Audit

Question 1

List the Audit Acceptance procedures

Answer 1

1. Identify users and nature
2. Legal and financial stability
3. Assess integrity of management
4. Communicate with predecessor auditor
5. Firm’s ability to audit client
6. Agree the basis of performance

Question 2

List examples of testing A/R for Existence

Answer 2

• Send confirmations
• subsequent receipts
• sample AR from AR listing, and agree AR to subsequent bank statements
• vouch to invoice

Question 3

What is Vouching vs. Tracing?

Answer 3

Tracing - goes towards FS

• trace from document to FS
• test for completeness

Vouching - goes away from FS

• start with FS and towards supporting doc
• test for occurrence

Question 4

List examples of testing A/R for Cutoff

Answer 4

• review shipping documents for orders delivered just before year-end (or cut off period)

Question 5

List examples of testing A/R for Valuation

Answer 5

• aged listing of receivable, and follow up on past due accounts, such as by performing subsequent receipts testing for collectibility (as it could be impaired)

Question 6

List examples of testing Inventory for Existence

Answer 6

• inventory count (sheet to floor)

Question 7

List examples of testing Inventory for Valuation

Answer 7

• look at subsequent sales to determine NRV, and compare this to cost outlined in purchase invoice or internal costing system
• review fixed overhead allocation to determine if this is properly attributed to inventory
• potentially damaged/obsolete inventory: determine NRV - if the inventory can be used on other projects / sold
• verify whether inventory includes goods that have been returned (and cannot be re-sold again)

Question 8

List examples of testing Inventory for Presentation

Answer 8

• review inventory listing to ensure only finished tanks are included in the finished goods inventory (floor to sheet)

Question 9

List examples of testing Contingent Liability for Completeness

Answer 9

• request updated legal letters to ensure no unrecorded lawsuits & amounts used in assessment of likely loss are accurate, or see if amount is now confirmed or if outcome is determinable

Question 10

List examples of testing Contingent Liability for Valuation

Answer 10

• review insurance policy for coverage to determine amount of likely loss
• review costing schedule for inventory (ie. for defective inventory recalls / returns) to determine the amount of likely loss
• Examine actual # of defective products / changes in # or $ in lawsuits since year end, to ensure amount of loss recorded at YE was not understated

Question 11

List examples of testing PP&E for Valuation / Existence

Answer 11

• Review estimates of future cashflows (for recoverable amount), and deteremine if underlying assumptions are reasonable
• inquire or obtain amortization schedule & perform recalculation (consider useful life)
  o appraisal - use of expert (revaluation method)
  o agree to purchase invoice (cost method)
  o inquire about assumptions in schedule & assess reasonability
• review invoice to ensure purchase is capital in nature

Question 12

What is the recommend materiality range for:

1. Revenue
2. NIBT
3. Assets
4. Equity
5. Expenses

Answer 12

1. Revenue -> 1% to 3%
2. NIBT -> 3% to 7%
3. Assets -> 1% to 3%
4. Equity -> 3% to 5%
5. Expenses -> 1% to 3%

Question 13

What are the audit assertions for Balance Sheet items?

Answer 13

• Completeness (any unreported/missing items? Doc to FS - tracing)
• Accuracy, valuation & allocations (NRV, impairment)
• Existence (FS states this - do they really exist?)
• very similar to Occurrence, but this is B/S item*
• Rights & Obligations
• Classification
• Presentation

Question 14

What are the audit assertions for Income Statement items?

Answer 14

• Completeness (Doc to FS - tracing)
• Accuracy
• Occurrence (FS to doc - vouching)
• very similar to Existence, but this is I/S item*
• Classification
• Cut-off
• Presentation