A3, M5-M6 Flashcards
What is audit evidence (defined)?
all the information auditor uses to arrive at conclusions for the audit opinion
What are the two broad categories of audit evidence?
(1) Accounting Records
(2) Corrorborating/Contradictory Evidence
What is included in accounting records?
journal entries and supporting records (ledgers, checks, invoices, worksheets)
Do accounting records along provide sufficient support for an audit opinion?
No, that is where corroborating or contradictory evidence comes in.
What does corroborating evidence do?
provide additional support and give validity to accounting data
What does contradictory evidence do?
provide support that an amount is incorrect, leading to additional audit procedures
What are examples of corroborating/contradictory evidence?
- board minutes,
- confirmations,
- analyst reports,
- info from observation, inquiry, and inspection
Does the auditor need to rely on persuasive or conclusive evidence to support the audit opinion?
persuasive, not conclusive
What affects persuasiveness of evidence?
NET of procedures
If a procedure costs too much to do, is that a valid basis for omitting a procedure for which there is no appropriate alternative?
No.
What does “sufficient” mean in terms of audit evidence?
quantity of audit evidence
The auditor’s decision regarding the sufficiency of audit evidence is influenced by what two things?
- risk of material misstatement
- quality of audit evidence
What does “appropriate” mean in terms of audit evidence?
reliability and relevance of evidence
What acronym tells you the considerations related to reliability of audit evidence?
AEIO
What does the A in AEIO stand for?
Auditor’s Direct Personal Knowledge and Observation
What does the E in AEIO stand for?
External Evidence (from sources outside the entity)
What does the I in AEIO stand for?
Internal Evidence (produced by the client)
What does the O in AEIO stand for?
Oral Evidence
What is more persusive, external evidence sent directly to the auditor or sent through the client?
evidence sent directly to the auditor
T/F: Evidence obtained from a management’s specialist is considered an external source of evidence.
False, because of the relationship between management and the specialist.
What improves the reliability of internally generated information provided by the client?
strong, effective internal controls
Is oral evidence sufficient on its own?
No.
Is determining whether evidence is accurate, complete, and sufficiently detailed related to reliability or relevance?
reliability
What are the considerations for relevance?
- related to the financial statement assertion
- timing consistent with the audit period
- designed for understatements/overstatements (related to first point)
The results of audit procedures may lead the auditor to what three things?
- Reassess the RMM
- Identify control deficiencies
- Identify misstatements
Can substantive procedures identify a control deficiency?
Yes.
When evaluating the results of audit procedures and the information obtained to be used as evidence, the auditor must be aware of what?
unconcious and concious auditor biases that may impact professional judgement/skepticism
What is the availability bias?
tendency to place more weight on events that are more recent, readily available, or top of mind
What is confirmation bias?
tendency to place more weight on information that corroborates, rather than contradicts, initial conclusions
What is overconfidence bias?
tendency to overestimate one’s ability to make accurate judgements
What is anchoring bias?
tendency to use initial information as an anchor against which subsequent information is assessed
What is an example where an auditor might fall for anchoring bias?
The auditor anchors onto management’s explanation of something.
What is automation bias?
tendency to favor information generated from automated systems, even when contradicts human reasoning
What is a lead sheet?
a table of contents from things you did in an audit
Who should a bank confirmation come from?
the bank DIRECTLY
When the auditor talks to legal counsel through the inquiry letter, is this from in-house or external legal counsel?
external
T/F: The auditor’s risk assessment affects the relevance of audit evidence.
False.
Are confirmations or analytical procedures more reliable? Why?
Confirmations, because this is external evidence. Analytical procedures are based on client internal data.
Is Inquiry + Corroborating Documents from External Sources enough for sufficient appropriate audit evidence or no?
Yes, this is enough.
T/F: If there are issues with the audit evidence or workpaper preparation, it does not count as sufficient, appropriate audit evidence.
True.
Municipal property tax bills prepared in the client’s name are considered (internal/external) evidence.
external
What is involved in observation?
when an auditor looks at a process or procedure performed by others
Does an auditor need to be physically present for observation?
No, they can use remote observation tools as well.
What is reperformance?
Auditor independently performs procedures or controls that were originally performed as part of an entity’s internal control.
How is segregation of duties usually tested?
through observation of SoD
Reperformance is usually a (substantive test/test of controls).
test of controls
What is inquiry?
requesting information from knowledgeable internal and external parties
What is important to remember about inquiry as an audit procedure?
generally considered insufficient on its own
What is walk-through?
(1) questioning an entity’s personnel about
(2) their understanding of what is required by prescribed procedures and controls
(3) at which important processing procedure soccur
What is a more simple way to describe a walkthrough?
going the process of transaction inception to inclusion on the financials
What is a subsequent events review?
when the auditor performs procedures after the BS date to the date of the auditor’s report
What is examination/inspection?
inspect or examine records, documents, or tangible assets
What is reconciliation?
compare financial amounts from two independent sources for agreement
What assertions is reconciliation most valuable for testing?
existence and valuation
What is footing?
adding down a column to verify mathematical accuracy
What is cross-footing?
adding across a row to verify mathematical accuracy
What is recalcualtion common for?
depreciation expense and accumulated depreciation
What is cutoff review?
looking at transactions right before and after year end to determine they are recorded in the correct period
What is an example of related accounts that would be audited simultaneously?
long-term liabilities and interest expense
Comparisons within the current year’s financials for internal consistency is what type of audit procedure?
analytical procedures
Scanning financials is what type of audit procedure?
Analytical, because using judgement for search for large, significant, or unusual items in the accounting records.
What is vouching?
directional testing, from the financials to the source documents
Is vouching used more for overstatements or understatements?
overstatements
Vouching is concerned most with what financial statement assertion?
existence
What is tracing?
directional testing, from the source documents to the financials
Is tracing used more for overstatements or understatements?
understatements
Tracing is concerned most with what financial statement assertion?
completeness
What is confirmation?
specific type of inquiry that involves obtaining representations from independent external parties about account balances/transactions/events
In what three phases of the audit can analytical procedures be used? In which of these phases are analytical procedures REQUIRED?
- can be used in planning, substantive procedures, and final review
- required in planning and final review only
How are analytical procedures used in final review?
- to assist in final review of the overall reasonableness of account balances, AND
- to determine whether sufficient appropriate audit evidence has been obtained
What is important to check when analytical procedures are used in substantive tests?
the reliability of the data
What three things should be checked to determine reliability of data?
- source and comparability
- nature and relevance
- controls over preparation of information
Generally, how are analytical procedures used in substantive testing?
used to come up with an expectation for a balance, to compare the recorded baalnce with
For what types of potential misstatements are analytical procedures best for (2)?
- not apparent from examination of detailed evidence, OR
- detail is unavailable
In order to provide an appropriate level of assurance, analytical procedures should be based on ________ relationships.
predictable
More predictable relationships are:
- provided by data generated in (dynamic/stable) environments
- involve (IS/BS) accounts
- involve transactions that are (more/less) subject to management discretion
- stable
- IS accounts
- less discretion
Are wide or precise expectations more effective in detecting misstatements?
more precise
What are four analytical methods, from the least assurance provided to the most?
- Trend Analysis
- Ratio Analysis
- Nonstatistical Predictive Modeling
- Regression Analysis
Which of the four analytical methods mentioned above need to be used with other audit procedures?
Trend Analysis
Ratio Analysis
When is trend analysis most appropriate?
amount/relationship is fairly predictable and operations are stable
When is ratio analysis most appropriate?
analyzing data at a disaggregated level
When is non statistical predictive modeling most appropriate?
create expectation based on simple variables
When is regression analysis most approrpriate?
creating expectation based on several independent variables
What is a key advantage of regression analysis over the other methods?
direct and quantitative measures of the precision of the expectation
What types of things need to be documented when analytical procedures are used as a principal substantive test of an assertion?
- auditor’s expectation
- how the expectation was developed
- results of comparison
- additional procedures performed
- results of additional procedures performed
Who usually performs the final review procedures?
a manager or partner with comprehensive understanding of the client’s business and industry
What are the three key purposes of applying analytical procedures during the overall review stage of an audit?
- evaluate overall financial statement preparation
- assess conclusions reached, and
- assist in forming opinion
What is tricky on the audit exam in relation to tracing and vouching?
The terms are often used interchangeably, so make sure to look at the direction of the testing!
Does an oral response to a confirmation meet the definition of an external confirmation?
No.
If the confirmation is given by management, does it meet the definition of external confirmation?
No.
What is a positive confirmation?
Auditor asks to provide the requested information OR to confirm whether the party agrees or disagrees with the amount.
What is a negative confirmation?
only respond if the confirming party disagrees with the information in the request
Can the client mail the confirmation?
No, the auditor must mail it.
Can the auditor put the confirmations into the client’s mailbox to be sent out?
No, the auditor must go to an external mail service.
What should the auditor do if there is refusal from management to allow confirmation procedures?
- evaluate validity and reasonableness of refusal
- evaluate effect of refusal on RMM and fraud risk
- perform alternative procedures
What should the auditor do if management’s refusal is unreasonable OR unable to obtain sufficient appropriate evidence?
- communicate with board, AND
- determine impact on opinion
What should the auditor do if they receive a confirmation electronically (including fax)?
directly contact the confirming party to validate their identity and the accuracy of the information received
What should the auditor do if they do not get responses to positive confirmation requests?
- Send additional requests.
- If still no response after 2nd and 3rd request, perform alternative procedures.
What is an exception?
response that indicates a difference between the entity’s records and the confirming party’s records
What should the auditor do in the case of an exception?
investigate further
When does the exception not represent a material misstatement?
comes from timing/measurement differences or clerical error
Which of the assertions we learned are not recognized by the PCAOB?
Cutoff
Which assertions are most relevant for account balances and disclosures (BS accounts)?
All except for Cutoff
Which assertions are most relevant for transactions, events, and disclosures (IS accounts)?
All except for Rights and Obligations
What is the key difference between inspection and observation?
Inspection is for tangible things (like documents).
Observation is for people/processes.
What is more appropriate if there have been limited transactions in an account (test of details or substantive analytical procedures)?
test of details
The auditor should develop reasonable expectations for analytical procedures (before/after) talking to management.
Before
If the entity has diversified operations, there is a (more/less) likely risk that high-level analytical procedures will not catch misstatements.
more
What should the auditor do if there are highly diversified operations?
disaggregated the population and performed multiple analytical procedures
When an analytical procedure is performed during the overall review stage, what are the specific documentation requirements?
There are none.
Observing the consistent use of cash registers and tapes by employees provides evidence about which assertion related to cash?
completeness (ensure no theft)
Boilerplate information provided in a
inquiry letter or confirmation would include what two statements?
- Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied.
- The reply is given solely for the purpose of the audit without any responsibility on the part of the respondent, its employees, or its agents, and it does not relieve the auditor from any other inquiry or the performance of any other duty.
T/F: Boilerplate disclaimers are OK and allow the auditor to still rely on the information.
True.
T/F: If people do not respond to confirmations, the auditor can ask the client to intervene.
True
If you are checking the accuracy of something, you are not just inspecting but actually _____ it.
recalculating
What is the key difference between recalculation and reperformance?
Recalculation involves doing the math again.
Reperformance is re-doing a process the client already does.
What procedure is this? “The auditor scanned the repairs and maintenance account for unusually large amounts.”
Analytical Procedures
What procedure is this? “Agreed sales invoices to credit files to determine whether the customer had a credit file and had been approved for credit.”
Reperformance, because the client should have already done this.
