Audit 4: Audit Evidence Flashcards
Appropriate Audit Evidence must be what…
Reliable and Relevant
Hierarchy of Audit Evidence
Auditors direct knowledge
External Evidence
Internal Evidence
Oral Evidence
Relevance of Evidence
example AR
AR confirmations are relevant to the existence of the receivables
but not valuation because it does not show if customer is going to pay
Substantive Procedures are…
designed to detect material misstatements at the assertion level
Substantive Procedures consist of..
Test of details
Substantive analytical procedures
When must analytical procedures be used?
Planning and Final Review
Can be used in Substantive procedures portion but not required
Some analytical procedures are..
Comparisons of Financial data
Ratio analysis
Test of Details includes what procedures…
Directional Testing
External Confirmation
Directional Testing is
Financial House going up or down
Vouching or Tracing
When vouching what are you testing for…
Tracing…
Vouching… Existence=Fin stmts down
Tracing… Confirmation=Source documents up
Financial House for Vouching and Tracing
Top to Bottom
Fin Stmts
Trial Balance
General Ledger
Subsidiary Ledger
Books of Original Entry
Source Documents
Execution of Event
Transaction Approved
What is negative confirmation of external confirmation?
3rd party responds to auditor only if they disagree with information in request
Standard Audit Procedures
FIVE CARROT CARS
Footing/Cross
Inquiry
Vouching
Examination
Confirmation
Analytical Procedures
Re-performance
Reconciliation
Observation
Tracing
Cutoff Review
Auditing Simultaneously
Rep Letter
Subsequent Events
Relevant Assertions from Chapter are what mnemomic
COVER-U
Completeness
CutOFF
Valuation/Accuracy
Existence
Rights
Understandability
What are the most important assertions of account balances?
CVER
Completeness
Valuation
Existence
Rights
What are the most important assertions of Transactions and Events?
COVEU
Completeness
CutOFF
Valuation/Accuracy
Existence
Understandability
What are the most important assertions of Presentation and Disclosure?
CVRU
Completeness
Valuation/Accuracy
Rights
Understandability
What assertion do Tracing Analytical Review Observation procedures relate to?
Completness
What assertion does Cutoff Procedures relate to ?
CutOff
What assertion do Inspection Footing Independent Calculation procedures relate to?
Valuation/Accuracy
What assertion do Confirmation Observation Vouching procedures relate to?
Existence and Occurrence
What assertion do Inspection procedures relate to?
Existence and Occurrence
What assertion do Inspection Review Inquiry of Mgmt procedures relate to?
Understandibility and Classification
Why do auditors audit by transaction cycle?
They can gather information from related accounts at the same time.
So it is more efficient
What is the most relevant assertion for the revenue cycle?
Existence- because likelihood revenue will be overstated is high
What is the most relevant assertion for the expense cycle?
Completeness- because not likely to make it to financial stmts
What are two types of fraud that can occur in the Cash Cycle?
Lapping-using today money to cover yesterdays theft
Kiting-using checks between multiple accounts
What does inventory observation include
can include test counts of inventory
But NOT a full count of inventory
What procedure is common to use on assets and revenue?
Vouch- Go down the financial house to check for existence
What procedure is common to use on liabilities and expenses?
Trace- Go up the financial house to make sure they make it to fin stmts
Engagement Quality review is..
PCAOB standards for another partner to look at the audit before it is released
Correcting Journal Entries
Need to know sometimes asked on test
Analytical procedures are most appropriate on what type of transactions?
on Income Stmt Transactions because they take place over time
Not Balance sheet transactions
What is not considered an analytical procedure?
Statistical Sampling not involving comparison
Who should mail a check?
Why?
Whomever signs the check should mail
prevents defalcations
How to handle incoming cash and checks?
1st person receives and creates remittance listing
NOT Allowed near journals
Another person does this
Misstatements of cash occur when..
Disbursement date per books and
receipt date per books
are in different periods
To provide assurance that each voucher is only paid once what would auditor look for?
Stamped paid by check signer
Where should undistributed payroll checks go after being returned?
Should not go to payroll because they are the record keepers.
Needs to go to independent party
What sort of opinion to issue if clients attorney cannot form a conclusion about pending litigation that could be material?
Unmodified and properly disclose it
What is important for an auditor to do with related party transactions?
Why?
Verify valuation?
and/or
Evaluating the disclosures?
You want to evaluate that they are disclosed
Dont care about valuation since they are related party
Who should request inquiry of clients lawyer?
Client Mgmt due to client attorney privilege
Acid Test Ratio Equation
Cash+Mkt Sercurities+AR
divided by
Current Liabilities
Cash Ratio equation
Cash + Mkt Securities
divided by
Current Liabilities
AR Turnover equation
Shows what?
Net Credit Sales
divided by
Average Net Receivables
Shows number of times to collect in year. higher the better
Inventory Turnover equation
Shows what?
COGS
divided by
Avg Inventory
shows number of times inventory sold in a time period
Inventory Turnover in Days equation
365
divided by
Inventory Turnover
Number of days to turnover
Operating cycle equation
is AR Turnover in days
plus
Inventory turnover in days
Shows # of days between acquisition of inventory and getting your money
Remittance Advice is…
payment for invoice
When there are many small balances that need to be confirmed with only a few likely to dispute what should auditor do?
Ask for Negative Response only
What is best way for auditor to value investment by the equity method?
Examine the audited financial stmts of the investee company
If original insurance policy document is not available for plant equipment what could this mean?
There is lien on plant equipment and lien holder has issurance
Bank confirmations check for what?
Bank Balances
Contingent liabilities
Pledged Collateral
You could tell of possible kiting occurs from what bank and book disbursement and receipt dates?
If
Disbursement Date Per Bank
is in period after
Receipt Date Per Bank
How can you tell from bank and books disbursement and receipt dates IN TRANSIT items?
Disbursement Date per Books
is in period prior
Receipt Date per Bank
What should Purchasing department send to accounting department when nonconforming goods returned?
Debit Memo
Revenue cycle financial house top to bottom
FS TB GL Sales Journal SALES INVOICE BILL OF LEADING SALES ORDER Execution report Authorization of the event
Expenditure cycle financial house top to bottom
FS TB GL SL General Journal PURCHASE JOURNAL CHECK VOUCHER VENDOR INVOICE RECEIVING REPORT PURCHASE ORDER PURCHASE REQUISITION Execution event Authorization of the event
What does revenue cycle include?
sales revenue
accounts receivable
cash receipt
What does expenditure cycle include?
purchases
accounts payable
cash disbursement
What are the keywords for completeness?
CUT UP Completeness Unrecorded Trace Understatement Pre-numbered documents
What are the keywords for existence and occurrence?
VOVOC Vouch Observation Valid Overstatements Confirmations
What are the keywords for valuation, allocation and accuracy?
PPRR.... FCC Price testing Properly valued Recalculation Recomputing Fair Value Contra Accounts Credits
What are the keywords for Rights and obligations?
T-CREDD Title Canceled checks Receipts External confirmations Debt agreements Deed
What are the keywords for Classification and understandability
Properly Recorded
Properly Classified
