1. Valuation or allocation
2. Completeness
3. Existence and occurrence
4. Completeness
5. Rights and obligations
6. Completeness
7. Valuation and allocation
8. Existence and occurrence
9. Presentation and disclosure
10 Valuation or allocation
11. Presentation and disclosure
6-22 Audit evidence
Bank statement sent directly to the auditor by the bank
1) directly from outsiders
Creditor monthly statement obtained from client’s files.
2) indirectly from outsiders
Vouchers in client’s unpaid voucher file.
4) entirely internal
Duplicate sales invoices in filled order file.
4) entirely internal
Time tickets filed in payroll department.
4) entirely internal …show more content…
Credit memo in customer’s file.
4) entirely internal
Material requisitions filed in storeroom.
4) entirely internal
Bank statement in client’s files.
2) indirectly from outsiders
Management working papers in making accounting estimates.
4) entirely internal
Paid checks returned with bank statement in (1) above.
3) internal but validated externally
Letter in customer file from collection agency on collectibility of balance.
2) directly from outsiders
Memo in customer file from treasurer authorizing the write-off of the account.
4) entirely internal
In general, evidence obtained directly from outsiders is more reliable than internal documents prepared by the Management or their staff. Internally generated documents that are not circulated externally are the least reliable sources.
7-22
Key Categories Describe the knowledge used to develop a knowledgeable perspective about HipStar Identify how the knowledge might assist in assessing the risk of material misstatement
1. Industry Conditions Is the music industry demand for on line music growing?
Who are the competitors?
Is the model easily replicated? This will help determine value of intangible assets such as goodwill.
2. Regulatory Environment What accounting principles or specific practices are relevant specifically to the online music industry?
What legislation (Sabranes Oxley Act, Companies Act) is applicable to HipStar? This will help to determine if the company is following latest regulations in accounting and the financial statements are in compliance with industry specific rules for eg. Valuation of inventory.
3. Other external forces affecting the business Who are HipStar's
competitors?
What capacity do they have and what prices do they charge?
Are they similar to HipStar or better, in terms of technology? Is the valuation of business in line with the competitors.
4. The client’s business operations What are the core products of HipStar?
Who are the key customers and suppliers of the business?
What is HipStar's policy on employment, research and development and general expenditure? If the business is not as solid as projected, there may be potential for misstatement by management to meet analyst’s and market’s ex[ectations.
5. The client’s investing activities and financing activitites What capital investment activities (software purchase, server purchase) has the entity made recently?
What is the capital structure of the business?
Does the business use equity or long-term debt to finance operations? Is client treating the capital investments correctly for accounting purposes i.e. capitalizing vs expensing
6. The client’s financial reporting activities What are the accounting principles and industry specific practices?
How does HipStar recognize its revenue?
How does HipStar treat inventories, foreign currency assets, liabilities and transactions? This will help to determine if the company is following latest regulations in accounting and the financial statements are in compliance with industry specific rules for eg. Valuation of inventory.
7. The client’s objectives, strategies, and related business risks Does the business have an ability to accurately project future demand?
Does the business have a comprehensive finance plan to support current/future operations? Are the revenue models reasonable?
8. How the client measures and reviews the entity’s financial performance We would need the following in order to measure the financial performance:
HipStar's key operating ratios
Key performance indicators of the industry
Budgets, forecasts and variance analysis
Analyst reports and credit rating
Year on year financial reports This would help with the unrealized P&L as well as valuation of the assets.