Chapter 10 -- Evidence -- Objectives and Nature Flashcards
Section 10.1: Nature, Sufficiency, and Appropriateness
What is the primary purpose of audit procedures?
- To gather evidence used by the auditor in drawing the conclusions on which the auditor’s opinion is based
- It includes the information contained in the accounting records and sources of information other than accounting records
Section 10.1: Nature, Sufficiency, and Appropriateness
What is the best way to test for unrecorded entries in the general ledger?
Vouching from the ledger to the source documentation
Section 10.1: Nature, Sufficiency, and Appropriateness
What is the most effective technique that provides an auditor with the most assurance about the effectiveness of the operation of a control?
Observation of client personnel
Section 10.1: Nature, Sufficiency, and Appropriateness
What are non-accounting sources of evidence that the auditor may use in an audit?
- Minutes of meetings
- External confirmations
- Analysts’ reports
- Comparable data about competitors
- Information obtained by the auditor from inquiries, observation, inspection, recalculation, reperformance, and analytical procedures
Section 10.1: Nature, Sufficiency, and Appropriateness
What are substantive procedures?
- Substantive procedures are used to detect material misstatements at the relevant assertion level.
- They include tests of details and substantive analytical procedures.
Section 10.1: Nature, Sufficiency, and Appropriateness
What terms identify audit evidence?
- Sufficient
- Appropriate
- Persuasiveness
Section 10.1: Nature, Sufficiency, and Appropriateness
What is the strongest criticism of the reliability of audit evidence that the auditor physically observes?
- The auditor may not be qualified to evaluate the items they are observing
- The auditor typically uses the work of an auditor’s specialist.
- Observation does not verify the cost or ownership of assets.
- Observation is best suited to verifying the existence of an asset
Section 10.1: Nature, Sufficiency, and Appropriateness
What is the reason to test of occurrence?
- To detect overstatements that may have been made
- Occurrence is performed by vouching
Section 10.1: Nature, Sufficiency, and Appropriateness
What is not a valid reason for an auditor to omit a procedure?
- Difficulty and cost involved in testing a particular item
- Difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test
Section 10.2: External Confirmations
Why are negative confirmations not used more often?
- Unreturned negative confirmation requests rarely provide significant evidence about assertions other than certain aspects of existence.
- Unreturned negative confirmations do not provide explicit evidence that the intended parties received the requests and verified the information provided.
Section 10.2: External Confirmations
When should negative confirmations be used?
- When the acceptable audit risk is high
- A small number of accounts may be in dispute
- When many small balances are involved
- The assessed risk of material misstatement is low
- A very low exception rate is expected
- The auditor has no reason to believe that the recipients of the requests are unlikely to consider them
- The auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls
Section 10.2: External Confirmations
When should an auditor consider confirming a large, complex transaction?
- The assessed RMM is high
- The auditor should consider confirming the terms of the transaction with the third parties in addition to examining documents
Section 10.2: External Confirmations
What two assertions are used when performing external confirmations?
- Rights and Obligations
- Existence
Section 10.3: Audit Documentation
What is one of the requirements for audit documentation?
- Significant audit findings or issues to be documented include findings that could result in modification of the report.
- The primary source of evidence should be documented at the time the procedures are performed.
- Oral explanation should not be the primary source of evidence.
Section 10.3: Audit Documentation
What audit documentation is required under PCAOB standards?
Audit documentation should:
* Demonstrate that the engagement complied with PCAOB standards
* Support the basis for conclusions about all relevant assertions
* Demonstrate that the accounting records agree or reconcile with the financial statements.
Section 10.3: Audit Documentation
What factors most likely affects an auditor’s judgment about the nature and extent of the auditor’s audit documentation?
- Risks of material misstatement
- Extent of judgment involved in performing the work and evaluating the results
- Nature of the auditing procedures
- Significance of the evidence obtained
- Nature and extent of exceptions identified
- Need to document a conclusion or the basis for a conclusion not readily determinable from other documentation of the work
- Size and complexity of the entity
- Audit methods.
Section 10.3: Audit Documentation
Why do the income statement accounts have less significance when reviewing a predecessor auditor’s documenation?
They do not have beginning balances because the income statement accounts are closed every year to the retained earnings account.
Section 10.3: Audit Documentation
What are lead schedules in audit documentation?
- Lead schedules are summaries of detailed schedules.
- To create these summaries, general ledger information is needed.
- A lead schedule contains the detailed accounts from the general ledger making up the line item total.
Section 10.3: Audit Documentation
What is the purpose of audit documentation?
Audit documentation should be designed to meet the cicumstances of the engagement, and should provide:
* A sufficient and appropriate record of the basis for the auditor’s report
* Evidence that the audit was planned and performed in accordance with GAAS
Section 10.4: The Computer as an Audit Tool
What is specialized audit software?
- Specialized audit software is written to fulfill a specific set of audit tasks.
- The purposes and users of the software are well defined before the software is written.
Section 10.4: The Computer as an Audit Tool
Why do auditor’s develop specialized software?
- Unavailability of alternative software
- Functional limitations of alternative software
- Efficiency considerations
- Increased understanding of systems
- Opportunity for easy implementation
- Increased auditor independence and prestige
Section 10.4: The Computer as an Audit Tool
What are the two requirements crucial to achieving audit efficiency and effectiveness with a personal computer?
- The appropriate audit tasks for personal computer applications
- The appropriate software to perform the selected audit tasks
Section 10.4: The Computer as an Audit Tool
What is the purpose of using generalized audit software?
Generalized audit software is useful for both tests of controls and substantive procedures.
Section 10.4: The Computer as an Audit Tool
What audit tasks are peformed when using generalized audit software?
- Sampling and selecting items
- Testing extensions, footings, and calculations
- Examining records
- Summarizing and sorting data
- Performing analytical procedures.
