Chapter 7 Flashcards
What four major decisions does an auditor must make regarding what to gather and how much to accumulate? (4)
- Which audit procedures to use?
- What sample size to select for a given procedure?
- Which items to select from the population?
- When to perform the procedures?
What does audit program includes?
An audit program, also called an audit plan, is an action plan that documents what procedures an auditor will follow to validate that an organization is in conformance with compliance regulations. … The framework should explain the audit’s objectives, its scope and its timeline.
What is sufficiency of evidence
refers to the quantity of evidence obtained.
What are the 2 factors of the samples sizes?
- The auditor’s expectation of misstatements
2. The effectiveness of the client’s internal controls
What is Appropriateness mean?
refers to the quality of evidence obtained
What is Appropriateness depended on? (2)
- Relevance of evidence means that the evidence must pertain to or be relevant to the audit objective that is being tested.
- Reliability of evidence refers to the degree to which evidence is believable or worthy of trust.
Reliability depends on the following characteristics: (6)
- Independence of provider
- Effectiveness of client’s internal controls
- Auditor’s direct knowledge
- Qualifications of individuals providing the information
- Degree of objectivity
- Timeliness
What is the Combined Effect?
The persuasiveness of the evidence can be evaluated only after considering the combination of appropriateness and sufficiency.
How many types of Audit Evidence are there? (8)
(8)
- Physical examination
- Confirmation
- Inspection (documentation)
- Analytical procedures
- Inquiries of the client
- Recalculation
- Reperformance
- Observation
Physical examination
The inspection or count of a tangible asset by the auditor.
Confirmation
Receipt of a written or oral response.
Inspection (documentation)
The auditor’s examination of the client’s documents (internal or external) and records to substantiate the information in the financial statements. Using documents to support recorded transactions (occurrence) is called vouching. Testing from source documents to recorded amounts (completeness objective) is called tracing.
Analytical procedures
Comparisons and relationships used to assess whether account balances or other data appear reasonable
Inquiries of the client
Obtaining written or oral information from the client.
Recalculation
Repeating a sample of calculations made by the client.
Reperformance
Redoing a sample of procedures other than calculations performed by the client
Observation
Watching a process or procedure being performed by others.
Cost of Types of Evidence? (3 groups)
Most expensive: Physical Examination and Confirmation
Moderately costly: Inspection, Analytical Procedures, and Reperformance
Least expensive: Observation, Inquiries of the Client, Recalculation
What is Purposes of Analytical Procedures during the audit engagement? (3)
- Analytical procedures are required in the planning phase as part of risk assessment to understand the client’s business and industry.
- Analytical procedures are often done (but not required) during the testing phase of the audit as substantive tests in support of an account balance.
- Analytical procedures are required during the completion phase of the audit, serving as a final review for material misstatements.
Types of Analytical Procedures—Auditors compare client data with: (4)
- Industry data
- Similar prior-period data
- Client-determined expected results
- Auditor-determined expected results
Financial ratios fall into several categories: (4)
- Short-Term Debt-Paying Ability
2 .Liquidity Activity Ratios - Ability to Meet Long-Term Debt Obligations
- Profitability Ratios
Short-Term Debt-Paying Ability: (3)
- Cash ratio
- Quick ratio
- Current ratio
Liquidity Activity Ratios: (4)
- Accounts receivable turnover
- Days to collect receivables
- Inventory turnover
- Days to sell inventory
Ability to Meet Long-Term Debt Obligations: (2)
- Debt to equity
2. Times interest earned
Profitability Ratios: (5)
- Earnings per share
- Gross profit percentage
- Profit margin
- Return on assets
- Return on common equity
What is Audit Documentation?
is the record of the audit procedures performed, relevant audit evidence, and conclusions the auditor reached.
Purpose for Audit Documentation? (4)
- Basis for planning the audit
- Record of the evidence accumulated and the results of the tests
- Data for determining the proper type of audit report
- Basis for review by supervisors and partners
Who owns the audit flies?
All audit files are the property of the auditor.
How can a member in public practice disclose any confidential client information?
With specific consent of the client.
Requirements for Retention of Audit Documentation: (2)
- Auditing standards require records of Private Companies be retained for a minimum of Five Years.
- Sarbanes-Oxley Act requires auditors of Public Companies to maintain audit files for a minimum of Seven Years.
Current Flies are what? plus 4 examples
Include all documentation for the current year audit including:
- Audit Program
- Working Trial Balance—Each line in the trial balance is supported by a lead schedule. A typical lead schedule for Cash is included in Figure 7-4.
- Adjusting Entries—Auditors propose adjusting entries for material misstatements.
- Supporting schedules as needed.
Permanent Flies are what? plus 4 examples
Contain data of a historical or continuing nature. These provide a convenient source of information that is used from year to year:
- Copies of company documents such as articles of incorporation, bylaws, bond indentures, and long-term contracts
- Analyses of accounts from previous years that have continuing importance
- Information related to understanding internal controls and assessing control risk
- Results of analytical procedures from prior years’ audits for comparison
Preparation of Audit Documentation means what?
Audit documentation should be in sufficient detail to provide a clear understanding of the work performed, evidence obtained, and conclusions reached.
Documentation should have these characteristics: (5)
- Identifies the client’s name, period covered, description of the contents, initials of the preparer, date of preparation, and an index code.
- Indexed and cross-referenced to aid in organization.
- Clearly indicates the audit work performed through memos, initialing the procedures in the audit program, or tick marks on the schedules.
- Includes sufficient information to fulfill the audit objectives.
- Communicates clearly the conclusions reached about the segment of the audit.
Which types of evidence is an auditor more likely to use? (3)
- Observation
- Inquiries of the Client
- Recalculation
