Chapter 4 - Audit Evidence Flashcards
What are the three components of a financial statement assertion?
1) Account Balances
2) Implication
3) Example procedure to prove
What are the 6 account balances and disclosure categories that the auditor is concerned with when making FS assertions?
1) Existence: assets, liabilities, equity interests exist
2) Rights and obligations: entity holds or controls rights to assets and liabilities are the obligations of entity
3) Completeness: assets, liabilities and equity interests should have been recorded and disclosures should have been included
4) Valuation: assets, liabilities and equity interest have been included at appropriate value
5) Classification: assets, liabilities and equity interests have been recorded in proper accounts
6) Presentation: assets, liabilities and equity interests are appropirately aggregated and disaggregated - disclosures are understandable and in line with IFRS requirements
If you are designing substantive procedures about statement of financial position items, you should?
1) Identify whether the question states which assertion you are trying to prove and if so, state and explain tests which prove that assertion
2) If not, ensure suggest procedures which address each of these assertions at once, explain what you are proving with your actions
What are the 6 account class of transactions and events and related disclosure categories that the auditor is concerned with when making FS assertions?
1) Occurrence: Transactions that have been recorded/disclosed happened and relate to the entity
2) Completeness: All transactions, events and disclosures that should have been recorded have been recorded
3) Accuracy: Amounts and other data relating to recorded transactions have been recorded appropriately and accurately described
4) Cut-off: transactions and events have been recorded in the correct accounting period
5) Classification: transactions and events have been classified in the proper accounts
6) Presentation: Transactions are appropriately aggregated or disaggregated. Disclosures are understandable and in line with IFRS requirements
Auditor must design and perform procedures to obtain that evidence that is?
Sufficient and appropriate
What 5 factors have an impact on the amount of evidence that needs to be gathered in relation to sufficiency?
1) Auditors previous experience of the client
2) Risky areas will require more evidence than less risky areas
3) Similarly, material areas will require more evidence
4) Areas requiring judgement will require more evidence
5) Quality of evidence obtained
What are the 7 different techniques an auditor can use to gather evidence?
1) Analytical procedures - Evaluation of financial information by studying possible relationships among financial and non-financial data
2) Enquiry - Ask a relevant person for information
3) Inspection - of a record or documents such as an invoice
4) Observation - of a process or procedure performed by client such as an inventory county
5) Recalculation - Check the mathematical accuracy of a document
6) Confirmation - Obtaining a representation from a third party
7) Reperformance - of a key procedure by the auditor to satisy himself that the client has done it properly
What are the three basic sources of audit evidence that can be used when testing controls?
1) Auditor generated (reperformance of calculation)
2) Third party - purchase invoice, bank statement
3) Client generated (non-current asset register, payroll report)
What are the four basic rules to ascertain if the audit evidence is reliable?
1) Original documents are more reliable than photocopies
2) Third party evidence is more reliable than client-generated
3) Written evidence is more reliable than oral
4) Audit evidence obtained directly by the auditor
What are analytical procedures used to spot?
Fluctuations and relationships that are inconsistent with other relevant information.
Analytical review of an accrual that seems reasonable may not need further testing if we are satisfied with the process used to produce the accrual last year.
What is an accounting estimate?
An approximation of the amount of an item in the absence of a precise means of measurement.
What are 5 examples of when an accounting estimate may be used?
1) Inventory allowances
2) Doubt debt allowance
3) Useful economic lives of non-current assets
4) Provision for a loss from a lawsuit
5) Provision to meet warranty claims
What are 6 common audit procedures used to test estimates?
1) Review process used by mgmt to develop estimate for reasonableness
2) Perform analytical procedures on estimate year on year and budget against actual and discuss any variations with mgmt (will not be valid in case of one off estimate: lawsuit)
3) Use an independent expert to make an estimate for comparison - independent so very strong
4) Review accuracy of prior years estimates compared to final actual results
5) Review subsequent events for events that help to confirm the accuracy of the estimate
6) Obtain sufficient appropriate audit evidence about whether the disclosures in the financial statements related to accounting estimates are reasonable
In the exam, if you are asked to describe audit procedures for an item in the FS, what MUST you do?
1) State what you will actually do
2) Explain why
What two things does testing on trade receivables focus on?
1) Existence and valuation - this covers client confirming debt and likelihood that it will be fully paid off
2) Cut-Off - ensure that the only sales relevant to this year are included in the FS
What is the most common procedure used to confirm assertations relating to receivables?
1) Circularisation - writing to sample of customers on year end listings to confirm debt stands
What four assertations does ‘positive circularisation’ help to confirm?
1) Existence - confirmed by receivable acknowledging debt is valid
2) Rights and obligations - confirms amount owed to company
3) Valuation
4) Cut off
What is the summary of procedures on receivables?
1) Obtain list of receivable balances and check that it casts
2) Agree total of receivables list to nominal ledger and FS
3) Perform analytical procedures on trade receivables listing by comparison and with prior period
4) Calculate trade receivable days and compare to last year
5) Any significant variations should be investigated and substantiated, with particular attention being paid to old outstanding amounts
6) Review ages receivables listing for any unpaid amounts
7) Sample of trade receivables - circularisation
8) Customers that don’t reply to circularisation or where recoverability is considered a particular risk, vouch any receipts back to cashbook or bank statements
What audit procedures can be performed on prepayments?
Auditor can compare balances from prior year to current year to see if there are any material differences
If material differences, mathematical accuracy of prepayment should be checked by obtaining clients backup schedule
What should inventories be valued at?
The lower of cost and net realisable value
What should be included in the ‘cost’ price of an asset?
Costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition
What is the net realisable value:
estimated selling price less estimated costs of completion and estimated costs of sale
What procedures should an auditor do before a company performs an inventory count?
1) Review prior year working papers to understand what to expect
2) Arrange attendance with the client and request a copy of the count instructions are sent before attendance
3) Instructions should be reviewed for reasonableness
4) If inventories are held offsite, enquire how count will be performed
5) Enquire of mgmt about likely level of write down of inventories - compare with prior year and check appropriateness
6) Book audit staff for attendance at inventory counts
7) Prepare audit programme for count
8) Prepare audit programme for the count
What recommendations can an auditor make if a inventory counts instructions do not contain appropriate levels of controls ?
1) Staff should count in pairs, with one person checking the inventory and another recording the details
2) Factory/shop should be closed during count to minimise the risk of double counting
3) Once counted, inventory should be marked up to avoid double counting
What substantive procedures can an auditor perform after the inventory count (during the final audit)?
1) Obtain the final inventory listing, showing quantity and cost for each item of stock held
2) Reconcile this listing to the figure in the financial statements
3) Trace the test counts performed to this listing (cut off testing from details of the last GRN and GDN received during the inventory count
What is the main focus when devising audit procedures on a payable account ?
Completeness - whether or not a liability is being understated
When must a provision be recognised?
1) When an entity has a present obligation (legal or constructive) as a result of a past event (the ‘obligating event’)
2) It is probable than an outflow of economic resources will be required to settle the obligation
3) The amount can be estimated reliably
What is a contingent liability?
Is a possible obligation or an obligation with a possible outflow of benefits. Contingent liabilities do not appear in the statement of financial position. They are disclosed in the notes to the accounts.
What are 5 typical tests of provisions?
1) Obtain a breakdown of this years provision and perform analytical procedures, comparing the components of the balance with last year
2) Discuss with mgmt the reasons for any omissions or unusual figures in this years balance
3) Cast the breakdown to check its mathematical accuracy
4) For samples on provisions list, discuss with mgmt to understand how the liability arises and any key timing issues which mean it must be provided for
5) If any provisions relate to legal costs, discuss the matter with client’s solicitors to determine the likelihood of the payment occurring and its likely value
What is the purpose of a bank report (bank confirmation letter) for audit purposes?
To give evidence that the bank accounts exist and confirm the year end valuations - should also ensure that all receipts and payments are recorded in the correct period - cut off.
What are the three steps an auditor can undertake to test the non-current asset register for cost and valuation? (Tangible non-current assets)
1) Obtain non-current asset register from client, cast the cost, depreciation and net book value columns of the register and agree to the FS
2) Vouch the cost and title back to purchase invoice for a sample of new additions or material items
3) For a sample of assets revalued in the year, confirm valuation to third party such as a valuations report
What are the four steps an auditor can undertake to test the non-current asset register for depreciation? (Tangible non-current assets)
1) Check appropriateness of deprecation charge by considering physical condition of assets and comparing to industry standards to ensure useful life
2) Perform a proof in total calculation of depreciation, considering timing of additions and disposals and compare this expectation to the actual charge and investigate any significant differences
3) Test calculation of depreciation int he non-current asset register, ensuring that the rates used are those disclosed in FS
4) Review profit or loss on disposal calculation and check for accuracy. Sale proceeds can be traced back to bank statement and depreciation charge vouched as reasonable
What are the four steps an auditor can undertake to test the non-current asset register for rights and ownership? (Tangible non-current assets)
1) Verify ownership of property via inspection of title deeds and land registration documents
2) Agree purchase invoices to verify additions/major assets
3) Review any new lease agreements to ensure assets are correctly treated as assets and liabilities or merely expenses
4) Inspect vehicle registration documents to confirm ownership of motor vehicles
What are the four audit tests of share capital?
1) Agree share capital figure to statutory documents of the company
2) Agree any issue of shares during the year to board minutes
3) Agree cash received for the shares to the cash book and bank statement
4) Reconcile the list of shareholders to the nominal ledger
What are the three audit tests for reserves?
1) Discuss the company’s reserves with the directors to establish which reserves they have
2) Agree the movement in any of the reserves to supporting documentation:
Share premium to board minutes
Revaluation surplus to third party valuation report
Retained earnings to statement of profit and loss and dividend payments
3) Review FS to ensure that the movements in reserves is accurately recorded in the statement of changes in equity
What are the 6 audit tests for directors emoluments?
1) Perform analytical procedures of directors total emoluments year on year to determine reasonableness. Discuss any large discrepancies with directors
2) For each director, obtain breakdown of total emoluments for year, split between salary, bonuses, other benefits and pensions contributions
3) Check addition of each schedule and reconcile total to nominal ledger
4) Check directors emoluments back to signed directors letter of employment/contracts
5) Obtain and review returns made to tax authorities to ensure consistency with amounts recorded in FS
6) Review FS to ensure adequate disclosure of Directors emoluments
What are three examples of statistical sampling?
1) Random selection
2) Systematic selection - every nth item in a population, starting at a random point
3) Monetary unit sampling - Value weighted selection whereby every £1 in a population is regarded as a separate sampling unit.
What are two examples of non-statistical sampling?
1) Haphazard selection - where a sample is chosen by hand - often deemed inappropriate
2) Block/Sequence selection - involves selecting a block of continuous items from a population
What are three common examples of Computer assisted audit techniques?
1) Testing password controls - see if unauthorised user (auditor) can access key areas of system
2) Testing individual transactions - does system reject invalid data
3) Test transaction using an embedded system - test a piece of data or collate information over a longer period
What are five advantages to using CAATs
1) Test program controls
2) Test greater number of items quickly and accurately
3) Test actual accounting system and records
4) Cost effective after initial setup
5) Allow results from using CAATs to be compared with traditional testing
What three things should an external auditor consider the reliance of work performed by an internal audit committee?
1) Organisation status
2) Technical competence
3) Systematic and disciplined approach including quality control
What 5 things should an auditor consider when relying on work of ‘experts’?
1) Qualifications
2) Experience
3) References
4) Access to information
5) Independence/objectivity
Can reference to work of others be included in the auditors report?
Not in the UK, no
