Chapter 5 - Audit Evidence and the Technology Driven Audit Flashcards
According to CAS 500, What is audit evidence?
Information, to which audit procedures are applied, that the auditor uses to draw conclusion which form the basis for the auditors opinion and report. It is a decision tool.
What are different types of information
- Oral information
- Visual Information
- Paper documents
- Electronic documents
- Data
What are the 6 common sources of information?
- The entity’s accounting records, management, or other sources internal to the entity.
- An external individual or organization that provides information suitable for a broad range of users, which the entity uses in preparing financial statements.
- Independent sources outside the entity that provide information to the entity, such as bank, legal counsel, customers, or supplies
- A management expert
- An auditor expert
- A service organization
What are examples of oral and visual information?
Oral Information:
- Oral inquires to the accounting staff
- Oral inquires made to external information sources
Visual Information:
- Auditor observing a message that appears on screen for a control restricting access to the IT system
- Inventory observed by auditor through live video stream via smart glasses worn by client representative.
What are examples of paper and electronic documents?
Paper Documents:
- Original sales contract provided by the client
- Written confirmation provided by clients customer
Electronic Documents
- Scanned versions of the sales contract
- Electronic confirmation
What are examples of data evidence?
Data stored in entity’s IT systems
Data from an external information source (social media or government agencies)
What are examples of internal accounting records and internal management sources of information?
Internal Accounting Records
- Aging analysis of accounts receivable
- Sales invoices, sales journals
Management
Internal marketing information developed by the sales function used in making an estimate for a warranty provision.
What are examples of external sources of information from external individuals or organizations, independent sources, and service organizations
External individuals or organizations:
1. Customer reviews of entity’s products from a social media website
2. Credit history data
3. Macro economic data such as historical and forecast employment rates and economic growth rates, or consensus data.
Independent Sources:
External legal counsel analysis of the likely outcome of the pending law suits
Service:
A service organization which processes the entity payroll and provides payroll reports
What are examples of sources of information for management and auditors experts
Management Experts:
- Management employs an actuarial for pension calculations
- Management employs valuation experts for assessment of fair value of an asset
Auditor Experts
- An IT expert included in the audit team for evaluation on the general IT controls.
What is an audit procedure?
What does the nature of audit procedures refer to and how does it change?
It is the technique to collect and analyze information to provide audit evidence. It is how the information is gathered.
The purpose and type, based on the objective of each part of the process.
What are the three broad purpose of the audit procedure?
- Identify and assess risks (Risk Assessment Process)
- Determine if controls are operating efficiently (Test of controls)
- Determine if accounts and assertions are fairly stated (Substantive Procedures)
What is the purpose of the risk assessment procedures?
To obtain an understanding of the entity and the environment, internal controls, and identify and assess the risk of material misstatements.
It sets the stage for audit planning, assessing risk of material misstatement, and developing an appropriate response
When would test controls be initiated? Why?
If through the risk assessment, the auditor understand the internal control policies and procedures. Since risk assessment procedures are not sufficient to conclude that internal controls are operating effectively, you test the controls if you are planning to rely on it heavily.
What are automated tools and techniques (ATT)?
Refers to the use of technology to perform audit procedure and / or obtain audit evidence.
What are examples of ATT?
- AI
- Machine Learning
- Remote Observation Tools
- Robotic Process Automation
- Audit Data Analytics.
What is sufficient and appropriate audit evidence?
Sufficient - Enough
Appropriate - Relevant and reliable
audit evidence to draw reasonable conclusions on which to base the audit opinion.
What type of evidence do auditors use? Why do we use this type of evidence?
The auditors draws conclusions and bases the audit opinion on persuasive (not conclusive) audit evidence. Due to the nature and the cost, we will never likely be 100% confident, but they must be reasonably sure their response is correct.
What are three factor considerations to relevance and reliability of the audit evidence?
- The source of the information
- Relevance of the information provided by the source
- Reliability of the information provided by the source. (quality controls and independence )
What is relevance?
Refers to information that has a logical connection with the purpose of the audit procedure and, when appropriate, with the assertion or control being tested.
What factors are considered in assessing relevance?
- To which classes of transaction, account balances, or disclosures (including relevant assertions) is the information relevant
- To what period of time does the information relate?
- What level of detail or precision is needed, given the purpose of the audit procedure.
What is reliability?
The degree to which the evidence can be believable or worthy of trust.
What is the reliability of information?
The degree to which the information is believable and worthy of trust, which depends on the nature and source of the information
What are the five main factors that affect the reliability of information used for audit evidence?
- Accuracy
- Completeness
- Authenticity
- Bias
- Credibility.
What is accuracy in the context of reliability?
The information is free from error and reflects the appropriate time period or point in time.
What is completeness in the context of reliability?
The information includes all the underlying conditions, events, circumstances, and actions / inactions
What is authenticity in the context of reliability?
The source that generated or provided the information is authorized to do so, and the information has not been altered.
What is bias in the context of reliability?
The information is free from intentional or unintentional bias.
What is credibility in the context of reliability?
The source has the competence and capability to generate the information to a required standard, the source can be trusted.
What are the three others factors that affect reliability?
- Nature and form of information
- Controls over preparation and maintenance on information.
- How the information was obtained by the auditor.
Describe the nature and form of information
Nature - Objective, factual evidence is more reliable than evidence that requires considerable judgement. (Physical inventory count vs aging receivables estimation). Depending on the situation, the nature will affect reliability.
Form - Electronic documents are less trusted and the auditor needs to perform additional procedures to ensure authenticity.
Describe controls over preparation and maintenance of information
If you have an original paper document, and you digitize it or create an electronic version, the reliability depends on the controls in the transformation and maintenance, additional procedures may be required to assess reliability ensuring the electronic document is authentic or the controls in transformation are accurate.
If the information is only initiated, recorded, processed, and reported in electronic form, the auditor needed to determine if the controls are operating efficiently. Internal controls assess the accuracy and completeness of information.
Describe how the information was obtained?
Evidence obtained by the auditor is more reliable than information obtained indirectly or by inference. If an auditor performs an analysis it is more reliable than if a controller did it. However if the auditor is un qualified, then it may not be better.
What are the 6 different types of audit evidence produced by audit procedures? How are they produced?
- Physical Evidence - Produces by senses, like examining an intangible asset
- Oral Evidence - Produced by asking questions
- Confirmation Evidence - Produced when confirmed in writing with a third party
- Documentary Evidence - Produced when auditors inspects internal or external documents
- Analytical Evidence - Produced when auditors make conclusions upon comparisons and / or data interrelationships
- Mathematical Evidence - Produced when they do calculations
What are the four factors that determine how do we determine which procedure should be applied?
- Purpose of the test
- The assertion or control being tested
- The nature and form of the information
- Risk of material misstatements
According to CAS 500, What are the 7 different types of audit procedures?
- Inspection
- Observation
- External Confirmation
- Recalculation
- Re-performance
- Analytical
- Inquiry.
What is inspection?
Examination (being physically present or through remote observation) of tangible assets and documents, internal or external, in paper, digital, or other media.
what does the inspection of tangible assets allow auditors to conclude and not conclude with regard to reliable audit evidence?
Conclude - The assets exists, the assets condition and quality
Can Not Conclude - The rights and obligations, and the valuation of the specific tangible being assessed.
What is an internal document? What are three practical example?
One that has been prepared and used within the clients organization and is retained without ever going to an outside party.
- Sales invoices, time reports, exception reports, inventory receiving reports.
What are external documents? What are practical example?
Documents that have been in the hands of someone outside the clients organizations who is a party to the transactions being documented.
- Vendor invoices and insurance policies
What is observation?
Looking at a process or procedure being performed by others. It may be done in person or online.
What is external confirmation?
The auditors receipt of a written or oral response from an independent third party verifying the accuracy of information requested. The response may be in paper or digital media. Facilitated through third party, web based, automated platforms.
What are the 3 factors that affect the reliability of confirmations.
- Characteristics of the third party - Do they have the knowledge and characteristics.
- Relationship of the third party to the entity - Confirmation may be less reliable)
- Subject matter being confirmed - Extremely complex information may be less reliable
How do we ensure that confirmation are reliable?
They must be controlled by the auditor from they time they are prepared until they are returned. If the client controls preparations, send out the confirmation, or receives the response, then the audit evidence has been reduced.
What is recalculation audit procedure?
Checking the mathematical accuracy of information prepared by the client during the period under audit. Done through spreadsheet or audit software.
What is the reperformance audit procedure?
Independent execution of procedures or controls that were originally performed as part of the entity’s accounting and internal control systems.
What are three situations under analytical procedure when the auditor has to investigate?
Auditors have to investigate identified fluctuations or relationships that are inconsistent with other relevant information or differ from expected values by a significant amount.
What are the four purposes of analytical procedures and what “purpose of audit procedure” does it assist?
- Understand the entity and its environment - Risk assessment procedures
- Assess the entity’s ability to continue as a going concern - Risk assessment procedure
- Identify possible misstatements - Risk assessment procedure
- Provide Evidence supporting an account balance
What is an overall analytical review? Why is this important?
Compare the current years unaudited information with prior years audited information.
It allows the auditor to focus on the overall financial statement risks. and assertion level risks.
What is the inquiry audit procedure?
Obtaining audit information from knowledgable people within the entity or outside the entity.
What does the term examine mean in an audit? What type of audit procedure is this?
A reasonably detailed study of a document or record to determine specific facts about it. Inspection
What is a scan in an audit? What type of audit procedure is this?
A less detailed examination of a document or record to determine if there is something unusual warranting a further investigation. It is an analytical procedure.
What does it mean to read in an audit? What type of audit procedure is this?
An examination of written information to determine facts pertinent to the audit and the recording of those facts in a working paper. It is an inspection.
What does it mean to compute in an audit? What type of procedure is this?
A calculation done by the auditor independent of the client. Analytical procedure.
What does it mean to recompute in an audit. What type of audit procedure is this?
A calculation done to determine whether a clients calculation is correct. it is a recalculation procedure.
What does foot mean in an audit? What type of audit procedure is this?
An addition of a column of numbers to determine if the total is the same as the client. Recalculation.
What is a trace in an audit? What type of procedure is this?
- T or F: More frequently, an audit procedure that includes the term trace will also include a section instruction.
The instruction of what details the auditor is tracing and where it is being traced too. It is a recalculation, reperformance, and inspection procedure.
- True
What does the term vouch in an audit mean? What type of audit procedure is this?
The instruction of what details the auditor is tracing, but they start with an entry in the accounting system and retrace it to the original source of information to determine what the auditor is vouching and where it is being traced from and to. It is a recalculation, reperformance, and inspection.
What does the term compare mean in an audit? What type of audit procedure is this?
A comparison of information in two different locations. The instruction should state which information is being compared in as much detail as possible. This is a reperformance
What is a count in an audit? What type of audit procedure is it?
A determination of assets on hand at a given time. This term should only be associated with the type of evidence determined as physical examination. This is an inspection.
What does observe mean in an audit? What type of audit procedure is this?
The act of observation should be associated with the type of evidence defined as observation. It is an observation audit procedure.
What does inquire mean in an audit. What audit procedure is this related to?
The act of inquire should be associated with the type of evidence defined as inquiry. Inquires of client.
What is the key difference between vouching and tracing?
They are complete opposites of each other. The vouch begins at the accounting records and the tracing begins at the supporting documents.
What is vouching?
The use of documentation to support recorded transactions and amounts.
What is tracing?
The use of documentation to determine if transactions or amounts recorded are included in the accounting records.
What are the two most expensive types of procedures? Why?
Inspection (Physical examination) and confirmation. Examination requires the auditor to be present when the client is counting. Confirmation is costly because they must follow careful procedures in preparing, transmitting, and receiving the reports.
