AUDIT 4.txt

• - Principle record of audit procedures performed, evidence obtained, and conclusions reached
• - Primary purpose is to give support for auditor's report

• - 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.

• - SAS rules (non-issuers): 5 years
• - PCAOB (issuers) rules: 7 years

• 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

• - 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

• - 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

• - 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

• - 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)

• - 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

• Hierarchy of audit evidence reliability
• - Auditor's personal knowledge & observation (obtained through observation, examination, inspection, or recalculation)
• - External evidence
• - Internal evidence
• - Oral evidence

Audit procedures gathering evidence to support account balances (end balances, details of transactions, or both)

• - 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

• - 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

• - 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

• - 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

• 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)

• "CVER"
• Completeness, Valuation/Allocation/Accuracy, Existence/Occurrence, and Rights/Obligations

• "COVE-U"
• Completeness, Cut-Off, Valuation/Allocation/Accuracy, Existence/Occurrence, and Understandability/Classification

• "CVR-U"
• Completeness, Valuation/Allocation/Accuracy, Rights and Obligations, Understandability and Classification

Properly disclosed in accordance with GAAP

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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)

• C - control team
• O - operators
• P - programmers
• A - analyst
• L - librarian

• - Audit tests should be performed on a continuous basis
• - Computer systems should be signed to supply electronic audit trails

• - 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

• - Auditor tests input data, processes data independently, and compares results to program results
• - Appropriate for simple batch systems
• - Risks include insufficient evidence or procedures

• - 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)

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

• - Identification of the appropriate audit tasks
• - Appropriate software to perform the selected audit tasks

• - 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

• - Planning levels of materiality and tolerable misstatement
• - Known and likely misstatements that were corrected by management
• - A summary of uncorrected misstatements

• - 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

• - 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

• - 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)

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - Not as good since no explicit verification
• - Use for low risk, small balances, or expect customer attention

• - 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)

• - 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)

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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

• - 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)

• - 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

• - 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

Strong segregation of duties between authorizing purchase/sale, someone acting as custodian (preferably third party), and maintaining detailed records of investments

• - 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

• - 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)

• - 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

• 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)

• - 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

• - 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

• - 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

• - 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)

• - 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

• 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

• - 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

• - 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

• 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

• - 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

• - 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

• - 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

• - 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

Current assets / Current liabilities

(Cash equivalents + Marketable securities + Net receivables) / Current liabilities

(Cash equivalents + Marketable securities ) / Current liabilities

• Success in collecting outstanding receivables
• = Net credit sales / Average net receivables

• Indicates avg. number of days required to collect A/R
• = Average net receivables / (net credit sales / 365)

• How quickly inventory is sold
• = Cost of goods sold / Average inventory

• Avg. number of days required to sell inventory
• = Average inventory / (COGS / 365)

• Number of days between acquisition of inventory and realization of cash from selling inventory
• = AR turnover in days + Inventory turnover in days

• How effectively working capital is used
• = Sales / average working capital

• How effectively assets is used
• = Net sales / Average total assets

• Number of times trade payables turnover during the year
• = COGS / Average accounts payable

• Average length of time trade payables are outstanding before they're paid
• = Average accounts payable (COGS/365)

• Profit rate
• = Net income / net sales

• Return on total assets
• = Net income / Average total assets

• Uses both net profit margin and total asset turnover
• = (Net income / net sales) x (Net sales / Average total assets)

• Performance of firm without regard to method of financing
• = (Net income + Interest expense(net of tax)) / (Average (LT liabilities + Equity))

• Measure returns accruing to common shareholders
• = (Net income - Preferred dividends) / Average common equity

Net operating income / Net sales

Gross profit margin / Net sales

Operating cash flow / common shares outstanding

Earnings before interest and taxes / earnings before taxes

Market price per share / Diluted earnings per share

Dividends per common share / Diluted earnings per share

Dividends per common share / Market price per common share

(Total stockholders' equity - Preferred stock) / Number of common shares outstanding

• Degree of protection to creditors in case of insolvency
• = Total liabilities / Common stockholder's equity

Total liabilities / total assets

• Ability of company to cover interest charges
• = Recurring income before taxes and interest / Interst

• Ability of company to cover total debt with yearly cash flow
• = Operating cash flow / total debt

• Ability of company to cover interest charges
• = Recurring income before taxes and interest / Interst

• Ability of company to cover total debt with yearly cash flow
• = Operating cash flow / total debt