AUDIT 4.txt

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AUDIT 4.txt
2013-01-05 15:01:58

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  1. Definition and purpose of audit documentation
    • - Principle record of audit procedures performed, evidence obtained, and conclusions reached
    • - Primary purpose is to give support for auditor's report
  2. Requirements of audit documentation
    • - Indicate that accounting records = Financial Statements
    • - Show results of audit tests and procedures
    • - Be prepared in enough detail so that an "experienced auditor" (new on client) can understand everything
    • - Demonstrate compliance with standards of fieldwork (planning, understanding, evidence)
    • - Documentation of any departures
    • - Identify staff involved, client, purpose, period, etc.
  3. Document retention rules
    • - SAS rules (non-issuers): 5 years
    • - PCAOB (issuers) rules: 7 years
  4. Documentation completion date rules
    • Window of time from report release date (which is when it's delivered to client) to assemble the final audit documentation file in which nothing can be deleted and additions have to be marked as such
    • - SAS rules (non-issuers): 60 days
    • - PCAOB (issuers) rules: 45 days
  5. Factors that determine nature and extent of audit documentation
    • - Auditor's judgement
    • - Risk of material misstatement
    • - Extent to which judgement was required in performing work and evaluating results
    • - Nature of specific auditing procedure
    • - Significant of the evidence obtained
    • - Nature and extent of any problems identified
    • - Need to document conclusions that may not be obvious
  6. Specific contents of workpapers
    • - Permanent (continuous) file which carryforward year to year of continuing interests
    • - Current file (documentation applicable to year under audit)
    • - Significant audit findings
    • - Other docs (related to consideration of internal controls, fraud risk, etc)
    • - Use tickmarks or symbols to indicate work was performed
  7. Matters that significant audit findings include
    • - Findings, actions taken and conclusions reached of these
    • - Are related to selection and application of accounting principles especially with complex/unusual transactions or estimates/uncertainties
    • - Are related to possible material misstatements
    • - Suggest a need to revise the auditor's previous risk assessment
    • - Cause significant difficulty in applying necessary audit procedures or indicate need for signifiacnt reviison of planned audit procedures
    • - May result in modification to the auditor's standard report
    • - Result in audit adjustments or corrections identified by the auditor that are material
  8. Types of audit evidence
    • - Underlying accounting records (tested through analytical procedures and subtantive procedures), don't provide sufficient support alone
    • - Corroborating evidence (observation, inquiry and inspection) give validity and support to recorded data
    • - Evidence in electronic form (affects NET of procedures)
  9. Factors the auditor's decision regarding the sufficiency of evidence is influenced by
    • - Risk of material misstatement (greater risk implies more evidence will be required)
    • - The quality of audit evidence: less audit evidence may be required when higher quality
  10. Need to evaluate management's assertions
    • Hierarchy of audit evidence reliability
    • - Auditor's personal knowledge & observation (obtained through observation, examination, inspection, or recalculation)
    • - External evidence
    • - Internal evidence
    • - Oral evidence
  11. Substantive procedures - test of details
    Audit procedures gathering evidence to support account balances (end balances, details of transactions, or both)
  12. Substantive procedures - analytical procedures
    • - Evaluations of financial information by plausible relationships (required in planning and final review, not required in substantive procedures)
    • - Comparisons of financial data and auditor expectations
    • - I/S is more predictable relationships than B/S
    • - Accounts with management discretion are less predictable
    • - Differences don't necessarily indicate fraud/error, but need for further investigation
  13. Factors affecting efficiency and effectiveness of analytical procedures
    • - Nature of the assertion being tested (big overview)
    • - Plausibility and predictability of the data relationship
    • - Availability and reliability of data used to develop the expectation
    • - Precision of the expectation
  14. Documentation requirements of analytical procedures
    • - Auditor's expectation and factors considered in the development of them
    • - Results of comparison
    • - Additional audit procedures performed in response to significant unexplained differences or unusual items
    • - Results of such procedures
  15. Directional testing in test of details
    • - Vouching backward goes from A/R->docs, testing for existence/occurrence and support in the risk of overstatement of revenues/assets
    • - Tracing forward goes from docs->A/R, testing for completeness and coverage in the risk of understatement of expenses/liabilities
  16. Standard auditing procedures
    • F - footing, crossfooting, recalculation (checking mathematical accuracy)
    • I - inquiry (requesting information internally and externally)
    • V - vouching (F/S ->doc, existence/occurrence assertion)
    • E - examination/inspection (providing evidence of existence)
    • C - confirmation (rep from 3rd parties about events/transactions/balances)
    • A - analytical procedures (evaluations of financial information and meaningful relationships)
    • R - reperformance (auditor independence performs procedures/control originally part of client's I/C)
    • R - reconciliation (substantiating existence/valuation of accounts)
    • O - observation (only applies to point of time of observation)
    • T - tracing (docs->F/S, completion assertion)
    • C - cut-off review (year end transactions especially inventory/cash/purchases/sales/accurals)
    • A - auditing related accounts simultaneously
    • R - representation letter (required)
    • S - subsequent events review (perform from period after B/S date to auditor's report date)
  17. Relevant assertions to account balances
    • "CVER"
    • Completeness, Valuation/Allocation/Accuracy, Existence/Occurrence, and Rights/Obligations
  18. Relevant assertions to transactions and events
    • "COVE-U"
    • Completeness, Cut-Off, Valuation/Allocation/Accuracy, Existence/Occurrence, and Understandability/Classification
  19. Relevant assertions to presentation and disclosure
    • "CVR-U"
    • Completeness, Valuation/Allocation/Accuracy, Rights and Obligations, Understandability and Classification
  20. Primary concern with related party transactions
    Properly disclosed in accordance with GAAP
  21. Determining existence of related parties
    • - Evaluating company's procedures for identifying and acct for related party transactions and obtaining a conflict of interest statement from the client
    • - Asking management for the names of all related parties and inquiring whether any transactions occurred during the period
    • - Reviewing the reporting's entity's filings with the SEC and other regulatory agencies concerning the names of officers and directors who occupy management or directorship positions of other businesses
    • - Reviewing material transactions (especially in investment) for related party evidence
    • - Reviewing prior years' audit documentation or inquiring of the predecessor auditor
  22. Identifying related party transactions
    • - Reviewing board minutes, SEC filings, and confirmations
    • - Compensating balance arrangements
    • - Loan guarantees (both payables/receivables)
    • - Unusual, nonrecurring transactions near year end
    • - Transactions based on terms that differ significantly from market terms
    • - Nonmonetary exchanges
  23. Auditor's responsibilities when evaluating estimates
    • - Assess management's written policies and practices regarding development and use of estimates
    • - Verify that all material estimates have been developed
    • - Determine that the accounting estimates are reasonable (focus on significant assumptions, sensitive to variations, deviations from historical patterns, subjective, or susceptible to misstatement/bias)
    • - Ensure that the accounting estimates are properly presented and disclosed in conformity with GAAP
  24. Procedures in testing reasonable of an estimate
    • - First obtain understanding of how management developed its estimate
    • - Review/test procedures used by management
    • - Develop an independent estimate of the item to compare
    • - Review subsequent events/transactions that corroborate value of the estimate
    • Additionally:
    • - Use same methods as prior period
    • - Past track record of estimates is good
    • - Justify any changes in approach
  25. Management's responsibilities in fair value reporting
    • - Where market prices are not available, appropriate valuation methods should be used to estimate FV
    • - Valuation methods should incorporate assumptions that would be used in the market when possible
    • - Management should identify and support any significant assumptions used
  26. Auditor's responsibilities in fair value reporting
    • - Obtain evidence to provide reasonable assurance FV measurements and disclosures are conformity w/ GAAP
    • - Assess risk of material misstatement of FV measurements
    • - Test FV measurements and disclosures (determine if significant assumptions provide a reasonable basis)
    • - Evaluate the sufficiency, competency, and consistency of evidence obtained with respect to FV measurements and disclosures
  27. Evaluating contingencies
    • - Auditor should ask management about contingent liabilities and controls for them
    • - Review minutes, contracts, correspondence with IRS, bank confirmations, purchase commitments, long-term leases, sales contracts
    • - Review interim F/S (subsequent events)
    • - Obtain client representation letter
    • - Send inquiry to client's attorneys
  28. Letter of inquiry to client's attorneys
    • - Signed by client and sent to auditors, and response is sent directly to auditor
    • - Lawyer's response should include professional opinion on expected outcome of any lawsuit and likely outcome of any liability (e.g. court costs)
    • - Lawyers may limit responses to "substantial attention" and are in confidentality limitations
    • - If lawyer refuses to respond, scope limitation (qualified or disclaimer) or if client refuses to permit inquiry (disclaimer)
  29. Segregation of duties in a computerized envinroment
    • C - control team
    • O - operators
    • P - programmers
    • A - analyst
    • L - librarian
  30. If there's a disappearing audit trail...
    • - Audit tests should be performed on a continuous basis
    • - Computer systems should be signed to supply electronic audit trails
  31. Advantages and disadvantages to IT computerized processing
    • - Opportunity for remote access (hacking), greater damage if security's breached
    • - Errors or fraud in design/maintenance
    • - Decreased human involvement means errors may go undetected for awhile
    • - Potential for increased supervision and review through integration of audit procedures in application programs themselves and analytical procedures
  32. Auditing around the computer (manual)
    • - Auditor tests input data, processes data independently, and compares results to program results
    • - Appropriate for simple batch systems
    • - Risks include insufficient evidence or procedures
  33. Auditing through the computer (CAAT)
    • - Transaction tagging (following specific transactions through system)
    • - Embedded audit modules (sections of code collect transaction data for auditor)
    • - Test data (test desk, process data offline while under auditor's control of info with results already known)
    • - Integrated test facility (commingle test data with live data to dummy accounts, like secret shopper)
    • - Parallel simulation (reperformance test, using client's data with auditor's own software to compare results)
  34. GASPS (generalized audit software packages)
    Allow auditor to perform tests of controls and substantive tests directly on the client's system by defining client's system and specifying tests to be done
  35. In microcomputer audit applications, what do efficient and effective systems require?
    • - Identification of the appropriate audit tasks
    • - Appropriate software to perform the selected audit tasks
  36. Evaluation of audit findings
    • - Evaluate materiality of all misstatements found by size, effects (individually and aggregate)
    • - Prior period misstatements that may affect current period
    • - Qualitative considerations (specific circumstances, affecting trends or compliance of firm, affect mgmt's compensation or affect significant F/S elements)
    • - Ultimately a matter of professional judgement
  37. Documentation requirements in evaluating audit findings
    • - Planning levels of materiality and tolerable misstatement
    • - Known and likely misstatements that were corrected by management
    • - A summary of uncorrected misstatements
  38. Engagement quality review process
    • - Hold discussions, review documentation, and evaluate significant judgments
    • - Evaluate team's assessment of and response to significant risks, including fraud risk
    • - Evaluate corrected and uncorrected misstatements, and control deficiencies
    • - Review evaluation of firm's independence
    • - Review engagement completion document
    • - Read F/S, mgmt's report on internal control, and the engagement report, other info filed with SEC, and communications with mgmt
  39. Indications of a significant engagement deficiency
    • - Engagement team failed to obtain sufficient appropriate evidence
    • - Engagement team reached an inappropriate overall conclusion
    • - Engagement report is not appropriate for the circumstances
    • - The firm is not independent of the client
  40. Revenue cycle - internal control - sales
    • - Preparation of sales order (sent to credit)
    • - Credit approval (valuation, approved is sent to shipping, billing, accounting)
    • - Shipping department (bill of lading prepared, goods are shipped)
    • - Billing (sales invoice created and everything's compared)
    • - Accounting (receivable/sales is recorded)
  41. Revenue cycle - internal control - accounts receivable
    • - Sales (receivable recorded)
    • - Collection of cash receipts (receivable eliminated)
    • - Uncollectible receivables (aging schedule prepared and sent to credit department to carry out collection)
    • - Sales returns (receiving report used as sales returns slip, once return's approved receivable eliminated)
    • - Sales discounts
  42. Revenue cycle - internal control - cash receipts
    • - Incoming mail must be opened by person who doesn't have access to A/R ledger
    • - Receipts should be sent to cashier (prepare bank deposit), A/R department (record entry), and accounting department (record in general ledger)
    • - Cash registers/lock boxes should be used
  43. Revenue cycle - substantive procedures - accounts receivable
    • - Completeness: obtain aged trial balance of A/R and trace total to general ledger control account
    • - Valuation/allocation/accuracy: examine results of confirmations and test adequacy of AUA
    • - Existence and occurrence: confirm sample of A/R
    • - Rights and obligations: review bank confirmations and debt agreements on receivables, and those that may have been factored/sold
  44. Revenue cycle - substantive procedures - sales transactions
    • - Completeness: trace sample of shipping documents to corresponding sales invoices/sales journal/AR ledger
    • - Cut-Off: compare sample of sales invoices from before/after YE with shipment dates and recorded dates
    • - Valuation/allocation/accuracy: compare prices on sample of sales invoices with authorized lists
    • - Existence and occurrence: vouch sample of sales transactions from journal to sales invoice back to customer order/shipping documents
    • - Understandability and classification: examine sales invoice samples for proper classification into appropriate revenue accounts
  45. Revenue cycle - substantive procedures - auditing presentation and disclosure
    • - Completeness: all required disclosures to A/R sales have been made (methods, segments, related parties, etc)
    • - Valuation/allocation/accuracy: read footnotes and other info to determine if it's accurate and presented at appropriate amounts
    • - Rights and obligations and occurrence: determine if any receivables are pledged/assigned/discounted and if disclosed properly
    • - Understandability and classification: should read A/R and sales disclosure
  46. Accounts receivable confirmations - positive confirmations
    • - Done for large accounts, when expected errors/disputes exist, or weak internal control
    • - Blank forms might result in lower response rates
    • = Send second request then consider alt. audit procedures if no response
    • - Provide evidence to existence and rights/obligations
  47. Accounts receivable confirmations - negative confirmations
    • - Not as good since no explicit verification
    • - Use for low risk, small balances, or expect customer attention
  48. Expenditure cycle - internal control - purchases
    • - Purchase requisition (depart sends approved, numbered requisition to purchasing department)
    • - Purchase orders (purchasing department considers order and places it to vendor, sends PO to req, vendor, receiving department, and acct department)
    • - Receipt of goods or services (PO copy to receiving department serves as authorization to receive goods but should have blank quantity so they count them)
  49. Expenditure cycle - internal control - accounts payable
    • - Record payable (Compare PO with receiving report and vendor's invoice to record goods and received and record payable)
    • - Approve invoice for payment (accounting department approves invoice, PO, receiving report, and sometimes requisition)
    • - Record payment after being paid by Treasurer (reverse the payable)
  50. Expenditure cycle - internal control - cash disbursements
    • - Pay invoices by check
    • - Segregate functions of approving payment and signing the checks
    • - Treasurer gets approved voucher packet (invoice, PO, receiving report and requisition) prepared by accounting department and they prepare/sign/mail checks
    • - Paid vouchers returned to accounting department to post payment and file documents
  51. Expenditure cycle - substantive procedures - accounts payable
    • - Completeness: agree A/P to general ledger, sample of vendor statements and agree to accounts, perform a search for unrecorded liabilities (bills paid in Jan/Feb and determine if they were incurred last Nov/Dec)
    • - Valuation/allocation/accuracy: obtain A/P and agree, sample of vendor statements and agree to vendor accounts, and review results of A/P confirmations
    • - Existence and occurrence: vouch selected amounts from accounts payable listing to voucher packages, and confirm A/P but not required, and search for unrecorded liabilities
    • - Rights and obligations: review sample of voucher packages to verify AP are owed
  52. Expenditure cycle - substantive procedures - purchase transactions
    • - Completeness: trace sample of vouchers to purchase journal
    • - Cut-off: compare dates on vouchers with purchase journal records
    • - Valuation/allocation/accuracy: recompute mathematical accuracy of vendor invoices
    • - Existence and occurrence:test sample of vouchers for authorization and presence of receiving report
    • - Understandability and classification: verify account classification on a sample of purchases
  53. Expenditure cycle - substantive procedures - presentation and disclosure
    • - Completeness: ensure all disclosures related to AP and purchases are included (payables by type/term, purchase contracts and commitments, related party transactions, expenses by segment)
    • - Valuation/allocation/accuracy: read footnotes to determine if accurate
    • - Rights and obligations and occurrence:compare disclosures to other audit evidence to ensure it's all there
    • - Understandability and classification: read all AP and purchase related disclosures to ensure they're all understandable, and if material items require separate disclosure
  54. Cash cycle - fraud risk - lapping
    • - Failing to account for cash receipts
    • - Today's cash receipts cover yesterday's theft
    • - Inspect when checks are deposited and cashed, compare to when A/R was booked
    • - Use lock box system or send payments directly to bank
  55. Cash cycle - fraud risk - kiting
    • - Check is drawn on one bank and deposited in another bank and no record made of disburesement in the balance of the first bank
    • - Cash is in two places at once (Dec 31) - in bank #2, and "still in" bank #1 ( lying)
    • - Audit procedure: bank cut-off procedure of when checks are drawn to when checks are deposited
  56. Cash cycle - substantive procedures - ending cash balance
    • - Completeness, valuation and allocation, existence
    • - Done by bank confirmations to all banks client has done business with
    • - Bank reconciliation of agreeing books, general ledger, bank confirmation, cut-off bank statement
  57. Cash cycle - substantive procedures - cash receipts and cash disbursements
    • - Completeness: trace sample of remittance advices to cash receipts journal and deposit slips, and sample of cancelled checks to cash disbursement journal
    • - Cut-off: verify by comparing dates for cash receipts record with dates of cash deposits or clearing
    • - Valuation/allocation/accuracy: foot remittance advice and entires on deposit slip and agree to cash receipts journal/bank statement, or agre PO/receiving report/invoice/cancelled check/disbursement journal
    • - Existence and occurrence: vouch sample of entries in cash receipts journal to remittance advices, deposit slips, and bank statements, or vouch cash disbursements to canceled checks, voucher package, and bank statement
    • - Understandability and classification: examine sample of remittance advices and canceled checks
  58. Cash cycle - substantive procedures - presentation and disclosure
    • - Completeness: ensure all disclosures have been made (policy, restrictions, compensating balance reqs)
    • - Valuation/allocation/accuracy: read footnotes and other info to determine if it's accurate
    • - Rights and obligation and occurrence: compare disclosures to other audit evidence
    • - Understandability and classification: read all cash related disclosures
  59. Inventory cycle - internal control
    • - Purchasing (serially number, properly approved PO's)
    • - Receiving (receiving department should verify quantities, damaged goods, etc.)
    • - Warehouse (custodian of goods received)
    • - Shipping (responsible of shipment of goods after authorization of approved sales order)
  60. Inventory cycle - substantive procedures - ending inventory balance
    • - Observation of beg/ending physical inventory counts is required
    • - Completeness: trace pre-numbered inventory tags to physical inventory report sheets and CPA test counts, and CPA test counts to physical inventory report (existence and completeness)
    • - Valuation/allocation/accuracy: test mathematical accuracy, inquire about obsolete/damaged goods, examine vendor invoices, perform inventory price tests
    • - Existence and occurrence: test existence of items on inventory report by vouching them to inventory tags
    • - Rights and obligations: ascertain consigned inventory is excluded from count
  61. Inventory cycle - substantive procedures - presentation and disclosure
    • - Completeness: ensure disclosures of cost method, RM/WIP/FG balances, consigned inventory, and pledged/assigned inventory, warranty obligations, and inventory write-down significant losses
    • - Valuation/allocation/accuracy: read footnotes to determine if appropriate and accurate
    • - Rights and obligations and occurrence: obligations are disclosed and review loan agreements
    • - Understandability and classification: inventory related disclosures and inventory records for proper classification between RM/WIP/FG
  62. Investment cycle - internal control
    Strong segregation of duties between authorizing purchase/sale, someone acting as custodian (preferably third party), and maintaining detailed records of investments
  63. Investment cycle - substantive procedures - ending investment balances
    • - Completeness: search for unrecorded purchases of securities, and confirm securities with third parties
    • - Valuation/allocation: obtain evidence corroborating quoted year-end fair value, and determine if there's any permanent impairment
    • - Existence: confirmation from third parties of securities, and examine securities on hand
    • - Rights and obligations: confirm securities and counting also provides evidence of ownership
  64. Investment cycle - substantive procedures - investment transactions
    • - Completeness: perform analytical procedures of dividend/interest income for reasonable and that it's been recorded
    • - Cut-off: review performed
    • - Valuation/allocation/accuracy: independent calculations made, recalculations made, and compare to Moody's
    • - Existence and occurrence: completeness procedures also provide evidence of existence
    • - Understandability and classification: examine sample of transactions to determine was recorded at proper accounts (e.g. AFS in OCI and trading in earnings)
  65. Investment cycle - substantive procedures - presentation and disclosure
    • - Completeness: ensure all disclosures have been made
    • - Valuation/allocation/accuracy: read footnotes to determine if appropriate and accurate
    • - Rights and obligations and occurrence: read disclosures
    • - Understandability and classification: marketable securities, equity method investments, derivatives
  66. PPE cycle - internal control
    • Major transactions are purchases, repairs/maintenance, depreciation, disposal, revaluation, leasing
    • - Acquisition (special form, tied to capital budget and approved by board sometimes. make sure policy's followed and properly authorized)
    • - Subsidiary ledgers (detailed information concerning asset)
    • - Physical security (ID plates, listed, and safeguarded)
    • - Written policies (depreciation policies and records maintained, and specific capitalization policies. Mgmt override possible like in WorldCom)
    • - Disposition (retirement of assets should be documented with proper authorization and reason)
  67. PPE cycle - substantive procedures - ending PPE balance
    • - Completeness: foot fixed asset schedule, additions/dispositions, and trace sample of actual assets to ledger
    • - Valuation/allocation: recalculate accumulated depreciation and evaluate fixed assets for impairment
    • - Existence: vouch additions to accounts by examining internal documents and test for unrecorded retirements
    • - Rights and obligations: examine invoices, deeds, title docs, etc
  68. PPE cycle - substantive procedures - PPE transactions
    • - Completeness: review related repair and maintenance expense accounts to test for completeness of asset additions (locate items to be capitalized)
    • - Cut-off: review fixed asset purchases/dispositions from before/after year-end
    • - Valuation/allocation/accuracy: depreciation expense recalculated and tested for reasonableness
    • - Existence and occurrence: vouch sample of purchases to supporting documentation
    • - Understandability and classification: see items that should be capitalized, and as operating/capitalized
  69. PPE cycle - substantive procedures - presentation and disclosure
    • - Completeness: disclosures of depreciation methods, expense for period, liens and mortgages, balance of each class, leasing information
    • - Valuation/allocation/accuracy: read footnotes to determine if appropriate and accurate
    • - Rights and obligations and occurrence: inquire of management and review loan agreements, minutes and other docs to see if pledged as collateral
    • - Understandability and classification
  70. Payroll/personnel cycle - internal control
    • - Service organization used
    • - Segregation of duties between authorization to employ and pay (HR), supervision of pay base data, timekeeping and cost accounting (time clocks), payroll check preparation (payroll department is record-keeping), check distribution (paymaster is custodian)
  71. Payroll/personnel cycle - internal control procedures
    • - Prenumbering checks and timecards
    • - Authorization of transactions
    • - Independent check to maintain asset accountability - bank reconciliation and unclaimed payroll checks should be followed up
    • - Documentation - changes sould be supported by documents and hours worked should be in payroll register
    • - Timely and appropriate performance reviews
    • - Information processing controls
    • - Physical controls for safeguarding assets
    • - Segregation of duties
  72. Payroll/personnel cycle - substantive procedures - payroll accrual
    • Substantive procedures done on valuation when internal control's effective
    • - Completeness: performed when searching for unrecorded liabilities
    • - Valuation and allocation: recalculate any year-end payroll accrual and compare to reported amount
    • - Existence: vouch amounts from calculation to supporting documentation
    • - Rights and obligations: examine supporting documentation to verify it's actually an obligation of entity
  73. Payroll/personnel cycle - substantive procedures - payroll transactions
    • - Completeness: trace timecards to payroll register
    • - Cut-off: trace from before/after year-end to make sure proper period
    • - Valuation/allocation/accuracy: accuracy and valuation of payroll expense by comparing, testing, verifying, recalculating amounts
    • - Existence and occurrence: vouch time on summaries to time cards/approved time reports
    • - Understandability and classification
  74. Payroll/personnel cycle - substantive procedures - presentation and disclosures
    • - Completeness: ensure disclosures related to pension/post-retirement benefits, stock-based compensation, deferred compensation/profit-sharing plans
    • - Valuation/allocation/accuracy: read footnotes
    • - Rights/obligations/occurrence: inquire about accruals for proper disclosure and compare to other evidence
    • - Understandability and classification
  75. Financing cycle - internal control of debt and equity
    • Debt internal control should have:
    • - adequate documentation of all financing agreements
    • - authorization of new financing by board of directors or management
    • - detailed records of LTD, including interest/principle payments
    • Equity internal control: all stock issuances, dividend declarations, T/S purchases must be authorized and recorded
  76. Financing cycle - substantive procedures - ending debt balance
    • - Completeness: review board minutes, new debt agreements, trace to F/S, etc
    • - Valuation/allocation: recompute any interest payable and amortization of premiums/discounts and examine new agreements to see if recorded at proper amounts
    • - Existence: confirm notes/bonds with creditors
    • - Rights and obligations: examine note/bond agreements
  77. Financing cycle - substantive procedures - debt transactions
    • - Completeness: review interest expense for payments to debt holders not included, and proper classification of lease agreements
    • - Cut-off: review debt activity before/after year end
    • - Valuation/allocation/accuracy: test sample of debt receipts and payments, compare int expense to debt balance for reasonableness
    • - Existence and occurrence: verify existence of new debt for evidence
    • - Understandability and classification: determine due dates to see if should be S/T or L/T
  78. Financing cycle - substantive procedures - presentation and disclosure
    • - Completeness: disclosures of dates, rates, privileges, etc. and future sinking fund payments, loan covenants
    • - Valuation/allocation/accuracy: read footnotes
    • - Rights/obligations/occurrences: compare to other audit evidence
    • - Understandbility and classification
  79. Financing cycle - substantive procedures - owner's equity and treasury stock
    • - Completeness: third party confirmations from stock transfer agent, or stock certification book, and required disclosures made
    • - Valuation: propriety of any direct entries to R/E, and recompute values assigned, analyze R/E from last audit
    • - Existence and occurrence: tested by vouching transactions recorded during current period to board minutes
    • - Understandability and classification: are there any restrictions on R/E from loans/agreements/state laws
  80. Liquidity ratio - current ratio (working capital ratio)
    Current assets / Current liabilities
  81. Liquidity ratio - acid-test ratio
    (Cash equivalents + Marketable securities + Net receivables) / Current liabilities
  82. Liquidity ratio - cash ratio
    (Cash equivalents + Marketable securities ) / Current liabilities
  83. Activity ratios - accounts receivable turnover
    • Success in collecting outstanding receivables
    • = Net credit sales / Average net receivables
  84. Activity ratios - accounts receivable turnover in days
    • Indicates avg. number of days required to collect A/R
    • = Average net receivables / (net credit sales / 365)
  85. Activity ratios - inventory turnover
    • How quickly inventory is sold
    • = Cost of goods sold / Average inventory
  86. Activity ratios - inventory turnover in days
    • Avg. number of days required to sell inventory
    • = Average inventory / (COGS / 365)
  87. Activity ratios - Operating cycle
    • Number of days between acquisition of inventory and realization of cash from selling inventory
    • = AR turnover in days + Inventory turnover in days
  88. Activity ratios - Working capital turnover
    • How effectively working capital is used
    • = Sales / average working capital
  89. Activity ratios - Total asset turnover
    • How effectively assets is used
    • = Net sales / Average total assets
  90. Activity ratios - Accounts payable turnover
    • Number of times trade payables turnover during the year
    • = COGS / Average accounts payable
  91. Activity ratios - Days in accounts payable
    • Average length of time trade payables are outstanding before they're paid
    • = Average accounts payable (COGS/365)
  92. Profitability ratios - net profit margin
    • Profit rate
    • = Net income / net sales
  93. Profitability ratios - return on total assets
    • Return on total assets
    • = Net income / Average total assets
  94. Profitability ratios - return on assets (alternate version)
    • Uses both net profit margin and total asset turnover
    • = (Net income / net sales) x (Net sales / Average total assets)
  95. Profitability ratios - return on investment
    • Performance of firm without regard to method of financing
    • = (Net income + Interest expense(net of tax)) / (Average (LT liabilities + Equity))
  96. Profitability ratios - return on common equity
    • Measure returns accruing to common shareholders
    • = (Net income - Preferred dividends) / Average common equity
  97. Profitability ratios - net operating margin percentage
    Net operating income / Net sales
  98. Profitability ratios - gross (profit) margin percentage
    Gross profit margin / Net sales
  99. Profitability ratios - Operating cash flow per share
    Operating cash flow / common shares outstanding
  100. Investor ratios - degree of financial leverage
    Earnings before interest and taxes / earnings before taxes
  101. Investor ratios - price/earnings ratio
    Market price per share / Diluted earnings per share
  102. Investor ratios - dividend payout ratio
    Dividends per common share / Diluted earnings per share
  103. Investor ratios - dividend yield
    Dividends per common share / Market price per common share
  104. Investor ratios - book value per share
    (Total stockholders' equity - Preferred stock) / Number of common shares outstanding
  105. LT debt paying ability ratios - debt/equity ratio
    • Degree of protection to creditors in case of insolvency
    • = Total liabilities / Common stockholder's equity
  106. LT debt paying ability ratios - debt ratio
    Total liabilities / total assets
  107. LT debt paying ability ratios - times interest earned
    • Ability of company to cover interest charges
    • = Recurring income before taxes and interest / Interst
  108. LT debt paying ability ratios - operating cash flow / total debt
    • Ability of company to cover total debt with yearly cash flow
    • = Operating cash flow / total debt
  109. LT debt paying ability ratios - times interest earned
    • Ability of company to cover interest charges
    • = Recurring income before taxes and interest / Interst
  110. LT debt paying ability ratios - operating cash flow / total debt
    • Ability of company to cover total debt with yearly cash flow
    • = Operating cash flow / total debt