Chapter 7 Audit Evidence

Question 1

all the information used by auditors in arriving at the conclusions on which the audit opinion is based.

Answer 1

Audit Evidence

Question 2

• Knowledge of the client
• Outside information
• Accounting systems
• Quality of internal control

Answer 2

Sources of audit evidence

Question 3

• existence and occurrence
• completeness
• rights and obligations
• valuation and allocation
• presentation and disclosures

Answer 3

5 assertions for audit evidence

Question 4

assets, liabilities and equity interests exist

Answer 4

existence/occurrence

Question 5

all assets, liabilities, and equity interests that should have been recorded have been recorded

Answer 5

completeness

Question 6

the entity holds or controls the rights to the assets, and liabilities are the obligations of the entity

Answer 6

rights and obligations

Question 7

assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

Answer 7

valuation and allocation

Question 8

assets, liabilities and equity interests are appropriately classified on the financial statements, and are adequately described in the footnotes to the financial statements

Answer 8

presentation and disclosure

Question 9

• Quality of evidence that auditor collects must always be high
• Quantity of evidence that auditor collects may be low so costs are low

Answer 9

Low risk client

Question 10

• Quality of evidence that auditor collects must always be high
• Quantity of evidence that the auditor collects must be high so costs are high

Answer 10

High risk client

Question 11

• Directly obtained evidence (observation of a control)
• Evidence derived from a well-controlled information system
• evidence from independent outside sources
• evidence that exists in documentary form
• original documents

Answer 11

More reliable audit evidence

Question 12

• indirectly obtained evidence
• evidence derived from a poorly controlled system or easily overridden information system
• evidence from within the client’s organization
• verbal evidence not supported by documentation
• Photocopies, or facsimiles,or digitized data

Answer 12

Less reliable audit evidence

Question 13

• evidence obtained from direct observation or directly asking a client’s customer.
• the only inference the auditor has to make is that
  a) customers know their account balance
  b) the sample is representative of the population as a whole

Answer 13

Direct evidence

Question 14

often requires more inferences and the logic for the conclusion relies on more complex inferences

Answer 14

Indirect Evidence

Question 15

• underlying accounting records

- corroborating information

Answer 15

2 basic types of evidence

Question 16

evidence of internal controls over financial reporting, as well as supporting records such as checks, invoices, contracts; the general and subsidiary ledgers; journal entries; and worksheets supporting cost allocations, computations, reconciliations and disclosures

Answer 16

underlying accounting records

Question 17

validates the underlying accounting records, such as minutes of meetings, confirmations from independent parties, industry data, inquiry, observation, physical examination, and inspection of documents

Answer 17

corroborating information

Question 18

• usually fewer items in the ending balance that are contained in the transactions that have taken place during the year
• Reliable evidence, which can be gathered efficiently such as ending inventory counts
• easier to focus on changes in assets or liabilities, rather than testing all the details that affected the accounts

Answer 18

3 reasons to focus on direct/substantive tests

Question 19

testing balances for either over- or understatement (but not both) and creates audit efficiency by taking advantage of the double-entry bookkeeping system

Answer 19

Directional testing

Question 20

most often used to gain an understanding of a client’s processing system, including a “walkthrough” of processes

Answer 20

Observation

Question 21

used to extensively gain an understanding of the following:

• the accounting system
• Management’s plans for such things as marketable investments, new products, disposal of lines of business, and new investments
• Pending or actual litigation against the organization

Answer 21

Inquiries of Knowledgeable Persons

Question 22

consist of sending an inquiry to an outside party to corroborate information

Answer 22

External confirmations

Question 23

auditors examine a client’s documents such as invoices, payroll time cards, and bank statements to insure accuracy and existence of all documents

Answer 23

Inspection of documents

Question 24

observation or inspection is useful in verifying the existence of tangible assets and in identifying potential obsolescence or signs of wear and tear

Answer 24

Inspection of physical assets

Question 25

auditors often find it useful to recalculate a number of client computations by ways such as:

• footing
• cross footing
• tests of extensions
• recalculating estimated amounts

Answer 25

recalculation of data

Question 26

auditors are now using sophisticated software to look for unusual patterns in the underlying data, or assessing the mathematical correctness of data

Answer 26

Data analysis

Question 27

auditor’s independent execution of controls that were originally performed as part of the entity’s internal control

Answer 27

Reperformance of client procedures

Question 28

selecting a sample from a population of source documents and reprocessing them to be sure they have all been properly recorded

Answer 28

Reprocessing of transactions

Question 29

taking a sample of already recorded transactions and tracing them back to their original source

Answer 29

Vouching

Question 30

comparisons, either judgmentally or statistically, of data, over time, across operating units, or between related components of the financial statements to develop insight concerning expected relationships

Answer 30

Analytical procedures

Question 31

written record that forms the basis for the auditor’s conclusions. should be prepared in sufficient detail to provide a clear understanding of its purpose, source and the conclusions reached.

Answer 31

Audit documentation

Question 32

taking a sample of already recorded transactions and tracing them back to their original source

Answer 32

Vouching

Question 33

comparisons, either judgmentally or statistically, of data, over time, across operating units, or between related components of the financial statements to develop insight concerning expected relationships

Answer 33

Analytical procedures

Question 34

written record that forms the basis for the auditor’s conclusions. should be prepared in sufficient detail to provide a clear understanding of its purpose, source and the conclusions reached.

Answer 34

Audit documentation

Question 35

specifies the procedures to be performed in gathering audit evidence and is used to record the successful completion of each audit step. most important piece of documentation in an audit engagement and provides an effective means for:

• organizing and distributing audit work
• monitoring the audit process and progress
• recording the audit work performed and those responsible for performing the work
• reviewing the completeness and persuasiveness of procedures performed

Answer 35

Audit Program- as an integral part of documentation

Question 36

• heading that includes the name of the audit client, an explanatory title, and the balance sheet date
• initials or electronic signature of the performing auditor and date test was completed
• description of the tests performed and findings
• Tick marks and legend indicating the nature of the work performed by the auditor

Answer 36

Characteristics of good audit documentation