Chapter 5 Flashcards
Management Assertions (3 types)
“Representations of management”.
- Assertions about classes of transactions and events for the period under audit.
- Assertions about account balances at the period end.
- Assertions about presentation and disclosure.
Assertions about classes of transactions and events for the period under audit
Income statement related. Occurrence, completeness, authorization, accuracy, cutoff, and classification.
Assertions about account balances at the period end
Balance sheet related. Existence, rights and obligations, completeness, valuation and allocations.
Assertions about presentation and disclosure
Footnotes. Occurrence and rights and obligations. Completeness. Classification and Understandability. Accuracy and valuation.
Evidence
Any information we use to help us do our work and reach our opinion.
Key point: Management assertions drives work, and how much evidence we needed.
Sufficiency & Apporiateness
Sufficiency = Quantity of the evidence.
Appropriateness = Quality of the evidence.
Chart 1: better the quality, less quantity needed.
Relevance
Relationship between evidence we gather to the assertion we are testing.
Chart 2: Greater the risk, greater the quantity or quality needed.
Reliability
Does the information tell the truth about assertions.
Chart 3: Better internal control, more reliable the evidence you will be using!
Papa’s Words of Wisdom: The auditor’s direct personal knowledge trumps everything!
Gathering/testing audit evidence (can be part of risk assesment, test of controls, and or sub tests, based on context in which applied)
Each of these 9 tests can be used in the big 4 categories above.
- Inspect records/documents
looking at documents. Internal = invoices.
External = confirmations.
- Inspect tangible assets
Physically touching and feeling, going to the asset. Does it really exist!
- Observation
Watching the client do what they do. The inherent problem is that they can work differently when you are watching!
- Inquiry
Talking to people within the firm or external parties associated with the entity. Inquiry alone will not provide sufficient evidence.
- Confirmations (extra sheet)
Types: Positive= make “positive” assertion of agreement or non-agreement. Negative=only return when non-agreement happens. Typical items confirmed: Cash balance, Notes Payable, and Common Stock outstanding.
- Recalculation
Very reliable. Re-doing the math!
- Reperformance
Doing what the client has already done.
- Analytic Procedures
Meh.
- Scanning
Looking for red flags.
Reliability hierarchy of audit testing procedures (Table 5-6)
High reliability: Inspection of TA, reperformance, and recalculation. In between: (the rest). Lower Reliability: Observation and Inquiry.
Top Down Approach
Required by SOX. You follow this order: 1. Risk Assessment procedures. 2. Tests of Controls. 3. Substantive Analytical procedures. 4. Remaining assurance needed from tests of details.
Assurance Bucket
Doing the audit procedures in this particular order.
- Risk assessment procedures (put in first).
- Tests of controls.
- Substantive analytical procedures.
- Remaining assurance need from tests of details.
Work Papers
Items we prepare are ours, if its things prepared by client that they want us to review it becomes part of our work papers! (ex. invoice from a client) Anything in the file related to the audit.
PCAOB rules regarding retention
Keep documents for 7 years. If the client has been subpoenaed or will be subpoenaed in future, you will have to keep them for more than 7 years!
Three Types of Analytic Procedures
Preliminary Analytics. Substantive analytics. Final analytics. If you can’t explain it, then you are not done!
- Expectations (4 steps to improve precision)
Disaggregate; Plausible/Predictable; Data Reliability; Types.
Do it before you start!
Disaggregate
Take things apart, breaking down to smaller buckets.
Plausible/Predictable
Does the relationship make sense? What is more relevant?
Ex: Fixed asset or sales for depreciation?
Data Reliability
How reliable is the data.
Types
Trend: how much it changed. Ratio: put on an equivalent basis. Reasonable analysis: what should have happened.
Trend is probably the weakest.
- Tolerable differances
If our expected amount was different from clients, how much of a difference can we tolerate! Tolerable difference has to be else than overall materiality, so we do not accept something materially misstated.
- Compare to Client
If less = good.
If more= do more test, talk to the client!
- Investigate differences, including potentially doing more/different tests
Inquiries of management. Tests of details used when a difference occurs. Figure out which number is correct.
- Conclude and document
You know.
Substantive Analytics is a multi-step process (5 Steps)
- Expectations. 2. Tolerable differences. 3. Compare to client 4. Investigate differences, including potentially doing more/different tests. 5. Conclude and document.
Ratios
Help us understand relationships that affect the nature, timing, and effect of work.
