What happens to interest rates when the economy slows, there’s weak employment (i.e. high unemployment), or inflation is too low?
Interest rates go down and demand for credit goes down too because people save more (think wanting to buy a house)
Can the external auditor request direct assistance from the internal auditors for:
1. assistance in obtaining an understanding of internal control
2. performing tests of controls
3. substantive tests
Yes, for all three, as long as the external auditor adequately oversees the work performed by the internal auditors.
Subsequent events are defined as events or transactions that occur after the financial statement date but before the financial statements are issued or made available for issuance.
Not necessarily the audit report date. Although usually, the audit report date is the date the financial statements are issued.
What type of model predicts the most likely future outcome based on historical data and current conditions?
Financial forecasts
What type of model explores potential outcomes based on hypothetical “what-if” scenarios?
Financial projections
What type of financial model is appropriate for general use?
Financial forecasts
What type of financial model is appropriate for limited use?
Financial forecasts and financial projections
Is independence impaired if a lease meets the criteria of a capital lease as defined by GAAP?
YES
Is independence impaired if a lease meets the criteria of an operating lease as defined by GAAP?
NO
Materiality of a transaction to the financial statement users does not depend solely on the recorded $ amount of the transaction but also on other specific relevant factors, such as the nature of the related-party relationship.
Related-party transactions may indicate an increased risk of material misstatement of the financial statements. They should always be disclosed I think, regardless of materiality?
Nonstatistical sampling is pure judgement regarding the sample size. For statistical sampling, the sample size has a scientific basis.
A note.
Find the MCQ that is fully correct.
A note.
Critical Audit Matters are matters communicated or required to be communicated to the audit committee and that:
- Relate to accounts or disclosures that are material to Financial Statements. Or
- Involved especially challenging, subjective, or complex auditor judgment
Critical Audit Matters get included on the audit report after the Opinion Paragraph and after the Basis for Opinion paragraph for Issuers.
Lapping
a type of accounts receivable fraud where an employee steals a customer’s payment and uses subsequent payments from other customers to cover the missing funds, delaying detection. It involves taking cash from Customer A, using money from Customer B’s payment to credit Customer A’s account, then using Customer C’s payment for Customer B, and so on, creating a cycle until the original amount is replaced or the fraud is discovered
What is a good safeguard for lapping?
a lockbox
How can an auditor detect lapping?
compare $ & date of deposit slip to AR credit amounts.
Kiting
when a check is deposited to Bank B from Bank A, BUT Bank A does NOT record a disbursement until AFTER year-end. It is a form of fraud to cover cash shortages or cushion the cash position.
How can an auditor detect kiting?
by looking at a bank transfer schedule
Another example of Kiting:
Kiting is a fraudulent accounting practice where a person exploits the time it takes for checks to clear between banks to inflate their account balance with non-existent funds. This is done by writing a check on one account and depositing it into another, then withdrawing the money before the first check is processed and bounced, creating a “float” of fake money. This is an illegal and unethical practice, often considered bank fraud
Kiting is cash fraud, and lapping is AR fraud.
Kiting and Lapping fraud.
What type of risk is this? The possibility that an auditor will issue an incorrect opinion on financial statements that are, in fact, materially misstated
Audit risk
memorize the COSO 5 components and 17 principles
Limiting access to inventory is an existing control activity and is not related to the
monitoring component of internal controls.
