AUD Deck 5-Audit Evidence-Concepts & Standards

Question 1

Nature-

Answer 1

The auditor has to decide what specific substantive procedure to perform. This includes determining how much emphasis should be placed on “test of details” versus substantive “analytical procedures”.

Question 2

Timing-

Answer 2

The auditor has to decide whether to perform the important substantive procedures, at an “interim date” or at “final”.

Question 3

Extent-

Answer 3

The auditor has to decide how large the samples sizes should be. Since the audit work is performed on a “test basis”, should the sample sizes be relatively large or can smaller sample sizes be justified?

Question 4

Substantive Audit Procedures-

Answer 4

These are audit procedures that are directly related to the f/s elements & disclosures. Or in other words “to search for material misstatements if there are any.”

Question 5

Test of details-

Answer 5

These are relatively precise (but usually rather expensive, labor intensive) procedures (that suggest whether the client’s recorded amounts are right or not.)

Question 6

Tests of Ending Balances-

Answer 6

Verifying the client’s recorded amounts by directly testing the composition making up the ending account balance.

Question 7

Analytical procedures-Evaluations of financial information through analysis of plausible relationships among both financial & non financial data. Analytical procedures serve 3 distinct purposes-

Answer 7

1) They are useful as a risk assessment procedure for planning purposes.
2) They are useful (but not required) as a form of substantive evidence.
3) The auditor is required to perform analytical procedures as near the end of the audit to assist the auditor when forming an overall conclusion about the f/s.

Question 8

The AICPA states that the effectiveness & efficiency of substantive analytical procedures depends on the following 4 factors or considerations:

Answer 8

1) Nature of Assertion
2) Plausibility & predictability of the relationship
3) Availability & reliability of data used
4) Precision of the expectation

Question 9

Audit evidence-

Answer 9

Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the f/s and other information.

Question 10

Audit procedures for Obtaining Evidence-The auditor’s basis for conclusion is comprised of 3 categories of procedures:

Answer 10

1) Risk assessment procedures
2) Test of controls
3) substantive procedures

Question 11

Risk Assessment Procedures-

Answer 11

The audit procedures performed to obtain an understanding of the entity & it’s environment, including the entity’s internal control, to identify & assess the risks of material misstatement, whether due to fraud or error, at the financial statement & relevant assertion levels.

Question 12

The auditor’s substantive procedures should include the following related to the financial reporting process;

Answer 12

1) Agree the financial statement information to the underlying accounting records.
2) Examine material journal entries and other adjustments made during the preparation of the financial statements.

Question 13

As covered in the course materials on Internal Controls, the auditor should document the following matters:

Answer 13

1) The overall responses to address the assessed risk of misstatement at the financial statement level.
2) The nature, timing, and extent of the further audit procedures.
3) The linkage of those procedures with the assessed risks at the relevant assertion level.
4) The results of the audit procedures.
5) The conclusions reached in the current audit about the operating effectiveness of controls tested in the prior audit.

Question 14

Misstatement-

Answer 14

A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable reporting framework.

Question 15

Uncorrected Misstatements-

Answer 15

Misstatements that the auditor has accumulated during the audit and that have not been corrected.

Question 16

Factual Misstatements-

Answer 16

Misstatements for which there is no doubt.

Question 17

Judgmental misstatements-

Answer 17

Differences due to the judgments of management that the auditor considers unreasonable or to the selection of accounting policies that the auditor views as inappropriate.

Question 18

Projected misstatements-

Answer 18

The auditor’s best estimate of misstatements in populations as suggested by audit sampling.

Question 19

AU 230: “Audit Documentation”-This pronouncement states that the auditor’s objective is “to prepare documentation that provides:

Answer 19

A) A sufficient & appropriate record of the basis for the auditor’s report
B) Evidence that the audit was planned & performed in accordance with (GAAS) and applicable legal & regulatory requirements.”

Question 20

Audit Documentation-

Answer 20

This is the record of audit procedures preformed, relevant audit evidence obtained, and conclusions reached.

Question 21

External Confirmation-

Answer 21

Audit evidence obtained as a direct written response to the auditor from a third party, either in paper form or by electronic or other medium.

Question 22

Positive Confirmation Requests-

Answer 22

Where a response is requested whether or not the other party agrees with the client’s recorded amount. A nonresponse is viewed as a “loose end” that must be addressed.

1) When individual accounts are large
2) Requires second (or possibly third) requests as a follow-up procedure for nonresponses.
3) If no response is obtained, the auditor must perform “alternative procedures.”

Question 23

Negative Confirmation Requests-

Answer 23

Where a response is only requested in the event of disagreement. A non response is viewed as evidence of agreement by the recipient.

1) Could easily misinterpret a non response as suggesting “agreement” when, instead, the other party did not open the envelope.
2) Therefor, negative confirmations usually require a larger sample size than would positive confirmations.
3) The auditor may justify using negative confirmations when:
a) the population consists of a large # of small, rather homogeneous items
b) the assessed risk of material misstatement is low, and the relevant controls are operating effectively
c) recipients are expected to pay attention to the requests, and a low rate of exceptions is expected.

Question 24

Accounting Estimate-

Answer 24

An approximation of a monetary amount in the absence of a precise means of measurement.

Question 25

Observable Inputs-

Answer 25

Assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity.

Question 26

Unobservable Inputs-

Answer 26

An entity’s own judgements about what assumptions market participants would use. Estimation uncertainty increases when the fair value estimates are based on unobservable inputs.

Question 27

Management Representation Letters

AU 580: “Written Responses”-This pronouncement states that the auditor’s objectives are to-

Answer 27

1) obtain written representations from management that they believe they have fulfilled their responsibility for the preparation & presentation of the f/s & for the completeness of information provided to the auditor.
2) support other audit evidence relevant to the f/s by means of written representations determined necessary by the auditor.
3) respond appropriately to written representations provided by management…or if management…(does) not provide the written representations requested by the auditor.

Question 28

Related Parties-

Answer 28

“Affiliates of the enterprise; entities for which investments are accounted for by the equity method by the enterprise; trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; principal owners of the enterprise; it’s management; members of the immediate families of principal owners of the enterprise and it’s management; and other parties with witch the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.” The essence of this definition is that one party has the ability to influence the conduct of the other party.

Question 29

Arm’s-length transaction-

Answer 29

A transaction conducted on such terms & conditions between a willing buyer & a willing seller who are unrelated & are acting independently of each other & pursuing their own interests.

Question 30

Subsequent Events-

Answer 30

Events occurring between the date of the financial statements and the date of the auditor’s report.

Question 31

Reasonable period of time-

Answer 31

A period of time not to exceed one year beyond the date of the financial statements being audited.