Audit Evidence - Concepts

Question 1

What is the Audit Process?

Question 2

What are tests of details?

Answer 2

relatively precise (but usually rather expensive, labor-intensive) procedures (that suggest whether the client’s recorded amounts are right or not).

• Tests of Ending Balances : Verifying the client’s recorded amounts by directly testing the composition making up the ending account balance.
• Tests of Transactions: Verifying the client’s recorded amounts by testing those relative few debits and credits (the transactions) that caused the account balance to change from last year’s audited balance to this year’s recorded balance.

Question 3

What are Analytical Procedures?

Answer 3

(Also called tests of reasonableness) evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

3 purposes

• useful as a risk assessment procedure for planning purposes
• useful (but not required) as a form of substantive evidence (and, in this context, are referred to as “substantive analytical procedures”)
• required to perform analytical procedures as near the end of the audit to assist the auditor when forming an overall conclusion about the financial statements.

Question 4

The effectiveness and efficiency of substantive analytical procedures depend on… (4 things)

Answer 4

1. Nature of the assertion
   
   1. effective in testing for omissions of transactions (completeness)
2. Plauibility and predictability of the relationship
   
   1. must develop meaningful relationship between auditor’s expectation and the client’s recorded balance.
3. Availablity and reliability of data used
   
   1. more reliable when
      
      1. obtained from independent party
      2. when it is subject to auditor testing (current or past)
      3. developed under conditions of effective internal control
4. Precision of the expectation
   
   1. stratify the data to get a better prediction

Question 5

What are the substantive tests that are most often performed?

Answer 5

Trace (or Vouch)
Reconcile
Analytical Procedures
Confirmations
Examine evidence that supports management assertions.

(T.R.A.C.E.)

Question 6

How is the Current Ratio calculated?

Answer 6

Current Ratio = Current Assets / Current Liabilities

Question 7

How is the Quick Ratio calculated?

Answer 7

Quick Ratio = Liquid Assets / Current Liabilities

Question 8

How is the Asset Turnover calculated?

Answer 8

Asset Turnover = Net Sales / Average Assets

Question 9

How is the Inventory Turnover calculated?

Answer 9

Inventory Turnover = COGS / Average Inventory

Question 10

How is Gross Margin % calculated?

Answer 10

Gross Margin % = Gross Margin / Sales

Question 11

What type of testing are ratios?

Answer 11

Ratios are Analytical Procedures

Question 12

What type of procedure is a Budget vs. Actual comparison?

Answer 12

Budget vs. Actual comparisons are Analytical Procedures.

Question 13

List Common Types of Analytical Procedures

Answer 13

Ratio analysis

Budget vs. Actual comparison

Comparison of data between years

Use of non-financial data to predict expected values for financial data

Question 14

What are the assertions related to account balances?

Answer 14

1. Existence
2. Completeness - no omissions.
3. Rights and obligations – entity holds or controls the rights, restrictions on the rights must be disclosed.
4. Valuation and allocation – appropriate amounts (relative to the requirements of GAAP)

Question 15

What are the assertions related to Presentation and Disclosure?

Answer 15

1. Occurrence and rights and obligations - disclosed events and transactions have occurred and pertain to the entity.
2. Completeness - all disclosures that should have been included have been included.
3. Classification and understandability - financial information is appropriately presented, described, and clearly expressed.
4. Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts.

Question 16

What are the assertions about “classes of transactions and events during the period”?

Answer 16

1. Accuracy - amounts and other data recorded appropriately.
2. Occurrence - properly recorded and valid.
3. Completeness - no omissions.
4. Cutoff - transactions and events have been recorded in the correct accounting period :prematurely (“occurrence”), and belatedly (“completeness”)
5. Classification - transactions and events have been recorded in the proper accounts.