Aggressive revenue recognition, why and what assertion is effected
- can come from pressure of wanting to boost revenues
- will effect the existence assertion of revenues
consider if recognition practices are consitent with industry and previous reports (review)
Improper amortization of intangibles, why and what assertion is effected
- make the amortization period too long so asset can last longer and expenses are smaller
- asset valuation
- expense existence
Inventory valuation issue what is the principle and what assertion is effected
- must record at lower of cost or market value
- asset valuation assertion
Contingent Liability not added, what assertions are effected
- Liability completeness assertion
- Presentation assertion
If R&D is not capitalized when it should be, what assertions are effected
- completeness of expense
- completeness of asset
What should be done with bonuses that are considered likely and what assertions are effected if not done?
- is considered likely should be accrued and expenses. not doing so will:
- expense completeness
- liability completeness
inventory count should be done when and also what must be considered in terms of assertions the count is associated to?
- must be done as close as possible to YE after YE
- must consider whether the auditor traced (completeness) and vouched (existence), and if not, not claiming the assertion is correct
should it be considered whether auditors are afraid to be connected to false or missleading onformation?
yes
what are the 5 independence threats?
- self review
- self interest
- familiarity
- advocacy
- intimidation
what is an example of self review threat
auditing a system or estimate that you helped management implement or you did for the management
what is an example of self interest threat and who is also included in self interest
- having financial interest, such as shares, which are dependant on the companies financial performance
- includes spouse, parents or dependents having such interests
what is the advocacy threat
the idea that you cannot promote the financial instruments of your client
when can and can you not advocate for a client
- can advocate in court, and right is signed off on engagement letter
- cannot advocate for the purpose of selling their shares
what are the main 2 threats in familiarity and how are they solved
- hard to be skeptical when you have audited a particular set of managment for long enough - solved by the mandtory 5 years partner rotation
- former firm partner working for audited client - 1 year cool off period where they cannot work for client and pass off the audit methodology
what are 2 examples of the intimidation threat
- threaten to use another firm if not receiving an unmodified opinion
- threaten to cap off audit fees that are based off audit work hours
should inventory on consignemtn be included for the consigner and consignee?
consigner - include
consginee - dont include
what are the materiality percentages based on:
- normalized pre tax income
- assets
- equity
- revenue
- gross profits
- rev or exp of a NPO
- pre-tax income - 5-10%
- assets - .5-1%
- equity - 1-2%
- revenues - .5-1%
- gross profits - .5-5%
- NPO rev or exp - .5-2%
what is perfromance materiality, why is it required, and what is the difference between US and Canada
- it is a reduced amount of materiality used for riskier audits in order to have have more room for error
- in US its .25 to .75 and in Canada its .5 to .75 of planning materiality
what are the 5 components of an unmodified auditor’s opinion report?
- opinion segment
- basis for opinion
- key audit matters (KAM)
- management responsibility
- auditor responsiblity
what is stated in opinion segment and what are some opinion examples
- auditors conclusion on the statements
- disclosure being adequate is an implicit assertion
- qualified, unqualified, adverse
what does the basis of opinion segment indicate and identify
indicates that an audit was conducted and identifies the audit F/S
what does the KAM section contain and what does it describe
- contains information that the auditors felt was relevant
- describes to users what issues presented difficulties, why, and what was done to address them
what are some 3 examples of issues
- valuaiton of GW or LT assets
- valuation of financial instruments
- revenue recognition
why is the KAM section needed
- the audit process is complex and this section clearly highlights the greatest issues for the final users
