#8 Audit Evidence - Concepts and Standards 1

Question 1

How might the auditor’s decisions about the extent of audit procedures lower detection risk?

Answer 1

Increasing the sample sizes for audit testing will lower detection risk.

Question 2

How might the auditors decisions about the nature of audit procedures lower detection risk?

Answer 2

Choosing audit procedures that provide a stronger basis for conclusions will lower detection risk.

Question 3

Identify the 4 considerations that determine the effectiveness and efficiency of analytical procedures used for substantive purposes.

Answer 3

1. Nature of the assertion
2. Plausibility and predictability of the relationship
3. Availability and reliability of data
4. Precision of the expectation

Question 4

Identify the 2 categories of substantive tests of details

Answer 4

Tests of ending balances

Tests of transactions

Question 5

Define analytical procedures.

Answer 5

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Question 6

What is the only component of the audit risk model that the auditor controls?

Answer 6

Detection risk.

Question 7

How might the auditor’s decisions about the timing of audit procedures lower detection risk?

Answer 7

Moving the auditors important substantive procedures away from an interim date (before year-end) to year-end will lower detection risk.

Question 8

List the 2 broad categories of substantive procedures.

Answer 8

1. Tests of details

2. Substantive analytical procedures

Question 9

Identify the 3 purposes that might be served by performing analytical procedures.

Answer 9

1. Audit planning (required).
2. As a form of substantive evidence (not required).
3. A final review (required).

Question 10

List the five assertions about classes of transactions and events during the period(income statement)

Answer 10

Accuracy
Occurrence
Completeness
Cutoff and
Classification

Question 11

What are the AICPA’s guidelines to rank the reliability of audit evidence.

Answer 11

1. Direct personal knowledge by the auditor is the most reliable audit evidence.
2. Evidence obtained from an independent outside source is the next most reliable.
3. Evidence obtained from the entity under effective internal control is next.
4. Documentary evidence is more reliable than verbal responses to inquiries (and original documents are more reliable than faxes and photocopies)

Question 12

List the four assertions about presentation and disclosure (footnotes)

Answer 12

Occurrence and Rights and Obligations;
Completeness
Classification and Understandability
Accuracy and Valuation

Question 13

Describe what the valuation or allocation assertion means.

Answer 13

It means that the dollar amounts attributed to element of the company’s financial statements are appropriate and in accordance with GAAP and other applicable financial reporting framework

Question 14

List the four assertions about account balances at the end of the period
(balance sheet).

Answer 14

Existence
Completeness
Rights and Obligations
Valuation and Allocation

Question 15

Describe what the completeness assertion means

Answer 15

It means that there are no omissions of transactions that should have been reported.

Question 16

Define Audit evidence

Answer 16

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information.

Question 17

Describe what the rights and obligations assertion means.

Answer 17

It means that the company has all the rights associated with its reported assets and all the ob.ligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed

Question 18

Define Assertion

Answer 18

Implicit or explicit statements of fact by management that are associated with the entity’s financial statements.

Question 19

What is meant by “sufficient” and “appropriate” when “sufficient appropriate audit evidence” is mentioned.

Answer 19

“Sufficient” refers to the quantity of evidence that is required; and
“Appropriate” refers the the quality of the evidence involved, in terms of “relevance” and “reliability.”

Question 20

List the broad categories of assertions under AICPA professional standards.

Answer 20

Account balances at the end of the period (there are 4 assertions related to the balance sheet)
Classes of transactions and events during the period (there are 5 assertions related to the income statement)
Presentation and disclosure (there are 4 assertions related to the footnotes applicable to any of the financial statements)

Question 21

Describe what the existence (occurrence) assertion means.

Answer 21

It means that the recorded transactions are valid economic events of the period in which they are reported, i.e., the recorded transactions/items are properly recorded.