Chapt 7 Types of Audit Evidence Flashcards
why is documentation widely used as evidence in audits?
becuase it is usually readily availabe at a relatively low cost
why is observation rarely sufficent by itself?
because of the risk of personnel changing their behavior because of the auditors presence
what is the broad category of evidence “confirmation”?
describes the receipt of a direct written response from a third party verifying the accuracy of info that was requested by the auditor
Would using confirmation for an extraordinarily large sales transaction recorded 3 days before year end be appropriate?
it could be
rechecking a sample of calculations made by the client is what category of evidence?
recalculation
physical examination evidence is most often associated with what? What is it also applicable to?
inventory and cash verification of securities, notes receivable, and tangible fixed assets
What are the assets often confirmed? (7)
- Cash in bank 2. Marketable securities 3. A/R 4. N/R 5. Owned inventory out on consignment 6. Inventory held in public warehouses 7. Cash surrender value of life insurance
evaluations of financial info through analysis of plausible relationships among financial and nonfinancial data is what type of evidence?
analytical procedures
what is one possible reason for the unusual fluctuation?
the presence of an accounting misstatement
although auditors should consider the reliability of documentation, they rarely verify what?
the authenticity of documentation
observation provides evidence about the perfornace of a process or procedure but what is its limiation?
it is limited to the point in time at whcih the observation takes place
each of the 8 types of evidence has the potential to be what (2)?
relevant and timely
what is the distinction in auditing between the inspection or physical examination of assets such as marketable securities and cash and the inspection of documents such as cancelled checks and sales documents?
if the object being examined, like a sales invoice, has no inherent value, the evidence being inspected is called documentation
what is the broad category of evidence “observation”?
looking at a process or procedure being performed by others
looking at a process or procedure being performed by others is what category of evidence
observation
why is a large volume of inspection evidence usually avialable?
because each transaction in the clients organization is normally supported by at least one document
when auditors use documentation to support recorded transactions or amounts, the process is called?
vouching
generally, physical examination is an objective means of ascertaining what? (2)
- the quantity of the asset 2. the description of the asset
auditors independent tests of client accounting procedures or controls that were originally done as part of the entitys accounting and internal control system is what type of evidence
reperformance
why are confimations not ordinarily used to verify individual transactions between organizations such as sales transactions?
because the auditor can use documents for that purpose
what does compute mean?
a calculation done by the auditor independent of the client
the auditors examination of the clients documents and records to substantiate the info that is, or should be , included in the FSs is what type of evidence category?
inspection
what two types of evidence are likely to be highly reliable if the internal controls are effective?
physical examination and recalculation
what is the only account that requires confirmation as the type of audit evidence?
A/R
what are the 2 most expensive types of evidence?
physical examination and confirmation
what is vouching?
when auditors use documentation to support recorded transactions or amounts
what is the broad category of evidence “inquiry”?
the obtaining of written or oral info from the client in response to questions from the auditor
what type of document has been prepared and used within the clients organization and is retained without ever going to an outside party
internal document
Auditors decide whether or not to use confirmations depending on the _____ needs of the situation as well as the _____ evidence available
reliability alternative
unusual fluctuations occur when? (2)
- significant differences are not expected but exist 2. significant differences are expected but dont exist
what does trace mean?
an instruction normally associated with inspection or reperformance. the instruciton should state what the auditor is tracing and where it is being traced from and to. often an audit procedure that includes the term trace will also include a second instruction such as compare or recalculate
significant unexpected differences between the current years unaudited financial data and other data used in comparisions
unusual fluctuations
if the auditor traces from recieving reports to the acquistions journal to satisfy the completeness objective, the process is called?
tracing
What is considered one of the most reliable and useful types of audit evidence?
physical examination
what type of document has been handled by someone outside the clients organization who is a party to the transaction being documented, but that is either currently held by the client or readily accessible?
external document
when substantive analytical procedures can be performed, the procedure constitutes what?
substantive evidence in support of the related account balances
what does an auditor consider if the document is internal when deciding if it is reliable evidence?
whether it was created and processed under conditions of effective internal control
what does extending invoices mean?
to take the amount and multiply by price to make sure it is correct
what does examine mean?
a reasonably detailed study of a document or record to determine specific facts about it
observation is particularly usfule in evaluating the effectivenss of client procedures in what?
counting inventory
each of the 8 types of evidence has the potential to be relevant and timely depending on what?
its source and when the eividence is obtained
What are liabilities often confirmed (5)
- A/P 2. N/P 3. Advances from customers 4. Mortgages payable 5. Bonds payable
if the unusual fluctuation is large, what must the auditor do?
determine the reason and be satisfied that the cause is a valid economic event and not a misstatment
In deciding which audit procedures to use, the auditor can choose from 8 broad categories of evidence which are called types of evidence. what are they?
- Physical examiniation 2. confirmation 3. inspection 4. analytical procedures 5. Inquires of the client 6. Recalculation 7. Reperformance 8. Observation
documents can be classified in what 2 ways
internal and external
physical examination is a direct means of what?
verifying that an asset actually exists (existence object)
what does read mean?
an exam of written info to determine facts pertinent to the audit
when the audito obtains evidence through inquiry, it is normally necessary to alos do what?
obtain corroborating evidence through other procedures
the inspection or count by the auditor of a tangible asset is what broad category of evidence?
physical examination
Why are confirmations not used in every instance in which they are applicable?
because they are relatively costly to obtain and may cause some inconvenience to those asked to supply them
what broad category of evidence describes the receipt of a direct written response from a third party verifying the accuracy of info that was requested by the auditor
confirmation
what does compare mean?
a comparison of info in 2 different locations.
why is physical examination costly?
requires auditors presence when the client is counting the asset often on the B/S date
observation is nornmally done ____ with other audit procedures
concurrently
what is the broad category of evidence “reperformance”?
auditors independent tests of client accounting procedures or controls that were originally done as part of the entitys accounting and internal control system ex. compare price on an invoice to an approved price list or reperfrom the aging of A/R. ex. rechecking transfersw of info by tracing info included in more than once place to verify that it is recorded at the same amount each time
why is confirmation costly?
auditor must follow careful procedures in the confirmation preparation, transmital, receipt, and in the follow up of nonresponses and exceptions
what does scan mean?
a less detailed examn of a document or record to determine whether there is something unusual about it to further investigatw
T/F Confirmation of A/R is not required by international auditing standards
T
analytical procedures are used extensively in practice and are required during what phases on all audits?
planning and completion phases
what is the broad category of evidence “analytical procedures”?
evaluations of financial info through analysis of plausible relationships among financial and nonfinancial data
why are external documents considerre more reliable evidence than internal ones?
because external documents have been in the hands of both the client and another party to the transaction so there is some indication that both members are in agreement about the info and the conditions stated on the document
what does recompute mean?
a calculations doen to determine whether a clients calculation is correct
the obtaining of written or oral info from the client in response to questions from the auditor is what category of evidence
inquiry
T/F Proper valuation for FS purposes usually can’t be determined by physical examination (accuracy and realizable value objectives)
T
what is the p[rimary determinant of the auditors willingness to accept a document as reliable evidence?
whether it is internal or external
What part of Owners Equity is often confirmed?
Shares outstanding
When practical and reasonable, U.S. auditing standards require the confirmation of a sample of what? why?
A/R because A/R usually represent a significant balance on the FSs and confirmations are a highly reliable type of evidence
which evidence alone is usually not sufficient to provide appropriate evidence to satisy any audit objective
inquiry
physical examination is not sufficient evidence to verify what?
that existing assets are owned by the client (rights and obligations objective)
what is the broad category of evidence “inspection”?
the auditors examination of the clients documents and records to substantiate the info that is, or should be , included in the FSs
what is the broad category of evidence “ physical examination “
the inspection or count by the auditor of a tangible asset
T/F AICPA and PCAOB auditing standards refer to inspection of physical assets and inspection of documents as one type of evidence
T
what are the purpose of conducting analytical procedures in which the current years unaudited info is compared with prior years audited info or industry data?
- understanding the clinets industry and business….because it will highlight changes that can represent important trends or specific events that will influence the audit planning as it points to things to audit more closely 2. its a usefule indicator for determining whether the client has financial problems which can affect the aduit plan and indicate substantial doubt about their ability to continue as a going concern 3. it can indicate the presence of possible misstaements in the FSs- unusual fluctuations 4. it can be used to provide evidence supporting recorded account balances
what does foot mean?
addition of a column of numbers to determine whetther the total is the same as the clients
Auditing standards provide general guidance in what 3 categories?
- Qualifications and conduct 2. Reporting 3. Evidence accumulation
in some cases, physical examination can be a useful method for evaluating an asset’s what? (2)
condition or quality
what does count mean?
a dermination of assets on hand at a given time. only used with physical examination
when can substantive analyutical procedures be performed?
when a predictable relationship exists and the procedure is based on reliable inputs
the documents examined or inspected by the audito are the records used by the client to do what?
provide info for conducting its business in an organized manner
what is tracing?
f the auditor traces from recieving reports to the acquistions journal to satisfy the completeness objective
T/F Because confirmations come from 3rd party sources instead of the client, they are a highly regarded and often used type of evidence
T
what are unusual fluctuations?
significant unexpected differences between the current years unaudited financial data and other data used in comparisions
the effectiveness of a clients internal controls has signifcant influence on the ____ of most types of evidence
reliability
what are the 3 least costly types of evidence?
observations, inquiry, and recalculation
what is the broad category of evidence “recalculation”?
rechecking a sample of calculations made by the client
confirmations are seldom used in the audit of fixed asset additions. Why?
they can be verified adequately by inspection and physical examination
