CSS Accounting and Auditing Auditing Flashcards

24 sample cards from the Auditing deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is the function of an audit committee?

   A sub-committee of the board, composed mainly of non-executive/independent directors, that oversees financial reporting, the internal control and risk management systems, the internal audit function, and the relationship with (and independence of) the external auditor.

2. How may an auditor evaluate (record) a client's internal control system?

   By using narrative notes, flowcharts, internal control questionnaires (ICQs), and internal control evaluation questionnaires (ICEQs), then confirming the system through walk-through tests.

3. What is the difference between an ICQ and an ICEQ?

   An Internal Control Questionnaire (ICQ) asks whether specific controls exist (answers indicate presence/absence of controls). An Internal Control Evaluation Questionnaire (ICEQ) asks key control questions about whether specific errors/frauds are prevented, focusing on control objectives rather than detailed controls.

4. What is a 'walk-through test'?

   Tracing one or a few transactions through the accounting system from initiation to recording in the financial statements to confirm that the auditor's understanding of the system and its controls is accurate.

5. What are the inherent limitations of any internal control system?

   Human error and carelessness; collusion among employees; management override of controls; costs of controls exceeding benefits; controls geared to routine (not unusual) transactions; and possible obsolescence of controls due to changing conditions.

6. Define vouching.

   The examination of documentary evidence (vouchers) supporting and substantiating a transaction recorded in the books, to verify its authority, authenticity, accuracy, and correct accounting treatment.

7. What is the main objective of vouching cash transactions?

   To ensure that all receipts and payments have actually occurred, are properly authorized and supported by genuine vouchers, are correctly recorded in the right accounts and period, and that no fictitious or omitted entries exist.

8. In vouching cash receipts, what key points does the auditor check?

   That receipts are recorded promptly and in full (completeness), supported by carbon copies of receipts/counterfoils, correctly classified (capital vs revenue), properly banked (compare with bank statements/pay-in slips), and that internal control prevents teeming and lading.

9. What is 'teeming and lading'?

   A type of cash defalcation where a shortage of cash receipts is concealed by misappropriating a later receipt and crediting it to the earlier customer's account, with each subsequent receipt used to cover the previous shortage.

10. In vouching cash payments, what does the auditor examine?

    That payments are supported by proper vouchers (invoices, receipts), are duly authorized, relate to the business, are correctly classified between capital and revenue, are recorded in the correct period, and that there is no duplication or fictitious payment.

11. What is the auditor's concern in vouching credit purchases (trading transactions)?

    To verify that purchases are genuine and relate to the business, are supported by invoices and goods received notes, are properly authorized, recorded at correct amounts in the correct period (cut-off), and that no fictitious purchases or purchases of a capital nature are charged to the trading account.

12. Define verification of assets.

    The process by which the auditor confirms the existence, ownership (rights), proper valuation, presentation, and that the assets are free from undisclosed charges, of the assets appearing in the balance sheet.

13. Distinguish vouching from verification.

    Vouching examines documentary evidence of transactions recorded in the books (focus on income statement items and authenticity of entries); verification confirms the existence, ownership, value, and presentation of assets and liabilities shown in the balance sheet at the period end.

14. What aspects does an auditor verify for a fixed asset such as plant and machinery?

    Existence (physical inspection), ownership/title (purchase documents, registers), proper valuation (cost less accumulated depreciation per policy), that additions/disposals are authorized and correctly recorded, and that any charge/lien on the asset is disclosed.

15. How does an auditor verify the existence of inventory (stock)?

    By attending and observing the physical stock count, performing test counts, checking the count procedures and cut-off, confirming valuation at the lower of cost and net realizable value, and reviewing for obsolete or slow-moving items.

16. At what value should inventory be stated, and what formula expresses it?

    Inventory should be valued at the lower of cost and net realizable value: $$\text{Inventory value} = \min(\text{Cost},\ \text{NRV})$$ where $NRV = \text{Estimated selling price} - \text{Costs to complete and sell}$.

17. How does an auditor verify trade receivables (debtors)?

    By obtaining direct external confirmations of balances, testing the aged receivables analysis, reviewing subsequent cash receipts, checking the adequacy of the allowance for doubtful debts, and verifying cut-off of sales.

18. What does the auditor check when verifying cash at bank?

    Obtaining a bank confirmation letter directly from the bank, reviewing the bank reconciliation statement, verifying outstanding/unpresented items in the subsequent period, and confirming all bank accounts and any charges over them are disclosed.

19. State the basic formula for the annual straight-line depreciation an auditor would verify.

    $$\text{Depreciation per year} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life (years)}}$$

20. What is the difference between the reducing-balance and straight-line depreciation methods an auditor may need to confirm?

    Straight-line charges a constant amount each year on cost less residual value; reducing-balance charges a fixed percentage on the asset's written-down (net book) value, giving a higher charge in early years that decreases over time: $\text{charge} = \text{rate} \times \text{NBV}$.

21. What is a 'window dressing' concern for an auditor verifying assets and balances?

    Window dressing is the manipulation of accounts (e.g., overstating liquidity by delaying payments or recording fictitious year-end transactions) to present a more favorable financial position than reality; the auditor must examine year-end cut-off and unusual transactions to detect it.

22. What is the difference between an error and a fraud in auditing?

    An error is an unintentional misstatement in the financial statements (e.g., a mistake in gathering data or applying policies); fraud is an intentional act involving deception to obtain an unjust advantage (e.g., fraudulent financial reporting or misappropriation of assets).

23. What is 'professional skepticism'?

    An attitude that includes a questioning mind, being alert to conditions indicating possible misstatement due to error or fraud, and a critical assessment of audit evidence rather than unquestioning acceptance of management's assertions.

24. What is the relationship between the strength of internal control and the extent of substantive testing?

    They are inversely related: if internal controls are evaluated as strong and effective (after tests of control), the auditor can reduce the extent of substantive procedures; if controls are weak, the auditor must increase substantive testing to gather sufficient evidence.

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