A-4 Audit Evidence Flashcards
What is the hierarchy of audit evidence?
AEIO
- Auditor’s direct personal knowledge and observation
- External evidence
- Internal evidence
- Oral evidence
What do substantive procedures consist of?
- tests of details
2. substantive analytical procedures
What standard procedures are used in every audit as risk assessment procedures, tests of controls, or substantive tests?
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
Relevant assertions for review of account balances
CVER
- Completeness
- Valuation, allocation, accuracy
- Existence and occurrence
- Rights and obligations
Relevant assertions for review of transactions and events
COVEU
- Completeness
- cutOff
- Valuation, allocation, accuracy
- Existence and occurrence
- Understandability and classification
Relevant assertions for review of presentation and disclosure
CVRU
- Completeness
- Valuation, allocation, accuracy
- Rights and obligations, and occurrence
- Understandability and classification
What are the elements of the revenue cycle?
- Sales
- Accounts receivable
- Cash receipts
Under what circumstances does positive confirmation for accounts receivable work best?
- Large dollar amounts
- Expect errors/disputes
- Weak internal control
Under what circumstances does negative confirmation for accounts receivable work best?
- Low risk
- Small balances
- Expect customer attention
What are the elements of the expenditure cycle?
- Purchases
- Accounts payable
What items may indicate related party transactions?
- Compensating balance arrangements
- Loan guarantees
- Unusual, nonrecurring transactions near year-end
- Transactions based on terms that differ significantly from market terms
- Nonmonetary exchanges
What audit evidence should be obtained for actual or potential litigation, claims, and assessments?
- Period in which underlying cause for legal action occurred
- Degree of probability of an unfavorable outcome
- Amount of range of potential loss
Define liquidity ratios
Measures of a firm’s short-term ability to pay maturing obligations
Define activity ratios
Measures of how effectively an enterprise is using its assets
Define profitability ratios
Measures the financial performance of an enterprise for a given time period
Define investor ratios
Measures that are of interest to investors
Define long-term debt-paying ability ratios (coverage ratios)
Measures of security for long-term creditors/investors
List of liquidity ratios
- working capital
- current ratio
- acid-test ratio
- cash ratio
Working Capital Ratio
current assets - current liabilities
Current Ratio
current assets / current liabilities
Acid-test Ratio
(cash equivalents + marketable securities + accounts receivable) / current liabilities
Cash Ratio
(cash equivalents + marketable securities) / current liabilities
List of activity ratios
- 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
Accounts Receivable Turnover
net credit sales / average net receivables
Accounts Receivable Turnover in Days
(average net receivables) / (net credit sales / 365)
Inventory Turnover
cost of goods sold / average inventory
Inventory Turnover in Days
(average inventory) / (cost of goods sold / 365)
Operating Cycle
AR turnover in days + inventory turnover in days
Working Capital Turnover
sales / average working capital
Total Asset Turnover
net sales / average total assets
Accounts Payable Turnover
cost of goods sold / average accounts payable
Days in Accounts Payable
(average accounts payable) / (cost of goods sold / 365)
List of profitability ratios
- 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
Net Profit Margin
net income / net sales
Return on Total Assets
net income + average total assets
Return on Assets
net profit margin x total asset turnover
Return on Investment
(net income + interest expense * (1 - tax rate)) / (average (long-term liabilities + equity))
Return on Common Equity
(net income - preferred dividends) / average common equity
Net Operating Margin Percentage
net operating income / net sales
Gross (profit) Margin Percentage
gross (profit) margin / net sales
Operating Cash Flow Per Share
operating cash flow / common shares outstanding
List of investor ratios
- degree of financial leverage
- earnings per share
- price/earnings ratio
- dividend payout ratio
- dividend yield
- book value per share
Degree of Financial Leverage
earnings before interest and taxes / earnings before taxes
Earnings Per Share
(net income - preferred dividends) / (weighted average number of common shares outstanding)
Price/Earnings Ratio
market price per share / diluted earnings per share
Dividend Payout Ratio
dividends per common share / diluted earnings per share
Dividend Yield
dividends per common share / market price per common share
Book Value Per Share
(total stockholders’ equity - preferred stock) / (number of common shares outstanding)
List of long-term debt-paying ability ratios
- debt/equity
- debt ratio
- times interest earned
- operating cash flow/total debt
Debt / Equity Ratio
total liabilities / common stockholders’ equity
Debt Ratio
total liabilities / total assets
Times Interest Earned Ratio
earnings before taxes and interest / interest
Operating Cash Flow / Total Debt Ratio
operating cash flow / total debt
