Chapter 5 Evidence and Documentation Flashcards
Managements Assertions about classes of transactions and events, and related disclosures, for the period under audit
Occurence, Completeness, Authorization, Accuracy, Cutoff, Classification, and Presentation
Managements Assertions about account balances and related disclosures, at the period end
Existence, Rights and Obligations, Completeness, Accuracy, valuation, and allocation, classification, and presentation
Audit Evidence
The information used by the auditor in arriving at the conclusions on which the audit opinion is based
Understanding audit evidence
-information used as audit evidence
-sufficiency and appropriateness of audit evidence
-evaluation of audit evidence
Information used as accounting evidence
-Accounting records: records of initial entries and supporting records, general and subsidiary ledgers, journal entries, and other adjustments to financials not reflected in journal entries, worksheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures, contracts
-Other Information: minutes of meetings, confirmations from third parties, industry analysts reports, comparable data about competitors, control manuals, information obtained by the auditor from inquiry, observation, and inspection
Sufficiency of Audit Evidence
the measure of the quantity of audit evidence
-greater risk of misstatement requires higher quantity of audit evidence
-higher quality of audit evidence results in a lower quantity of audit evidence (inverse relationship b/w sufficiency and appropriateness)
Appropriateness of Audit evidence
the measure of the quality of audit evidence
-relevance
-reliability
*independent source outside the entity
*effectiveness of internal control
*Documentary evidence
*Original documents
Evaluation of audit evidence
Proper evaluation of evidence requires an understanding of the:
-types of evidence available
-relative reliability of audit evidence
*auditor should be thorough in searching for evidence and unbiased in its evaluation
Audit Procedures
Specific acts performed by the auditor to gather evidence about whether specific assertions are being met
*Risk assessment procedures
*Test of Controls
*Substantive Procedures
Audit Program
a set of audit procedures prepared to test assertions for a component of the financial statements
Audit procedures for obtaining audit evidence
-Inspection
-Observation
-Inquiry
-Confirmation
-Recalulation
-Reperformance
-Analytical Procedures
Inspection
Evidence obtained from external documents is more reliable than evidence obtained from internal documents
*Physical examination of assets
-Journal Ledger->Source Documents (vouching/occurence)
-Source Documents->Journal or Ledger (tracing/completeness)
Observation
The process of watching a process or procedure being performed by others
*not only that the count is correct but that the client cannot add to the count after the observation of the count has taken place
Inquiry
In conducting inquiry, the auditor should:
-Consider the knowledge, objectivity, experience, responsibilitym and qualifications of the individual to be questioned
-Ask clear, concise, and relevant questions
-Use open or closed questions appropriately
-listen actively and effectively
-consider the reactions and responses and ask follow up questions
-evaluate the response
Confirmation
Audit evidence obtained by the auditor as a direct written response to the auditor from a third party
The reliability of evidence obtained through external confirmations may be affected by factors such as:
-The form of the confirmation
-prior experience with the entity
-The nature of the information being confirmed
-The intended respondent
*Positive vs. Negative A/R confirmations
Positive A/R Confirmations
The customer of the client MUST respond
More effective
if customer does’t respond the auditor must perform additional testing
Negative A/R Confirmations
The customer only has to respond if they disagree with the balance sent to them
more efficient, takes less time
Recalculation
Checking the mathematical accuracy of documents or records
-testing of client software or using our own software like IDEA
Reperformance
The auditor’s independence execution of procedures or controls that were originally performed by company personnel
Analytical Procedures
Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data
Audit Documentation
The auditors record of the audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached
Three purposes:
-to provide support for the audit report
-to aid in the planning performance, and supervision of the audit
-to provide a focal point for reviewing work of subordinates; to provide a basis for quality reviews
Audit Documentation should:
-demonstrate how the audit complied with auditing and related professional practice standards
-supports the basis for the auditors conclusions concerning each material financial assertion
-demonstrate whether the underlying accounting records agreed or reconciled with the financial statements
-include a written audit program detailing auditing procedures necessary and experienced reviewer to:
*understand the nature, timing, extent, and results of audit procedures, evidence obtainedm and conclusions reached
*Determine who performed and reviewed the work, as well as the dates of the work and reviews
Format of Audit Documentation
-Heading
-Indexing and cross referencing
-Tick marks
Ownership of audit documentation, archiving, and retention
-All audit documentations is the property of the auditor, including documents prepared by the entity at the auditors requesti
-The Sarbanes-Oxley Act of 2002 requires audit documentation to be retained for a number of years from the completion date of the engagement
*7 years
-Audit documentation should be organized so that audit team members and others can find evidence supporting financial statement accounts
Purposes of Analytical Procedures
Risk Assessment Procedures
Substantive Analytical Procedures
Final Analytical Procedures
Risk Assessment Procedures
Used to assist the auditor to better understand the business and to plan the 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
used as an overall review of the financial information in the final review stage of the audit
Types of Analytical Procedures
-Trend analysis
-Ratio analysis
-Reasonableness Analysis
