Chapter 15 - Audit Evidence Flashcards
This PSA explains what constitutes audit evidence in an audit of financial statements, and deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion
PSA 500 “Audit Evidence”
Is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes both information contained in the accounting records underlying the financial statements and other information
Audit evidence
True or False:
Auditors are expected to address all information that may exist.
False.
Is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based
Appropriateness (of Audit evidence)
Is the measure of the quantity of audit evidence.
Sufficiency (of audit evidence)
The quantity of the audit evidence needed is affected by the auditor’s assessment of the ____________________ and also by the ______________ of such audit evidence.
risks of material misstatement; quality
The ultimate goal of an audit
To express an opinion as to whether the financial statements are presented fairly in accordance with financial reporting standards.
Assertions used by the auditor fall into the following categories (3):
- Assertions about classes of transactions and events for the period under audit
- Assertions about account balances at the period end
- Assertions about presentation and disclosure
Assertions about classes of transactions and events for the period under audit (5)
- Occurrence
- Completeness
- Accuracy
- Cutoff
- Classification
Assertions about account balances at the period end (4):
- Existence
- Rights and obligations
- Completeness
- Valuation and allocation
Assertions about presentation and disclosure (4):
- Occurrence and rights and obligations
- Completeness
- Classification and understandability
- Accuracy and valuation
Determination as to whether evidential matter is valid or competent for audit purposes rests on the auditor’s __________________ giving regard to the pertinence, objectivity, and timeliness of the evidence, and to the existence of other evidential matter corroborating the conclusion to which it leads
Professional judgement
Is responsible for the preparation of the financial statements based upon the accounting records of the entity.
Management
True or False:
Accounting records alone provide sufficient audit evidence on which to base an audit opinion on the financial statements.
False.
The auditor needs to obtain other audit evidence.
Other information that the auditor may use as audit evidence includes: (5)
- Minutes of meetings
- Confirmations from third parties
- Analysts’ reports
- Information obtained by the auditor from audit procedures (inquiry, observation, inspection)
- Other information developed by, or available to, the auditor
The auditor should obtain _________________ to be able to draw reasonable conclusions on which to base the audit opinion
Sufficient appropriate evidence
True or False:
Ordinarily, the auditor finds it necessary to rely on audit evidence that is persuasive rather than conclusive.
True.
True or False:
Conclusions can be reached about an account balance, class of transactions or control by way of using judgemental or statistical sampling procedures.
True.
The aspects of the accounting and internal control systems about which the auditor would obtain audit evidence are:
- Design (the accounting and internal control systems are suitably designed to prevent and/or detect and correct material misstatements)
- Operation (the system exist and have operated effectively throughout the relevant period)
The reliability of audit evidence is influenced by its source: ________ or ________, and by its nature: ________, __________, or ___________.
internal, external;
visual, documentary, oral
True or False:
Audit evidence is more reliable when it is obtained from independent sources outside the entity.
True.
True or False:
Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective.
True.
True or False:
Audit evidence obtained indirectly or by inference is just as reliable as audit evidence obtained directly by the auditor.
False.
Audit evidence obtained directly by the auditor is more reliable.
True or False:
Audit evidence is more reliable when it exists in documentary form.
True.
True or False:
Audit evidence provided by original documents is equally reliable as audit evidence provided by photocopies or facsimiles.
False.
Original documents are more reliable.
Audit evidence is more persuasive when it s of evidence from different sources or of different name are __________
Consistent
When audit evidence obtained from one source is inconsistent with that obtained from another, the auditor ________________
Determines what additional procedures are necessary to resolve the inconsistency
True or False:
The auditor needs to consider the relationship between cost of obtaining audit evidence and the usefulness of the information obtained. Therefore, difficulty and expense involved is in itself a valid basis for omitting a necessary procedure.
False.
While the first sentence is true, the matter of difficulty and expense are not a valid basis is for omitting a necessary procedure.
True or False:
The auditor may have to express a qualified opinion or disclaimer of opinion if he is unable to gather sufficient appropriate audit evidence on a material financial statement assertion in which there is substantial doubt
True
Refers to the trustworthiness or believability of evidence
Competence or appropriateness of evidence
Factors that determine the competence of evidence are (4):
- Relevance of the evidence to the particular assertion being tested
- Objectivity of the evidence
- Qualifications of the provider of the evidence
- Timeliness of the evidence
True or False.
Evidence can be objective or subjective.
True.
True or False:
In general, the more objective the evidence, the more reliable and competent it is.
True.
True or False:
The more subjective the evidence, the more important the auditor’s experience in evaluating it.
True.
True or False:
Evidence an auditor obtains directly through his or her own work is more reliable than information obtained through the work of others.
True.
True or False:
Evidence about a year-end account balance provides more evidence about a year-end balance than does evidence gathered about the balance at another date.
True.
The hierarchy of evidential matter, form strongest to weakest (5):
- Auditor’s direct, personal knowledge, physical observation, and mathematical computations
- External evidence
- External-Internal evidence
- Internal evidence
- Verbal and written confirmation
True or False:
The concept of appropriateness recognises that the accumulation of evidence should be persuasive rather than convincing.
False.
It is the concept of sufficient that is being described in the sentence, not appropriateness.
In exercising professional judgement to determine the extent of tests necessary to obtain sufficient evidence, auditors consider both the ______________ as well as ______________ of the item. (2)
materiality; relative risk
The auditor obtains audit evidence by one more of the following procedures: (6)
- Inspection
- Observation
- Inquiry and confirmation
- Recalculation
- Reperformance
- Analytical procedures
Involves the examination of records, documents, or tangible assets.
Inspection
Is the auditor’s examination of the client’s documents and records to substantiate the information that is or should be included in the financial statement.
Documentation aka Vouching
Is one that has been prepared and used within the client’s organisation and is retained without its ever going to an outside party such as a customer or vendor.
Internal document
Is one that has been in the hands of someone outside the client’s organisation who is a party to the transaction being documented but which is either currently in the hands of the client or readily accessible.
External document
______________ or ________________ of tangible assets provides reliable audit evidence with respect to their existence but not necessarily as to their ownership or value.
Inspection; physical examination
a specific type of inquiry; is the process of obtaining representation of information or of an existing condition directly form a third party.
Confirmation
_________ describes the receipt of a written response form an independent third party, in a paper form, or by electronic or other medium, verifying the accuracy of information that was requested by the auditor.
External confirmation
In the confirmation of account balances, the auditor may use the (2)
- Positive form of confirmation
2. Negative form of confirmation
Asks the respondent to reply to the auditor in all cases either by indicating the responded’s agreement with the given information, or by asking the respondent to fill in information
Positive external confirmation request
Asks the respondent to reply only in the event of disagreement with the information provided in the request.
Negative external confirmation request
True or False:
The use of negative confirmation requests ordinarily provides more reliable evidence than the use of positive confirmation requests.
False.
Positive confirmation requests are more reliable.
Negative confirmation requests may be used to reduce audit risk to an acceptable level when:
(a) the assessed level of inherent and control risk is _______;
(b) a large number of ____________ balances;
(c) a substantial number of errors is ___________;
(d) the auditor has no reason to believe that respondents will ___________ these requests.
(a) low
(b) small
(c) not expected
(d) disregard
Involves seeking information both financial and nonfinancial of knowledgeable persons inside or outside the entity;
Is the obtaining of written or oral information from the client in response to questions from the auditor.
Inquiry
True or False:
Evidence obtained from the client through inquiry usually can be considered conclusive.
False.
It usually cannot be conclusive because it is not from an independent source and may be biased in the client’s favour.
Are necessary information that the auditor requires in connection with the audit of the entity’s financial statements.
Written representations
True or False:
Although written representations provide necessary audit evidence, they do not provide sufficient appropriate evidence on their own about any of the matters with which they deal.
True.
Consists of looking at a process or procedure being performed by others.
Observation
Consists of checking the mathematical accuracy of source documents and accounting records or of performing independent calculations.
Recalculation
Recalculation can be performed through the use of information technology, for example, by obtaining an electronic file from the entity and using _____ to check the accuracy of the summarisation of the file
CAATs (Computer-Assisted Auditing Techniques)
Involves rechecking a sample of computations and transfers of information made by the client during the period under audit.
Testing of mechanical accuracy
Is the auditor’s independent executing or procedures or controls that were originally performed as part of the entity’s internal control either manually or through the use of CAATs
Reperformance
Consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. It also encompasses the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.
Analytical procedures
15 most commonly used audit procedures to gather audit evidence
- Analyse 6. Extent 11. Reconcile
- Compare 7. Foot 12. Test
- Confirm 8. Inspect 13. Trace
- Count 9. Interrelate 14. Verify
- Examine 10. Obseve 15. Vouch
To identify and classify items for further study
Analyse
To observe similarities and differences between related items
Compare
To communicate with outside parties to authenticate internal evidence
Confirm
To enumerate a characteristic
Count
To review critically
Examine
To multiply
Extend
To add a column
Foot
To scrutinise or critically examine a document
Inspect
To show relationship
Interrelate
To watch or test a client
Observe
To establish agreement between separate sources of information
Reconcile
To sample
Test
To follow a transaction through the steps of the system
Trace
To prove accuracy of numbers or existence of amount
Verify
To prove accuracy of accounting entries by tracing to supporting documents
Vouch
Means an approximation of the amount of an item in the absence of a precise means of measurement
Accounting estimate
Refers to the client entity and any other party with which the client may deal where one party has the ability to influence the other to the extent that one party to the transaction may not pursue its own separate interests
Related parties
Is any transaction between the company and these parties (except for normal compensation arrangements, expense allowances, and similar transactions arising in the ordinary course of the business).
Related party transaction
True or False:
A list of all known related parties should be prepared at the beginning of the audit so that the audit staff may be alert for related party transactions throughout the engagement
True.
