AUD 4 - Audit Evidence

Question 1

AUD Evid gathered when performing

Answer 1

1. RA procedures
2. TOCs
3. Subst. procedures
4. Other aud procedures
5. prev. auds, firm’s QC for cilent accep/continuance

Question 2

Passkey - Hierarchy of aud evid from most reliable to least: AEIO

Answer 2

Aud direct personal knowledge/observation

Ext evid

Int evid

Oral evid

Question 3

What is the purpose for using A/Ps during each of the planning, as subst. procedes, and the final review stages of the audit?

Answer 3

Planning = u.standing of ent/environ (Rsk meas for possible prob areas)

Subst. test - obtain aud evid ab mgt assert related to acct bal/trans

Final review = final review of overall reas. of acct bals

Question 4

What are the factors that affect the decision to use A/Ps as substantive test is based on what?

Answer 4

1. Nature of assertion being tested (when potential MMS arent apparent from data or its not available)
2. plausible / predictability of data relationship
3. availability, reliability of data used and
4. precision of data used to develop the expectation

Question 5

Which assertion and which direction? =

To determine whether transactions have been recorded

Answer 5

Completeness

Go from source documents to financial statements

Question 6

AR confirms are required per GAAS except when?

Answer 6

1. receivables are immaterial
2. confirm w/be ineffective
3. IR and CR are very low and evid provided by other procedures is sufficient to reduce AR to low level.

Question 7

Related parties may include:

Answer 7

Entity affiliates, principal owners, management, and members of their immediate families

Question 8

For RPT audit objectives, the aud s/obtain an understanding of RPTs sufficient to:

Answer 8

1. Recognize fraud risk factors relating to RPTs
2. Conclude if FS are fairly presented in terms of RPTs
3. Obtain SAAE about if RPTs have been ID’d, accounted for, and disclosed.

Question 9

The auditor s/remain alert for which items relating to RPTs which may be indicative of a RPTransaction?

Answer 9

1. Compensating balance arrangements
2. Loan guarantees
3. Unusual, nonrecurring trans near YE
4. Trans based on terms that differ sig. from market terms
5. Nonmonetary exchanges

Question 10

When the aud IDs sig. RPTs outside the normal course of the entity’s business, the aud s/:

Answer 10

1. Inspect contracts agreements for bus. rationale of trans that may indicated fraud, terms of the trans match mgt explanation, trans have been approp. acct for/disclosed.
2. Obtain aud evid that trans h/been approp approved

Question 11

If aud ID RPT that mgt hasn’t previously id’d or disclosed to the aud, the auditor should:

Answer 11

1. communicate info to members of engagement team
2. request mgt to ID all trans w/newly ID’d RParties
3. Inquire why the entity’s controls failed to ID and disclose this RParty
4. Perform approp. subst. procedes
5. Reconsider risk that other RPs or RPTs might not have been ID’d
6. Eval audit implications if mgt disclosure appears intentional

Question 12

Why are estimates used?

Answer 12

Because either data about past events cannot be accumulated in a timely or cost-effective manner, or because measurement of some accounts is dependent upon the outcome of future events.

Question 13

Under PCAOB, when auditor determines that amount of actg estimate included in the FS is unreasonable or was not determined per fwork, then the aud should:

Answer 13

Treat as a misstatement the difference between the recorded estimate and the best estimate supported by the audit evidence. and eval whether indication of mgt bias.

Question 14

Things to look for when auditing fair values

Answer 14

1. Consistent method w/prior period
2. Past track record of estimates is accurate
3. Justify any changes in approach
4. Approp. in relation to industry

Question 15

What are the two 3 levels/ways FV is determined

Answer 15

1. Market value identical
2. market value similar level 2
3. estimates/valuations when market value not available = level 3 (DCF)

Question 16

Things auditor s/do as responsibilities relating to FV:

Answer 16

a. ustand ent’s procedess for detmining FV meas/discl.
b. understand relev. controls (ARC)
c. asses RMM of FV measurements
d. eval conformity w/GAAP
e. consid need for specialist
f. test FM meas/disc.
g. eval if FV discl. conform w/GAAP
h. eval suffic/competency/consist. of evid obtained w/respect to FV meas/discl
i. obtain relev. mgt reps
j. communicate reev. matter to govnance

Question 17

Under GAAP, when must contingent liabilities be accrued and disclosed?

Answer 17

When contingent liabilities are PROBABLE AND CAN BE REASONABLY ESTIMATED

Question 18

For acutal or potential litigation/claims/assessments, aud s/obtain aud evid relev. to:

Answer 18

1. Period in which underlying cause for legal action occurred
2. degree of probability of an unfavorable outcome
3. amount or range of potential loss.

Question 19

What is the substantial attention limitation concerning letters to lawyers about pending litigations etc.

Answer 19

lawyer can limit replies to matters that they have given substantial attention to only, and c/only be limited to material matter if agreement reached with auditor about materiality

Question 20

A refusal to respond by a client’s lawyer would be between which to outcomes in the auditor report?

Answer 20

Qualified or DOO

This is when the lawyer has devoted substantial attention to litigation matters. Its a scope limitation which makes it where the aud cant give an unmod opinion.

Question 21

Refusal to permit inquiry to lawyer would be between which two audit opinions?

Answer 21

DOO or withdraw

Question 22

What does mgt include about the Pending or threatening litigation within the letter of inquiry to lawyer?

Answer 22

1. nature of litigation
2. progress of case to date
3. how mgt is responding or intends to respond to litigation
4. evaluation of likelihood of unfavorable outcome w/an estimate of potential loss if that’s possible

Question 23

PCAOB stds state the aud’s evaluation of audit results s/include eval of what?

Answer 23

1. The restults of A/Ps performed during overall stage
2. MMS found during audit, including uncorrect MMS
3. Qual. aspects of company acctg practices
4. Conditions ID’d during the audit that relate to fraud risk.
5. The presentation of the FS incl. disclosures
6. The sufficiency/approp. of audit evidence obtained.

Question 24

What factors do the PCAOB state s/be considered when evaluating whether FS are free of MMS?

Answer 24

• Form of the arrangement
• content of the FS and notes
  3. Terminology used
  4. amt of detail given
  5. classification of items in the FS
  6. the basis of amounts set forth

Question 25

What are the additional qualitative factors the PCAOB state s/be considered when evaluating the materiality of uncorrected MMS?

Answer 25

- The effect of the mMS on segment info - existence of statutory/regulatory reporting requirements that affect materiality thresholds - Effects of misclassifications - sig. of MMS relative to the needs of users - The existence of offsetting effects of individually sig. but different MMS - likelihood that a MMS thats currently immaterial w/have a material effect in the future - cost of the correction - risk that possible additional undetected MMS c/affect the auditor's eval.

Question 26

A sig. engagement deficiency which would preclude concurring approval of issuance and prevent the client from being able to use to engagement report exists when:

Answer 26

1. Team failed to get SAAE 2. Team reached inappropriate overall conclusion 3. Engagement report not approp. for the circumstances 4. Firm isn’t independent of client.

Question 27

Which of the following functions represents a weakness in internal control related to cash disbursements? a. After the checks are mailed, the Treasurer returns the voucher packages to the accounts payable department for cancellation of the voucher and filing of the documents.

Answer 27

This represents a weakness in internal control over cash disbursements. The accounts payable department is responsible for preparing and verifying the accuracy of supporting documents and approving the unpaid voucher. The voucher package is then forwarded to the Treasurer, who reviews the documentation, and signs and mails the checks to the vendors. The Treasurer is responsible for cancelling the voucher packages and maintaining them in a cancelled voucher package file. To have the accounts payable department cancel the voucher packages would be a weakness in internal control, as voucher packages could be resent to the Treasurer again for payment at a later date.

Question 28

Pres and disclosure of Payroll: To test the completeness assertion, the auditor would ensure that all required payroll disclosures are included in the footnotes to the financial statements. Payroll footnote disclosures include stock-based compensation, pension and post-retirement benefits, and deferred compensation and profit-sharing plans.

Answer 28

When auditing the presentation and disclosure of a client’s payroll reporting, the auditor reads the footnotes and other information pertaining to payroll to determine if all disclosures are presented in the appropriate amounts. This procedure tests the valuation, allocation, and accuracy assertion related to payroll reporting.

Question 29

What is a consignment sale?

Answer 29

A consignment sale is effectively a "trial sale" where the customer has a stipulated amount of days to return the product without making payment to the company. Although not a typical transaction for many companies, it is used as a sales vehicle depending on the nature of the product sold (i.e., magazines). Since it is considered an arms-length transaction, it would not be indicative of a related party transaction.

Question 30

About what procedures are required when auditing estimates. The auditor is required to determine if the client’s accounting estimates are reasonable, which may include a comparison with industry standards. However, the auditor is not required to determine if the accounting estimates are consistent with the client’s primary competitors. Although in the same industry, the client’s businesses could have unique features that may impact the rationale behind the accounting estimates used by the client.

Answer 30

The auditor is required to determine if the client’s accounting estimates are reasonable, which may include a comparison with industry standards. However, the auditor is not required to determine if the accounting estimates are consistent with the client’s primary competitors. Although in the same industry, the client’s businesses could have unique features that may impact the rationale behind the accounting estimates used by the client.

Question 31

which fraud technique goes with the bank transfer schedule or is detected best with a bank transfer schedule?

Answer 31

kiting