Evidence and Risk 1

Question 1

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)?

Answer 1

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.

Question 2

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

Answer 2

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.

Question 3

When are Analytical Procedures required?

Answer 3

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.

Question 4

How do Analytical Procedures assist the auditor?

Answer 4

Helps the Auditor:Determine if Management Assertions are reasonableDevelop audit planDevelop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

Question 5

What is the focus of Analytical Procedures?

Answer 5

Analytical Procedure focus is on dollar amounts (not internal controls)Analyzes Financial Data: Do Financial Statements Make Sense? Comparison of data between years

Question 6

How is the Current Ratio calculated?

Answer 6

Current Ratio = Current Assets / Current Liabilities

Question 7

How is the Quick Ratio calculated?

Answer 7

Quick Ratio = Liquid Assets / Current Liabilities

Question 8

How is the Asset Turnover calculated?

Answer 8

Asset Turnover = Net Sales / Average Assets

Question 9

How is the Inventory Turnover calculated?

Answer 9

Inventory Turnover = COGS / Average Inventory

Question 10

How is Gross Margin % calculated?

Answer 10

Gross Margin % = Gross Margin / Sales

Question 11

What type of testing are ratios?

Answer 11

Ratios are Analytical Procedures

Question 12

What type of procedure is a Budget vs. Actual comparison?

Answer 12

Budget vs. Actual comparisons are Analytical Procedures.

Question 13

List Common Types of Analytical Procedures

Answer 13

Ratio analysisBudget vs. Actual comparisonComparison of data between yearsUse of non-financial data to predict expected values for financial data

Question 14

How do management assertions affect the audit?

Answer 14

Management assertions help the auditor to plan the audit and select substantive tests.

Question 15

What assertions do auditors test?

Answer 15

Presentation - Cutoff Classification - Is it in the right period and category?Existence/ Occurrence - Did it happen? Does it exist?Rights & Obligations - Does the company own them?Completeness - Was everything recorded?Valuation - Are they worth the amount at which they are recorded?(PERCV)

Question 16

What assertions are tests for transaction classes?

Answer 16

OccurrenceCutoffClassificationCompletenessAccuracy

Question 17

For which assertions are disclosures tested?

Answer 17

OccurrenceCompletenessClassificationAccuracy

Question 18

Is testing the validity of direct evidence a basic audit procedure?

Answer 18

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.

Question 19

How are Management Estimates audited?

Answer 19

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.

Question 20

Whose property are audit documentation (audit workpapers)? In what form must they be?

Answer 20

Audit workpapers are the property of the auditor.They can be paper or electronic.They must include a WRITTEN audit program (either paper or electronic).

Question 21

What is the Current File?

Answer 21

Information pertaining to the current year’s audit.

Question 22

What is the Permanent File?

Answer 22

Information used for this audit and future audits which is updated as needed.

Question 23

How long must audit workpapers be maintained?

Answer 23

Must be kept for 5 years after the audit release date or according to regulations whichever is longer.Must be kept for 7 years under PCAOB AuditPCAOB audits also require an Engagement Completion Document

Question 24

What is the primary requirement for audit workpapers besides being written?

Answer 24

Any experienced auditor should be able to look at your work and understand what you did.

Question 25

How should documents added to work papers be treated?

Answer 25

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

Question 26

How should documents removed from workpapers be treated?

Answer 26

After the audit report is released the firm has 60 days to subtract from the file. You can still add to the file if you document it but you cannot delete any information after 60 days. Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.