A3 - Procedures to obtain evidence Flashcards
what are the standard procedures used in an audit?
C the FIVE CARROT WARS
C. Confirmation (external evidence)
F. Footing, cross-footing, and recalculation
I. Inquiry
V. Vouching DOWN from FS back to source/supporting docs: to test the existence/occurrence of revenue and assets not overstated
E. Examination/inspection: physical inspection of documents, records, or tangible assets to test the existence
C. Cutoff review: auditor should perform a cutoff review of year-end transactions, especially inventory, cash, purchases, sales, and accruals
A. Analytical procedures: highlight unusual fluctuations
R. Reperformance: auditor independently complete/perform certain procedures that were previously done by the client
R. Reconciliation: perform a comparison of financial amounts between two independent sources for agreement or to test the existence and valuation of accounts
O. Observation:
T. Tracing UP from source docs to books/records: to test the completeness/record properly of expenses and liabilities not understated
W. Walk-through: includes inquiry, observation, inspection
A. Auditing related accounts simultaneously
R. Representation letter: mandatory at the end of fieldwork
S. Subsequent event: perform procedures from period after the BS date through the date of the audit’s report. Includes: contingencies, unrecorded liabilities, disclosures
what are the methods used to develop the auditor’s expectation?
- Trend analysis: compare CY and PY FS => low assurance
- Ratio analysis: compare calculated ratios to PY or to comparable entities => low assurance
- Non-statistical predictive modeling: use predictive model to estimate the FS amount => high assurance
- Regression analysis: advanced statistical technique used PY data to develop a model to predict future periods => high assurance
what made up of a FS house used for tracing up and vouching down?
Financial statements
Trial balance
General ledger
Subsidiary ledger
Books of original entry
Source documents
Execution of event
Transaction approved
what are the procedures to assert BS and IS accounts?
COVER UP
- when audit procedures relate to asset, liability, and equity account balances (BS) and related disclosures, the most relevant assertions are C VERUP
- when testing transactions, events, related disclosures (IS), the most relevant assertions are COVE UP
C. Completeness: observation, tracing docs, perform analytical review
O. Cutoff: analyze transactions before and after year end to determine if they were recorded in the proper period
V. Valuation, allocation, and accuracy: foot schedules, perform independent recalculations, reconciles supporting schedules…
E. Existence and Occurrence: confirmation, vouching transactions..
R. Rights and Obligations: inspect supporting documentation of accounts
UP: Understanding of Presentation and classification: review related disclosures, inspect supporting documentation of accounts
Note:
- when auditing ASSET or REVENUE balances, focus on testing the EXISTENCE because assets are more likely to be overstated.
- when auditing LIABILITY or EXPENSE balances, focus on testing the COMPLETENESS because liabilities are more likely to be understated
when are analytical procedures are required to be applied in some extent?
- in planning and final/overall review stage in some extent.
- purposes (planning): to assist the auditor in understanding the entity and its environment.
- purposes (final): to assist auditor in final review of the overall reasonable of account balances
Analytical procedures may be used as a substantive test when they are more effective or efficient than test of details. This is called substantive analytical procedures
what is analytical procedures?
- are evaluations of financial information made by a study plausible relationships among both financial and nonfinancial data. Ex: comparisons of recorded amounts to independent expectations developed by the auditor.
- What should an auditor do when designing and performing analytical procedures as substantive procedures?
- Determine the analytical procedures that are suitable for testing the assertions, taking into account the assessed risks of material misstatement and test of details
- Evaluate the reliability of the data from which the auditor’s expectation is to be developed.
- Develop and expectation of recorded amounts and ratios and evaluate if the expectation is sufficiently precise to identify MM
- Perform the analytical procedures and compare the results with expectations
- Investigate any significant differences by inquire management and obtain evidence relevant to management’s response
- what factors do efficiency and effectiveness of analytical procedures in detecting potential MM depend on?
- Nature of the assertion being tested: use AP when potential MM are not apparent from an examination of detailed, or when such detail is not available
- Plausibility and predictability of the data relationship: auditor must have a clear understanding of the relationship among data, and AP should be based on predictable relationships. EX:
+ Income statement accounts are more predictable.
+ Accounts with management discretion are less predictable
+ Dynamic environment is less predictable - Availability and reliability of data used to develop the expectation: data used to develop expectation should be both readily available and reliable
- Precision of the expectation: more precise (data is developed at a sufficiently detailed level) expectations are more effective in detecting MM
what are the primary objectives of audit analytical procedures?
- Analytical procedures during the overall view stage: EVALUATE the overall FS presentation, to assess the conclusions reached, and to assist in forming an opinion
- Analytical procedures during planning stage: IDENTIFY account balances that represent specific risks relevant to the audit
- Analytical procedures used as Substantive procedures: GATHER evidence from tests of details to corroborate FS assertions
what type of audit procedures would most likely use if auditors determine that an account has minimal activity during the year?
test of details
what are negative and positive confirmations?
- Negative confirmation: auditors only ask customers to return the confirmation if they disagree with the balance provided by the auditor
- Positive confirmation: the customer is asked to return the confirmation request whether they agree or disagree with the information provided by the auditor
Note:
- Oral response is NOT an external confirmation. External confirmation must be returned by customers in a “written” form
