Ch 5 and 7 Flashcards
3 audit evidence decisions
NATURE: Which audit procedures?
EXTENT: Which items to test?
TIMING
3 categories of audit procedures
RISK ASSESSMENT: assess risk of material misstatement
TESTS OF CONTROLS
SUBSTANTIVE: detect material misstatements
Audit program
Detailed instructions for the entire collection of evidence
T or F: Sufficient appropriate evidence must be conclusive.
F. It must be persuasive.
3 characteristics of persuasive evidence
APPROPRIATE: reliable & relevant
SUFFICIENT: enough evidence
TIMELY: covering appropriate time period
6 Factors to consider when assessing reliability of evidence
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
2 most important factors in determining sample size
Auditor’s expectation of errors
Effectiveness of client’s internal controls
Timeliness of audit evidence
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
7 ways to collect audit evidence
- Inspection
- Observation
- External confirmation
- Recalculation
- Reperformance
- Analytical procedures
- Inquiry
T or F: External documents are considered more reliable than internal
True.
Vouching vs. Tracing
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
4 Types of Analytical Procedures
Compare client data with:
- Industry data
- Similar prior-period data
- Client-determined expected results
- Auditor-determined expected results
If risk is pervasive, what adjustments to audit strategy may be undertaken?
- Assign more experienced staff
- Heighten the level of professional skepticism
- Increase involvement of audit partners and managers
- Closer supervision and review
Per CAS 315.28, the auditor is required to consider… (re: significant risk)
- 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
Steps of a Fraud Risk Assessment
- DISCUSS with audit team members
- Make INQUIRIES to management, those in charge of governance, etc regarding process for identifying/responding to fraud
- Evaluate UNUSUAL/UNEXPECTED relationships
- Evaluate risk for revenue fraud and MANAGEMENT OVERRIDE
Fraud triangle
Incentives/pressures
Opportunities
Attitudes/rationalization
Audit risk
The risk that the auditor will express an inappropriate audit opinion when the financial statements are materially misstated
Detection risk
The risk that the audit evidence for an audit assertion will fail to detect misstatements
Inherent risk
The susceptibility to material misstatement
Control risk
The risk a misstatement is not prevented or detected by internal controls
Acceptable audit risk
How willing the auditor is to accept the financial statements may be materially misstated and an unqualified audit opinion has been issued.
Factors in assessing acceptable audit risk
Degree to which external users rely on statements
Likelihood client will have financial difficulties
Auditor’s evaluation of management integrity
How do auditors respond to risk?
- 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
How is risk related to materiality?
Risk is a measure of uncertainty. Materiality is a measure of size. Together they measure the uncertainty of amounts of a given magnitude.
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
(c) pre-numbered client sales invoices because it is internally generated
