Audit 4 - Audit Evidence Flashcards
What is audit evidence?
All the information used to arrive at the conclusions on which audit opinion is based
When is audit evidence gathered?
When performing: risk assessment procedures, tests of controls, substantive procedures, and other audit procedures
What are the types of evidence?
- Accounting records
- Corroborating evidence
- Evidence in electronic form
How does an auditor test accounting records?
Through analytical procedures and substantive procedures, such as retracing procedural steps, recalculation, and reconciliation
What does corroborating evidence include?
Minutes of meetings, confirmations, industry analysts’ reports, data about competitors, and info obtained through observation, inquiry and inspection
What is the objective of substantive testing?
To detect material misstatement in financial statements
What must the audit evidence persuade the auditor of?
That the ending balances in the F/S are fairly presented
Sufficiency of evidence is influenced by…
- The RMM: greater risk implies more evidence will be required
- The quality of evidence: less audit evidence may be required when that evidence is of higher quality
Appropriate audit evidence must be both…
Reliable and Relevant
Reliability of audit evidence is dependent on..
The circumstances under which it is gathered – is also influenced by its source and nature
Hierarchy of audit evidence
- Auditor’s direct personal knowledge & observation
- External evidence
- Internal evidence
- Oral evidence
Auditor’s direct personal knowledge examples
Observation, physical examination, inspection, or recalculation
External audit evidence example
- Evidence sent directly to an independent auditor (bank confirmation)
- Evidence received and held by the client
Internal evidence examples
Purchase orders, sales orders, general ledgers, and management reports (validity strengthened by good I/C)
Oral evidence examples
Statements made by clients concerning the procedures involved in a given transaction, often resulting in the explanation of an account balance
What should the auditor do if he/she intends to use information produced by the client?
Determine if the information is sufficiently reliable
To be relevant, audit evidence must…
Relate to the F/S assertion(s) under consideration
The evaluation of audit evidence must take into consideration…
The achievement of audit objectives
What do substantive procedures consist of?
Tests of details applied to transactions, balances and disclosures, and substantive analytical procedures
Tests of details consist of…
Audit procedures used to gather evidence to support the account balances as reflected in the F/S.
What are tests of details performed on?
Ending balances, the details of transactions, or a combination of the two
What are analytical procedures?
Evaluations of financial information made by a study of plausible relationship among both financial and nonfinancial data. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor
When are analytical procedures required?
Planning and final review stages of the audit
What are types of analytical procedures?
Comparisons of financial data, and ratio analysis
When should analytical procedures be used as substantive tests?
When they are more effective and efficient means of gathering evidence than tests of details
When designing and performing analytical procedures as substantive procedures, the auditor should…
- Determine suitable procedures
- Evaluate reliability of data from which expectation is to be based
- Develop expectation and evaluate whether the expectation is sufficiently precise to identify material misstatement
- Perform analytical procedure and compare results to expectation
- Investigate significant differences, if any
What does the efficiency and effectiveness of analytical procedures depend on?
- Nature of assertion being tested
- Plausibility and predictability of the data relationship
- Availability and reliability of data used to develop the expectation
- Precision of the expectation
What are the documentation requirements when analytical procedures are used as the principal substantive test of a significant F/S assertion?
- Auditor’s expectation
- Factors considered in the development of the expectation
- Results of the comparison of the expectation to recorded amounts
- Addt’l audit procedures performed
- Results of addt’l procedures
Tracing
FORWARD: from source documents to journal entries. Provides evidence of completeness
Vouching
BACKWARD: from journal entries to source documents. Provides evidence of existence/occurrence
What is external confirmation?
A direct written response to the auditor from a third party, either in paper form or by electronic or other medium
What is a positive confirmation?
A request that the confirming party respond directly to the auditor by providing the requested information or by stating whether they agree or disagree with the information in the request
What is a negative confirmation?
A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information in the request
The auditor should maintain control over external confirmation requests, including…
Information to be confirmed, selecting appropriate confirming parties, designing the confirmation requests, and sending requests and follow-up requests
For each confirmation nonresponse, the auditor should…
Perform alternative procedures
When responses are received electronically, the auditor should…
Contact the confirming party to validate the identity of the sender and the accuracy of the information received
What is a confirmation exception?
A response that indicates a difference between the information in the entity’s records and the information provided by the confirming party. Investigate all differences to verify whether they are indicative of material misstatement, fraud, deficiencies in I/C over financial reporting
What are the standard auditing procedures?
FIVE CARROT CARS;
- Footing, cross-footing and recalculation
- Inquiry
- Vouching
- Examination/inspection
- Confirmation
- Analytical procedures
- Reperformance
- Reconciliation
- Observation
- Tracing
- Cutoff Review
- Auditing related accounts simultaneously
- Rep letter
- Subsequent events review
Footing, cross-footing, and recalculation
Verifying the mathematical accuracy
Inquiry
Consists of requesting information from knowledgeable parties both internally and externally
Vouching
Directional testing in which the auditor examines support for what has been recorded in the records and statements
Examination/inspection
Generally provides evidence about the existence assertion, rather than about ownership, rights, obligations, or valuation
Confirmation
Specific type of inquiry that involves obtaining representations form independent external third parties about account balances and transactions or events
Analytical procedures
Evaluations of financial information made by a study of meaningful relationships among data, to help highlight unusual fluctuations that could be the results of errors or fraudulent omissions or overstatements
Reperformance
Auditor independently performs procedures or controls that were originally performed as part of an entity’s internal control
Reconciliation
Substantiates the existence and valuation of accounts
Observation
Auditor looks at a process or procedure performed by others
Tracing
Directional testing which looks for coverage in the opposite direction from vouching
Cutoff Review
Review of year-end transactions, especially inventory, cash, purchases, sales, and accruals
Auditing related accounts simultaneously
Certain accounts can be audited simultaneously, such as long-term liabilities and interest expense, capital additional to plant and equipment and repairs and maintenance expense, investments and dividend and interest income
Representation letter
Must obtain a management representation letter from the client
Subsequent events review
Required to perform certain procedures for the period after the balance sheet date of the auditor’s report
Relevant assertions: Account balances (CVER)
Completeness: all that should’ve been recorded have been
Valuation, Allocation, and Accuracy: recorded fairly and at appropriate amounts
Existence and Occurrence: assets, liabilities, and equity interests exist
Rights and Obligations: entity holds or controls the rights to assets and liabilities are the obligations of the entity
Relevant assertions: Transactions and Events (COVEU)
Completeness: all that should’ve been recorded have been Cutoff: transactions and events have been recorded in the correct period
Valuation, Allocation, and Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately
Existence and Occurrence: transactions and events that have been recorded have occurred and pertain to the entity
Understandability and Classification: transactions and events have been recorded in the proper accounts
Relevant assertions: Presentation and Disclosure (CVRU)
Completeness: all disclosures that should have been included in F/S are included
Valuation, Allocation, and Accuracy: financial information and other information are fairly and at appropriate amounts
Rights and Obligations, and Occurrence: disclosed events and transactions have occurred and pertain to the entity
Understandability and Classification: financial information is appropriately presented and described and disclosures are clearly expressed