question

Management's 3 assertion categories

answer

1. assertions about classes of transactions and events for the period under audit (IS) 2. assertions about account balances at the period end (BS) 3. assertions about presentation and disclosure

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Income Statement Accts: classes of transactions and events

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1. completeness 2. classification. 3. cutoff. 4. Accuracy 5. Authorization 6. Occurrence

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Occurrence

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did this stuff actually occur- sometimes referred to as validity- results in overstatements normally of the revenue accounts

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Completeness

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have all events been recorded? understatements in accounts like expenses are normally the result

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Authorization

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properly authorized? ex: new manufacturing facility approved by the board of directors

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Accuracy

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Did this stuff follow GAAP? ex: a new machine + all reasonable costs to install it

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Cutoff

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Has this stuff been reported in the proper period? matching revenues with expenses

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Classification

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has everything been reported in the proper account? did we expense what needed to be expensed instead of putting it in the asset account? ex: recording an improvement to a machine as an expense instead of applying it to the asset account

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Balance Sheet Accts: Account balances

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1. existence 2. completeness 3. rights and obligations 4. valuation and allocation

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Existence

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assets liabilities or equity actaully exist... don't inflate your assets and cause overstatement ex: inventories are actually there

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Rights and Obligations

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the rights to assets are the company's and the liabilities are the obligation of the company ex: lease capitalizations are all leases we actually have and correspond to the lease liability

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Completeness

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relates to whether all assets, liabilities, and equity interests that should have been included as ending balances on the financial statements have been included... particularly relevant for liability balances bc there sometimes are incentives to understatement

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Valuation and Allocation

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relates to whether A, L and OE interests included are at appropriate amounts and any resulting valuation and allocation adjustments are properly recorded... ex: deprecation expense is accounted for in PP

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Assertions about presentation and disclosures

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1. classification and understandability 2. completeness 3. accuracy and valuation 4, occurrence and rights/obligations

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occurrence and rights/obligations

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relates to whether disclosed events/other matters pertain to the entity

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completeness

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relates to whether all disclosures that should have been included in the financial statements have been

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classification and understandability

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relates to whether financial info is appropriately presented and described, and disclosures are clearly expressed... don't be opaque!

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Accuracy and Valuation

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relates to whether financial and other info is disclosed fairly and in appropriate amounts ....financial instruments such as investments in stocks are properly recorded like GAAP for example

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Audit Evidence

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all the info, used from whateer source, used by the auditor in arriving at the conclusions on which the audit opinion is based

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The concepts of audit evidence

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1. nature of audit evidence 2. sufficiency and appropriateness of audit evidence 3. evaluation of audit evidence

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Nature of audit evidence

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1. records of initial entries and supporting records 2. invoices 3. adjustments to financial statements 4. general and subsidiary ledgers 5. worksheets 6. spreadsheets supporting cost allocations 7. contracts 8. other computations, reconciliations and disclosures

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Sufficiency

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the measure of the QUANTITY of audit evidence >> greater the risk of misstatement the higher the quantity needed however the higher the quality of audit evidence the lower quantity needed

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appropriateness

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measure of QUALITY of audit evidence>> reliability and relevance that relates to: 1. independent source 2. effectiveness of internal control 3. auditor's direct personal knowledge 4. documentary evidence 5. original docs

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proper evaluation of evidence requires an understanding of the

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1. types of evidence available 2. relative reliability of availablee evidence

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Audit Procedures

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specific acts performed by the auditor to gather evidence about whether specific assertions are being met 1. risk assessment procedures 2. test of controls 3. substantive procedure

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Audit Procedures for Obtaining Audit Evidence

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1. inspection of tangible assets 2. observation 3. inquiry 4. confirmation 5. recalculation 6. re performance 7. analytical procedures 8. scanning

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Inspection of tangible assets

answer

physical examination of a tangible asset

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Observation

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the process of watching a process of procedure being performed by others

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Inquiry

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-consider the knowledge, objectivity, experience responsibility, and qualification of the individual to be questioned -ask clear, concise and relevant questions -use open or closed questions appropriately -listen actively and effectively -consider the reactions and responses and ask follow up questions -evaluate the response

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confirmation

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process of obtaining a rep of info or of an existing condition directly from a third party reliability is affected by: 1. the form of the confirmation 2. prior experience with the entity 3. the nature of the info being confirmed 4. the intended respondent

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recalcualtion

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determining the math accuracy of documents or records

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reperfromance

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the auditor's independent execution of procedures or controls that were originally performed by company personnel

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analytical procedures

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evaluations of financial info made by a study of plausible relationships among both financial and nonfinancial data

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scanning

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review of accounting data to identify significant or unusual items

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assurance bucket

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-remaining assurance needed from test of details -substantive analytical procedures -tests of controls -risk assessment procedures

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audit documentation

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the auditor's record of the audit procedures performed, evidence obtained and conclusions reached three functions: 1. to provide support for the audit report 2. to aid in the planning, performance, and supervision of the audit 3. to provide basis for quality reviews; to provide evidence of supporting the auditor's significant conclusions

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content of audit documentation should

answer

1. demonstrate how the audit complied with auditing and related professional practice standards 2. support the basis for the auditor's conclusions concerning each material financial statement assertion 3. demonstrate that the underlying accounting records agreed or reconciled with the financial statements 4. include a written audit program detailing auditing procedures necessary to accomplish audit objectives 5. enable knowledgeable and experienced reviewer to understand nature/timing/extent and results of audit proce4dures, evidence obtain and conclusions reached and also determine who performed and reviewed the work, as well as dates of the work and reviews

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format of audit doc

answer

1. heading- entity name, title of working paper and entity's year-end date 2. indexing and cross-referencing-trail from financial statements to audit docs 3. tick marks-notations made next to work paper items indicating auditor/reviewer actions

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purpose of analytical procedures

answer

risk assessment procedures- used to assist the auditor to better understand the business and to plan the nature timing and extent of audit procedures 2.substantive analytical procedures- used to obtain evidential matter about particular assertions related to account balances or classes of transactions 3. final analytical procedures- used as an overall review of the financial info in the final review stage of the audit

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corroborating evidence

answer

required for final analytical procedures differences, not for the risk assessment procuedres differences

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current ratio

answer

CA/CL

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quick ratio

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liquid A/ CL

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operating cash flow ration

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cash flows from ops/ CL

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receivables turnover

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credit sales/receivables

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days outstanding in accts receivable

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365/receivable turnover

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inventory turnover

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cogs/inventory

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days of inventory on hand

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365/inventory turnover

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gross profit percentage

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gross profit/net sales

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profit margin

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net income/net sales

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return on assets

answer

net income/ total assets

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return on equity

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net income/OE

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debt to equity

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short term debt + long term debt / SE

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times interest earned

answer

net income + interest expense/ interest expense

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Relationship of audit evidence to the audit report

answer

financial statements > management assertions about components of financial statements > audit procedures > provide evidence on the fairness of the financial statements > auditor reaches a conclusion based on the evidence > audit report

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audit program

answer

a set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit program

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vouching vs tracing

answer

vouching (occurance) matching source docs to the journal/ledger so journal --> source docs (ex...select a sample of purchase transactions and ensuring they are supported by receiving docs) tracing (completeness) is matching the journal/ledger to docs so source docs --> journal (ex: selecting a sample of receiving docs and matching that to inventory received)

question

reliability of types of evidence

answer

1. inspection of tangibles/ REcalculation, REperformance 2. inspection of recs/docs, confirmation, analytical procedures, scanning 3. observation/inquiry

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permanent files

answer

corporate charter, chart of accounts, organization chart, important contracts, internal control documentation, terms of stock and bond issues and prior years' analytical procedures

question

audit documentation...

answer

1. should be organized so members can find evidence supporting financial statement accounts 2. is the property of the auditor.. including docs prepared by the entity by the auditor's request 3. must be kept for 7 ys after completion date by the auditor according to SOX

question

size of tolerable differences depends on

answer

1. significance of account 2. desired degree of reliance on the substantive analytical procedures 3. level of disaggregation in the amount being tested 4. precision of the expectation (always less than overall materiality)

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corroborating evidence is required..

answer

with final analytical procedures differences but not risk assessment procedures differences

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activity ratios

answer

how assets are managed

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coverage ratios

answer

look at long term solvency and going concern of the firm

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audit testing hierarchy

answer

start with test of controls > substantive analytical procedures > test of details

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current files

answer

Audit report Adjusting journal entries Audit plan and programs Reclassification journal entries Working trial balance Current financial statements Minutes of meetings Working papers supporting accounts

question

substantive analytical procedures

answer

develop an expectation > tolerable difference > compare expected amount to recorded> it it's greater than the tolerable difference then investigate differences > if the evidence not adequate do more audit procedures > doc results

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