Chapter 4 Flashcards
What are analytical procedures?
Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor
What is the hierarchy of audit evidence?
- A: The auditor’s direct, personal knowledge (obtained through observation, examination, inspection, or recalculation)
- E: External Evidence
- I: Internal Evidence
- O: Oral Evidence
What procedure most effectively reduces attestation risk?
Examination of evidence (evidence obtained directly from the client, through physical examination).
The decision about whether or not an auditor should use analytical procedures as substantive tests is based of off…?
It’s based in part on the availability, reliability, and precision of the data used to develop expectations
How does an auditor audit the statement of cash flows?
By reconciling the amounts included in the statement of cash flows to the other financial statements’ balances and amounts
What two things does an auditor usually confirm together?
Cash in the bank and collateral for loans. The AICPA Bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank
How is investment income from dividends recalculated?
By comparing recorded income with dividend record books produced by investment advisory services such as “Moody’s Dividend Record”. These books state the dividend that was declared and paid by the investee
Why does an auditor review repair and maintenance expense accounts?
They are testing for completeness of asset additions (the auditor is looking for items recorded as repairs and maintenance that would more properly have been capitalized as betterment of an asset).
What is a reasonable test?
In a reasonable test, data in two or more fields are checked for consistency. Comparing overtime hours in the current period to the prior period in one type of reasonableness test
What happens in a search for unrecorded disposals?
the auditor would vouch a sample of assets on the property ledger to those on hand at the client facility
What is an auditors responsibility with regard to fair value?
The auditor’s overall responsibility is to obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP
When an auditor is evaluating the reasonableness of an accounting estimate, what step is first?
First obtain an understanding of how management developed it’s estimate
When analytical procedures are formed in the review stage and indicate that several accounts have unexpected relationships, what is the next step?
Additional tests of detail are required
What are the objectives of analytical procedures used in the review stage of an audit?
To assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. They are also used to consider the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning an audit, and to identify unusual or unexpected balances or relationships that were not previously identified
What is the difference between the sufficiency and reliability of audit evidence?
Sufficiency: refers to the amount of corroborated evidence obtained
Reliability: quality of evidence (which is enhanced by a satisfactory system of internal control)
