Evidence Flashcards
How should dividends earned on equity investments be verified?
Reconcile amounts with published dividend records, represents strong externally generated evidence
What type of transactions are most appropriate for analytical procedures
They are most effective when they are applied to plausible and predictable relationships, often involving income statement accounts such as operating expense transactions.
Payroll and benefit liabilities, acquisitions and disposals of fixed assets, long term debt transactions relate to the BS and can vary widely by period.
What are analytical procedures vs tests of details of transactions and balances?
APs are used to gather evidence relative to relationships among various accounting and nonaccounting data. Comparing financial info with info of prior periods is a suggested AP.
Tracing amounts to related documents, and ascertaining that NI amount in the cash flow statement agrees with the IS are both test of details of transactions and balances.
What does the resignation of the client’s lawyer indicate after the attorney gives a letter in which no significant disagreements on assessments of contingent liabilities were noted?
The auditor is concerned with obtaining from the client’s lawyer corroborating evidence concerning info furnished by mgmt regarding litigtion, claims, and assessments. The resignation of the client’s lawyer may indicate the development of a conflict between the client and the lawyer regarding undisclosed unasserted claims.
The auditor should inquire as to the nature of the resignation.
What is the appropriate limitation for an attorney’s response to a client’s letter of audit inquiry?
AU337 states that an attorney may appropriately limit his response to matters to which he has given substantive attention in the form of legal consultation or representation.
Attorney is obligated to reply to questions about unasserted and asserted claims and assessments.
Attorney must reply to matters regardless of whether the probable resolution.
How does the auditor establish the accuracy of perpetual inventory records?
By comparing perpetual inventory records with receiving reports, which will indicate the quantity actually received.
Note that purchase orders - the quantity of ordered can be different that what is received.
Vendor pmts are not as helpful as it is difficult to convert pmt to the items received.
What are purchase requisitions
Deals with the quantity of inventory ordered which differs from the quantity received.
What is the focus of analytical procedures used in planning the audit?
APs used in planning the audit should focus on
- enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit date, and
- on identifying areas that may represent specific risks relevant to the audit.
How does the auditor test the quantity of materials charged to work in process?
By tracing these quantities to the material requisition.
Material requisitions by production depts would be the basis for charging materials to WIP.
Note perpetual inventory records are maintained based upon supporting or initiating docs such as material requisitions.
What is the primary reason auditors examine invoices from lawyers?
An auditor may learn of litigation, claims, and assessments on which an attorney has worked when the attorney lists them on an invoice.
How can auditor assess legal ramifications and estimate contingent liabilities?
Note legal ramifications and estimates of contingent liabilities will be obtained primarily through use of lawyers’ letters and through discussions with mgmt.
What are the types of financial statement assertions?
1- existence - is it present, did it take place
2 completeness - transactions are all included in FS
3 valuation - included in FS in the right proportion
4 rights and obligations - check that assets are rights and liabilities are obligations
5 presentation and disclosure - FS items are classified in the right way
What are the management assertions?
Transactions (occurrence, completeness, accuracy, authorization, cutoff, classification) Accounts Balance (existence, rights and obligations, completeness, valuation and allocation) Presentation and disclosure (occurrence, rights and obligations, completeness, classification and understandibility, accuracy and valuation)
What procedure do auditors use in identifying related party transactions?
Auditors review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.
Note that mgmt accounting estimates often have little relationship to related party transactions.
How does the auditor determine whether dividend income from publicly held investments is reasonable?
They refer to records produced by investment services, not available from SEC or registrars. Investment services maintain records of such dividend income and auditors compare with a client’s recorded dividend income.
Which account would the auditor be most likely to analyze the details? Service revenue/sales/repairs expense/sale salaries expense
Repairs and maintenance expense - errors expensing capital acquisitions is a frequent accounting error.
The other three are frequently tested through APs and tests of controls.
What are the auditor’s objective when evaluating mgmt estimates?
- ensure that all estimates material to the FS have been developed.
- auditor is responsible for determining the reasonableness of the estimates
- ensure that the FS are presented in accordance with GAAP
Note no one estimate can be considered accurate with 100% certainty
What can be found on the deed
Deeds generally consist of a legal conveyance of rights to use real property. Frequently the sales price is not even specified and the related mortgage acquisition costs are much less likely to be stated in the deed.
What can be used to verify mortgage acquisition costs?
Canceled checks
Closing statement - detailed listing of costs of acquiring real property including possible mortgage acq costs
Interest expense
When can interim testing be done?
Interim testing is considered inherently more risky so it would rely on good internal controls existing for the period after the testing.
If there is a high turnover of senior mgmt or it is a new client, this is considered higher risk and auditor should wait until year end to perform substantive procedures.
What influences the auditor’s consideration of the reliability of data for purposes of achieving audit objectives?
- whether sources within the entity were independent of those responsible for the amount being audited
- whether the data were subjected to audit testing in the current or prior year
- whether the data were obtained from independent sources outside the entity or from sources within
Why is the blank form of AR confirmations less efficient that the positive form?
Blank form (confirmations sent out without amounts) forces the respondent to provide the info and thereby discourages the practice of signing forms without proper investigation. However, requiring respondents to supply such info may decrease the number of responses obtained and result in the need for additional audit procedures.
When should auditor use positive and negative forms of confirmation requests for AR?
The professional standards suggest the use of the positive form for large balances and the negative form for small balances. Positive are suggested when internal control is unsatisfactory, and negative when internal control is satisfactory.
Why would an auditor’s analytical procedures indicate a lower than expected return on an equity method investment?
If the amortization is higher than proper, the return to the investment account will be lower than expected.
Note the cash dividend policy will not affect the return. Under the equity method, dividends reduce the carrying value of the investment. Fluctuation in the price of the common stock is not reflected by the equity method.
What does auditor trace to obtain assurance that all inventory items in a client’s inventory listing are valid?
Start with the inventory listing and trace to inventory tags and the auditor’s recorded count sheets. This provides assurance that items in the inventory listing are valid in the sense that they have an inventory tag and some will have also been counted by auditor.
If only the tags were noted during the auditor’s observations to items in the inventory listing, it does not address whether the items on the listing are valid.
If the tags were traced to receiving report and vendor invoices, it only addresses whether items with tags have proper support, not if the inventory listing is valid.
What are the types of subsequent events and how do they affect the audit? Ex: loss on an uncollectible trade receivable recorded in year 1 from customer that declared bankruptcy in year 2, or uninsured loss of inventories purchased in year 1 as a result of flood in year 2, proceeds from a capital stock issuance in year 2 which was being approved by board in year 1
Type 1 subsequent events provide additional evidence with respect to conditions that existed at the date of the BS and affect the estimates inherent in the process of preparing FS. Advising mgmt to have FS adjustment is appropriate for Type 1. Ex: loss on an uncollectible trade receivable recorded in year 1 from customer that declared bankruptcy in year 2, others are type 2
Type 2 events provide evidence with respect to conditions that did not exist at the date of the BS being reported on but arose subsequent to that date. They do not require FS adj, but may be disclosed in the notes to keep the FS from being misleading.
Note that the auditor does not issue FS for the client; the FS is the responsibility of mgmt.
How does a subsequent event affect the auditor’s report
The opinion paragraph should not be modified. If the auditor wishes to emphasize an unusually important subsequent event, the info should be presented in a separate explanatory paragraph preceding the opinion prgh.
What info is ordinarily included among the written client representations obtained by the auditor?
Professional standards include info on compensating balances and other cash balance restrictions as items for which the auditor ordinarily obtains written representations.
Note that mgmt need not acknowledge responsibility for illegal employee actions.
Inventory assertions checks
Rights - ownership
Valuation - pricing
Existence - physical count quantities
Note that inventory not on hand might be owned by client such as items purchased in transit at year end when title has passed, or inventory on consignment.
What is the most efficient AP for verification of interest earned on bond investments?
An auditor may quickly and easily recompute the amount of interest which has been earned.
Note that vouching the receipt and deposit of interest checks will test interest RECEIVED and records, NOT interest EARNED.
The interest rate can be found on the bond agreement instead of confirming with issuer of bond.
How does auditor verify accrued commissions payable?
Commissions are directly related to sales in verifying accrued commissions payable; by looking at sales cutoff review, the auditor can determine that both are recorded in the proper period.
What should auditor do when it receives a confirmation on a client’s fax machine?
The auditor should verify the source and content in some manner (ex: telephone call) before accepting the confirmation.
What is included on a security count worksheet?
Auditor records details of the count on this worksheet and obtains acknowledgement by a client rep that he securities were returned so as to eliminate subsequent questions in the event that such securities disappear.
Why does the auditor trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule?
This AP is undertaken to provide evidence that items physically present and observed by the auditor at the time of the count are included in the final inventory schedule.
What is the auditor required to do when errors exist that are not material in the aggregate?
AU312 - requires a summary of uncorrected misstatements/errors (other than those considered trivial) AND required to document the conclusion that the errors do not cause the FS to be misstated.
Why should the auditor gain an understanding of each subsidiary’s relationship to the total entity when searching for related party transactions?
Experience has shown that business structure and operating style are occasionally deliberately designed to obscure related party transactions. Auditor wants to determine whether related party transactions were done on terms not equivalent to arms length transactions.
