Evidence Flashcards
what is the objective of an auditor during an audit?
Obtain sufficient appropriate audit evidence to be able to support the auditor’s opinion
what are the characteristics of the evidence?
sufficient = quantity
appropriate = quality (relevant and reliable)
is cost a sufficient reason to eliminate an audit procedure?
No. Cost and usefulness can be considered but cost alone cannot be valid to eliminate a procedure if no other alternative procedure exists.
What are the primary risks in an audit for a typical for-profit company?
Auditors are there to verify that
Assets & Revenues are not overstated
Expenses & Liabilities are not understated
Exception - if the CPA Exam states that it is a tax-driven company flip them around
What characteristics should audit evidence have?
Sufficient (quantity)
Appropriate: Relevant & Reliable (Quality)
Does evidence have to be conclusive?
No. It needs to be persuasive
What is the hierarchy of persuasive evidence?
externally generated, externally circulated (most -confirmations, bank cutoff statements)
externally generated, internally circulated (bank statement)
internally generated, externally circulated (cancelled check)
internally, generated, internally circulated (least - client generated documents)
What are substantive procedures? Which are performed most often?
Test substance/amounts/values of accounts and transactions ($ubstantive)
Trace (or Vouch) Reconcile Analytical Procedures Confirmations Examine evidence that supports management assertions.
(T.R.A.C.E.)
How is Cash audited?
Audited for Existence (proof of cash, simultaneously count all cash, help detect kiting) and
Completeness (review/prepare year end bank reconciliation, bank cutoff statement)
Kiting = overstating intentionally by misstating dates of cash transfer
How is Accounts Receivable audited?
Valuation & Allocation (aged a/r schedule, recalculate bad debt expense and allowances)
Existence (confirm a/r through negative/positive confirmations, test for lapping)
lapping=ponzi scheme
negative confirmation=response only if disagree
positive confirmation=response required
How is Accounts Payable audited?
Search for unrecorded liabilities (completeness)
All payables have been recorded in the proper period
Search for unmatched invoices and unbilled receiving reports
Perform cutoff procedures
Review purchase orders/invoices
Confirm with Vendors
How is Inventory audited?
Audited for :
Existence (observation, confirm inventory with 3rd parties, books to floor-vouch)
Completeness (floor to books-tracing)
books=inventory listing or client summary
floor=test counts, count sheets, inventory tags
Is Inventory held as collateral?
Corresponding Income Statement Account - COGS
How are beginning balances audited?
successor auditor is required to assume responsibility if planning to rely
required to obtain sufficient appropriate evidence (if there are MM impacting current period, consistency of policies to current period)
if unable to obtain evidence, qualified or disclaimer opinion
if contain MM or inconsistencies of application of accounting, qualified or adverse
How is a Statement of Cash Flows audited?
Limited substantive procedures required since underlying accounts are audited with B/S and I/S.
- Determine presentation is properly classified (operating, investing, financing)
- Verify that cash matches the B/S
- SCF is presented for each year of I/S presented
What are Subsequent Events and what do they require?
Events that have a material effect and occur after the Balance Sheet Date but before the audit report is issued.
Type I - require adjustment because it is related to a condition that existed at the balance sheet date
Type II - requires disclose - because though the event did not exist at the balance sheet date, lack of disclosure would be misleading
What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?
If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement.
Regulatory agencies might need to get involved under some circumstances.
What should an auditor do if they discover they have forgotten to perform a substantive procedure?
If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute.
Otherwise support for their audit opinion could be jeopardized.
When are Analytical Procedures required?
REQUIRED When planning the audit (preliminary)
REQUIRED When reviewing the audit (final)
Analytical procedures may be also performed optionally along with the substantive testing.
Use of Analytical Procedures in the audit must be documented.
How do Analytical Procedures assist the auditor?
Helps the Auditor:
Determine if Management Assertions are reasonable
Develop audit plan
Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement
What is the focus of Analytical Procedures?
Analytical Procedure focus is on dollar amounts (not internal controls)
Analyzes Financial Data: Do Financial Statements Make Sense?
Comparison of data between years
How is the Current Ratio calculated?
Current Ratio = Current Assets / Current Liabilities
How is the Quick Ratio calculated?
Quick Ratio = cash+mkt sec+receivables / Current Liabilities
