Audit Evidence Flashcards
The auditor’s primary concern in relation to estimates is
that they are reasonable under the circumstances
Permanent files in an auditor’s documentation will include
items that will have ongoing significance, such as debt agreements where the debt will relate to more than one period
contains docs that are useful for current and future audits, such as contractual arrangements (e.g. debt and lease agreements), articles of incorporation, analysis of capital stock and other owner equity accounts, and the documentation of the auditor’s understanding of internal controls
Current files auditor’s documentation will include
items that relate to the current period such as
lead schedules,
attorneys’ letters, and
bank statements
When an audit client is involved in related party transactions, the auditor’s primary concern is
proper disclosure and presentation
example of nonsampling risk
The auditor selecting inappropriate auditing procedures
Nonsampling risk is the risk that an auditor will draw an incorrect conclusion from an audit procedure due to a flaw in the procedure or the auditor’s interpretation of the results, which would include selecting an inappropriate audit procedure
what audit procedures is most likely to be conducted only after year-end
Evaluation of management’s adjusting journal entries to the financial statements
search for unrecorded liabilities
analytical procedure involves
comparing client data to expectations developed by the auditor for that data
actors most likely would assist an independent auditor in assessing the objectivity of the internal auditor
The organizational status of the director of internal audit will indicate who the internal auditors report to, which will affect their objectivity
getting credit approval before shipping goods
valuation OR allocation
Assessing this control is part of the auditor’s evaluation of the valuation of accounts receivable at its net realizable value
channel stuffing involves
shipping goods to customers in excess of their needs to increase amounts reported as revenues
A standard bank confirmation will provide
- information about balances in deposit accounts
- balances of outstanding loans as of the balance sheet date
- information about arrangements related to compensating balances
- collateral for loans.
Bearer bonds can be
converted into cash by anyone possessing them and, as a result, they pose a significant risk of misappropriation
Slow-moving and obsolete inventory would require inventory amounts to be reduced
affecting the valuation assertion
auditor may use internal auditors to
provide direct assistance, which may include obtaining an understanding of internal control or in performing tests of controls or tests of details, provided the auditor is satisfied as to the internal auditor’s competence and objectivity.
convincing vs persuasive audit evidence
persuasive evidence more reliable than convincing evidence
check kiting
check kiting occurs when transfers between accounts are recognized in the receiving account prior to being recognized in the disbursing account, overstating the cash balance. If deposits are overstated, as would be indicated by kiting, the average balance would seem too low for the level of activity
Kiting occurs when a deposit resulting from a transfer between two cash accounts within the same entity is recorded in an earlier period than the disbursement from the other account, resulting in an overstatement of cash
to audit: can request bank transfer schedule to show transfers in that exceed transfers out
what to do during interim period
Internal control can be tested at an interim period when controls over the remaining period are effective.
inventory may be observed and accounts receivable can be confirmed at an interim date
test depreciation expense
At a minimum, the auditor’s working papers must document
- that the financial statements agree to the records
- the audit work was supervised
- the work is sufficient to support the opinion
- provide support that a GAAS audit was performed.
Whenever using a specialist that has a relationship with the client,
there is the risk that the relationship will impair the specialist’s objectivity, causing the auditor to evaluate whether or not the findings of the specialist can be relied upon
specialist does NOT have to be independent
The auditor is not prohibited from using a client’s specialist, but must be aware of the risks
During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing
An external auditor may use the services of an internal auditor to assist with tests of controls or substantive tests provided that the external auditor believes that the internal auditor is competent and objective in performing such procedures.
which account are more predictable?
income statement accounts are more predictable than balance sheet accounts
Analytical procedures are required for
in the planning of an audit and in the evaluation of audit results
Detection risk
relates to the auditor not detecting a material misstatement in the financial statements when the financial statements are materially misstated.
Sampling risk
concerns the possibility that a statistical sample does not represent a given population.
Non-sampling risk refers to
the risk that the auditor will not evaluate a sample properly
RELY is high
RRM is LOW
Detection risk is HIGH
Substantive testing is LOW
RELY is low
RRM is HIGH
Detection risk is low
substantive testing is HIGH
assertions related to inventory (account balance)
RACE
rights and obligations
allocation and valuation
completeness
existence
The primary purpose of tests of details is to
detect material misstatements to the financial statements.
incremental risk
Applying principal substantive tests prior to the balance sheet date increases the risk that misstatements may exist at the balance sheet date that will not be detected by the auditor. This is referred to as incremental risk, which would be reduced if the amount of the year-end balances selected for interim testing were reasonably predictable.
levels of persuasiveness
- evidence obtained by auditor, direct observation (MOST)
- evidence obtained directly from outside sources
- evidence obtained from outside sources through the client
- evidence generated from client (LEAST)
risk assessment procedures
The procedures used by an auditor to obtain an understanding of a client and its environment, including its internal controls, which include inquiries, observations, and analytical procedures
substantive tests:
comparing reported balances for to auditor expectations
are used to evaluate management’s assertions that make up the financial statements
Analytical procedures
are used in the planning of an engagement to determine what areas may represent higher risk of material misstatement
when RRM is high regarding inventory
Review the client’s control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year
when RRM is low regarding inventory
Performing analytical procedures and performing physical counts throughout the year
bill of lading
is evidence of a shipment
The auditor’s working trial balance includes
reclassification and adjustments
columns for pre-audit trial balance amounts and audit adjustments. When the audit adjustments are added or subtracted from the pre-audit amounts, the sum is placed in a column for audited amounts. The audited amounts are then cross-referenced to the financial statement
what steps to do after finding out there’s subsequent events that happened after opinion was formed.
- Assess the importance of the omitted procedures to present ability to support the opinion
- inquire: are parties relying on the financial statements?
Management’s written representations are required to be presented in the form of a letter that is addressed to the
auditor
range test
A range test involves comparing an amount to a previously established range of values
A category test is used to determine
if something is properly classified
reasonable test
A comparison in one period to a comparable prior period
Lead schedules
are the working paper that reflects the major components of an amount reported in the financial statements.
Carryforward schedules,
such as depreciation schedules, show amounts from previous periods and are updated each period to reflect increments and other changes
Interbank transfer schedules are used
to reconcile balances in multiple bank accounts within the same entity and to detect kiting
Supporting schedules
provide the detail that makes up each of the major components that are indicated on the lead schedules.
Confirming authorization for major transactions with directors
verified through a review of minutes of board of director meetings
negative confirmation
customer asked to respond if amount is incorrect
no need to respond
RMM low, control risk low
positive confirmation
customer asked to verify correctness of amount
requires a response
good for large balances
RMM high, control risk high
blank confirmation
type of positive confirmation
customer asked to provide amount w/o being told value on the books
good for large balance
active account
RMM high
The assertions related to events and transactions include
completeness, cutoff, accuracy, classification, and occurrence
assertions related to account balances
RACE
right and obligation
allocation and valuation
completeness
existence
Audit documentation
aids in supervision,
provides support for the audit report, and
supports that a GAAS audit was performed
enable an experienced auditor with no previous connection to the audit to understand the nature, timing, and extent of procedures performed; the results of procedures performed and evidence obtained; and significant findings, conclusions reached, and judgments made
Tests of control
are used to determine whether or not internal controls may be relied upon
Analytical procedures performed in the review stage of an audit consist largely of
evaluating the overall financial statement presentation and comparing it to the auditor’s expectations as to financial position, results of operations, and cash flows
Analytical procedures used in planning
assist the auditor in identifying balances that represent specific risks.
Analytical procedures performed as substantive tests
gather evidence from tests of details and can be useful in the detection of fraud.
A letter for underwriters is a report
on a nonissuer’s financial statements that is included in a registration statement filed with the SEC
What is the maximum number of days in which a nonissuer’s auditor should complete the assembly of the final audit file following the report release date?
60 days
