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Audit Exam 2 Cheat Sheet (DRAFT) by

Paske Audit class exam 2, chapters 3, 4, 5, A, and G

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Fraud Risk

Fraud
The misrep­res­ent­ation of facts that the individual knows to be false with the intention to deceive
Overst­ating revenues and assets
Unders­tating expenses and liabil­ities
Giving disclo­sures that are misstated or that omit important inform­ation
Management fraud
Fraudulent financial reporting
Employee fraud
Misapp­rop­riation of assets
Fraud Risk categories
Manage­ment's Charac­ter­istics and Influence
 
Industry Conditions
 
Operating Charac­ter­istics and Financial Stability
Errors = uninte­ntional
Fraud = intent­ional

Misapp­rop­riation of Assets

Fraud
 
Requires intent to deceive the victim
Embezz­lement
 
employees or nonemp­loyees wrongfully taking money or property entrusted to them, by cover-up
 
to perman­ently deprive the owner
Larceny
 
theft of an employer’s property that is not entrusted to an employee
 
to perman­ently deprive the owner
Defalcation
Misuse of funds by a fiduciary
 
intent­ional wrongdoing
 
OR neglig­ence*
Errors
uninte­ntional missta­tements or omissions
If neglig­ence: fraud
  

Engagement planning

Goals
obtain or update
Important Events
ID areas
Special Risks
Ensure that engagement is
Timely
Control
Engagement Risk
Identify the risk of material missta­tement at the financial statement level and the relevant assertion level.

AU-C 300

Planning an Audit
Purpose
 
Identify risk of material missta­tement at F/S and assertion level
 
design procedures to mitigate
 
issue approp­riate opinion
Goals
 
Understand important events
 
identify special risks
 
ensure timely completion
 
control engagement risk
Requir­ements
 
Client accept­anc­e/c­ont­inuance
 
indepe­nde­nce­/ethics check
 
engagement letter
Key signal
 
Procedures may change.
 
Standards do not.
The nature and extent of planning activities that are necessary depend on:
 
the size and complexity of the company
 
the auditor's experience with the company
 
changes in circum­stances that occur during the audit

CLIENT SELECTION & RETENTION

Main factor
 
Management integrity
Sources
Annual reports (8-k)
Background checks
Inquiry of banker­s/c­ounsel
Prior auditors (must inquire)
PREDEC­ESSOR / SUCCESSOR
Requir­ement
Attempt to commun­icate only
Topics
 
Accounting disagr­eements
 
fraud/­illegal acts commun­ica­tions
 
reasons for change

8 Gathering Evidence Procedures

Inspection of records and docs
vouching
Books → Source
 
(occur­rence)
tracing
Source → Books
 
(compl­ete­ness)
scanning
general looking for anything unusual
 
existence, comple­teness, cutoff
inspection of tangible assets
 
existence
 
valuation (asset condition)
 
NOT necess­arily 'Rights'
observ­ation
 
watching people's action­s/r­eac­tions
inquiry
 
asking questions
 
written repres­ent­ations or management repres­ent­ations
 
“inquiry alone” is never enough
Verbal Inquiry = Interview
 
Prepare
 
Make an appoin­tment
 
Be conver­sat­ional
 
Ask questions
 
Listen carefully
 
Be noncom­mittal
 
Close gracefully
 
Document the interview
confir­mation
 
direct corres­pon­dence with indepe­ndent parties
 
existence
 
rights and obliga­tions
 
valuation
 
cutoff
recalc­ulation
 
ecalcu­lation of comput­ations previously performed by client personnel produces compelling evidence
 
existence and valuation
reperf­ormance
 
review of controls
 
reperf­ormance is much broader than recalc­ulation
analytical procedures
 
studying relati­onships among both financial and nonfin­ancial data.
CAATs: comput­er-­ass­isted audit techniques
(1) accounts receivable balances for amounts over the credit limit
(2) inventory quantities for negative balances or unreas­onably large balances
(3) payroll files for terminated employees
(4) loan files for loans with negative balances
(5) debits in revenue accounts
(6) credits in expense accounts
  

Permanent Files

the corpor­ate­/as­soc­iation:
 
charter
 
bylaws
 
partne­rship agreement
continuing contracts such as:
 
leases
 
bond indentures
 
royalty agreements
A history of:
 
the company
 
its products
 
markets
 
background
minutes of meetings
 
stockh­old­ers­/di­rectors that have lasting interest.
Continuing schedules of long term accounts
 
such as owners’ equity
 
partne­rship capital
 
retained earnings, ect.
prior-­years’ financial statements and audit reports.
Client organi­zation chart.

Current Files

aka. planning memorandum

The document summar­izing the prelim­inary analytical procedures and the materi­ality assessment with specific directions about the effect on the audit.


In other words, the docume­ntation must be sufficient to enable an experi­enced auditor, having no previous connection with the engage­ment, to understand
(1) the nature, timing, extent, and results of procedures
(2) the overall conclu­sions reached with respect to the area covered by the audit docume­ntation
(3) the audit team member performing the work, the date of work, the audit team member
reviewing the work, and the date of review.

The audit docume­ntation should also be sufficient to allow another auditor to reperform the work if necessary.

(1) the client’s accounting records agree or reconcile with the financial statem­ents,
(2) the work was adequately planned and superv­ised,
(3) a sufficient unders­tanding of the client’s internal control was obtained, and
(4) sufficient approp­riate audit evidence was obtained as a reasonable basis for an audit opinion.