Chapter 4 Flashcards
What does sufficiency mean in terms of audit evidence?
Sufficiency is the extent of testing
What does appropriateness mean in terms of audit evidence?
Appropriateness relates to the nature of evidence.
What does relevance mean in terms of audit evidence?
It means that evidence provides support of a relevant assertion
What are the different levels of reliable audit evidence?
- Evidence obtained directly by the auditor (most reliable)
- Evidence obtained from outside the client
- Evidence that originated from outside the client, but was obtained from inside the client
- Evidence generated internally (least reliable)
What are management’s assertions that are represented in the financial statements?
Completeness
Ocurrence
Cutoff
Accuracy
Classification
Understandibility
Rights and obligations
Valuation
Existence
COCA-CURVE
What are the two categories of substantive tests?
Tests of details and analytical procedures
What are the different types of audit procedures?
Inquiry
Confirmation
Observation
Recalculation
Reperformance
Inspection of tangible assets
Inspection/examination of records or documents
Analytical procedures
What is tracing and what assertion is it associated with?
Going from the source documents to the books.
It is associated with completeness
What is vouching and what assertion is it associated with?
Going from the books to the source documents
Associated with existence/occurrence
When is it required to perform analytical procedures? When is is it optional?
During the planning phase and during the overall review phase, it is required
During substantive testing it is optional
What are the five basic types of comparisons?
Client vs industry
Related accounts
Actual vs budget
Financial vs nonfinancial
This year vs prior year
CRAFT
Are relationships between income statement accounts or balance sheet accounts more predictable?
Income statement accounts
What are the two audit approaches in terms of testing?
Test of balances: Used for the balance sheet. Many transactions, small dollar amounts
Test of transactions: Used for the income statement. Few transactions, large dollar amounts.
What is kiting?
A special type of fraud used by management to overstate cash and cash equivalent’s at the end of a period.
Company transfers cash from one account to another, but recognizes the increase in cash during the current period and the decrease in cash in the subsequent period.
What is a type of evidence required to be obtained for receivables?
External confirmations
What is a negative confirmation and what type of evidence does it provide?
A confirmation in which the customer is only asked to respond if the amount is incorrect
Provides implicit evidence
What is a positive confirmation and what type of evidence does it provide?
A confirmation that asks the customer to verify the correctness of the amount on the confirmation
Provides explicit evidence
What is a blank confirmation?
Special type of positive confirmation that requires to customer to provide an amount without being told what it is
What is lapping?
Attempt to cover theft of receivables collection by posting collection from one customer to a different customer’s account.
What is an audit program?
Step-by-step list of audit procedures that emphasizes account balances
REQUIRED for every GAAS audit
What are the steps to drafting an audit program/plan?
- Identify a material class of transaction
- Identify the relevant assertions
- Identify all control activities that pertain to the relevant assertion. Evaluate if they are sufficient at preventing, detecting, or correcting a material misstatement.
- Decide on procedure of procedures that will provide sufficient appropriate evidence for the assertion.
- Evaluate whether evidence obtained supports one or more assertions or a different one.
- Prepare uditor programs with a lower risk on an incremental basis
How long is the documentation completion period for audit documentation for a non-public company?
60 days following the report release date
How long does the documentation retention period last for a non-public company?
At least 5 years from report release date
Who owns audit documentation?
The auditor and it is confidential
What are exceptions to confidentiality of audit documentation?
Valid subpoena
IRS admin subpoena
Court order
Quality control peer review
What is an engagement completion document?
Document that identifies all significant findings and issues and is sufficiently specific for a review to obtain a thorough understanding.
Required for public company audits
How long is the documentation completion period for a public company?
45 days from the report release date
How long is the document retention period for a public company?
7 years
What does management say it is responsible for in a management/client representation letter?
Preparation and fair presentation of the financial statements according to the applicable financial reporting framework
Design, implementation, and maintenance of internal controls relevant to the prep and fair presentation of financial statements
What is one representation management CANNOT make in the management rep letter?
CANNOT claim that there have been no errors or fraud committed by employees. Can only say they were unaware or have committed no fraud themselves.
What information is in an attorney’s letter to the auditor?
Info on litigation, claims, and assessments to corroborate with management’s info.
