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
How is the Asset Turnover calculated?
Asset Turnover = Net Sales / Average Total Assets
How is the Inventory Turnover calculated?
Inventory Turnover = COGS / Average Inventory
How is Gross Margin % calculated?
Gross Margin % = Gross Margin / Net Sales
What assertions are tested for account balances?
Completeness
Valuation and Allocation
Existence
Rights and Obligations
(CVER)
What assertions are tested for transaction classes?
Completeness cutOff accuracy/(Valuation) occurrEnce Understandibility and classification
(COVEU)
What assertions are tested for disclosure and presentation?
Completeness Valuation and accuracy occurrEnce Rights and obligations Understandibility and Classification
(CVERU)
Is testing the validity of direct evidence a basic audit procedure?
No it is an extended procedure.
For example you don’t have to take a loan covenant document and go search out that it’s a valid loan covenant. Instead you consider the source - if it’s externally prepared it’s more persuasive.
How are Management Estimates audited?
First and foremost you need to understand management’s rationale and methods for developing estimates before you can judge reasonableness.
Next Auditor should formulate their own opinion on what a good estimate should be and compare it.
Finally determine if subsequent events affect the estimate.
Whose property are audit documentation (audit work papers)?
Audit workpapers are the property of the auditor.
What is the Current File?
Information pertaining to the current year’s audit.
What is the Permanent File?
Information used for this audit and future audits which is updated as needed.
How long must audit workpapers be retained?
Must be kept for 5 years after the audit report release date or according to regulations whichever is longer.
PCAOB requires 7 years
what does audit documentation include and how should it be prepared?
Audit documentation should include a written audit program and be prepared so that an experienced auditor should understand the procedures performed.
How should documents added to work papers after the issuance of the report be treated?
it must be documented as to who added them, when they were added, why they were added and any effects on the audit report.
How should documents removed from workpapers be treated?
after the report is released no documents should be removed
What is the documentation completion period following the report release date?
the completion period is 60 days following the release of the report.
PCAOB is 45 days following the release of the report.
why does the auditor prepare audit documentation?
documentation provides :
-a sufficient and appropriate record of the basis for the auditor’s report
-evidence that the audit was planned and performed in accordance with GAAS
How is working capital calculated?
current assets - current liabilities
How is accounts receivable turnover calculated?
net credit sales/average receivables
How is accounts receivable turnover in days calculated?
365 days/receivables turnover
how is inventory turnover in days calculated?
365 days/inventory turnover
how is total asset turnover calculated?
net sales/average total assets
How is accounts payable turnover calculated?
COGS/average accounts payable
How is days in accounts payable calculated?
365 days/ accounts payable turnover
How is net profit margin calculated?
net income/net sales
How is return of total assets calculated?
net income/average total assets
What is the alternate calculation of return on assets?
net income/net sales
X
net sales/average total assets
How is EPS calculated?
(NI-Preferred dividend)/weighted avg common shares o/s
What are some key word when testing for Completeness?
Trace Unrecorded Understatements Prenumbered documents All Cutoff
What are some key words when testing existence and occurrence?
Vouch Valid Overstatements Observation Confirmation
What are some key words when testing valuation and accuracy?
Recalculate
Recompute
Price Test
Properly valued
what are some accounts/contra accounts tested for valuation?
A/R and Allowance for doubtful accounts
Fixed assets and Acc Depreciation
Intangibles and Amortization
Bonds and Premiums and Discounts
Sakes and Sales Returns and Allowances
Purchases and Purchase Returns and allowances
Investments - Temp vs AFS vs HTM, cost vs equity method
Key words for rights and obligations?
rights-deed, title, receipts, cancelled checks
obligations-debt agreements, confirmations
key words for classifications and understandibility?
recorded in proper accounts
properly classified
appropriately presented and described
transfers recorded properly
what is performance materiality?
materiality at the assertion level
