Evidence and Risk 2

Question 1

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

Answer 1

Collection of evidence to support the opinion.

Question 2

Of what does audit Evidence consist?

Answer 2

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

Question 3

What is the relationship between Evidence and Detection Risk?

Answer 3

Evidence has an inverse relationship with Detection RiskThe 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.

Question 4

Which aspects of Audit Risk can an auditor control?

Answer 4

Detection Risk which is decreased by gathering evidence.

Question 5

Which aspects of Audit Risk can an auditor NOT control?

Answer 5

Inherent Risk and Control Risk are outside of an auditor’s control.

Question 6

How does a high level of acceptable Detection Risk affect an audit?

Answer 6

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.

Question 7

What should occur when a low level of Detection Risk is acceptable?

Answer 7

More Evidence collected(N) More-competent Evidence collected(T) End of year balance testing(E) More transactions are verified

Question 8

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

Answer 8

Auditors are there to verify thatAssets & Revenues are not overstatedExpenses & Liabilities are not understatedException - if the CPA Exam states that it is a tax-driven company flip them around

Question 9

What is the primary constraint on audit evidence?

Answer 9

Cost vs. Benefit is a primary constraint.

Question 10

What characteristics should audit evidence have?

Answer 10

Sufficient (quantity)Appropriate: Relevant & Reliable (Quality)

Question 11

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

Answer 11

Best evidence: Observation of activity by auditor.2nd 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.

Question 12

Which documents are the most persuasive and credible?

Answer 12

Third party documents are more persuasive and credible than internally-prepared docsAuditor Knowledge = Most Persuasive3rd Party info given to auditor3rd Party info given to clientInternally-prepared doc

Question 13

What are Substantive Procedures?

Answer 13

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

Question 14

What are the substantive tests that are most often performed?

Answer 14

Trace (or Vouch)ReconcileAnalytical ProceduresConfirmationsExamine evidence that supports management assertions.(T.R.A.C.E.)

Question 15

When performing audit procedures what should auditors focus on?

Answer 15

Auditors focus first on Balance Sheet Accounts then associated Income Statement items

Question 16

How is Cash audited?

Answer 16

Assurance Level is High.Acceptable Detection Risk is Low.

Question 17

How is Accounts Receivable audited?

Answer 17

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

Question 18

How is Accounts Payable audited?

Answer 18

Review purchase orders/invoicesConfirm with VendorsCorresponding Income Statement Account - Various Expenses

Question 19

How is Inventory audited?

Answer 19

Examine purchase agreementsLook at Board MinutesIs Inventory held as collateral?Corresponding Income Statement Account - COGS

Question 20

How are beginning balances audited?

Answer 20

Should match last year’s ending balance.

Question 21

What is the general presumption for auditing Ending Balances?

Answer 21

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

Question 22

How is a Statement of Cash Flows audited?

Answer 22

Foot all balances - Check the MathTrace Cash Flow items to other Financial StatementsCheck classifications - Operating Activities Investing Activities Financing Activities

Question 23

Under the Indirect Method what must be disclosed on a Statement of Cash Flows?

Answer 23

Interest PaidIncome Taxes PaidNon-cash TransactionsCash and Cash Equivalents Definitions

Question 24

Under the Direct Method what must be disclosed on a Statement of Cash Flows?

Answer 24

Results as if you had used Indirect MethodNon-cash TransactionsCash and Cash Equivalents Definition

Question 25

What are Subsequent Events and what do they require?

Answer 25

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.