Audit Lecture 4 Flashcards
When is audit evidence gathered during an audit?
The auditor gathers audit evidence when performing:
- Risk assessment procedures
- Tests of controls
- Substantive procedures
- Other audit procedures
What factors should be considered when evaluating the reliability of audit evidence?
The following factors should be considered when evaluating the reliability of audit evidence:
- The auditor’s direct personal knowledge (e.g., from observation, examination, inspection or recalculation) provides more persuasive evidence than knowledge obtained indirectly.
- Evidence obtained from independent external sources is more reliable than internally generated evidence.
- Evidence sent directly to the auditor is more valid than evidence received and held by the client.
- Internal evidence generated under strong, effective internal controls is more reliable than that generated under weak controls.
- Evidence in documentary form is more reliable than oral evidence.
- Consistency among evidence provides a greater degree of assurance.
- The accurancy and completeness of information produced by the client should be evaluated.
How is the relevance of evidence determined?
To be relevant, evidence must relate to the financial statement assertions under consideration.
PCAOB standards state that the relevance of audit evidence depends on the design and timing of the audit procedure.
What influences the auditor’s decision regarding the sufficiency of evidential matter?
- The risk of material misstatement
- The quality of audit evidence
What steps are involved when using analytical procedures for substantive testing?
The steps involved when using analytical procedures for substantive testing are as follows:
- Determine that analytical procedures are suitable for testing the assertion(s).
- Evaluate the reliability of data from which the auditor’s expectation is to be developed.
- Develop an expectation of the recorded amount.
- Compare the actual and expected amounts.
- Investigate any significant differences.
List some of the standard auditing procedures used in most audits.
[FIVE CARROT CARS]
- *F**ooting, cross-footing, and recalculation
- *I**nquiry
- *V**ouching
- *E**xamination/inspection
- *C**onfirmation
- *A**nalytical procedures
- *R**eperformance
- *R**econciliation
- *O**bservation
- *T**racing
- *C**utoff review
- *A**uditing related accounts simultaneously
- *R**epresentation letter
- *S**ubsequent events review
What should the direction of testing be if the auditor is concerned about the existence or occurrence assertion?
Vouching backwards from the accounting records (financial statements, journal entries, etc.) to source documents provides evidence of existence or occurrence.
What should the direction of testing be if the auditor is concerned about the completeness assertion?
Tracing forward from source documents to the accounting records (i.e., financial statements, journal entries, etc.) provides evidence of completeness.
Which departments are responsible for preparing the sales order, approving the sales order, preparing the bill of lading, and preparing the invoice?
Sales department: Prepares the sales order
Credit department: Approves the sales order
Shipping department: Prepares the bill of lading
Billing department: Prepares the invoice
Which department should approve write-offs of uncollectible accounts?
The treasurer’s department should approve all write-offs of uncollectible accounts.
A listing of cash receipts should be sent to which three departments?
The cashier, accounts receivable (billing), and general accounting departments should each receive a copy of the cash receipts listing.
What are some common audit procedures related to the revenue cycle?
Audit procedures related to the revenue cycle might include:
- Trace a sample of shipping documents to sales invoices and the sales journal (completeness).
- Vouch a sample of sales transactions from the sales journal to the shipping documents (existence).
- Examine sales transactions from shortly before year-end for recording in the proper period (cutoff).
- Confirmation of a sample of accounts receivable (existence).
- Testing of the allowance for uncollectible accounts (valuation).
Compare and contrast positive, negative, and blank confirmations.
Positive confirmation:
Customer is requested to return confirmation to the auditor.
Should be used when: accounts are large, errors are expected, or items are disputed.
Negative confirmation:
Customer is required to reply only if amount stated by the auditor is incorrect.
Should be used when: combined assessed level of inherent risk and control risk is low, a large number of small balances is being confirmed, and recipients are not expected to disregard the confirmations.
Blank confirmation:
A positive confirmation that does not include a balance, instead requesting the recipient to provide this information. Blank confirmations provide greater assurance but may result in lower response rates.
In a purchase transaction, which departments are responsible for preparing the purchase order, preparing the receiving report, recording the payable, approving the invoice, signing the check, and mailing the check?
Purchasing department: Prepares the purchase order
Receiving department: Preparing the receiving report
Accounts payable department: Records the payable and approves the invoice
Treasurer’s department: Signs and mails the check
What documents should be compared before an invoice is approved for payment, and why?
The purchase order, receiving report, and vendor invoice should be compared before an invoice is approved for payment. This is to ensure that the company does not pay for goods that are not ordered or that were ordered but not received.
What are some common audit procedures related to the expenditure cycle?
Audit procedures related to the expenditure cycle might include:
- Performing a search for unrecorded liabilities (completeness).
- Accounts payable confirmations (existence).
- Examination of purchases before and after year-end for recording in the proper period (cutoff).
Describe the procedures performed when an auditor is searching for unrecorded accounts payable.
The auditor should select cash disbursements made subsequent to year-end and examine supporting documentation (e.g., receiving reports, vendor invoices, etc.). The auditor is looking for items that should have been recorded at the balance sheet date, but were not.
Note: Cash disbursements made subsequent to year-end may be identified by reviewing the cash disbursements journal, subsequent bank statements, or the voucher register.
When might accounts payable confirmations be used, and to whom would they be sent?
Accounts payable confirmations might be used when:
- Internal control is weak.
- There are disputed amounts.
- Monthly vendor statements are not available.
They would be sent to vendors with small or zero balances, because errors often involve unrecorded liabilities.
Note: Confirmation of recorded accounts payable will not provide evidence regarding unrecorded liabilities, but confirmations sent to vendors with zero (or small) balances might provide such evidence.
Define lapping.
Delaying the recording of cash receipts to conceal the theft of cash.
