Audit Evidence Ivory Book Tidrick

Question 1

What is the performance principle?

Answer 1

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.

Question 2

What is the definition of audit evidence?

Answer 2

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.

Question 3

What is included in audit evidence?

Answer 3

Accounting records and other info (such as minutes of meetings, confirmations, industry analysts’ reports.

Question 4

What does “sufficient” mean?

Answer 4

Refers tot the quantity of evidence that is needed

Question 5

how much evidence is required for a reasonable basis for an opinion?

Answer 5

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).

Question 6

What does “appropriate” mean?

Answer 6

Refers to the quality of the evidence that is available (where quality consists of relevance and reliability).

Question 7

What is the rank of reliability?

Answer 7

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.

Question 8

what does substantive mean?

Answer 8

Means to verify. Searching for material misstatements.

Question 9

What is audit risk?

Answer 9

Probability that auditor fails to modify opinion on F/Ss that are materially misstated.

Question 10

Describe detection risk?

Answer 10

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.

Question 11

Describe nature, timing and extent:

Answer 11

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.

Question 12

What is the menu of specific substantive audit procedures?

Answer 12

Inspection of records/documents
Inspection of tangible assets
 Observation
Inquiry
confirmation
Recalculation
Reperformance
Analytical procedures

Question 13

What are the main 5 assertions?

Answer 13

Presentation and disclosure
Existence or occurrence
Rights and obligations
Completeness
Valuation or allocation

Question 14

What are the 2 categories of substantive audit procedures?

Answer 14

Test of details

Analytical procedures

Question 15

What is tests of details?

Answer 15

These procedures indicate that the entity’s recorded FS items are fairly state or not.
Tests of ending balances
Tests of transactions

Question 16

what are analytical procedures?

Answer 16

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.

Question 17

Analytical procedures serve 3 distinct purposes:

Answer 17

As a tool for planning
As substantive evidence
As a final review to assess appropriateness of conclusions

Question 18

Analytical procedures are required when?

Answer 18

Required in audit planning and as a final review.

Not required as substantive evidence when used during fieldwork.

Question 19

What are 4 important liquidity ratios?

Answer 19

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

Question 20

What are the 5 activity ratios?

Answer 20

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.

Question 21

To test completeness, you start at

Answer 21

Source documents

Question 22

Audit documentations is often referred to as?

Answer 22

Working papers

Question 23

what is the purpose of audit documentation?

Answer 23

provides the principal support for the auditor’s report (including procedures performed and conclusions reached)

Question 24

AICPA’s standard on “audit documentation” requires that the audit documentation be understandable for:

Answer 24

Audit documentation should permit an experienced auditor without prior connection to the audit to understand the work done.

Question 25

What should be the report release date?

Answer 25

defined as the date the auditor grants the entity permission to use the auditor’s report.

Question 26

What are the document completion date for nonissuers and issuers?

Answer 26

The auditor should complete the assembly of the final audit file no later than 60 days after the “report release date” (PCAOB specifies 45 days.

Question 27

After the document completion date, is the auditor allowed to add or delete audit documentation?

Answer 27

must not delete audit documentation before the end of the retention period; may add to the documentation but must document the changes made, by whom, when, reasons for the change, and the effect on the auditor’s conclusions.

Question 28

What is included in a permanent file?

Answer 28

description of client’s inducsty, brief history of client, and a description of the client’s facilities. important legal documents, long tem contracts, leases, labor contract,

Question 29

Current year’s audit files would include?

Answer 29

audit plan, memoranda, confirmations, attorney letters, analyses and schedules.

Question 30

What is a lead schedule?

Answer 30

The audit working paper that reflects the major components of an amount reported in the FSs.

Question 31

confirmation is what kind of auditing procedure?

Answer 31

Substantive auditing procedure

Question 32

What are the 2 types of confirmation requests?

Answer 32

Positive and negative

Question 33

Describe positive confirmation:

Answer 33

Where a response is required whether or not the other party agrees with the client’s recorded amount. Requires second (or possibly third) requests to follow up for non responses. if no response is obtained, the auditor must perform “alternate procedures”

Question 34

Describe negative confirmation:

Answer 34

Where a response is only requested if the recipient disagrees with the stated amount. Usually requires a larger sample size than would positive confirmations.

Question 35

In what situations may an auditor justify using negative confirmations?

Answer 35

there is a large number of small accounts
Control risk is assessed as low (that is, IC is effective
the recipients are expected to be attentive to the request and respond if warranted.

Question 36

What is the auditor’s objective in regards to estimates?

Answer 36

The auditor’s objective is to evaluate the reasonableness of any such estimates relative to the requirements of GAAP.

Question 37

What might an auditor do to obtain an understanding of how the estimate was made?

Answer 37

Inquire of appropriate personnel to obtain an understanding of how management developed the estimate
Review and test the process used by management
Develop an independent expectation for corroboration
Review subsequent events for additional evidence regarding estimates.

Question 38

When obtaining the lawyer letter, send a “letter of inquiry” to those lawyers who have rendered litigation related services. What is the primary purpose?

Answer 38

the primary purpose of the lawyer’s letter is to corroborate management’s responses to the auditor’s inquiries.

Question 39

If there is a limitation in the lawyer’s response, it is a:

Answer 39

scope limitation sufficient to prevent issuing an unqualified opinion.

Question 40

The primary source of info to be reported about litigation, claims, and assessments is the:

Answer 40

Client’s management.

Question 41

If management is unwilling to sign the representations letter it would be considered a:

Answer 41

scope limitation

Question 42

What should be the date of the management rep letter?

Answer 42

Should be dated the same as the date of the auditor’s report.

Question 43

What are the audit procedures used to identify the existence of related parties?

Answer 43

inquire mgmt. as to any related entities
Review prior year’s working papers for continuing engagements
Inquire of the predecessor auditors
Review any applicable SEC filings which list related parties
Review stockholder listings to identify major stockholders

Question 44

If related party transactions are identified and are material, the auditor should apply any procedures deemed necessary to understand the nature of the transactions and their effect on the FS:

Answer 44

Obtain an understanding of the business purpose of the transaction
Determine whether the transaction has been authorized by those charged with governance
Evaluate the reasonableness of amounts to be disclosed.

Question 45

What are subsequent events?

Answer 45

Event occurring between the date of the FSs and the date of the auditor’s report.

Question 46

What kind of subsequent event require adjustment?

Answer 46

Where such an event provides better info about material circumstances already in existence as of the BS date
For example- a lawsuit that could only be estimated at the balance sheet date was settled for a fixed amount prior to the issuance of the audit report.

Question 47

What kind of subsequent event required disclosure only?

Answer 47

where disclosure is necessary so that the FSs will not be misleading, even though unrelated to circumstances existing at the BS date.
For example-after the BS date a tornado wiped out the company’s facilities and the company had no casualty insurance. (obviously this would be relevant to prospective investors)

Question 48

What is kiting?

Answer 48

Refers to an overstatement of the true cash balance at year end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between cash accounts.

Question 49

what is a positive confirmation?

Answer 49

Request a response whether the individual customer agrees or disagrees with the stated balance

Question 50

What is negative confirmation?

Answer 50

Request a response only if the individual customer disagrees with the stated balance.

Question 51

What happens if no response if received to a positive confirmation?

Answer 51

The auditor should send a second confirmation request, and perform alternative procedures if still no response is received.

Question 52

What would constitute as alternative procedures if no response if received to a positive confirmation?

Answer 52

Subsequent cash receipts (did they pay in Jan or Feb)

Inspect underlying documents- POs, invoice..

Question 53

What is lapping?

Answer 53

an attempt to cover up a theft of a given customer’s payment on A/R, where a clerk applies a later customer’s payment to the wrong customer’s account (repeatedly) until the scam usually ends by writing off someone’s account as uncollectible.

Question 54

If an auditor is able to verify the ending inventory but is unable to verify the beginning inventory for a first year audit, what should the auditor do?

Answer 54

The auditor may give an opinion on the BS and disclaim an opinion on the IS, statement of retained earnings, and the statement of cash flows (due to the inability to verify COGS)

Question 55

What is a hedge?

Answer 55

It is a defensive strategy designed to protect an entity against the risk of adverse price or interest-rate movements on certain of its assets, liabilities, or anticipated transactions. A hedge is used to avoid or reduce risks by creating a relationship by which losses on certain positions are expected to be counterbalanced in whole or in part by gains on separate positions in another market.

Question 56

What is credit risk?

Answer 56

Risk of loss caused by a counterparty’s failure to meet its obligation

Question 57

what is market risk?

Answer 57

adverse changes due to market forces (interest rates, currency exchange rates, price changes)

Question 58

What duties should be segregated? CAR

Answer 58

Custody
Authorization
Recording

Question 59

Why is completeness assertion is a major concern for liabilities?

Answer 59

Because management presumably may have an inventive to understate the company’s true liability position.

Question 60

When is the best time to do a search for unrecorded liabilities?

Answer 60

Towards the end of fieldwork to provide the best chance of detecting any significant unrecorded liabilities.

Question 61

What are comfort letters?

Answer 61

may help underwriters or others having a statutory due diligence defense to establish a reasonable investigation-due diligence.

Question 62

Are comfort letters filed with the SEC?

Answer 62

No, comfort letters are not required and are not filed with the SEC.

Question 63

What kind of assurance does Capsule financial info give?

Answer 63

At most, can give negative assurance; in some cases, may be required to structure comments as procedures and findings.

Question 64

What does sufficient and appropriate refer to?

Answer 64

Sufficient refers to the quantity

Appropriate refers to the quality