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AUD Becker > A-4 Audit Evidence > Flashcards

A-4 Audit Evidence Flashcards

1
Q

What is the hierarchy of audit evidence?

A

AEIO

  1. Auditor’s direct personal knowledge and observation
  2. External evidence
  3. Internal evidence
  4. Oral evidence
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2
Q

What do substantive procedures consist of?

A
  1. tests of details

2. substantive analytical procedures

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3
Q

What standard procedures are used in every audit as risk assessment procedures, tests of controls, or substantive tests?

A

FIVE CARROT CARS

  • Footing, crossfooting, and recalculation
  • Inquiry
  • Vouching
  • Examination/inspection
  • Confirmation
  • Analytical procedures
  • Reperformance
  • Reconciliation
  • Observation
  • Tracing
  • Cutoff review
  • Auditing related accounts simultaneously
  • Representation letter
  • Subsequent events review
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4
Q

Relevant assertions for review of account balances

A

CVER

  • Completeness
  • Valuation, allocation, accuracy
  • Existence and occurrence
  • Rights and obligations
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5
Q

Relevant assertions for review of transactions and events

A

COVEU

  • Completeness
  • cutOff
  • Valuation, allocation, accuracy
  • Existence and occurrence
  • Understandability and classification
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6
Q

Relevant assertions for review of presentation and disclosure

A

CVRU

  • Completeness
  • Valuation, allocation, accuracy
  • Rights and obligations, and occurrence
  • Understandability and classification
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7
Q

What are the elements of the revenue cycle?

A
  • Sales
  • Accounts receivable
  • Cash receipts
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8
Q

Under what circumstances does positive confirmation for accounts receivable work best?

A
  1. Large dollar amounts
  2. Expect errors/disputes
  3. Weak internal control
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9
Q

Under what circumstances does negative confirmation for accounts receivable work best?

A
  1. Low risk
  2. Small balances
  3. Expect customer attention
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10
Q

What are the elements of the expenditure cycle?

A
  • Purchases

- Accounts payable

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11
Q

What items may indicate related party transactions?

A
  • Compensating balance arrangements
  • Loan guarantees
  • Unusual, nonrecurring transactions near year-end
  • Transactions based on terms that differ significantly from market terms
  • Nonmonetary exchanges
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12
Q

What audit evidence should be obtained for actual or potential litigation, claims, and assessments?

A
  1. Period in which underlying cause for legal action occurred
  2. Degree of probability of an unfavorable outcome
  3. Amount of range of potential loss
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13
Q

Define liquidity ratios

A

Measures of a firm’s short-term ability to pay maturing obligations

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14
Q

Define activity ratios

A

Measures of how effectively an enterprise is using its assets

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15
Q

Define profitability ratios

A

Measures the financial performance of an enterprise for a given time period

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16
Q

Define investor ratios

A

Measures that are of interest to investors

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17
Q

Define long-term debt-paying ability ratios (coverage ratios)

A

Measures of security for long-term creditors/investors

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18
Q

List of liquidity ratios

A
  • working capital
  • current ratio
  • acid-test ratio
  • cash ratio
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19
Q

Working Capital Ratio

A

current assets - current liabilities

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20
Q

Current Ratio

A

current assets / current liabilities

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21
Q

Acid-test Ratio

A

(cash equivalents + marketable securities + accounts receivable) / current liabilities

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22
Q

Cash Ratio

A

(cash equivalents + marketable securities) / current liabilities

23
Q

List of activity ratios

A
  • accounts receivable turnover
  • accounts receivable turnover in days
  • inventory turnover
  • inventory turnover in days
  • operating cycle
  • working capital turnover
  • total asset turnover
  • accounts payable turnover
  • days in accounts payable
24
Q

Accounts Receivable Turnover

A

net credit sales / average net receivables

25
Q

Accounts Receivable Turnover in Days

A

(average net receivables) / (net credit sales / 365)

26
Q

Inventory Turnover

A

cost of goods sold / average inventory

27
Q

Inventory Turnover in Days

A

(average inventory) / (cost of goods sold / 365)

28
Q

Operating Cycle

A

AR turnover in days + inventory turnover in days

29
Q

Working Capital Turnover

A

sales / average working capital

30
Q

Total Asset Turnover

A

net sales / average total assets

31
Q

Accounts Payable Turnover

A

cost of goods sold / average accounts payable

32
Q

Days in Accounts Payable

A

(average accounts payable) / (cost of goods sold / 365)

33
Q

List of profitability ratios

A
  • net profit margin
  • return on total assets
  • return on assets
  • return on investment
  • return on common equity
  • net operating margin percentage
  • gross (profit) margin percentage
  • operating cash flow per share
34
Q

Net Profit Margin

A

net income / net sales

35
Q

Return on Total Assets

A

net income + average total assets

36
Q

Return on Assets

A

net profit margin x total asset turnover

37
Q

Return on Investment

A

(net income + interest expense * (1 - tax rate)) / (average (long-term liabilities + equity))

38
Q

Return on Common Equity

A

(net income - preferred dividends) / average common equity

39
Q

Net Operating Margin Percentage

A

net operating income / net sales

40
Q

Gross (profit) Margin Percentage

A

gross (profit) margin / net sales

41
Q

Operating Cash Flow Per Share

A

operating cash flow / common shares outstanding

42
Q

List of investor ratios

A
  • degree of financial leverage
  • earnings per share
  • price/earnings ratio
  • dividend payout ratio
  • dividend yield
  • book value per share
43
Q

Degree of Financial Leverage

A

earnings before interest and taxes / earnings before taxes

44
Q

Earnings Per Share

A

(net income - preferred dividends) / (weighted average number of common shares outstanding)

45
Q

Price/Earnings Ratio

A

market price per share / diluted earnings per share

46
Q

Dividend Payout Ratio

A

dividends per common share / diluted earnings per share

47
Q

Dividend Yield

A

dividends per common share / market price per common share

48
Q

Book Value Per Share

A

(total stockholders’ equity - preferred stock) / (number of common shares outstanding)

49
Q

List of long-term debt-paying ability ratios

A
  • debt/equity
  • debt ratio
  • times interest earned
  • operating cash flow/total debt
50
Q

Debt / Equity Ratio

A

total liabilities / common stockholders’ equity

51
Q

Debt Ratio

A

total liabilities / total assets

52
Q

Times Interest Earned Ratio

A

earnings before taxes and interest / interest

53
Q

Operating Cash Flow / Total Debt Ratio

A

operating cash flow / total debt

AUD Becker (4 decks)

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