Chapter 5 - Audit Evidence - Slideshow Flashcards
What is the objective of audit evidence?
The objective of the auditor is to design and perform an audit procedure in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditors opinion.
How many types of audit evidence do the auditors typically look for? What are the 7 general audit procedures?
- Inquiry - Asking people for information
- Observation - Watching a process
- Inspection - Looking and analyzing records, documents, etc.
- Analytical - Ratio analysis, reasonableness testing, test of details
- Reperfomance - Independently redoing accounting records
- Recalculation - The auditor independently looking at the numbers and recalculating them.
- External confirmation - Getting a written or a physical report regarding the truth of the inquiry.
What is the objective of the external confirmations?
When using the external confirmation procedures, is to design and perform such procedures to obtain relevant and reliable audit evidence.
What is vouching? What does vouching support?
Information is selected from an account or other summary information and the auditor goes back through the control system to find the source documentation.
Vouching supports the existence assertion.
What is tracing? What does tracing support?
Audit selects the source document and proceeds forward through the control system to the final recording of the transaction. It supports completeness.
What are the objectives of the auditor in analytical procedures?
- To obtain relevant and reliable audit evidence when using substantive analytical procedures.
- To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditors understanding of the entity.
What are audits designed to detect?
They are designed to provide reasonable assurance of detecting misstatements that are material to the financial statements.
How effective are soft procedures? What are soft procedures? Are these procedures always applied first?
Soft procedures include analysis and enquiry, and they account for 45%-50% of the discovered errors. Yes these procedures are always applied first.
What are examples of business information sources and methods?
- For continuing audits, information about the client is in the permanent file.
- Observations and tour of company’s physical facilities.
- Study reference materials.
- Internal auditors.
- Experts.
What does it mean for evidence to be persuasive? What does sufficient mean?
You need enough evidence of high quality to form an opinion / conclusion with respect to the audit opinion. Reliability and relevance make persuasiveness. The quantity of evidence determines the sufficiency.
What is appropriateness?
It refers to the quality of evidence, while accounting records are evidence, they are not sufficient appropriate evidence for an audit opinion. They need to obtain corroborating evidence.
What are the two characteristics of appropriateness?
Relevance and reliable?
What does relevant mean?
Audit evidence. must relate to one of the management assertions.
What does reliable mean? What are examples?
Audit evidence depends on the nature and the source. (Who examined the evidence, state of the clients system, and the type of evidence collected).
What is the hierarchy of the reliability of evidence?
- Auditors direct knowledge
- External evidence
- External internal evidence
- Internal evidence
- Analysis
- Inquiry
What is the direct personal knowledge evidence?
- Gained through inspection, recalculation, and repreformance.
- Most reliable evidence
What is external evidence ?
- Documentary evidence obtained from independent sources
- Very reliable evidence.
What is external internal evidence?
Documentary evidence that originates outside the clients system, but that has been received and processed by the client.
- This is reliable as long as the internal controls are good.
What is internal evidence? What determines its reliability?
- Evidence produced within the clients system.
- Less reliable, but used extensively under satisfactory internal control conditions.
- Plentiful and easy to obtain, less costly than other evidence.
- The reliability is based on whether the controls are weak or strong.
What is analysis evidence?
- Broad analytical procedures of general nature are not considered highly reliable (Used for preliminary risk identification and attention directing early in the audit)
- ANALYSIS USING SPECIFIC Data the auditor has verified produces evidence that is fairly reliable.
What is the inquiry evidence (spoken and written representations)?
- Evidence that comes from the clients officers, management, and employees in response to inquiry.
- They are generally the weakest form of evidence and the representations should be corroborated with other types of evidence.
What are other considerations for the reliability of the evidence?
Independence, qualification, and objectivity.
What is the official standard of the sufficiency of evidence?
There is no official standard, you must use professional judgement. Test of sufficiency is whether you can persuade someone else that you have collected enough evidence to support your conclusion.
What is the relationship between audit risk and the sufficiency of evidence.
In order to reduce detection risk, more audit evidence is required to support an opinion. In order to reduce the audit risk, only detection risk can be affected by the auditor, you need more evidence.
When is audit planning done?
Audit planning is an ongoing process that starts at the beginning of an audit but also continues as new information results in revisions to the plan/.
What is the planning memorandum?
It is a summarization of the preliminary analytical review, materiality, and risk assessment with specific directions about the effects on the audit.
What does planning become the basis for?
Planning becomes the basis for the audit program.
What is an audit program?
The audit program specifies the procedures the auditor will use to guide the work of inherent control and control risk assessment to obtain sufficient audit evidence as the basis for the audit report.
What does the audit program set out? What do they describe?
The audit program sets out the nature, timing, and the extent of the audit procedures.
Nature - Types of evidence to be used
Timing - What procedures will be performed at interim dates or at year end
Extent - The size of the sample to be used
Selection - Which particular items to select from the population.
What are the two types of audit programs?
Internal control program - A specification of the procedures for obtaining and understanding the clients business and control systems (IR and CR)
Balance audit program - A specification of substantive procedures for gathering direct evidence on assertions about dollar amounts and the accounts.
What are audit working papers? What should working papers contain?
They are the auditors record of compliance with GAAS. They should contain support for the decisions made in the course of the audit
Who is the owner of the working papers?
The auditor is the owner of the working paper and the confidentiality requires client consent before the file is opened to third parties.
How many categories of working papers are there and what two files are they stored in?
These are three categories stored in 2 files.
What characteristics should working papers have
- Indexed and cross referenced
- Name of the client, auditor, date of the working paper, the date the audit was done, the index code, and description of contents.
- Clearly indicate the audit work performed.
- Have enough information to fulfill the objectives for what it was designed
What is a permanent file?
Permanent file papers for information of continuing interest.
What are audit administrative papers?
What are audit evidence papers?
- Documentation of early planning
- Evidence obtained and decisions made.
