Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AUD Flashcards > Evidence and Risk > Flashcards

Evidence and Risk Flashcards

1
Q

What constitutes the majority of an auditor’s work in determining an audit opinion?

A

Collection of evidence to support the opinion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What does audit evidence consist of?

A

Evidence consists of client accounting data and supporting documentation from client or third parties.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the relationship between evidence and detection risk?

A
  • Evidence has an inverse relationship with detection
    risk.
  • The one aspect of audit risk an auditor can control
    through (N)ature (T)iming (E)xtent of audit
    procedures.
  • Inherent risk and control risk are outside of auditor’s
    control.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Which aspects of audit risk can an auditor control?

A

An auditor can control detection risk, which is decreased by gathering evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Which aspects of audit risk can an auditor NOT control?

A

Inherent risk and control risk are outside of an auditor’s control.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How does a high level of acceptable detection risk affect an audit?

A
  • Less evidence collected.
    • Opens door for incremental audit risk.
    • Internal control should be strong.
    • Business and transactions should be relatively
      stable and predictable.
      (N) Less-competent evidence collected (T) Interim testing acceptable (E) Fewer transactions are verified.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What should occur when a low level of detection risk is acceptable?

A

More evidence collected

- (N) More-competent evidence collected
- (T) End of year balance testing
- (E) More transactions are verified
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the primary risks in an audit for a typical for-profit company?

A

Auditors are there to verify that:
- assets and revenues are not overstated
- expenses and liabilities are not understated
Exception: If the CPA Exam states that it is a tax-driven company, flip them around.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the primary constraint on audit evidence?

A

Cost vs. Benefit is a primary constraint.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What characteristics should audit evidence have?

A

Audit evidence should be:

- Sufficient (Quantity)
- Appropriate: Relevant and Reliable (Quality)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How does the quality of audit evidence vary depending on who has provided it?

A

Best evidence: Observation of activity by auditor.

Second Best: Originates from external parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement).

Weakest: Oral evidence from management.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Which documents are the most persuasive and credible?

A

Third party documents are more persuasive and credible than internally-prepared documents. Auditor Knowledge = Most Persuasive

   1. Third party info given to auditor
   2. Third party info given to client
   3. Internally-prepared document
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are substantive procedures?

A

Test substance/amounts/values.
- They help to reduce the risk of material
misstatements.
- They only test accuracy of financial statements and
dollar amounts.
- They do not test internal controls.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the substantive tests that are most often performed?

A

T.R.A.C.E

  • Trace (or Vouch)
  • Reconcile
  • Analytical procedures
  • Confirmations
  • Examine evidence that supports management
    assertion
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

When performing audit procedures, what financial statement elements should auditors focus on?

A

Auditors focus first on balance sheet accounts then associated income statement items.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How is cash audited?

A

Assurance level is high. Acceptable detection risk is low.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How is accounts receivable audited?

A

If acceptable DR is high - negative confirmation is used.
- Customer only responds if balance is materially
wrong.

If acceptable DR is low - positive confirmation is used.
- Customer asked to confirm by telling auditor the
balance.

Corresponding Income Statement Account - Revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How is accounts payable audited?

A

Accounts payable is audited by:
- Reviewing purchase orders/invoices
- Confirming with vendors
Corresponding Income Statement Account - Various Expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

How is inventory audited?

A

To audit an inventory, one must:
- Examine purchase agreements
- Look at board minutes.
Is inventory held as collateral? Corresponding Income Statement Account - COGS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How are beginning balances audited?

A

Beginning balances should match last year’s ending balance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is the general presumption for auditing ending balances?

A

If beginning balance additions subtractions are OK, then ending balances should also be OK.

22
Q

How is a statement of cash flows audited?

A

Foot all balances - Check the math
- Trace cash flow items to other financial statements
- Check classifications - Operating Activities,
Investing Activities, Financing Activities

23
Q

Under the indirect method, what must be disclosed on a statement of cash flows?

A
  • Interest paid
  • Income taxes paid
  • Non-cash transactions
  • Cash and cash equivalents definitions
24
Q

Under the direct method, what must be disclosed on a statement of cash flows?

A
  • Results as if you had used indirect method
  • Non-cash transactions
  • Cash and cash equivalents definition
25
Q

What are subsequent events and what do they require?

A

Subsequent events occur after the balance sheet date but before the audit report is issued.

Auditor needs to make inquiries and assess if they affect the audit report.

26
Q

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)?

A

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.

27
Q

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

A

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.

28
Q

When are analytical procedures required?

A

Analytical procedures are REQUIRED when:

- Planning the audit (preliminary)
- Reviewing the audit (final)

Analytical procedures may be also performed optionally along with substantive testing. Use of analytical procedures in the audit must be documented.

29
Q

How do analytical procedures assist the auditor?

A

Analytical procedures help 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

30
Q

What is the focus of analytical procedures?

A

Analytical procedure’s focus is on dollar amounts (not internal controls).
- It analyzes financial data: Do Financial Statements
Make Sense?
- It compares data between years.

31
Q

How is the current ratio calculated?

A

Current Ratio = Current Assets / Current Liabilities

32
Q

How is the quick ratio calculated?

A

Quick Ratio = Liquid Assets / Current Liabilities

33
Q

How is the asset turnover calculated?

A

Asset Turnover = Net Sales / Average Assets

34
Q

How is the inventory turnover calculated?

A

Inventory Turnover = COGS / Average Inventory

35
Q

How is Gross Margin % calculated?

A

Gross Margin % = Gross Margin / Sales

36
Q

What type of testing are ratios?

A

Ratios are analytical procedures.

37
Q

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

A

Budget vs. Actual comparisons are analytical procedures.

38
Q

List common types of analytical procedures.

A
  • Ratio analysis
  • Budget vs. Actual comparison
  • Comparison of data between years
  • Use of non-financial data to predict expected values
    for financial data
39
Q

How do management assertions affect the audit?

A

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

40
Q

What assertions do auditors test?

A

PERCV
- 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?

41
Q

What assertions are tests for transaction classes?

A
  • Occurrence
  • Cutoff
  • Classification
  • Completeness
  • Accuracy
42
Q

For which assertions are disclosures tested?

A
  • Occurrence
  • Completeness
  • Classification
  • Accuracy
43
Q

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

A

No, it is an extended procedure. 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.

44
Q

How are management estimates audited?

A
  1. First and foremost, you need to understand management’s rationale and methods for developing estimates before you can judge reasonableness.
  2. Next, auditor should formulate their own opinion on what a good estimate should be and compare it.
  3. Finally, determine if subsequent events affect the estimate.
45
Q

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

A

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).

46
Q

What is the current file?

A

Current file is information pertaining to the current year’s audit.

47
Q

What is the permanent file?

A

Permanent file is information used for this audit and future audits, which is updated as needed.

48
Q

How long must audit workpapers be maintained?

A

Audit workpapers must be kept for 5 years after the audit release date or according to regulations whichever is longer.

They must be kept for 7 years under PCAOB Audit. PCAOB audits also require an Engagement Completion Document.

49
Q

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

A

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

50
Q

How should documents added to work papers be treated?

A

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.

51
Q

How should documents removed from workpapers be treated?

A

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.

52
Q

How should an audit procedure be applied to Required Supplementary Information?

A

The auditor should make management inquiries about RSI and obtain written assertions regarding its preparation. The auditor should compare the RSI to the rest of the financial statements to ensure consistency.

AUD Flashcards (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions