Chapter 5: Evidence and Documentation Flashcards
Types of Management Assertions
- Transaction & Events
- Account Balances
Transaction and events assertions
- Occurrence
- Accuracy
- Cutoff
- Completeness
- Classification
- Presentation
Account balance assertions
- Existence
- Rights & Obligations
- Accuracy, valuation, and allocation
- Completeness
- Classification
- Presentation
PCAOB Assertions
- Existence or occurence
- Completeness
- Valuation or allocation
- Rights and obligations
- Presentation and disclosure
Concepts of Audit Evidence
- Nature of audit evidence (Accounting Records & Other Information)
- Sufficiency and appropriateness of audit evidence
- Evaluation of audit evidence
Sufficiency
QUANTITY of audit evidence (greater risk of misstatement; higher quantity needed)
Evidence must be relevant to the assertion being tested
Evidence may have varying levels of reliability
Appropriateness
QUALITY of audit evidence (higher quality evidence; lower quantity needed)
Two types of Appropriateness of Audit Evidence
- Relevant
- Reliable
Relevant Appropriateness of Audit Evidence
Relationship to the assertion or to the objective of the control being tested
Reliable Appropriateness of Audit Evidence
Whether a particular type of evidence can be relied upon to signal the true state of an assertion
Factors that influence the reliability of evidence
- Independence of the source
- Effectiveness of internal control
- Auditor’s direct personal knowledge
- Documentary evidence
- Original documents
- Qualifications of the provider
- Degree of objectivity
Types of evidence
- Internal
- External
Internal Evidence
Prepared/edited by entity (purchase orders, overhead cost allocation sheet, materials requisition form)
External Evidence
Prepared/edited by external party (bank statement, remittance advice, contract signed by both parties, vendor invoice)
Types of Audit Procedures
- Inspection
- Observation
- Confirmation
- Inquiry
- Recalculation
- Reperformance
- Analytical procedures
- Scanning
Inspection
Physical examination of assets or documents
Observation
Watching a process or procedure being performed (someone else does it, low reliability cause people know you’re watching)
Confirmation
Obtaining information from a third party in WRITING
Inquiry
Consider qualifications and experience; ask clear questions; consider reactions (low reliability cause people can lie, but you learn a lot; better face to face)
Recalculation
Determining mathematical accuracy of documents (footing a statement; high reliability because auditor does it)
Reperformance
Auditor’s execution of procedures or controls that were originally performed as part of the internal control system (high reliability because auditor does it)
Analytical procedures
Study of plausible relationships of financial and non-financial data
Scanning
Review of account data for significant or unusual items
Types of Analytical Procedures
- Trend analysis
- Ratio analysis
- Reasonableness analysis
Trend Analysis
Analysis of changes in an account over time
Takes last year’s account balances and compares to current balance
Need to compare multiple years to discover trend
Ratio Analysis
Comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and non-financial data
More effective than Trend Analysis
Reasonableness Analysis
Involves forming an expectation using a model (EX: depreciation expense can be modeled by taking book value divided by average useful life for lass of assets)
Since it forms an explicit expectation, reasonableness analysis typically forms a more precise expectation than trend or ratio analysis
Risk Assessment Procedures
Used to gain an understanding of the entity, and determine nature, timing, and extent of audit procedures
Substantive Analytical Procedures
Used to obtain evidential matter about particular assertions related to account balances or classes of transactions
Final Analytical Procedures
Overall review of the financial information in the final review stage of the audit
Transactions and Events and Related Disclosures: Occurrence/Existence
DURING THE PERIOD
Transactions and events that have been recorded or disclosed have occurred, and such transactions and evens pertain to the entity (sometimes referred to as validity)
Accounts Balances and Related Disclosures: Occurrence/Existence
END OF THE PERIOD (B/S)
Assets, liabilities, and equity interests exist
PCAOB Assertions: Occurrence/Existence
Assets or liabilities of the company exist a given date, and recorded transactions have occurred during a given period
Account Balances and Related Disclosures: Rights and Obligations
END OF THE PERIOD (B/S)
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity
PCAOB Assertions: Rights and Obligations
The company holds or controls the rights to the assets, and liabilities are obligations of the company at a given date
Transactions and Events and Related Disclosures: Completeness
DURING THE PERIOD
All transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included
Account Balances and Related Disclosures: Completeness
END OF THE PERIOD (B/S)
All assets, liabilities, and equity interests that should have ben recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included
PCAOB Assertions: Completeness
All transactions and accounts that should be presented in the financial statements are so included
Transactions and Events and Related Disclosures: Accuracy
DURING THE PERIOD
Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described
Account Balances and Related Disclosures: Accuracy/Valuation, and Allocation
END OF PERIOD (B/S)
Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described
PCAOB Assertions: Valuation and Allocation
Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts
Transactions and Events and Related Disclosures: Cutoff
DURING THE PERIOD
Transactions and events have been recorded in the correct accounting period
Transactions and Events and Related Disclosures: Classification
DURING THE PERIOD
Transactions and events have been recorded in the proper accounts
Account Balances and Related Disclosures: Classification
END OF PERIOD (B/S)
Assets, liabilities, and equity interests have been recorded in the proper accounts
Transactions and Events and Related Disclosures: Presentation
DURING THE PERIOD
Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework
Account Balances and Related Disclosures: Presentation
END OF PERIOD (B/S)
Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures and relevant and understandable in the context of the requirements of the applicable financial reporting framework
PCAOB Assertions: Presentation
The components of the financial statements are properly classified, described, and disclosed
Vouching
Occurence
- Picking a transaction on the GL to match a source doc
Tracing
Completeness
- Picking a source doc to make sure it is in the GL
Why can’t completeness ever be tested starting from the statements?
Violating the completeness assertions means that something that should be in the statements, isn’t. Therefore, how are we supposed to know that something isn’t in the statements by just looking at it?
