Audit Evidence - Concepts Standards

Question 1

When unexpected differences occur

Answer 1

• Analytical procedures result in further investigation when unexpected differences occur.
• This investigation will generally involve substantive procedures of details of transactions and balances.

Question 2

Analytical Procedures Definded

Answer 2

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data

Question 3

Attribute sampling

Answer 3

• Tests of controls utilize attribute sampling.
• Attribute sampling is based on the binomial distribution which describes yes/no decisions, and error/non-error situations

Question 4

When auditing a firm with a transfer agent what is the most efficient approach for an auditor to obtain information about the transfer agent’s internal control?

Answer 4

• If the transfer agent is operating as a service organization, when a service organization is involved and is to be relied upon, the most efficient approach is for an auditor to obtain that organization’s service auditor report on its internal control.
• In this situation a “type 2” report will provide information on both the suitability of design control and control operating effectiveness.
• A “type 1” report only addresses suitability of design.

Question 5

Audit Plan vs Audit Program

Answer 5

Audit Plan refers to the scheme formulated by the auditor that comprises of strategy or approach, that is followed for carrying out audit.

An audit program implies a range of verification procedures, which are applied to the final accounts, to acquire audit evidence, and thus helping auditor in providing an informed opinion.

Question 6

What is a bond sinking fund?

Answer 6

• A bond sinking fund is a restricted asset of a corporation that was required to set aside money for redeeming or buying back some of its bonds payable.
• The bond sinking fund begins when the corporation deposits money with an independent trustee.
• The trustee then invests the money in order for the balance in the sinking fund to increase.
• The balance in the sinking fund will also grow from additional required deposits made by the corporation.
• The bond sinking fund decreases when the trustee purchases or redeems the corporation’s bonds.

Question 7

Channel stuffing

Answer 7

Channel stuffing is a marketing practice that suppliers sometimes use to boost sales by inducing distributors to buy substantially more inventory than they can promptly resell; accordingly, increased sales returns in the future are likely

Question 8

Completeness

Answer 8

• Assertions about completeness deal with whether all transactions and accounts that should be in the financial statements are included.

For example, management asserts that all purchases of goods and services are included in the financial statements. Similarly, management asserts that notes payable in the balance sheet include all such obligations of the entity.

Question 9

What is meant by Dual Date the audit report

Answer 9

If a major event comes to the auditor’s attention between the report date and issuance of the report, the financial statements may include the event as an adjustment or disclosure. The auditor dual dates the audit report (as of the end of workpaper review, except footnote XX, which is dated later).

Question 10

Precision - allowance for sampling risk

Answer 10

• Precision (the allowance for sampling risk) is used to construct an interval around the sample results in which the true population characteristic is expected to lie.
• Accordingly, possible error in either direction from the sample results is considered

Question 11

Search for unrecorded liabilities:

Answer 11

• The search for unrecorded liabilities is performed near the completion of the audit to determine that proper cutoffs have been made and to give the auditor additional information in his/her evaluations of account balances as of the balance sheet date.
• One of the principal procedures used to accomplish this objective is the examination of a sample of cash disbursements in the period subsequent to year-end.
  
  • This examination will allow the auditor to see if any cash disbursements are made for liabilities which were unrecorded in the previous year

Question 12

Sequential sampling

Answer 12

• Sequential sampling results in the selection of a sample in several steps, with each step conditional on the result of the previous steps.
• Therefore, sample size will vary depending upon the number of stages that prove necessary.
• Statistical sampling plans do not use a fixed sample size for tests of controls.

Question 13

Define Tracing

Answer 13

• Tracing looks at a financial document and traces the path of that document all the way to the financial statements.
• Tracing goes towards the financial statements.
• Tracing provides evidence for completeness.

Question 14

Define Vouching

Answer 14

• Vouching starts with a number on the financial statement and then you find the original document that supports that number.
• Vouching goes away from the financial statements.
• Vouching provides evidence for occurrence