Audit (Final Exam) 2022 Solved Correctly

Audit (Final Exam) 2022 Solved Correctly What is audit evidence? -Ans- Defining characteristic between positive and negative assurance What are the five assertions when evaluating financial statements? -Ans- Existence Completeness Valuation Rights and Obligations Disclosure What are the four steps of audit? -Ans- Assess risks Test internal controls/Planning audit Substantive audit evidence Form conclusions Which provides stronger evidence: Internal or External sources? -Ans- External A lack of external evidence is considered to be...? -Ans- Unfavorable evidence Why do auditors spend a lot of time in balance sheet? Does this detect fraudulent expenditures or unearned revenue? -Ans- -Change(A-L) = Change(OE) -No -Not necessarily, example = gift cards (Liability) Name an account at risk for over/under statement. What population should you select for sample? -Ans- -Accounts Receivable (Test recorded AR balance) -Accounts Payable (Look at companies you'' be paying them to, even if account is at zero) What was the point of the tangled giraffe's heads? -Ans- Looking at heads, down to the bodies. What is vouching? Purpose? -Ans- From account to entries to source documents, only validity. What is tracing? Purpose? -Ans- From source documents to account entries, tests completion. Name the seven types of audit evidence. -Ans- Observation Physical examination Inquires and interviews Confirmations Recalculations Inspecting supporting documents (Vouching/Tracing) Analytical procedures Going through the motions is pointless, unless exercising what three character traits? - Ans- Judgement Common sense Professional Skepticism What is appropriateness? Example? -Ans- Doing the right thing Vouching vs. Tracing What is sufficiency? Example? -Ans- Doing enough Sample size MUST KNOW AUDITING ESTIMATES. Chapter 14. -AnsWhat factors should be considered when making auditing estimates. (3) -AnsReasonableness of assumptions Consistency with industry standards Consistency with actual experience over time is often the most reliable indicator Current standards permit auditors to use one of these two estimate approaches. Which is less biased? -Ans- 1. Test processes, inputs, and assumptions supporting the company's estimate. 2. Develop an independent estimate or range and compare it to company's estimate. 2 - Because 1 anchors our judgement, and 2 is less susceptible to anchoring base. Example a company that used intentionally poor estimates to cook books. -Ans- -Waste Management increased the useful life's on trucks and garbage steel containers. -Used odd discount rates for expenses on landfill SEC sued for 7 million Five examples of related parties -Ans- -Subsidiaries -Special Purpose Entities/Variable Interest Entities (SPG) -Immediate family -Majority Shareholder -Managers/Executives What is the most basic internal control of all? -Ans- Arm's length transactions because affiliations with related parties can remove this natural discipline -Example - Enron and Special Purpose Entities Buy/sell things for whatever price Explain the Shady real estate sales made by Lincoln Savings and Loan. -Ans- - Lincoln had a real estate subsidiary, whom had a related party. Lincoln would give them cash, in return for a note payable. That related party gave a big loan and cash to the subsidiary, in return for real estate. What happens if a transaction is with a consolidated affiliate? What if the related entity is not consolidated? -Ans- -It must be eliminated from consolidated statements. -Must be approved by board, scrutinized by auditor for reasonableness, and full disclosed to the financial statements. Name the five responsibilities of auditor for related parties. -Ans- 1. Identify related parties 2. Verify proper authorization and approval of all transactions 3. Scrutinize values for reasonableness and consistency 4. Ensure adequate disclosures 5. Discuss material related party transactions with audit committee. Much of the work for an audit should be completed....? Including? -Ans- -Before year end. -Tests on internal controls, substantive testing in low risk areas, must ensure rollforward procedures to ensure a proper cutoff. What does an audit program do? -Ans- -Highlights the objectives for each area -Specifies the procedures to be performed documenting who performed them and when Most prominent difference between a novice and expert? -Ans- Novice does the procedures, expert criticizes the objectives. What is Auditing Standard 3? -Ans- Auditor representations after the fact do not substitute for explicit documentation (can be on paper or computer, must be explicit) Example of substandard documentation? -Ans- Manager of BDO Phili who knew inspection was coming, had people go in and put documentation after. 7 Special Situation for documentation? -Ans- 1. Significant accounting matters 2. Any modification to planned audit procedures 3. All errors detected, with the corresponding adjusting entries that would be needed to correct those errors. 4. Any disagreements within the audit team 5. Any obstacles that hinder the audit 6. Changes in assessed risks 7. Any matters that could influence audit report. What are the components of the revenue cycle? -Ans- -Sales, Cash, A/R, Reductions of inventory (At point of sales) What is a natural control against overstated revenues? ways to review? -Ans- -Double entry accounting -Credit to cash, make sure cash is there. Debit to receivable, make sure it legitimate and collectible 7 ways to overstate revenue. -Ans- -Record revenue without delivering the goods -Record sales for customers that do not exist -Offer irrevocable rights of return and then understate the corresponding allowances -Understate obligations (rebates) -Move sales at beginning of year 2, to the end of year 1 -Huge gains to related parties -Channel stuffing What percentage of frauds deal with revenue recognition? -Ans- Over 60% What are two examples of understating revenue risk? -Ans- -Natural gas revenues earned by Jicarilla Apache Tribe (Got checks, cashed it) -Product outflow controls in restaurants to prevent embezzlement (short changing customers, pocketing cash) Main rule for revenue recognition? -Ans- Companies cannot recognize revenue until the end customer has assumed substantially all risks and rewards of ownership (Providing service over time, should recognize it ratably) The five objectives from client to client for internal controls are the same, which are? - Ans- -Completeness, existence, valuation, right and obligations, disclosure US GAAP requires companies to disclose any buyer-seller relationships that account for more than __% of recorded revenues. -Ans- -10% Legitimate receivables are not necessarily collectible receivables. T/F -Ans- True Analysis of an aging schedule is a standard audit procedure, what do you consider? - Ans- The collection history. Is the allowance for doubtful accounts as a percentage of total receivables shrinking or increasing over time? Also consider collateral What does "securitizes" receivables mean? -Ans- Bundling receivables through a financial intermediary to get cash right away. Confirmation proves collectability. T/F -Ans- False, because companies will complain if bills are too high, but not if too low Confirmations should be sent and received by? -Ans- The auditor What happened with Parmalat? -Ans- Company made up cash, auditor wanted confirmation, put it in outgoing mail, company intercepted mail/forged signature. What is positive confirmation? -Ans- Request a reply even if the confirmed balance is correct. Auditor must follow up on non-replies or apply alternate procedures. What company does not reply to confirmations? -Ans- Walmart What is the best alternative to positive evidence? -Ans- Subsequent receipt. Check to see if they paid you What is negative evidence?. -Ans- Request a reply if balance is wrong What is a common strategy when dealing with positive/negative evidence? -Ans- Send positive confirmations on individually significant balances and negative for a sample of other accounts Name three words for warning for confirmations. -Ans- -Vendors replying electronically -Some banks and major vendors will often give auditors access to company's online records (Needs to be monitored) -Electronic communication can be forged What is lapping? -Ans- Steals cash from customer one, applies customers two's payment to customer one, and so on. How is lapping controlled? -Ans- Segregation of duties and through end of the year cutoff tests Inventory is _________. -Ans- Desceptibly important. It is easy to distort income by manipulating inventories, than by manipulating cash or investments. t/f -Ans- True In a cosignment arrangement, the supplier retains title to inventory held by a retailer until...?? -Ans- A sale to the ultimate consumer takes place In a cosignment arrangement, what is the benefit to the vendor? -Ans- Control over shelf space and access to consumers In a cosignment arrangement, what is the benefit to the retailer? -Ans- Lower financing costs and lower risks What are the risks of a cosignment arrangement? -Ans- Incentives and controls over existence/access (It is very difficult to audit inventory when it is in other stores) What are automated inventory systems? -Ans- Electric scanning of bar codes enables companies to track quantities on hand and order inventory. What is a Radio Frequency IDentification? -Ans- Identifies items going through radars. Who has the largest RFID center? -Ans- Arkansas, funde