Evidence and Risk 5 Flashcards
What should an auditor do if they discover they have forgotten to perform a substantive procedure?
If auditor discovers that they forgot to perform a substantive procedure auditor should
1) Assess the importance of omitted procedure
2) Anything to compensate for omitted procedure
3) Perform procedure
4) Minimize reliance on the financial statemetn - notify client, regularory agencie and anyone relying on the statement
How is a Statement of Cash Flows audited?
- The statement of cash flows is prepared from the other financial statements and from analyses of increases and decreases in selected account balances.
- Since the amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts, only limited substantive procedures are necessary
- Foot all balances -
- Check the Math Trace Cash Flow items to other Financial Statements
- Check classifications - Operating Activities Investing Activities Financing Activities
What are the primary risks in an audit for a typical for-profit company?
Auditors are there to verify that Assets & Revenues are not overstated Expenses & Liabilities are not understated Exception
- if the CPA Exam states that it is a tax-driven company flip them around
When performing audit procedures what should auditors focus on?
Auditors focus first on Balance Sheet Accounts then associated Income Statement items
Relationships predictable
analytical procedures applied as substantive procedures
- Relationships in a dynamic or unstable environment are less predictable than those in a stable environment
- Relationships involving balance sheet accounts are less predictable than income statement accounts (because balance sheet accounts represent balances at one arbitrary point in time)
- Relationships involving management discretion are sometimes less predictable (e.g., decision to incur maintenance expense rather than replace plant)
The date of the audit report
- The date of the report is not earlier than the date on which the auditors have obtained sufficient appropriate audit evidence to support the audit opinion, normally the last day of fieldwork.
- When a subsequent event requiring note disclosure has occurred after the date of the audit report but prior to its issuance, the auditor may either dual date the report or change its date to that of the subsequent event.
- For example, assume that March 2 was the date sufficient appropriate audit evidence had been accumulated (other than that related to the subsequent event). A dual dated report would be dated as “March 2, year 1, except for note X for which the date is March 6, year 1.” Alternatively, the auditor may change the report date to March 6. This latter option is generally less desirable since the auditor’s responsibility with respect to other possible subsequent events is extended to the date of the report—here March 6.
Financing Cycle
This cycle includes issuance and repurchase of debt (bank loans, mortgages, bonds payable) and capital stock, and payment of interest and dividends.
Debt and capital stock transactions should be authorized by the board of directors. Often an independent trustee issues bonds, monitors company compliance with the provisions of the debt agreement, and pays interest.
For capital stock transactions, corporations may either employ an independent stock registrar and a stock transfer agent, or handle their own transactions. Normally, internal control is stronger when a stock registrar and a stock transfer agent are utilized.A _stock registrar’s_ primary responsibility* is to verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation;the stock transfer agent’s*** primary responsibility is maintaining detailed stockholder records and carrying out transfers of stock ownership.
- *Major Financing Controls Frequently Missing in CPA Exam Questions**
- *(1)** Debt and equity transactions are properly approved by the company’s board of directors.
- *(2)** An independent trustee handles bond transactions.
- *(3)** A stock registrar and a stock transfer agent handle capital stock transactions.
- *(4)** Canceled stock certificates are defaced to prevent their reissuance.
Example transactions that may be indicative of related-party transactions AU-C 550
- *a.** Borrowing or lending at interest rates above or below the market rate
- *b.** Selling real estate at a price significantly different from its appraised value
- *c.** Exchanging property for similar property in a nonmonetary transaction
- *d.** Making loans with no scheduled repayment terms
Procedures to identify transactions with related parties
- *a.** Provide audit personnel with related-party names
- *b.** Review Board of Directors’ minutes (and other committees)
- *c.** Review SEC filings
- *d.** Review client “conflict of interest” statements obtained by company from management
- *e.** Review nature of transactions with major customers, suppliers, etc.
- *f.** Consider whether unrecorded transactions exist
- *g.** Review accounting records for large, nonrecurring transactions
- *h.** Review confirmations of compensating balances for indications that balances are maintained for or by related parties
- *i.** Review legal invoices
- *j.** Review confirmations of loans receivable and payable for guarantees
Operational Auditing
- Operational audits, generally performed by internal auditors, typically evaluate the effectiveness and efficiency of various operational processes. As such they are similar to “performance audits” as presented in the Government Auditing Standards. In fact, the topic “operational auditing” was dropped from the AICPA Content Specification Outline when compliance auditing was added.
- frequent objective of operational audits is to develop recommendations for improving performance. Other objectives include assessing performance and identifying improvement opportunities
Procedures Completed near the End of the Audit
The overall review near the end of the audit ordinarily would include considering (1) the adequacy of evidence gathered in response to unexpected balances, and (2) unusual or unexpected balances or relationships that were not previously identified
These procedures, completed on or near the last day of fieldwork, include
• Search for unrecorded liabilities.
• Review minutes of meetings of shareholders, board of directors, and the audit committee.
• Perform analytical procedures.
• Perform procedures, including the inquiry of client’s lawyers, to identify loss contingencies.
• Perform review for subsequent events.
• Obtain representation letter.
• Evaluate audit findings (see 2. below).
• Review adequacy of disclosures using a disclosure checklist that lists all specific disclosures required by GAAP and the SEC, if appropriate.
• Review of working papers performed by manager, partner, and possibly a second partner review performed by a partner who is not otherwise involved in the engagement but to provide an independent review of the work performed. The review process helps provide assurance that audit risk is an appropriately low level, working paper documentation is adequate, and that the evidence supports the opinion being rendered.
• Communicate with the audit committee
Requirements for related-party disclosures
- The FASB Professional Standards provide accounting requirements for related-party disclosures
a. Nature of relationship(s)
b. Description of transaction(s)
c. Dollar amount of transactions
d. Amounts due to/from related parties, including terms - Transactions should reflect their substance (rather than merely their legal form)
Information included in the inquiry to the lawyer
Information included in the inquiry to the lawyer:
a. Identification of the client and the date of the audit
b. A list prepared by management (or a request by management that the lawyer prepare a list) describing pending or threatened litigation, claims, or assessments for which the lawyer has been engaged and devoted substantive attention with a request that the lawyer indicate
(1) A description of the nature of the matter, progress of the case to date, and the action the company intends to take (e.g., contest vigorously)
(2) If possible, an evaluation of the likelihood and amount of potential loss
(3) Identification of any omissions from list, or a statement that the list is complete with respect to litigation, claims, or assessments
Management Representations letter should also include AU-C 580
Management Representations letter should include also **AU-C 580
a. **Financial statements
(1) Management acknowledges its responsibility for the financial statements being prepared in conformity with GAAP
(2) Management believes financial statements presented in conformity with GAAP
(3) Management believes effects of uncorrected financial statement misstatements are immaterial, both individually and in the aggregate
- *b.** Completeness of information
(1) Availability of all financial records and related data
(2) Completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors
(3) Communications from regulatory agencies
(4) Absence of unrecorded transactions - *c.** Recognition, measurement, and disclosure
(1) Management’s acknowledgement of its responsibility to design and implement programs and controls to prevent or detect fraud
(2) Information concerning fraud or suspected fraud affecting the company
(3) Information concerning any allegations of fraud or suspected fraud affecting the company, for example, because of communications from employees, former employees, analysts, regulators, short sellers, or other investors
(4) Plans or intentions that may affect carrying value or classification of assets or liabilities
(5) Information about related-party transactions and receivable or payables
(6) Guarantee (written or oral) under which the entity is contingently liable
(7) All significant estimates and material concentrations known to management are disclosed as per AICPA Statement of Position 94-6, Disclosure of Certain Significant Risk and Uncertainties
(8) Violations or possible violations of laws whose effects should be considered for disclosure or as basis for recording loss contingency
(9) Unasserted claims or assessments that entity’s lawyer has advised are probable of assertion and must be disclosed as per SFAS 5, Accounting for Contingencies
(10) Satisfactory title to assets, liens on assets, and assets pledged as collateral
(11) Compliance with aspects of contractual agreements that may affect financial statements
PP&E acquisition relationship with repairs and maintenance.
- A PP&E acquisition may improperly be recorded in the _repair and maintenance expense accoun_t. Therefore, an analysis of repairs and maintenance may detect understatements of PP&E.
- Alternatively, an analysis of PP&E may disclose repairs and maintenance that have improperly been capitalized, thereby resulting in overstatements of PP&E.
