Chapter 5: Audit Evidence and Documentation

Question 1

audit risk

Answer 1

the risk that the auditor will incorrectly give an unqualified opinion on financial statements that are materially misstated

Question 2

best case scenario

Answer 2

both audit opinion and actual have no material misstatement

Question 3

audit risk, catastrophic

Answer 3

audit opinion = no material misstatement and there actually is some

Question 4

bad scenario, loss of client

Answer 4

audit opinion is material misstatement and there isn’t any

Question 5

shit happens

Answer 5

auditor give material misstatement and there is material misstatement

Question 6

inherent risk

Answer 6

risk of misstatement in account assuming no controls

Question 7

control risk

Answer 7

risk that material misstatement will not be prevented or detected and corrected by controls

Question 8

detection risk

Answer 8

risk that audit procedures do not detect material misstatements

Question 9

the auditor must

Answer 9

obtain sufficient and appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit

Question 10

major types of audit evidence

Answer 10

1. AIS
2. documentary evidence
3. third-party representations
4. physical evidence
5. computations
6. data interrelationships (analytical procedures)
7. client representations
8. evidence from related party transactions
9. subjective audit evidence (like estimates)

Question 11

auditing estimates

Answer 11

1. review management’s approach and consider its reasonableness
2. independently develop an estimate (auditor’s own method)
3. review subsequent events bearing on estimate

Question 12

appropriate

Answer 12

a measure of audit evidence quality–relevance and its reliability

Question 13

independent source

Answer 13

if obtained from knowledgeable independent sources outside the client company rather than from nonindependent sources

Question 14

effective controls

Answer 14

if generated internally through system of effective controls rather than ineffective controls

Question 15

directly

Answer 15

if obtained directly by auditor rather than indirectly

Question 16

documentary

Answer 16

documentary in form rather than oral representation

Question 17

original documents

Answer 17

original documents rather than copies or facsimilies

Question 18

quantity for sufficiency

Answer 18

(of evidence) enough evidence to form a reasonable opinion

Question 19

scope

Answer 19

1. nature- what audit procedure
2. timing- when to perform procedure
3. extent- how many items should be subjected to the procedure

Question 20

inquiries

Answer 20

with management and employees

Question 21

observation

Answer 21

observe inventories, cash, securities, segregation of duties, etc.

Question 22

inspect

Answer 22

read documents

Question 23

vouch

Answer 23

from financial statements to internal documents

Question 24

trace

Answer 24

from internal documents to financial statements

Question 25

recalculate

Answer 25

test the mathematical accuracy of documents and records

Question 26

analytical

Answer 26

use of trend analysis, ratios, regressions, etc. to identify significant unusual items that will be tested

Question 27

confirm

Answer 27

with third parties

Question 28

reperformance

Answer 28

an independent execution of procedures and controls that were originally performed by the client

Question 29

further audit procedures

Answer 29

tests of controls
substantive procedures
NOT risk assessment procedures those come before

Question 30

risk assessment procedures

Answer 30

1. inquiries of management and others within the entity
2. analytical procedures
3. observation
4. inspection
5. other procedures such as inspections of others outside the entity and reviewing info from external sources such as analysts, banks, etc.

Question 31

tests of controls

Answer 31

test for operating effectiveness, don’t really include monetary values i.e. the means of processing

Question 32

substantive tests

Answer 32

tests the ends of processing, they directly test whether the balance in the account is correct

1. tests if details (in transactions, ending balances, disclosures)–dual purpose tests test at least two of these
2. analytical procedures (identify unusual values to be tested)

Question 33

Risk assessment (Planning)

Answer 33

determine the nature, timing, and extent of other audit tests (required)

Question 34

Substantive testing

Answer 34

to obtain evidential matter about particular assertions related to account balances or classes of transactions (not required but generally performed)

Question 35

Near the end of the audit (overall review)

Answer 35

assess conclusions reached and in the evaluation of the overall financial statement presentation (required)

Question 36

Working Papers

Answer 36

1. document basis for opinion–should include a written audit program for every audit
2. evidence of compliance with GAAS
3. coordinate and supervise audit
4. audit documentation must contain sufficient info to enable an experienced auditor understand nature, timing, and extent and results of procedures performed, evidence obtained, and conclusion reached and determine who performed the work and the date completed and the person who reviewed and the date of review

Question 37

tickmarks

Answer 37

notes on the working papers summarizing results of audit tests

Question 38

cross reference

Answer 38

when the same info is included on two work papers, auditors indicate on each work paper index of the other work paper containing the identical info

Question 39

documentation completion date

Answer 39

60 days after the audit report release date (45 for public)

Question 40

saved

Answer 40

5 years non public

7 years public

Question 41

engagement completion document

Answer 41

PCAOB requirement that the auditor must prepare identifying significant findings or issues, actions taken to address them (including addition evidence obtained) and the basis for the conclusion in connection with each engagement