Ch 5 and 7 Flashcards

1
Q

3 audit evidence decisions

A

NATURE: Which audit procedures?
EXTENT: Which items to test?
TIMING

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2
Q

3 categories of audit procedures

A

RISK ASSESSMENT: assess risk of material misstatement
TESTS OF CONTROLS
SUBSTANTIVE: detect material misstatements

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3
Q

Audit program

A

Detailed instructions for the entire collection of evidence

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4
Q

T or F: Sufficient appropriate evidence must be conclusive.

A

F. It must be persuasive.

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5
Q

3 characteristics of persuasive evidence

A

APPROPRIATE: reliable & relevant
SUFFICIENT: enough evidence
TIMELY: covering appropriate time period

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6
Q

6 Factors to consider when assessing reliability of evidence

A

In general, the reliability of audit evidence increases when it is obtained:
(1) Directly by the auditor
(2) From an independent source
(3) From a qualified source
(4) From consistent multiple sources
(5) If the client’s internal controls are effective
and also note that (6) objective evidence is more reliable than subjective evidence

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7
Q

2 most important factors in determining sample size

A

Auditor’s expectation of errors

Effectiveness of client’s internal controls

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8
Q

Timeliness of audit evidence

A

SFP accounts: obtained as close to the balance sheet date as possible

SCI accounts: covers the entire period rather than only a part of the period

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9
Q

7 ways to collect audit evidence

A
  1. Inspection
  2. Observation
  3. External confirmation
  4. Recalculation
  5. Reperformance
  6. Analytical procedures
  7. Inquiry
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10
Q

T or F: External documents are considered more reliable than internal

A

True.

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11
Q

Vouching vs. Tracing

A

Vouching: use of documentation to support recorded transactions/amounts
Tracing: use of documentation to determine if transactions or amounts are included in the accounting records

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12
Q

4 Types of Analytical Procedures

A

Compare client data with:

  • Industry data
  • Similar prior-period data
  • Client-determined expected results
  • Auditor-determined expected results
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13
Q

If risk is pervasive, what adjustments to audit strategy may be undertaken?

A
  • Assign more experienced staff
  • Heighten the level of professional skepticism
  • Increase involvement of audit partners and managers
  • Closer supervision and review
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14
Q

Per CAS 315.28, the auditor is required to consider… (re: significant risk)

A
  • risk of fraud
  • risk related to key economic, accounting, or other developments
  • complexity of transactions
  • significant related party transactions
  • degree of subjectivity in the measurement of financial information
  • significant transactions outside the normal course of business
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15
Q

Steps of a Fraud Risk Assessment

A
  1. DISCUSS with audit team members
  2. Make INQUIRIES to management, those in charge of governance, etc regarding process for identifying/responding to fraud
  3. Evaluate UNUSUAL/UNEXPECTED relationships
  4. Evaluate risk for revenue fraud and MANAGEMENT OVERRIDE
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16
Q

Fraud triangle

A

Incentives/pressures
Opportunities
Attitudes/rationalization

17
Q

Audit risk

A

The risk that the auditor will express an inappropriate audit opinion when the financial statements are materially misstated

18
Q

Detection risk

A

The risk that the audit evidence for an audit assertion will fail to detect misstatements

19
Q

Inherent risk

A

The susceptibility to material misstatement

20
Q

Control risk

A

The risk a misstatement is not prevented or detected by internal controls

21
Q

Acceptable audit risk

A

How willing the auditor is to accept the financial statements may be materially misstated and an unqualified audit opinion has been issued.

22
Q

Factors in assessing acceptable audit risk

A

Degree to which external users rely on statements
Likelihood client will have financial difficulties
Auditor’s evaluation of management integrity

23
Q

How do auditors respond to risk?

A
  • Changing the nature and extent of testing and types of audit procedures, including unpredictability
  • Assigning more experienced staff to the audit
  • Review the engagement more carefully than usual
24
Q

How is risk related to materiality?

A

Risk is a measure of uncertainty. Materiality is a measure of size. Together they measure the uncertainty of amounts of a given magnitude.

25
Q

Which of the following is the least persuasive evidence?

(a) bank statement obtained from client
(b) computations made by auditor
(c) pre-numbered client sales invoices
(d) a vendor’s invoice

A

(c) pre-numbered client sales invoices because it is internally generated