Audit 4- Audit Evidence Flashcards
Examples of Substantive Procedures
- Observation
- Inquiry
- Confirmation
- Recalculation
- Reperformance
Hierachy of Audit Evidence
Auditor’s Direct Personal Knowledge & Observation
External Evidence
Internal Evidence
Oral Evidence
Test of Details - Tracing
Evidence of Completeness
Trace forward from source documents to journal entries
Test of Details - Vouching
Evidence of Existence/Occurence
Vouch backwards from journal entries to source documents
Audit Risk: Understatement
Related to Expenses & Liabilities
Trace
Audit Risk: Overstatement
Related to Revenue & Assets
Vouch
Objective of Vouching
To gather evidence regarding possible overstatement errors (existence or occurrence assertions). Vouching backwards.
Reconciliation
Substantiates existence and valuation of accounts
Objective of Tracing
Gather evidence regarding possible understatement of errors (completeness assertion), tracing forward.
Assertion & Auditing Procedure:
Completeness
- Tracing
- Analytical Review
- Observation
Assertion & Auditing Procedure:
Valuation, Allocation & Accuracy
- Inspection
- Footing
- Independent recalculation
- Reconciliation
Assertion & Auditing Procedure:
Existence & Occurrence
- Confirmation- w/ 3rd parties as example
- Observation, inspection, examination
- Vouching
Assertion & Auditing Procedure:
Rights & Obligations
Inspection
Assertion & Auditing Procedure:
*Understandability & Classification”
- Inspection
- Review
- Inquiry of management
Most relevant assertion for revenue cycle
Existence - risk a/r and sales will be overstated is high
Biggest concern of expenditure cycle
Understatement of expenses & liabilities
Inventory cycle- what should be reconciled
Inventory & COGS
Investment cycle- what should be reconciled
Interest & Dividends
Most significant payroll and personnel cycle risks
Creation of ficticious employees & falsification of hours worked.
Auditor’s primary emphasis on auditing related party transactions.
Auditor must determine whether they are adequately disclosed in accordance with GAAP.
Assertion for Revenue Transactions
Existence & Occurence Assertion
Assertion for Expense Transactions
Completeness Assertion
Assertion for Asset Accounts
Existence (ensure not overstated)
Assertion for Liability Accounts
Completeness (ensure not understated)
What does reconciliation substantiate?
Existence and Valuation of accounts
Prime area for recalculation auditing procedure
Related to estimates made by clients.
What is observation, inspection, examination mainly used for as auditing procedure
Evidence regarding:
Assets,
Processes
Procedures
Segregation of Duties
A.R.C.
A.- Authorization
R.- Record Keeping
C.- Custody
Transaction Cycle - Path to Financial Statements
- Transaction Approved
- Execution of Event
- Source Documents
- Books of Original Entry
- Subsidiary Ledger
- General Ledger
- Trial Balance
- Financial Statements
When Should a Cutoff Review take place?
Should be performed on year-end transactions, especially inventory, cash, purchases, sales, and accruals.
Subsequent Events Review
Evidence becomming available after B/S date should be used in making judgments about valuation of assets and liabilities on B/S date. Ex: decreases in L/T debt, may indicate such debt should be reported as current liability on B/S.
Most Relevant Assertion for Account Balances
Completeness
Valuation, Allocation, Accuracy
Existence & Occurence
Rights & Obligations
Most Relevant Assertions for Transactions & Events
C.O.V.E.U.
Completeness Cutoff Valuation, Allocation, Accuracy Existence & Occurence Understandability and Classification
Most Relevant Assertion for Presentation & Disclosure
C.V.R.U.
Completeness
Valuation, Allocation, & Accuracy
Rights & Obligations, & Occurrence
Understandability & Classification
What are cutoff procedures usually performed on?
Year-end transactions:
Inventory Cash Purchases Sales Accruals
