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AUD > 11 - III: Audit evidence: Concepts and Standards 1 > Flashcards

11 - III: Audit evidence: Concepts and Standards 1 Flashcards

1
Q

What is the purpose of substantive procedures?

A

To search for material misstatements if any.

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2
Q

What does substantive procedures consist of?

A

Analytical procesdures.

Test of details.

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3
Q

What are 2 components of test of details?

A

Tests of ending balances.

Tests of transactions.

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4
Q

What’s the definition of analytical procedures?

A

Evaluations of financial information throughanalysis of plausible relationships among both financial and nonfinancial data.

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5
Q

Where analytical procedures are required? Where is it useful?

A

In planning and final review.

As substantive audit evidence.

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6
Q

What are 4 factors that effectiveness of substantive analytical procedures depend on?

A
  1. Nature of the assertion: when testing for omissions of transactions with no doc.
  2. Predictability of the relationships.
  3. Reliability of data.
  4. Precision of the expectation.
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7
Q

What are 4 categories of ratios?

A
  1. Liquidity ratio.
  2. Profitability ratio.
  3. Activity ratio (efficiency/turnover ratio).
  4. Coverage ratios (leverage ratio).
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8
Q

Formula for quick ratio and current cash to debt ratio?

A

Q: cash, marketable securities, AR / AP.

Net cash from operations/Average current liabilities.

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9
Q

Formula for profit margin on sales, gross profit percentage, rate of return on common stockholder’s equity, price earnings ratio (PE)?

A

P: NI/Net sales.
G: (Sales-COGS)/Sales.
R:(NI-dividends to preferred stockholders)/average common stockholder’s equity.
PE: Market price of stock/EPS.

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10
Q

Formula for times interest earned?

A

Income before interest and taxes/Interest exp.

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11
Q

What are 7 types of substantive audit procedures?

A

(1) inspection; (2) observation; (3) external confirmation; (4) recalculation; (5) reperformance; (6) inquiry; and (7) analytical procedures.

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12
Q

What is the definition of audit evidence?

A

Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.

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13
Q

What are 2 components of audit evidence?

A
  1. Underlying accounting records: JEs, ledgers, supporting records (spread sheets, checks, invoices..).
  2. Other information: minutes of meetings, letters, industry analysis….
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14
Q

What is the auditor’s objective:AICPA?

A

Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.

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15
Q

What does the words sufficient and appropriate entails?

A

S: quantity.
A: quality (relevance and reliability).

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16
Q

AICPA: What are 5 points of emphasis of reliability?

A
  1. Direct personal knowledge by the auditor is most reliable.
  2. Evidence obtained indirectly from independent outside sources.
  3. Evidence obtained indirectly from within an entity under conditions of effective I/C.
  4. Documentary evidence is more reliable than non-documentary evidence (verbal inquiry/response etc).
  5. Original documents are more liable than photocopies or faxes.
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17
Q

What are 5 assertions under PCAOB?

A 
Existence/occurrence;
Completeness;
Rights and obligations;
Valuation and allocation; and
Presentation and disclosure.
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18
Q

What are 3 categories of assertions under AICPA and how many assertions are under each category?

A
  1. Account balances at period end (4) - BS.
  2. Transactions or events during the period (5) - IS.
  3. Presentation and disclosures (4) - footnotes.
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19
Q

What are 4 assertions underAccount balances at period end?

A
  1. Existence.
  2. Completeness.
  3. Rights and obligations.
  4. Valuation and allocation.
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20
Q

What are 5 assertions under Transactions or events during the period?

A
  1. Occurence.
  2. Completeness (did all transaction recorded).
  3. Cutoff.
  4. Accuracy.
  5. Classification.
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21
Q

What are 4 assertions under presentation and disclosures?

A
  1. Occurrence and rights/obligations.
  2. Completeness.
  3. Accuracy and valuation.
  4. Classification and understandability.
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22
Q

What are 3 categories of audit procedures?

A
  1. Risk assessment procedures (required): Assess the risk of material misstatement.
  2. Test of controls (not required under AICPA. required under PCAOB): Obtain info about the operating effectiveness of controls.
  3. Substantive procedures (required): Detect material misstatement at relevant assertion levels.
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23
Q

What is the auditor’s basic responsibility about substantive procedures?

A

Plan and perform substantive procedures to be responsive to the assessed RMM.

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24
Q

What are 3 factors that detection risk is determined by and what do they include?

A
  1. Nature: test of details and substantive analytical procedures.
  2. Timing: maybe at at interim or at final.
  3. Extent: sample size.
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25
Q

What are doc requirements for audit procedures?

A
  1. Overall response at the F/S level to assessed RMM.
  2. Nature, timing, extent of further audit procedures.
  3. Linkage of those procedures w/ the assessed RMM at the relevant assertion level.
  4. Results of the audit procedures performed.
  5. Conclusions in the current audit about the operating effectiveness of controls tested in a prior period.
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26
Q

Who must comply to AICPA audit stds? PCAOB stds?

A

A: non-issuer.
P: issuer.

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27
Q

PCAOB on audit risk: What is the auditor’s objective?

A

To conduct the audit of financial statements in a manner that reduces audit risk to an appropriately low level.

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28
Q

PCAOB on audit risk: Which levels should the auditor assess RMM?

A

At the F/S level.

At the assertion level.

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29
Q

PCAOB on audit planning: Objective?

A

To plan the audit so that the audit is conducted effectively.

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30
Q

PCAOB on audit planning: What are 2 elements?

A

Audit strategy and audit plan.

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31
Q

PCAOB on audit planning: Engagement partner responsibility?

A

For engagement and its performance.

For planning.

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32
Q

PCAOB on supervision: Objective?

A

To supervise the audit engagement so that the work is performed as directed and supports the conclusions reached.

33
Q

PCAOB on materiality: Objective?

A

To apply the concept of materiality appropriately in planning and performing audit procedures.

34
Q

PCAOB on materiality: Planning?

A

Plan and perform to detect material misstatement individually or aggregate.

35
Q

PCAOB on materiality: is it used consistently for F/S and I/C? or is it different?

A

Consistent.

36
Q

PCAOB on identifying/assessing RMM: Objective?

A

To identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement.

37
Q

PCAOB on identifying/assessing RMM: What are keys for qty and quality?

A

Sufficient.

Reasonable basis.

38
Q

PCAOB on identifying/assessing RMM: What are 5 factors involved?

A
  1. Obtain the understanding of the entity/environment.
  2. Obtain an understanding of I/C over financial reporting.
  3. Consider info from the clients.
  4. Perform analytical procedures.
  5. Inquire of the audit committee, management, etc about RMM.
39
Q

PCAOB on the auditor’s response to RMM: Objective?

A

To address the risks of material misstatement through appropriate overall audit responses and audit procedures.

40
Q

PCAOB on the auditor’s response to RMM: What does overall response include?

A
  1. capabilities of team members.
  2. Appropriate supervision.
  3. incorporate a degree of unpredictability.
  4. evaluate sig accounting principles, especially in subjective areas).
  5. If necessary to make pervasive changes to nature, timing, extent of audit procedures.
41
Q

PCAOB on evaluating audit results: Objective?

A

To evaluate the results of the audit to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion.

42
Q

PCAOB on audit evidence: Objective?

A

To plan and perform the audit to obtain appropriate audit evidence that is sufficient to support the opinion.

43
Q

PCAOB on audit evidence: what does sufficient refer to? Appropriate? What does appropriate include?

A

S: qty.
A: quality.
Reliability, relevance.

44
Q

What are the 2 objectives about identified misstatements?

A
  1. Evaluate the effect on the audit.

2. Evaluate the effect of uncorrected misstatements on F/S.

45
Q

Must the auditor accumulate misstatements? What is the exception?

A

Yes. When they are clearly trivial = inconsequential (no equal immaterial).

46
Q

What must auditor consider regarding accumulating misstatements?

A

Whether audit strategy and plan needs to be changed.

47
Q

Must the auditor communicate misstatements? To who? When?

A

Yes. Appropriate management, On a timely basis.

48
Q

What should the auditor do if management makes a correction on misstatement? If they refuse to do so?

A

Determine whether misstatement remain.

Obtain an understanding why and consider the effect on F/S and audit report.

49
Q

What must the auditor do when identifying misstatements (actual F/S results)?

A

Reassess the appropriateness of materiality.

Determine whether uncorrected misstatements are material individually or in the aggregate.

50
Q

How can the auditor determine if the misstatement is material?

A

Based on size/nature.

Considering effect of uncorrected misstatements in prior periods.

51
Q

What are doc requirements on misstatements?

A
  1. The threshold for clearly trivial.
  2. All misstatements accumulated and whether they have been corrected.
  3. Conclusion about materiality of uncorrected misstatements individually and in the aggregate.
52
Q

What is audit doc? What are they called sometimes?

A

the record of audit procedures performed, relevant audit evidence obtained, and conclusions reached.
Working papers.

53
Q

What are 2 objectives of audit doc?

A

To provide doc that provides:

  1. A sufficient and appropriate record of the basis for the auditor’s report.
  2. Evidence that the audit was planned/performed in accordance with GAAS, applicable legal and regulatory requirements.
54
Q

Who has the ownership of audit doc? What is the considerations?

A

The auditor.

Confidentiality.

55
Q

How is the composition of audit doc is decided?

A

A matter of judgment.

56
Q

What is the general requirements of audit doc?

A

An experienced auditor with no association with the engagement can obtain a clear understanding of the work performed, the evidence obtained, and the resulting conclusions.

57
Q

What should audit doc include?

A

Abstracts or copies of sig contracts or agreements examined by the auditor.

58
Q

What should audit doc identify?

A

Specific items tested or identifying characters.

59
Q

Audit doc should include sig audit findings/issues. What does it include (5)?

A
  1. Sig matters about accounting principles, applications, consistency.
  2. Difficulties in applying audit procedures.
  3. Indication of possible material misstatements or sig risks.
  4. Findings that could result in modification of the audit report.
  5. Proposed audit adjustments (even if not recorded by management).
60
Q

What should the auditor do with the info inconsistent with the conclusions?

A

Document.

61
Q

Should the auditor document the preparer and reviewer of the specific doc?

A

Yes.

62
Q

What are other required items to document?

A

Departure from a presumptively mandatory requirements.

Report release date (the date the auditor grants the entity permission to use the report).

63
Q

What is the time frame within which the auditor must complete the final audit engagement file (doc completion date) after the release date under PCAOB and AICPA?

A

P: 45 days.
A: 60 days.

64
Q

After the doc completion date, can the auditor delete or add to the doc?

A

Delete: No.
Add: Yes, if properly documented.

65
Q

What is the doc retention time frame under PCAOB and AICPA?

A

P: 7 yrs or required by law.
A: 5 yrs.

66
Q

What does lead schedule include?

A

aggregate the major components of F/S.

67
Q

What does supporting schedule include?

A

Details supporting the lead schedule.

68
Q

What are 6 factors that impact the degree of doc?

A

(1) the risk of material misstatement, (2) extent of judgment, (3) nature of the auditing procedures, (4) significance of the evidence obtained, (5) nature and extent of the exceptions identified, and (6) the need to document a conclusion that is not obvious from the documentation of the work.

69
Q

PCAOB on audit doc: What are 3 basic requirements?

A
  1. Demonstrate compliance w/ PCAOB stds.
  2. Support basis for the conclusions.
  3. Agreement of underlying accounting records w/ F/S elements.
70
Q

PCAOB on audit doc: What are 2 specific matters?

A
  1. Document audit procedures involving inspection.

2. All sig findings or issues must be identified in an engagement completion document.

71
Q

What is the definition of confirmation?

A

Audit evidence obtained as a direct written response to the auditor from a third party (“the confirming party”), either in paper form or by electronic or other medium.

72
Q

When the management provides an access code to information, is it considered confirmation? When the third party provide it?

A

No.

Yes.

73
Q

Who must have control over external confirmation requests?

A

The auditor.

74
Q

What should the auditor do if management refuses to allow confirmation procedure?

A

Determine whether the auditor can still obtain sufficient appropriate audit evidence.
If no, considered to be scope limitation.

75
Q

What is positive confirmation?

A

Request a response whether or not the recipients agree or disagree with the client’s balance.

76
Q

Is blank confirmation a stronger evidence? What is the drawback?

A

Yes. Lower response rate.

77
Q

What should the auditor do when there is no response to positive information?

A

Must send a follow-up request.

78
Q

What must the auditor do if a follow-up did not work?

A

Must perform appropriate alternate procedures.

79
Q

What is negative confirmation? What is the drawback?

A

Requests a response only if the recipients disagrees with the client’s balance.
Recipients may not have even opened the envelope - considered weaker evidence.

AUD (24 decks)

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