Chapter 5. Audit Evidence - Concepts and Standards Flashcards
Identify the 2 categories of substantive test of details
- Tests of Ending Balances
2. Tests of Transactions
inventory turnover
Cost of Goods Sold / Average inventory
Define analytical procedures
Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
Identify the 3 purposes that might be served by performing analytical procedures
- Audit Planning (required)
- As a form of substantive evidence (not required)
- A final review (required)
How might the auditor’s decisions about the timing of audit perocedures lower detection risk
Moving the auditor’s important substantive procedures away from an interim date (before year-end) to year-end will lower detection risk
How might the auditor’s decisions about the nature of audit procedures lower detection risk
Choosing audit procedures that provide a stronger basis for conclusions will lower detection risk
Identify the 4 considerations that determine the effectiveness and efficiency of analytical procedures used for substantive purposes
- Nature of the assertion;
- Plausibility and predictability of the relationship;
- Availability and reliability of data; and
- Precision of the expectation
How might the auditor’s decision about the extent of audit procedures lower detection risk
Increasing the sample sizes for audit testing will lower detection risk
List the 2 broad categories of substantive procedures
Test of details
Substantive analytical procedures
Selected ratio
Liquidity ratios (=solvency ratio): Measures of an entity’s ST ability to meet its obligations
Activity ratios (=turnover or efficiency ratios): measures of an entity’s effectiveness putting its assets to use.
Profitability ratios: Measures of an entity’s operating success (failure) for a period of time.
Coverage ratios (leverage ratios): Measures of the entity’s ability to meet its obligations over time.
Working apital
current assets - current liabilities. (this is a definition, not a ratio)
Current ratio
CA / CL
Quick ratio (acid-test ratio)
(cash + marketable securities + A/R) / CL
Current cash to debt ratio
net cash from operations/average CL
Asset turnover =
net sales/ average total assets
Receivable turnover=
net (credit) sales / average trade receivable (net)
Number of days sales in receivables=
365 days/ receivable turnover
Inventory turnover
CGS / average inventory
Number of days sales in inventory
365 days/ inventory turnover
profit margin on sales =
net income/ net sales
Gross profit percentage =
(saels - CGS) / sales
Rate of return on assets=
NI / average total assets
Rate of return on common stockholders’ equity=
(NI - DIV attributable to preferred stockholders) / average common stockholders’ equity
Earnings per share (EPS)
(NI - preferred DIV)/average number of common shares outstanding
Price earnings ratio (“P-E ratio”)
market price of stock / earnings per share
Debt to total assets ratio =
total liabilities / total assets
Debt to equity ratio =
total liabilities / total stockholders’ equity
Times interest earned=
income before interest expense and income taxes/ interest expense
Cash to debt coverage ratio=
net cash from operations/ average total liabilities
