Auditors test the ICFR by reviewing the receiving process.
The Sarbanes-Oxley Act requires that the PCAOB perform audits on all publicly traded
companies.
Information about changes in a company’s ownership, management, and/or audit firm is
provided within Form 8K.
One method for testing cutoff and in-transit inventory is for the auditor to examine
shipping documents for a few days before and after year-end and determine whether the
inventory records properly reflect the transaction in the correct period.
Following are the planning steps involved in considering materiality in a top-down
approach to planning for tests of controls. Number the items in from 1 (top) through 6
(bottom) to indicate the proper top-down sequence of the steps.
Identify risks that could cause material misstatement of relevant assertions in a
significant account.
Set financial statement level materiality
Design audit procedures addressing controls
Investigate controls addressing risks
Identify significant accounts
Determine relevant management assertions for significant accounts and set materiality
at the account level
Auditors perform walkthroughs as an efficient way to gain an understanding of ICFR
and assess design effectiveness.
Lapping occurs when an employee steals cash and manipulates the accounts receivable
entries to hide the theft.
The difference between a SAS 70 Type I and Type II report centers on risk.
Javier is an experienced, second-year staff accountant at a midsized CPA firm who has
only worked on audits of large, private companies. His firm recently won a proposal for
the year-end audit of a small, publicly-traded company. Javier’s evaluations have
indicated that he is a hard worker and value-added team player. The audit partner tells
the human resources scheduler to assign Javier to the audit team of the new public
company engagement. Javier finds out that his first task is to work on the audit of the
internal controls over financial reporting (ICFR). Javier is excited because he knows
that gaining experience on a public client is a good opportunity. However, he has only
per-formed financial statement audits and is apprehensive about his lack of experience.
How can Javier apply the components of the formal definition of auditing to the audit of
ICFR?
Reviewing employment contracts for payments due is an example of the cut-off
assertion.
Companies often change audit firms prior to an initial public offering (IPO).
When cash is received, the goal is to create an immediate record of its payment and
place it in safekeeping.
Jillian is on the Big City Defense Company’s audit with Andrew (described in 15-31)
but has been assigned the task of performing tests of details of balances for the
investment account. She has never audited investments before and asks Andrew for
some advice.Andrew tells her that she needs to review which management
assertions are relevant for the investment account. Then she needs to understand
appropriate
tests that will provide evidence on these assertions.
(a)What are management’s key assertions for the investment accounts?
(b)How can Jillian utilize inspection in the tests of details of balances for investments?
How can she utilize confirmations? What evidence will these audit procedures
provide for the financial statement audit?
How are the auditor’s concerns regarding purchase discounts different from those of
management? Why?
The activities involved in managing bad debts include estimating and recording the
appropriate amount of bad debt expense and writing off those receivables believed to be
uncollectible.
A W-4 form is used to report earnings to the appropriate governmental bodies.