Chapter 4 Flashcards
This type of audit evidence is among the most reliable pieces of evidence:
confirmations, because they constitute external evidence sent directly to the auditor.
Evidence that reduces attestation risk is
obtained directly by the accountant (through physical examination) and it provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical procedures.
Analytical procedures are more appropriate for
income statement accounts. Relationships involving income statement accounts tend to be more predictable than relationships involving balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts present amounts as of a point in time.
When applying analytical procedures during an audit, the best approach for developing expectations is to
identify reasonable explanations for unexpected differences before talking to management. This helps the auditor determine is management’s explanations are reasonable.
Relevance of audit evidence depends on, in part
whether the audit procedure is designed to test for an understatement or overstatement. Audit evidence relevance does not depend on the auditor’s risk assessment.
An example of a subsequent event that might require disclosure in the footnotes to the financials is
a change in capital stock that is recorded after year end.
It is unlikely that a CPA would accept a new audit engagement if inquiry
of legal counsel is not permitted. A direct letter of inquiry to the entity’s legal counsel is required, and a client refusal to permit such inquiry generally will result in a disclaimer of opinion.
The letter of inquiry to the client’s attorney is a request made by
client management, but sent directly to the auditor. Due to attorney-client privilege, the attorney would not be able to respond to such a request made by the auditor.
Inspecting evidence related to prenumbering of payroll checks would relate to which assertion?
completeness assertion.
Observing the segregation of duties concerning personnel responsibilities and payroll distribution would relate to which assertion?
occurrence assertion. The occurrence assertion as it relates to payroll transactions would correspond to determining that payroll transactions have actually occurred ( i.e., that all payroll checks were issued to valid employees for hours actually worked).
If control risk is assessed low, less substantive testing is necessary. In such an instance, substantive testing would normally be limited to analytical procedures and
recalculating year end accruals.
In auditing long-term bond payable, an auditor would most likely
compare interest expense with the bond payable amount for reasonableness. It provides evidence that all interest expense was included and that the outstanding balance of the bonds payable is reasonable, as well as providing limited evidence concerning the amortization of bond discounts or premiums.
An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to
records produced by investment services. Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services. These books state the dividend that was declared and paid by the investee.
To test the reasonableness of dividend income from investments in publicly-held companies the auditor would compute the amount that should have been received and recorded by the client by
electronically assessing the details of dividend records on the internet. This is an efficient means of verifying dividend rates for multiple investments in a short amount of time. The auditor would not confirm the details with the investee company’s’ registrar. That would be time consuming and inefficient.
If an insignificant portion of a client’s inventory is in a public warehouse, evidence of the existence of this merchandise can most efficiently be acquired through
confirmation of such inventory. The auditor does not have to observe the physical count for insignificant inventory amounts.
