AUD 4 - Audit Evidence Flashcards
Audit evidence is gathered throughout the audit when performing what?
- Risk assessment procedures
- Tests of controls
- Substantive procedures
- Other audit procedures
What is the objective of substantive testing, and what do substantive procedures consist of?
- To detect material misstatements in f/s.
2. Tests of details applied to transactions, balances, and disclosures and substantive analytical procedures.
What does the auditor test accounting records through, and what does corroborating evidence include?
- Through analytical procedures and substantive procedures.
- Minutes of meetings, confirmations, industry analysts’ reports, data about competitors, and info obtained through observation, inquiry, and inspection.
What is the hierarchy of audit evidence from most reliable to least reliable?
AEIO
- Auditor’s direct personal knowledge and observation,
- External evidence.
- Internal evidence.
- Oral evidence.
What do tests of details consist of and are performed on?
Consists of audit procedures used to gather evidence to support the account balances as reflected in the f/s. They are performed on ending balances, the details of transactions, or a combination of the two.
Summarize the use of analytical procedures, including the phase, the requirement, and the purpose.
- Planning phase: Required: to assist the auditor in understanding the entity and its environment; used for risk measurement to alert the auditor to problem areas - vital planning function.
- Substantive procedures: Not required: as a substantive test to obtain audit evidence about specific mngt assertions related to account balances or transactions; the evidence is circumstantial and generally additional corroborating evidence (such as documentation) must be obtained.
- Final review: Required: to assist the auditor in the final review of the overall reasonableness of account balances.
Describe directional testing, including which assertion is being tested.
If a test starts with items in the f/s, the proper assertion is most likely to be existence (testing for existence, support, occurrence) - the auditor searches for evidence indicating that the item truly exists and has not been created my mngt - the auditor is vouching backwards to the original source documents - helps to identify overstatement errors; if a test starts with source documents, it is most likely related to the completeness (testing for completeness and coverage) assertion, since the goal is probably to make sure all transactions (as identified by the source documents) have been included in the f/s - the auditor traces forward to the account records - helps to identify understatement errors.
What is the difference b/w positive and negative confirmations?
A positive confirmation is a request that the confirming party respond directly to the auditor by providing the requested info or by stating that the party agrees or disagrees with the info in the request. A negative confirmation is a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the info in the request.
What are confirmation nonresponses, oral responses, and exceptions?
- A confirmation request returned undelivered, or a failure of the confirming party to respond, or fully respond, to a positive confirmation request.
- Does not meet the definition of an external confirmation bc not a direct written response.
- A response that indicates a difference b/w the info in the entity’s records and the info provided by the confirming party.
What do standard auditing procedures consist of?
“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
What are the common transaction cycles, and what do they include?
- Revenue: sales rev., rec., and cash receipts.
- Expenditure: purchases, pay., and cash disbursements.
- Inventory: perpetual inv., physical counts, and manuf. costs.
- Investments: invest. in debt and equity and the income received from invest.
- PPE: acquisitions and disposals and related dep. exp.
- Payroll and personnel: payroll (salaried and hourly) and personnel functions.
- Financing: debt and equity financing, repayments to borrowers, int. exp., and dividends.
Under strong internal control, what are the segregation of functions that should exist as follows in the revenue cycle for sales, accounts receivable, and cash receipts.
- Sales: preparation of the sales order, credit approval, shipment, billing, and accounting.
- A/R: sales, collection of cash receipts, uncollectable receivables, sales returns, and sales discounts.
- Cash receipts: collection of cash receipts (mail should not be opened by someone who has access to the a/r ledger).
Under strong internal control, what are the segregation of functions that should exist as follows in the expenditure cycle for purchases, accounts payable, and cash disbursements?
- Purchases: purchase requisition, purchase orders, receipt of goods and services.
- A/P: recording the payable, approving the invoice for payment, recording the payment after it is paid by the Treasurer.
- Cash disbursements: treasury pays the bill (approving the payment and signing the check should be segregated).
What are two common cash fraud schemes?
- Lapping: Withholding and not recording current receipts of cash or checks. The unrecorded receipt is covered by applying a subsequent receipt to the previously unrecorded account.
- Kiting: Occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. May cover a cash shortage or pad a company’s cash position.
What are the relevant assertions for auditing the ending cash balances, and how are they primarily tested?
- Completeness, Valuation and Allocation, and Existence.
2. By sending out standard bank confirmations and performing tests on year-end bank reconciliations.
