Audit Evidence Ivory Book Tidrick Flashcards
What is the performance principle?
To obtain reasonable assurance, which is a high, but not absolute, level of assurance.
The auditor plans the work and properly supervises any assistants.
Determines and applies appropriate materiality level or levels throughout the audit.
Identifies and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and tis environment, including the entity’s internal control.
Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.
What is the definition of audit evidence?
All the info used by the auditor in arriving at the conclusions on which the audit opinion is based and includes the info contained in the accounting records underlying the FSs and other info.
What is included in audit evidence?
Accounting records and other info (such as minutes of meetings, confirmations, industry analysts’ reports.
What does “sufficient” mean?
Refers tot the quantity of evidence that is needed
how much evidence is required for a reasonable basis for an opinion?
That depends on the quality of the evidential matter. The quantity of evidence required is directly related to the risk of misstatement (the greater the risk, the more evidence is needed) and inversely related to the quality of evidence (the higher the quality, the less evidence is needed).
What does “appropriate” mean?
Refers to the quality of the evidence that is available (where quality consists of relevance and reliability).
What is the rank of reliability?
Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly of inference.
Evidence is more reliable when obtained from independent (knowledgeable) sources outside the entity.
Evidence generated internally is more reliable when the related controls are effective.
Evidence is more reliable when it exists in documentary form.
Evidence provided by original documents is more reliable than evidence based on photocopies/faxes.
what does substantive mean?
Means to verify. Searching for material misstatements.
What is audit risk?
Probability that auditor fails to modify opinion on F/Ss that are materially misstated.
Describe detection risk?
Detection risk is the only component within the auditor’s direct influence and which is essentially “set” by specifying the nature, timing, and extent of the auditor’s substantive audit procedures.
Describe nature, timing and extent:
Nature: What specific procedures should the auditor perform? These procedures should be responsive to the planned level of detection risk and consist of 1)test od details and 2) substantive analytical procedures.
Timing: When should the auditor perform the procedures, at an “interim” date (before the books are closed) or at “final” (after the books are “‘closed”, that is, at or after the BS date.
Extent: What size should the auditor’s samples be? (since the work is performed on a “test basis”, should the sample sizes be relatively large, or can small sample sized be justified.
What is the menu of specific substantive audit procedures?
Inspection of records/documents Inspection of tangible assets Observation Inquiry confirmation Recalculation Reperformance Analytical procedures
What are the main 5 assertions?
Presentation and disclosure Existence or occurrence Rights and obligations Completeness Valuation or allocation
What are the 2 categories of substantive audit procedures?
Test of details
Analytical procedures
What is tests of details?
These procedures indicate that the entity’s recorded FS items are fairly state or not.
Tests of ending balances
Tests of transactions
what are analytical procedures?
Evaluations of financial info through analysis of plausible relationships among both financial and nonfinancial data. it involves analyzing trends and interrelationships- the key is developing a meaningful expectation to compare to the entity’s recorded amount.
Analytical procedures serve 3 distinct purposes:
As a tool for planning
As substantive evidence
As a final review to assess appropriateness of conclusions
Analytical procedures are required when?
Required in audit planning and as a final review.
Not required as substantive evidence when used during fieldwork.
What are 4 important liquidity ratios?
Working Capital=CA-CL Current Ratio=CA/CL Quick Ratio (acid-test ratio)=(cash+marketable securities+A/R)/current liabilities Current cash to debt ratio=net cash from operations/average current liabilities
What are the 5 activity ratios?
Asset Turnover=net sales/average total assets
Receivable turnover=net(credit)sales/average trade receivable (net)
Number of days sales in receivables=365 days/receivable turnover
Inventory turnover=COGS/Average inventory
number of days sales in inventory=365 days/inventory turnover.
To test completeness, you start at
Source documents
Audit documentations is often referred to as?
Working papers
what is the purpose of audit documentation?
provides the principal support for the auditor’s report (including procedures performed and conclusions reached)
AICPA’s standard on “audit documentation” requires that the audit documentation be understandable for:
Audit documentation should permit an experienced auditor without prior connection to the audit to understand the work done.
What should be the report release date?
defined as the date the auditor grants the entity permission to use the auditor’s report.