Chapter 7 Audit Evidence Flashcards
all the information used by auditors in arriving at the conclusions on which the audit opinion is based.
Audit Evidence
- Knowledge of the client
- Outside information
- Accounting systems
- Quality of internal control
Sources of audit evidence
- existence and occurrence
- completeness
- rights and obligations
- valuation and allocation
- presentation and disclosures
5 assertions for audit evidence
assets, liabilities and equity interests exist
existence/occurrence
all assets, liabilities, and equity interests that should have been recorded have been recorded
completeness
the entity holds or controls the rights to the assets, and liabilities are the obligations of the entity
rights and obligations
assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
valuation and allocation
assets, liabilities and equity interests are appropriately classified on the financial statements, and are adequately described in the footnotes to the financial statements
presentation and disclosure
- Quality of evidence that auditor collects must always be high
- Quantity of evidence that auditor collects may be low so costs are low
Low risk client
- Quality of evidence that auditor collects must always be high
- Quantity of evidence that the auditor collects must be high so costs are high
High risk client
- 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
More reliable audit evidence
- 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
Less reliable audit evidence
- 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
Direct evidence
often requires more inferences and the logic for the conclusion relies on more complex inferences
Indirect Evidence
- underlying accounting records
- corroborating information
2 basic types of evidence
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
underlying accounting records
validates the underlying accounting records, such as minutes of meetings, confirmations from independent parties, industry data, inquiry, observation, physical examination, and inspection of documents
corroborating information
- 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
3 reasons to focus on direct/substantive tests
testing balances for either over- or understatement (but not both) and creates audit efficiency by taking advantage of the double-entry bookkeeping system
Directional testing
most often used to gain an understanding of a client’s processing system, including a “walkthrough” of processes
Observation
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
Inquiries of Knowledgeable Persons
consist of sending an inquiry to an outside party to corroborate information
External confirmations
auditors examine a client’s documents such as invoices, payroll time cards, and bank statements to insure accuracy and existence of all documents
Inspection of documents
observation or inspection is useful in verifying the existence of tangible assets and in identifying potential obsolescence or signs of wear and tear
Inspection of physical assets
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
recalculation of data
auditors are now using sophisticated software to look for unusual patterns in the underlying data, or assessing the mathematical correctness of data
Data analysis
auditor’s independent execution of controls that were originally performed as part of the entity’s internal control
Reperformance of client procedures
selecting a sample from a population of source documents and reprocessing them to be sure they have all been properly recorded
Reprocessing of transactions
taking a sample of already recorded transactions and tracing them back to their original source
Vouching
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
Analytical procedures
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.
Audit documentation
taking a sample of already recorded transactions and tracing them back to their original source
Vouching
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
Analytical procedures
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.
Audit documentation
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
Audit Program- as an integral part of documentation
- 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
Characteristics of good audit documentation
