QUESTION 1 - How would we go about testing each of the above and which management's assertions do they relate to? Purchasing & Accounts Payable

In the purchasing and payable process, understatement is your highest risk.

QUESTION 2 - Which assertions do understating expenses relate to and how do we test to make sure that all expenses for the period under audit have been accounted for?

Payroll

Paying fictitious employees, paying terminated employees and paying current employees who haven't worked are three ways that payroll expenses could be misstated (either via error or fraud).

QUESTION 3 - Explain at least two ways we can detect these possible misstatements and explain how segregation of duties in the payroll process can mitigate this risk.

Inventory

As auditors we do not perform the inventory count, but we observe it to make sure that the balance sheet inventory balance is correct.

QUESTION 4a - Why should you forbid the movement of inventory until the count is done?

QUESTION 4b - Why do we select year end and immediately after year end shipping and receiving documents to trace to the financial statements? What assertions are we testing? Explain.

Fixed Assets

As auditors we need to make sure that the client has capitalized all costs relating to property, plant and equipment purchases properly.

QUESTION 5 - Why would you review a "Repairs & Maintenance" and/or a "Lease Expense" account on the income statement when trying to determine if the fixed assets on the balance sheet are correct? What assertion are you testing and why is this important?

Long Term Liabilities & Retained Earnings

Analytical procedures (comparing what's on your clients books to what you expect to see on the books) are great auditing procedures.

QUESTION 6 - How would we apply an analytical procedure to interest expense resulting from loan agreements on the books? If interest expense is higher than we expect, what could that mean?

QUESTION 7 - What is the first thing I said we have to look at when testing retained earnings? That the beginning balance must do what?

Completing the audit

After completing the audit, we go on the hunt for contingent liabilities. A contingent liability is when an existing circumstance may cause a loss in the future depending on how an event unfolds. A good example is a lawsuit or an IRS audit.

QUESTION 8 - There are three categories of contingent liabilities. What are they and what determines whether they need to be disclosed in the notes to the financial statement or not? Do we ever have to adjust the financials themselves for a contingent liability?

The Auditor's Report

There are various circumstances that might force you to not issue an unqualified report. These include a scope limitation, a departure from GAAP or lack of auditor independence.

QUESTION 9a - Give an example of a scope limitation, a departure from GAAP and a lack of auditor independence.

QUESTION 9b - Fill in the blank.

If you have a scope limitation or a material departure from GAAP but the rest of the financials statement assertions were not materially misstated you would issue a(an) _____________________ report.

If you weren't able to gather sufficient amount of competent evidence to issue an unqualified opinion you issue a(an) _______________________ report.

When GAAP departures are so widespread that the financials statements are no presented fairly in accordance with GAAP, you issue a(an) __________________________ report.