Control Deficiencies
Type 1 report vs Type 2 report:
Type 1: auditor has an opinion on design only
type 2: auditor has an opinion on design and performs test of operating effectiveness (this is best)
Most important assertions?
Best evidence?
Existence and Valuation
Bank statements, cut-off bank statements, confirmations
Most important assertions auditing debt/int exp?
Best evidence?
C, V, P/D
Lender statements, board minutes, confirmations
Timing of journal entry testing:
Anytime through the audit
Type 1 vs type 2 for subsequent events:
Type 1 - the financials must be adjusted and restated, relates to the period of the audit.
Type 2 - Audit must request mgmt to disclose the event after year end, relates to the subsequent period.
What is a material weakness and does it get reported to the AC.
Enough deficiencies that there is reasonable possibility that a MM would not be prevented, detected, or corrected. Yes, it does
Deposits overstated assertions
Existence, valuation
Most important assertions for auditing prepaids?
Best evidence?
E, V
Bank statements, vendor invoices, payments
4 things you must obtain an understanding of relating to ICs for JE testing:
- how they are initiated
- how they are approved
- how they get posted and processed
- segregation of duties
Big R vs Little R errors:
- form used?
- this period or next?
- material or not?
Big R: when prior period portion is material to prior year FS, those FS restated. Warn users that FS no longer available, form 8-K, Form 10-K/A. Error not material to prior periods.
Little R: when prior period portion is NOT material to prior year FS, companies are allowed to wait and revise the PY period amounts in the CY without an 8-K. Form 10-Q
What is a deficiency?
Not important enough to merit telling the AC, lowest level.
Deposits understated assertions
Completeness
Most important assertions for auditing AP/acc liabilites?
Best evidence?
C, V
Subsequent bank statements, invoices, purchase orders
6 common red flags:
- topside manual entries
- JE by random employees
- JE in new/barely used accounts
- JE with no supporting documentation
- JE with large, rounded numbers
- JEs made at unusal times
4 basic elements of the unqualified opinion:
- title/addressee
- opinion on FS
- basis for opinion
- other: signature, year auditor began audit, city/state, date
What is a significant deficiency?
In-between MW and deficiency, but important enough to tell the AC.
Outstanding check overstated assertions
Completeness, valuation
Rights and Obligations for EVERY account
Does to company name appear
What happens when evaluating design of controls over JEs:
If stating opinions on ICFR or using the reliance approach, test the operating effectiveness over4 controls over JEs
- communicated to AC
- challenging, subjective, or complex
- relates to material amounts or disclosures
1. fraud by senior management
2. auditor finds a MM in audit procedures
3. company restates previous FS.
4. AC is ineffective
Outstanding checks understated assertions
Existence
Substantive testing
To test the completeness of JE listing and reconcile to GL:
(3 things)
- use IT specialist
- ensure population includes top-side JEs too
- make inquiries about unusual JEs
- Unqualified
- Qualified
- Adverse
- Disclaimer
- Unqualified - clean
- Qualified - "except for"
- Adverse - "not in compliance with GAAP"
- Disclaimer - "we couldn't finish our audit"