Chapter 11: Audit Evidence and Common Audit Procedures Flashcards
What is the objective of an audit?
To test the validity of management’s assertions
What is audit evidence?
any information acquired by the auditors that provides an indication as to the validity of one or more of management’s assertions
What does audit evidence need to be to effectively test the validity of management’s assertions?
sufficient and competent
What is sufficiency?
amount of audit evidence needed to provide a reasonable basis for an auditor’s opinion, auditor’s need to have enough audit evidence to provide a reasonable basis for their opinion as to the validity of management’s assertions
What does the amount of audit evidence that is considered sufficient depend on?
the competency of the obtained audit evidence
What is competency?
information quality of audit evidence
What is competency a function of?
relevance and reliability
What is relevance?
whether evidence provides an indication as to the validity of one or more of management’s assertions
What is reliability?
likely accuracy of information provided by the evidence
What factors affect the reliability of audit evidence?
1) Independence of the provider, 2) Degree of auditor’s direct observation, 3) Qualifications of the provider, 4) Degree of objectivity, 5) Quality of information system that produces the audit evidence
Why is the independence of the provider important?
independent source less likely to intentionally mislead the auditors than a source that has an interest in the outcome of the audit
When is audit evidence considered independent?
when it is provided by an external third party who has a business relationship with or has relevant information about the audited company but who does not have a significant interest in the outcome of the audit
When is audit evidence considered objective?
when it is not subject to interpretation
What are the most common audit procedures?
1) Observation, 2) Physical Examination, 3) Client Inquiry, 4) Confirmation, 5) Reperformance/Recalculation, 6) Inspection of Source Documents and Records, 7) Analytical Procedures
What is observation?
physical observation of various client activities and is primarily used to test internal controls, moderately reliable
What is physical examination?
auditors physically examining tangible assets and is relevant to the existence and completeness assertions, considered reliable
How do you test the existence assertion of physical examination?
auditors select sample test items from accounting records and then go physically examine actual asset to ensure it exists
How do you test the completeness assertion of physical examination?
auditors select their sample test items from the actual assets and then inspect accounting records to make sure the selected items are recorded
What is client inquiry?
asking the clients questions, relevant to any account and assertion and not considered reliable because do not come from independent source
What is confirmation?
hard copy letters that are sent to independent third parties to confirm or help corroborate one or more assertions, considered reliable
What do confirmations primarily do?
test the existence assertion for assets and completeness assertion for liabilities
What are the limitations for confirmations?
responses might not be accurate so auditors should consider reliability of respondent, response rates can be low and necessitate alternative procedures
What is reperformance and recalculation?
testing mathematical accuracy of client’s work, highly reliable and used to test all accounts
What is the inspection of source documents and records testing?
to make sure that accounting records are supported by source documents and that information in accounting records is consistent with information presented in source documents, moderately reliable
What are the two procedures of inspecting source documents and records?
Vouching and Tracing
What is vouching?
involves first selecting specific ledger or journal entries and then inspecting source documents that support entry, test occurrence assertion
What is tracing?
selecting test transactions from available source documents and then following transaction through to accounting records to make sure were properly recorded, test completeness assertion
What increases the reliability of source documents?
originate at an external independent source
What decreases the reliability of source documents?
in client’s custody at some pint and subject to tampering
What are analytical procedures?
auditors use knowledge of client’s operations, industry and environment to develop expectations regarding account balance in F/S, expectations then compared to amounts actually reported in unaudited financial F/S to determine whether amount seems reasonable, moderately reliable
What does the reliability of analytical procedures vary based on?
auditor’s understanding of company and auditors’ ability to accurately develop specific expectations for account balances
