Audit 4 - Audit Evidence Flashcards
Competence of Evidential Matter -
Competence of Evidential Matter - When internal controls are effective, the client’s data is more COMPETENT so the auditor can obtain more assurance about the accounting data and financial statements.
Competence of Evidential Matter -
Competence of Evidential Matter - The auditor’s direct personal knowledge is the most competent form of evidence. The competence of evidence relates to information that is both inside and outside the company.
A standard bank Confirmation requests info…
Confirmation - A standard bank confirmation requests information about the cash held in the bank and whether any collateral has been pledged for loans on the same form.
Inside Audit Evidence / Shipping Docs and Receiving Reports
Inside Audit Evidence - Shipping documents and receiving reports are client-generated audit evidence, whereas customer POs/bank statements are generated by the banks and client, bills of lading/AR confirms are generated by the shipper and banks, and vendor invoices/packing slips are generated by suppliers.
Audit Evidence/Fraud Risk Factor
Audit Evidence/Fraud Risk Factor - When original documents are not available to the auditor, there is always the risk that copies provided have been altered in some way that would be obvious if the auditor had access to the originals.
Audit Evidence/Fraud Risk Factor -
Audit Evidence/Fraud Risk Factor - When original documents are altered, such as a photocopy of vendor invoices, this represents a fraud risk factor and would require the auditor to respond by applying audit procedures to those transactions for which original documents were not available.
Audit Evidence/Fraud Risk Factor -
Audit Evidence/Fraud Risk Factor - When there is the possibility of fraud, it is not sufficient to simply trace payments to invoices or consider transactions with that vendor as exceptions. The auditor should respond by reevaluating the risk of fraud, and design alternate tests for the related transactions.
Detection Risk can be reduced when…
Detection Risk - Detection risk can be reduced when the auditor enhances some combination of the nature, timing, and extent of substantive testing, which comprise relevent assertions.
Detection Risk - The more substantive testing done…
Detection Risk - The more substantive testing performed, or the more reliable the evidence derived from substantive testing, the lower the assessment of detection risk.
Inherent Risk define…
Inherent Risk - Inherent risk is the risk that an item will be misstated if there are no controls in place, which is beyond the control of both the auditor and the client.
Control Risk define
Control Risk - Control risk is the risk that existing controls will neither prevent nor detect and correct misstatements on a timely basis.
Control Risk can be affected by…
Control Risk - Control risk can be affected by the client’s actions in relation to the enhancement or enforcement of internal control, but is beyond the control of the auditor.
Risk of Material Misstatement
Risk of Material Misstatement - RMM is comprised of inherent risk and control risk, both of which are outside the control of the auditor, making RMM beyond the auditor’s control.
Management representation letter
Management representation letter - Includes a statement indicating management’s disclosure of all known instances of non-compliance with laws and regulations.
Report on Internal Control / Management Assertion
Report on Internal Control - A report on internal control will provide information about the results of the auditor’s study of internal controls and tests of controls, not management’s assertions.
Special Report -
Special Report - is used when an auditor is performing an engagement other than an audit of a complete set financial statements prepared in accordance with US GAAP, and would not refer to communications from regulatory agencies.
Letter for underwriters -
Letter for underwriters - is a report on a nonissuer’s financial statements tha tis included ina registration statement filed with the SEC.
Audit Testing -
Audit Testing - When auditing from the GL balances, the adjusted trial balance, or GJE, the auditor is only evaluating transations that have been recorded, which will not assist the auditor in determining if all transactions have been recorded.
Audit Testing
Audit Testing - In order to determine if all transactions have been recorded, the auditor will audit from the transaction, which will be evidenced by the original source documents, and trace them to the accounting records, thereby making certain that the transactions have been recorded.
Valuation / Foreign Currency
Valuation - The fact that a company has significant amounts of cash in the form of foreign currency would raise the inherent risk of which management assertion of VALUATION.
Quick Ratio
Quick Ratio - The quick ration, whcih is the ratio of current liquid assets to total current liabilities provides information abou the resources that are immediately available to cover current obligations.
Earnings per share -
Earnings per share - Provides information about hte amount of net income earned per share.
Gross Profit Margin -
Gross Profit Margin - GPM indicates how much sales generate toward covering expenses and profits.
Asset Turnover
Asset Turnover - The ratio of sales to assets, the asset turnover ratio, shows how efficiently assets are used to generate sales.
Analytical procedures -
Analytical procedures - applied in the overall review of an audit are designed to give the auditor sufficient appropriate audit evidence to support the opinion.,
Analytical procedures -
Analytical procedures - involve comparing the F/S info to the auditor’s perceptiosn of the entity to determine fi they seem to fairly reflect financial position, results of operations, and cash flows…to determine if additional evidence is necesssary
Review -
Review - A review of working papers, not analytical procedures, will inform the auditor if necessary procedures were ommited.
Periodic/Cycle Counts
Periodic/Cycle Counts - Periodic or cycle counts of selected inventory are made at various times during the year rather than a single inventory count at year end.
Periodic/Cycle Counts -
Periodic/Cycle Counts - By maintaining perpetual records, the entity and the audtor can periodically compare physical counts to verify the accuracy of records. As a result, an auditor can observe inventory counts at interim dates.
Periodic/Cycle Counts
Periodic/Cycle Counts - If perpetual records are not maintained, an auditor would not be able to determine if inventory is fairly stated as of a balance sheet date without having observed a count at or near that date.
AR Cutoff Testing -
AR Cutoff Testing - An auditor tests a client’s sales cut-off by examining transactions within a reasonable period both before and after the end fo the period to make certain that transactions were recorded in the appropriate periods. Such a test would be used to determine if sales at year end were unrecorded.
AR Cutoff Testing -
AR Cutoff Testing - An auditor’s review of a client’s sales cut-off would most likely detect…Unrecorded sales at year end (and not excessive write-offs of AR, which would show up in GJEs).
A standard bank Confirmation will provide…
Confirmation - A standard bank confirmation will provide information about balances in deposit accounts and balances of outstanding loans as of the balance sheet date.
A standard bank Confirmation will provide…
Confirmation - A standard bank confirmation will provide information about arrangements related to compensating balances and collateral for loans.
Confirmation / Inactive Accounts
Confirmation - A standard bank confirmation DOES NOT ordinarily provide information about the dates on which INACTIVE accounts were closed.
Balance Confirmation -
Balance Confirmation - A list of invoices providing details of account balances, such as a client-prepared statement, will make it easier for customers to verify amounts on confirmations and increase the likelihood that customers will respond.
Balance Confirmation / List of Invoices
Balance Confirmation - Including a list of items or invoices making up an account balance reduces the amount of effort a customer will have to apply to respond to the confirmation, increasing the likelihood that it will be responded to.
Incremental Audit Risk -
Incremental Audit Risk - Before applyng principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should…assess the difficulty in controlling the incremental audit risk.
Incremental Audit Risk / Test of Accounts
Incremental Audit Risk - Whenever tests of accounts are performed at an interim period, there is the risk that transactions between the date of the test and the end fo the period may be handled inappropriately, whcih would not be detected in the interim test. In order for interim testing to be acceptable, the auditor should be confident of being able to control the incremental risk.
Confirmations/ AR balances
Confirmations - It would be appropriate to use confirmations to confirm AR balances with customers, inventories on hand with warehouses, and loan terms and amounts with lenders since these all represent transactions with parties that are separate from the entity being audited.
Confirmations / Major Transactions
Confirmations - Authorization of major transactions will generally be verified through aa review of minutes of board of direct meetings, not by sending confirmations to directors.
Confirmations /Existence of AR
Confirmations - When the auditor does not receive a reply from a confirmation for year-end balances, the EXISTENCE of AR must still be established, requiring alternative procedures such as reviewing cash received after (not prior to) year-end and the related shipping documentation to verify the goods were sold before year-end.
Confirmations / No Reply of Positive
Confirmations - When an auditor does not receiveve replies to POSITIVE confirmation requests for year end AR confirmations, the auditor most likely would…Ask the client to contact the customers to request that the confirmations be returned.
Confirm Existence / Interest & Dividends
Existence - Since interest and dividends will only be received if the entity actually holds investments investments in receivables and equity securities, reconciling interest and dividends will provide EXISTENCE evidence as to whether amounts are reasonable based on the entity’s holdings supporting management’s assertion that the investment exists.
Valuation / Investee Accounts
Valuation - Comparing recorded amounts with published market value information and reviewing financial statements of investees accounting for under the equity method will provide evidence about valuation and allocation.
Existence / Collateral
Existence - Collateral arrangements from bank confirmations will will NOT generally provide sufficient evidence regarding EXISTENCE unless all investments are pledged as collateral for loans with the confirmation institution.
Existence /LT Investments
Existence - In establishing the existence and ownership of long-term investments in the form of publicly-traded stock, an auditor most likely would inspect the securities or confirm the number of shares owned that are held by an independent custodian.
Existence / Dividend Income
Existence - Analytical procedures related to the dividend income will NOT provide evidence that the investments were not sold prior to the end of the period.
Existence/.Valuation
Existence/.Valuation - A test to make certain that transfers of investments have been properly recorded would provide the auditor with evidence that investments are properly presented and that the amount is correct, supporting the assertions of presentation/disclosure and valuation/allocation.
Valuation/Allocation
Valuation/Allocation - Inventory is generally required to be reported at the lower of cost or market.
Valuation/Allocation
Valuation/Allocation - To obtain evidence as to whether or not inventory is valued properly, the auditor will seek evidence about the cost, which can be obtained from purchase documents, and the market, which is replacement cost, subject to upper and lower limitations, referred to as ceiling and floor.
Existence / PPE
Existence - Inspecting new additions to PP&E give the auditor evidence that the assets actually exist. To determine if they are properly presented and disclosed, the auditor would trace amounts to the financail statements and the footnotes.
Cash Disbursements
Cash Disbursements - To determine if cash payments were made for legitimate purposes, the auditor would select from the population of payments from teh cash disbursements journal, and trce them to supporting documjents.
Cash Disbursements / Destroyed Docs
Cash Disbursements - To determine if cash payments were made for legitimate purposes, the auditor would not find fraudulent transactions selecting from a population of approved vouchers, receiving reports, or vendors’ invoices since all of them can be destroyed.
Payroll /Vouching
Payroll - When vouching data from payroll entries to the employee’s time card, the auditor is verifying that the proper number of hours worked was recorded.
Working Trial Balance
Working Trial Balance - An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for…Reclassifications and adjustments.
Working Trial Balance
Working Trial Balance - When the audit adjustmes are added or subtracted from the pre-audit amounts, the sum is placed in a column for audited amounts, which are then cross-referenced to the F/S.
Engagement Letter -
Engagement Letter - In establishing an understanding with the client, the auditor includes a provision that the prevention and detection of fraud are responsibilities of management, not the auditor.
Engagement Letter -
Engagement Letter - In establishing an understanding with the client, the auditor indicates that the audit provides REASONABLE ASSURANCE, NOT ABSOLUTE, about F/S being free from material misstatements due to error or fraud and it is possible that both will not be detected.
Auditor Documentation -
Auditor Documentation - An auditor’s documentation provides evidence of the work performed, the evidence evaluated, and the conclusions drawn.
Auditor Documentation
Auditor Documentation - In reviewing an auditor’s documentation, a supervisor or manager will review the audit program, analytics performed, and the adjusted trial balance.
Auditor Documentation
Auditor Documentation - An auditor’s documentation should allow a person unfamiliar with the audit to reach the same conclusions reached by teh auditor who performed the audit.
Auditor Documentation
Auditor Documentation - Working papers include the audit program or audit plan indicating work performed, analytical procedures performed demonstrating evidence gathered, and the adjusted trial balance demonstrating agreement with the financial statements.
Remote (Slight chance)
Remote (Slight chance) - Do not disclose nor accrue if it is remote.
Reaonably Possible
Reaonably Possible - Only disclose but do not accrue.
Probable (Most likely) -
Probable (Most likely) - An entity is required to recognize a LOSS if it is probable and estimable, but is only required to disclose if it is reasonably possible.
Probable (Most likely)
Probable (Most likely) - Only contingent losses, not contingent gains, are recognized as an adjustment, even if probable.
Probale (Most likely)
Probale (Most likely) - A contingnent liability that is not estimable should only be disclosed but not accrued.
Ommitted Procedures -
Ommitted Procedures - If ommitted procedures are discovered, assess the importance of the ommitted procedures to support the opinion.
Ommitted Procedures -
Ommitted Procedures - When the auditor becomes aware, after the issuance of the auditor’s report, of a necessary audit procedure, the first step the auditor will take will be to determine if the report can be supported by the amount of appropropriate audit evidence obtained. If so, no further action is required.
Ommitted Procedures -
Ommitted Procedures - If ommitted procedures discovered after the issuance of the auditor’s report affects the auditor’s opinion, the auditor may inquire as to whether there are parties relying on the F/S, as the performance of the procedure may not be necessary.
Ommitted Procedures - .
Ommitted Procedures - If there are entity’s relying on the opinion, the auditor may performa a procedure if practicable.
Ommitted Procedures -
Ommitted Procedures - Taking no addtional action would be inappropriate if ommitted procedures are discovered.
Estimates
Estimates - The auditor’s primary concern in relation to estimates is that they are reasonable under the circumstances.
Estimates - .
Estimates - If estimates are not prepared in a satisfactory control environment, the auditor will be more conscientious in applying substantive tests to obtain evidence supporting the estimate.
Estimates
Estimates - Estimates will not necessarily conform to industry guidelines as the client may not be typical of entities in the industry or special circumstances may apply to the entity.
Estimates
Estimates - Estimates cannot always be derived from verifiable objective assumption and when they are not, the auditor will be more careful in making certain they appear reasonable.
Specialists
Specialists - When using the work of a specialist, the auditor should obtain a sufficient understanding of the field of expertise of the specialist to enable the auditor to determine the nature, scope, and objectives of the work of the auditor’s specialists, and evaluat the adequacy of the work fo rthe auditor’s purpose. Client consent is not required, nor is independence.
Internal Auditor -
Internal Auditor - The organizational level to which an internal auditor reports is a factor affecting the internal auditor’s objectivity, but not competence.
Internal Auditor / Competence
Internal Auditor - Factors affecting competence, which is the ability of the internal auditor to perform the task effectively, include education expereince, and professional certifications.
Internal Auditor / Existence
Internal Auditor - An auditor may rely on the assistance of the internal auditor for tasks that do not require judgment, such as determining if assets exists, which does not require judgment.
Internal Auditor / Judgement
Internal Auditor - Determining if something is properly reported, such as properly reporting inventory at lower of cost or market, REQUIRES JUDGMENT and would therefore NOT BE APPROPRIATE task for the internal auditor.
Ommitted Procedures / Alternative Procedures
Ommitted Procedures - Upon learning that a necessary audit procedure was not performed, the auditor will first try to determine if the financial statements, and the auditor’s report, can still be relied upon. This can be accomplished by performing alternate procedures to the extent possible.
Ommitted Procedures / Relied Upon Report
Ommitted Procedures - If the auditor determines that the report should not be relied upon, the next course of action may involve 1) having the the entity communicate to users that the report should not be relied upon, 2) advising the client to disclose it in a subsequent report that may be imminent, or 3) having the entity revise the financial statements.
Ommitted Procedures / Reissue
Ommitted Procedures - Upon learning that a necessary audit procedure was not performed, the auditor should NOT reissue the report with a paragraph explaining the departure.
