Chapter 5 - Audit Evidence Flashcards
What is audit evidence?
- Any information used by the auditor to determine whether the financial statement being audited is stated in accordance with the established criteria.
- Both information that supports and corroborates management’s assertions, and any information that contradicts those assertions.
- Evidence includes information generated by the auditor, third parties, and the client.
How is audit evidence used at each stage of the audit process?
- Client Acceptance and Continuance - assess engagement acceptance risk, ensure client has integrity, ensure auditor competence and independence
- Audit Planning - understand entity and environment, understand accounting policies, assess control risk, set materiality
- Assess Risk of Material Misstatement (including fraud risk at assertion and financial statement level)
- Develop Risk Response - detailed audit plan, further procedures and programs
- Perform Risk Response - determine if controls are working, detect possible misstatements
- Conclusion - do we have sufficient appropriate evidence to form a conclusion?
- Report - determine type of audit opinion to issue
What are the 3 big audit evidence decisions?
- NATURE - which audit procedures to use?
- EXTENT - which items to select for testing?
- TIMING - when to perform the procedures?
What is an audit procedure?
It is the detailed instructions for the collection of audit evidence—that is, the actual task that you do to obtain evidence with respect to an audit objective:
For example, when you count inventory, you note the quantity, location, tag number, unit of measure and condition.
What are the three categories of audit procedures?
- Risk assessment procedures - Performed by the auditor to obtain information for identifying and assessing risks of material misstatement in the financial statements due to fraud or error. (e.g., gaining an understanding of internal controls)
- Tests of controls - Designed to evaluate the operating effectiveness of controls at the assertion level.
- Substantive procedures - Designed to detect material misstatements in accounts which include tests of details and analytical procedures. (looking at DOLLAR VALUES $$)
What are the 4 options for selecting samples, and how do you choose which one to use?
(1) select all items in the population,
(2) select specific items in the population,
(3) use audit sampling (i.e., random sample), or
(4) use some combination of first three.
The choice depends upon the purpose of the test and the particular circumstances, such as the extent of automated controls and the risk of material misstatement, as well as the practicality and/or efficiency of the procedure.
What is an audit program?
The set of detailed instructions for the entire collection of evidence for an audit area.
Normally, there is an audit program for each component of the audit (e.g., accounts receivable and sales)
What are the 3 characteristics of persuasive evidence?
- Appropriate
- Sufficient
- Timely
What do we mean by “appropriateness of evidence”, and what are the two characteristics of appropriate evidence?
Appropriateness means that there is enough evidence of a high enough QUALITY to form a conclusion with respect to the audit opinion.
Appropriate evidence is RELEVANT and RELIABLE.
What do we mean by “relevance” of evidence?
Relevance of evidence deals with the logical connection with the design of the audit procedure and the assertion or control that is being tested.
(Make sure the evidence you are obtaining through the test is relevant to the assertion you are testing).
***What are the 6 factors to consider when assessing the reliability of evidence?
1) Evidence obtained directly by auditor—evidence obtained directly by the auditor through physical examination, observation, reperformance and/or inspection.
2) Independence of source (ie., the information provider)—evidence obtained from a source outside the entity is more reliable than that obtained from within.
3) Qualifications of source (ie., the information provider)—individuals providing information should be competent and qualified to do so.
4) Consistency from multiple sources—evidence with all sources consistent is more reliable than inconsistent evidence.
5) The effectiveness of client’s internal controls—when a client’s internal controls are effective, evidence obtained internally is more reliable than when controls are weak.
6) Degree of objectivity—evidence that requires the use of a high level of judgment is less objective.
What do we mean by “sufficiency” of audit evidence?
The QUANTITY of evidence obtained determines its sufficiency.
What are the 2 most important factors when determining the appropriate sample size?
- The auditor’s expectation of errors
2. The effectiveness of the client’s internal controls
What do we mean by the “timeliness” of audit evidence?
Timeliness – the timing of audit evidence in relation to the period covered by the audit
What makes evidence more persuasive, based on timeliness, for balance sheet accounts vs. income statement accounts?
For balance sheet accounts, evidence is more persuasive when it is obtained as close to the balance sheet date as possible.
For income statement accounts, evidence is more persuasive if it covers the entire period under audit rather than only a part of the period.
Describe the “Inspection” audit procedure.
Inspection—literally the auditor’s inspection or count of a tangible asset or document.
Inspection is regarded as one of the most reliable and useful types of audit evidence.
What is the difference between vouching and tracing, and which assertions do they test?
Vouching is the use of documentation to support recorded transactions or amounts (occurrence assertion)
Tracing is the use of documentation to determine if transactions or amounts are included in the accounting records (completeness assertion)
What is the difference between internal documents and external documents?
An internal document is one that has been prepared and used within the client’s organization and is retained without ever going to an outside party such as a customer or a vendor.
An external document is one that has been in the hands of someone outside the client’s organization who is a party to the transaction being documented.
External documents are regarded as more reliable than those that are internal.
Describe the “Observation” audit procedure.
Observation—observation is the use of one’s senses to assess certain activities (e.g., watch products being made, watch people doing accounting tasks, etc.)
It is never sufficient by itself, and the auditor must follow up initial impressions with other kinds of corroborative evidence (because people may act differently knowing that they are being watched)
Describe the “External Confirmation” audit procedure.
External confirmation—The receipt of a written or oral response from an independent third party verifying the accuracy of information.
Auditors typically obtain written responses rather than oral ones.
Confirmations are highly regarded and often used; however, they are costly to obtain.
Describe the “Recalculation” audit procedure.
Recalculation—involves rechecking the computations and mathematical work completed by the client during the period under audit.
Describe the “Reperformance” audit procedure.
Reperformance—the redoing of non-mathematical procedures such as internal controls. This could include rechecking of transfers of information.
Both recalculation and reperformance are heavily reliant on Computer-Assisted Audit Tasks (CAATs). What is the difference between Test Data and Generalized Audit Software?
Test data – run a fictitious transaction through the client system to make sure it is processed correctly
Generalized Audit software – run an actual transaction through generalized audit software to ensure we obtain the same result as what the client has recorded
What are analytical procedures?
Analytical procedures—the use of COMPARISONS and relationships between financial and non-financial information to determine whether account balances appear reasonable.
Describe the “Inquiry” audit procedure.
Inquiry—obtaining of written or oral information from the client in response to questions from the auditor.
It is usually necessary to obtain further corroborating evidence through other procedures (management might be bias).
In what 3 stages of the audit process are analytical procedures used, and what are they used for?
- Audit Planning - preliminary analytical review is required to assist in determining the nature, extent, and timing of audit procedures. (REQUIRED)
- Risk response - determine expectations of what the balance should be and then compare to what the actual balance is (where there is a predictable relationship and reliable inputs)
- Completion - Serve as a final analytical review for material misstatements or financial problems and help the auditor take a final “objective look” at the audited financial statements (REQUIRED)
What are the 4 types of analytical procedures (i.e., what 4 types of data do auditors compare client data with)?
- Industry data.
- Similar prior-period data.
- Client-determined expected results.
- Auditor-determined expected results.
What are the 4 steps to develop analytical procedures?
- Develop an independent expectation
- Define a significant difference
- Compute the difference
- Investigate significant differences
What is audit documentation?
Audit documentation is the written or electronic record of risk assessments, procedures or tests performed, information obtained, and conclusions reached.
What are 4 ways that audit documentation is used?
- As a basis for planning the audit
- As a record of the evidence accumulated and the results of the tests
- To provide support for determining the proper type of auditor’s report
- Basis for review by supervisory personnel
What 4 characteristics should working papers possess?
- Each working paper should be properly identified with such information as the client’s name, the period covered, a description of the contents, the name of the preparer, the date of preparation, and an index code.
- Working papers should be indexed and cross-referenced to aid in organizing and filing.
- Completed working papers must clearly indicate the audit work performed
- Each working paper should include enough information to fulfill the objectives for which it was designed.
Who owns/has access the the working papers prepared during the audit engagement?
The working papers prepared during the engagement, including those prepared by the client for the auditor, are the property of the auditor.
The rules of conduct of the professional accounting bodies require their members not to disclose any confidential information obtained in the course of a professional engagement except with the consent of the client or when required by the courts or by the professional accounting associations.
