Chapter 4 - Audit Evidence

Question 1

AP can be performed three times during audit

Answer 1

• Planning
  
  • Used to understand clients business and assess RMM
  • required
• Substantive
  
  • AP may be used to lower DR
  • optional
  • steps for using AP in sub testing:
    
    • determine suitability of AP for given assertions
    • evaluate reliability of data from which expectations are developed.
    • develop an expectation for a recorded amount or ratio
    • evaluate whether the expectation is sufficiently precise to identify a misstatement that may cause the FS to be materially misstated.
    • compare the recorded amounts or ratios with the expectations.
    • investigate any significant difference from he expectations.
• Overall review
  
  • to identify relationships that were not found earlier
  • ultimate purpose is to form an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.
  • if there are misstated account, then perform more tests
  • done by manager or partner of firm
  • required

Question 2

Workpaper Deficiencies (CCHITF) shit the foot

Answer 2

• Comment on exception
  
  • Make sure each exceptional item has been resolved and that the resolution has been documented
• Conclusions
  
  • closing comments at the bottom of the working paper should be reviewed to ensure they are consistent with the information in the audit documentation. They are usually wrong.
• Heading
  
  • name of client, title of working paper, and audit year
• Initials
  
  • each person working on it should initial
• Tick marks (symbols)
• Foot

Question 3

Audit Documentation (working papers) min. requirements

Answer 3

• reconciliation of accounting records with the FS
• audit program
• documentation of understanding of IC
• documentation of assessed level of control risk
• proof of sufficient evidence having been obtained to support the auditor’s opinion on the FS
• client representation letter

Question 4

Current File

Answer 4

• audit program
• working trial balance
  
  • this is a trial balance pulled from the client’s records which provides additional columns for reclassifications and adjustments. the final column is the adjusted balances of the accounts, which should agree with the financial statements that are issued that year
• lead schedules
  
  • these summarize all the major components that determine an amount appearing in the FS or notes, and serve as a form of table of contents referencing individual audit documentation that support the components listed. a separate lead schedule will normally be needed for each material account balance.
• Responses to information requests
  
  • confirmations
  • attorneys letter
  • client rep. letter
• Reconciliations and analyses by the auditor
  
  • refer to evidence directly obtained by the auditor to support amounts in the current financial statements or notes

Question 5

Permanent File

Answer 5

• organization documents
  
  • articles of incorporation and bylaws
• Minutes
• flowcharts of IC
• debt agreements
• analyses of equity accounts
• depreciation schedules

Question 6

4 approached to evaluate reasonableness of estimates

Answer 6

• eview and test managements process, including the method of measurement, assumptions made, and the data used;
• independently develop an estimate
• review subsequent events up to the date of the auditors report
• test the effectiveness of IC related to accounting estimates

Question 7

current ratio

Answer 7

• current assets/current liabilities
• measures short term debt paying abilities

Question 8

quick ratio

Answer 8

• quick assets (cash +marketable sec. + AR)/current liab.
• measures immediate short term liquidity

Question 9

receivables turnover

Answer 9

• net credit sales/average level of accounts receivable
• measure liquidity of receivables

Question 10

inventory turnover

Answer 10

• COGS/average inv.
• measure liquidity of inv.

Question 11

debt-equity ratio

Answer 11

• total liab./stockholder equity
• shows creditors the corporations ability to sustain losses.

Question 12

working capital

Answer 12

• current assets - current liab.
• measure company’s solvency

Question 13

Management rep letter/ client rep letter

Answer 13

• prep. and fair pres. of FS in accordance with applicalbe framework
• DIM of IC
• unaware of any errors or fraud that would have material effect
• no acts of fraud or noncompliance by management
• minuest of all board of director and shareholder meeting are avail.
• all financial records made avail.
• no pending legal matter with material impact
• estimates are reasonable
• related party transactions are identified to auditor
• subsequent even have been properly accounted for.

Question 14

Attorney’s letter (letter of inquiry)

Answer 14

• letter of inquiry
  
  • contains info about litigation discussed with management
  • prepared by auditor, signed by management, and mailed by auditor
  • attorney provides corroborating evidence about the likelihood of losses and where approprate estimates of amount.
• if attorney refuses to respond or management doesnt sign then scope limitation and thus qualified or disclaimer
• if attorney is uncertain, then explanatory par.