with related parties
    Primary concern with adequacy of disclosure about transactions with related parties
  16. Procedures to Identify Related Party Transactions
    • Review minutes of board of directors' meetings for activities with related parties
    • Inquire of management as to such transactions
    • Examine underlying documents for unusual or large transactions, especially investment transactions
  17. Transactions that may indicate related party involvement
    1) Unusual or large transactions; 2) Transactions with terms or conditions that are inconsistent with prevailing market conditions
  18. Procedure to Identify Related Parties
    • Inquire of management as to related entities
    • Review prior year's audit documentation
    • Review any applicable SEC filings
    • Inquire of predecessor auditors if applicable
    • Review stockholder listings of closely held companies to identify major stockholders
  19. Subsequent Events - Type II
    Relates to circumstances arising after balance sheet date and requires disclosure
  20. The period after the balance sheet date up to the report date
    Subsequent period
  21. Subsequent Events - Type I
    Relates to estimate already in financial statements and requires adjustment
  22. Audit procedures to identify subsequent events
    1) Management inquiry; 2) Review of minutes of directors' meetings; 3) Review of lawyers' letters; 4) Scan of transactions subsequent to year end
  23. Subsequent Events
    Events or transactions that occur after the balance sheet date and before the issuance of the auditor's report which have a material effect on the financial statements and, therefore, require either financial statement adjustment or disclosure
  24. Defaults on debt, violations of debt covenants, disposals of major assets, or restructuring of debt
    Indicators of "substantial doubt" related to "going concern" issues
  25. Labor problems, dependence on single projects or customers, or harmful long-term commitments
    Internal matters raising doubts about "going concern" issues
  26. Auditor requirement regarding "going concern" issues
    To identify if there is doubt about the entity's ability to continue as a going concern
  27. Recurring losses, negative cash flows, or working capital deficiencies
    Negative trends raising doubts about "going concern" issues
  28. Required communication if substantial doubt exists regarding an entity's ability to continue as a going concern
    To those charged with governance: 1) nature of conditions identified; 2) possible effect on financial statements and disclosures; 3) effect on auditor's report
  29. SCARE
    Segregation, comparison, access, records, and execution
  30. Schedule of Interbank transfers
    Schedule used to verify that transfers are recorded properly and to detect kiting
  31. Cash Audit Procedures
    • Review and test bank reconciliations
    • Prepare and test schedule of transfers if more than one bank account
    • Prepare proof of cash if fraud suspected
    • May count petty cash
    • Inquire about restrictions on cash balances
  32. Proof of Cash
    Compares the beginning balance per the bank plus deposits minus checks clearing the bank versus the beginning balance per the books plus receipts minus disbursements according to the books
  33. Bank confirmation
    Verifies existence and ownership of bank accounts
  34. Cutoff bank statement
    Short period bank statement obtained directly from the bank
  35. Kiting
    An overstatement of the true cash balance at year-end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between cash accounts
  36. Audit Procedure Related to Completeness of Accounts Receivable
    Perform cutoff test of sales
  37. Lapping
    An attempt to cover up a theft of receipts, where a clerk might try to apply a later receipt to the prior customer's account (and so on) until the scam ends by writing off someone's account as uncollectible
  38. Cutoff Test of Sales
    Examine the shipping documents for the last few shipments before year-end and the first few shipments after year-end; compare these shipping documents with the related sales invoices to assess whether the sales were recorded in the appropriate period
  39. Audit Procedures Related to Rights and Obligations and Presentation and Disclosure of Accounts Receivable
    • Inquire about receivables pledged as collateral
    • Inquire about shipments on consignment
  40. Audit Procedures to Support Valuation of Accounts Receivable
    • Review aged trial balance for large delinquent items
    • Estimate uncollectible accounts based on time outstanding
    • Review receivers after year end for sales returns
    • Review adjusting journal entries
  41. Audit Procedures to Support Existence/Occurrence of Accounts Receivable
    • Verify subsidiary ledger agrees with control account in general ledger
    • Confirm material accounts
    • Investigate exceptions from confirmations
    • Complete alternate procedures for unreturned confirmations
  42. Audit Procedures for Valuation of Inventory
    • Price tests
    • Test extensions (quantity times cost/unit)
    • Perform lower of cost or market (LCM) analysis
  43. Audit Procedures Related to Completeness Assertion for Inventory
    • Test cut-off
    • Perform analytical procedures
  44. Inventory Observation Audit Procedures
    • Determine count will be complete and accurate
    • Perform test counts
    • Determine all tags properly accounted for
    • Be alert for and inquire about obsolete or damaged items
  45. Audit Procedures Related to Existence/Occurrence of Inventory
    Participate in the client count of inventory or confirm inventory stored in public warehouse
  46. Audit Procedures Relating to Rights and Obligations and Presentation and Disclosure of Inventory
    Inquire of management for inventory held on consignment or pledged as collateral
  47. Hedge
    Defensive strategy designed to protect against risk of adverse price or interest rate movements
  48. Control Risk Assessment Considerations
    • 5 components of internal controls that the auditor is obligated to understand - (1) control environment; (2) risk assessment;(3) information and communication system; (4) control activities; and (5)monitoring
    • "Control activities" can be recognized by "SCARE"
    • The services of a service organization may be part of an entity's information system, having implications to the assessment of control risk ["service organizations" (SAS 70)]
  49. Inherent Risk Assessment Considerations
  50. Entity's experience
    • Complexity of the instrument
    • Management's objectives
    • Evolving nature of derivatives
    • Whether the transaction involves an exchange of cash
    • A derivative that is an "embedded feature" is more difficult to detect
  51. Detection Risk Assessment Considerations
    The size of the entity; its experience with such derivatives and securities; the types and complexity of the derivatives and securities; and the controls affecting the derivatives and securities (especially controls over segregation of duties, access/custody, recording, and authorization)
  52. Derivative
    Financial instrument or other contract with: 1) 1 or more underlyings and 1 or more notional amounts; 2) requires no initial net investment; and 3) terms require or permit net settlement
  53. Valuation: Procedures to consider
    • When the valuation is based on cost
    • When the valuation is based on the investee's financial results (i.e., the "equity method")
    • When the valuation is based on fair value
  54. Audit Procedures for Valuation of Fixed Assets
    Audit Procedures for Rights, Obligations, Presentation and Disclosure Assertions
  55. Audit Procedure for Completeness of Fixed Assets
    Review repairs and maintenance expense accounts to see if any should have been capitalized
  56. Substantive tests of transactions of fixed assets
    Usually employed to verify changes rather than audit entire ending balance
  57. Audit Procedures for Existence/Occurrence of Fixed Assets
    • Verify that detailed listing supports general ledger account
    • Vouch additions to underlying documents
    • Trace proceeds from disposals to cash receipts journal
  58. Audit Procedures for Rights, Obligations, Presentation, and Disclosure of Accounts Payable
    Inspect terms of payables and inquire about any related party transactions
  59. Audit Procedures for Dividends Payable
    The auditor can compute, in view of the declared dividends/share (per the minutes of board meetings) times the number of shares outstanding
  60. Audit Procedures for Wages and Salaries Payable
    The auditor can compute the estimated accrual, in view of the number of days to be accrued relative to a whole pay period
  61. Audit Procedure for Interest Payable
    The auditor can compute an estimate of accrued interest for the time period involved, based on the interest rate (and payment dates) specified in the underlying debt agreements
  62. Audit Procedures for Completeness of Accounts Payable
    • Review cash disbursements after year end for unrecorded liabilities
    • Examine unpaid invoices at year-end to see if included
    • Inquire of management as to completeness
  63. Audit Procedures for Existence/Occurrence and Valuation of Accounts Payable
    • Compare general ledger control account to supporting detail of payables
    • Vouch selected items to vendors' invoices
    • May confirm payables
  64. Audit Procedures for Valuation Assertion of Long-term Liabilities
    • Trace related cash receipts and disbursements
    • Examine underlying loan documents
    • Recalculate amortization
    • Apply analytical procedures to related expense accounts (interest)
  65. Audit Procedures for Existence/Occurrence of Long-term Liabilities
    • Obtain copies of new loan agreements for the audit documentation for the auditor's review
    • Verify authorization of new debt in board's minutes
    • Trace receipts from the accounting records to the bank statement
  66. Audit Procedures for Rights, Obligations, Presentation, and Disclosure of Long-term Liabilities
    • Disclose important debt covenant restrictions
    • Disclose assets pledged as collateral
    • Reclassify current portion of long-term debt as current
  67. Audit Procedures for Completeness of Long-term Liabilities
    • Verify due dates for payments in the loan agreements
    • Trace cash disbursements from the accounting records to the bank statement
    • Examine canceled notes if paid in full
  68. Audit Procedures for Completeness of Stockholder's Equity
    • Read board minutes
    • Account for all certificate numbers
  69. Audit Procedures for Valuation of Stockholder's Equity
    • Review cash receipts and disbursements for changes in stock accounts
    • Compare subsidiary ledger to general ledger
    • Verify par value
  70. Audit Procedure for Existence/Occurrence of Stockholder's Equity
    Confirm outstanding shares of stock if external registrar
  71. Audit Procedures for Valuation of Stockholder's Equity
    • Review cash receipts and disbursements for changes in stock accounts
    • Compare subsidiary ledger to general ledger
  72. Audit Procedures for Rights, Obligations, Presentation, and Disclosure of Stockholder's Equity
    • Review board minutes for transaction authorization
    • Review compliance with contracts for employee stock plans
    • Disclose any restrictions on retained earnings
  73. Audit Procedures For Classification of Payroll
    • Audit procedures for accuracy and occurrence
    • Verify payroll deductions and taxes
    • Review outside reports related to pension, other post-retirement benefits and profit-sharing plans
  74. Detailed testing of payroll
    Usually performed only when analytical procedures suggest risk of material misstatement relating to payroll exists
  75. Audit Procedures for Cutoff of Payroll
    Audit procedures for existence and completeness
  76. Audit Procedures for Accuracy and Existence of Payroll
    • Examine personnel records on a test basis
    • Trace selected transactions from payroll register to g/l to payroll bank account
    • Recalculate selected entries on the payroll register
  77. Audit Procedures for Completeness of Payroll
    • Review time reports and time cards to verify support for production records
    • Apply analytical procedures (and recalculation) to verify that the payroll-related accruals at year-end are adequate
Card Set
Auditing 4