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PASSED AUD UCSB > Evidence and Risk > Flashcards

Evidence and Risk Flashcards

1
Q

Going Concern

A

Auditors consider management’s plans when evaluating the ability of a company to continue as a going concern

  • (1) dispose of assets
  • (2) borrow money or restructure debt
  • (3) reduce or delay expenditures
  • (4) increase ownership equity
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2
Q

Analytical Procedures

A

Not always appropriate or effective with Substantive Testing

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3
Q

Audit Evidence

A

Auditors want evidence that is

  • Sufficient (Quantity) - Cost vs. Benefit is a constraint
  • Appropriate:
    • Relevant & Reliable (Quality)
    • BEST: Observation by Auditor
    • 2nd BEST: Originates from External Parties
      • Sent directly to auditor
      • WEAKEST: Oral Evidence from management
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4
Q

Audit Evidence

A

3rd party documents are more persuasive and credible than internally-prepared docs:

  • Auditor Knowledge = Most Persuasive
  • 3rd Party info given to auditor
  • 3rd Party info given to client
  • Internally-prepared doc
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5
Q

Audit Procedures

A

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

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6
Q

Audit Procedures

A

Cash

  • Assurance Level = High
  • Acceptable Detection Risk = Low
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7
Q

Audit Procedures

A

Accounts Receivable

  • Acceptable Detection Risk is High?
    • Negative Confirmation Used
    • Customer only responds if balance is materially wrong
  • Acceptable Detection Risk is Low?
    • Positive Confirmation Used
    • Customer asked to confirm
  • Income Statement Account – Revenue
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8
Q

Audit Procedures

A

Accounts Payable

  • Review purchase orders/invoices
  • Confirm with Vendors
  • Income Statement Account – Expense
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9
Q

Audit Procedures

A

Inventory

  • Examine purchase agreements
  • Look at Board Minutes
    • Is Inventory held as collateral?
  • Income Statement Account – COGS
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10
Q

Audit Procedures

A

Additions & Subtractions

  • Did cash-in transactions make it to cash receipts journal?
  • Did cash-out transactions get proper approval?
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11
Q

Beginning - Ending Balances

A

Beginning Balance - Should match last year’s Ending Balance

Ending Balance - If Beginning Balance, Additions &
Subtractions are ok, then Ending Balances should also be ok

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12
Q

Compliance with Laws & Regulations

A
  • The auditor must perform procedures to identify any noncompliance with laws and regulations that may have a material effect on the financial statements
  • Inspect correspondences with any regulatory authorities
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13
Q

Confirm

A

Test of Controls - RIIO​

  • Re- Perform
  • Inquire
  • Inspect
  • Observe
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14
Q

Detection Risk - High Level

A

High level of Detection Risk acceptable - Less Evidence collected

  • (N) Less-competent Evidence collected
  • (T) Interim testing acceptable
    • Opens door for incremental audit risk
    • Internal Control should be strong
    • Business and transactions should be
      relatively stable & predictable
  • (E) Fewer transactions are verified
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15
Q

Detection Risk - Low Level

A

Low level of Detection Risk acceptable - More Evidence collected

  • (N) More-competent Evidence collected
  • (T) End of year balance testing
  • (E) More transactions are verified
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16
Q

Evidence

A
  • Evidence has an Inverse relationship with Detection Risk
  • Evidence is the one aspect of Audit Risk an auditor can control through (N)ature, (T)iming, (E)xtent of audit procedures - NET
17
Q

Examine

A

Evidence that supports Managment Assertions

18
Q

Post Audit Issue

A

If auditor discovers they forgot to perform a substantive procedure

  • Determine if other substantive procedures performed served as a substitute
  • Otherwise, support for their audit opinion could be jeopardized
19
Q

Reconcile

A

Account for any difference between support and F/S

20
Q

Segregation of Duties

A

Authorizing transactions, recording transactions, and maintaining custody of assets should be segregated.

21
Q

Statement of Cash Flows

A
  • Foot all balances – Check the Math
  • Trace Cash Flow items to other Financial Statements
  • ​Check classifications
    • Operating Activities
    • Investing Activities
    • Financing Activities
  • *
22
Q

Statement of Cash Flows - Direct Method

A

Direct Method must disclose:

  • Results as if you had used Indirect Method
  • Non-Cash Transactions
  • Cash and Cash Equivalents Definition
23
Q

Statement of Cash Flows Indirect Method

A

Indirect Method must disclose:Interest Paid

  • Income Taxes Paid
  • Non-Cash Transactions
  • Cash and Cash Equivalents Definition
24
Q

Subsequent Events & Post-Audit Issues

A
  • Notable events that occur After Balance Sheet Date Before Audit Report is issued
  • Auditor needs to make inquiries and assess if a Subsequent Event affects the audit report
    *
25
Q

Subsequent Events - Audit Issued

A

If Audit Report has already been issued

  • If situation that was present as of the Balance Sheet Date
    • Client should issue a disclosure to F/S users and/or revise the Financial Statements.
  • Regulatory agencies might need to get involved under some circumstances
26
Q

Substantive Procedures (TRACE)

A
  • Help to reduce the risk of Material Misstatements
  • Only test accuracy of Financial Statements and dollar amounts – they don’t test Internal Controls
  • Trace
  • Reconcile
  • Anaultical Procedures
  • Confirm
  • Evidence
27
Q

Trace - Vouch

A
  • Track Financial Statement data to evidence
  • Did the invoice make it to the Financial Statements?
  • Are the Financial Statements backed by support/invoices?
28
Q

Verification

A

Auditors are to verify that:

  • Assets & Revenues are not overstated
  • Expense & Liabilities are not understated
  • Exception – if the CPA Exam states that it is a “tax-driven” company, flip them around
29
Q

Tests of Controls

A

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

  • inquiries
  • inspections of documents
  • observation
  • reperformance of the application of a control
30
Q

Control Risk

A

Audit evidence about control risk is obtained by performing tests of controls that evaluate the effectiveness of specific controls.

Methods of determining the effectiveness of the design and operation of a control include :

  • inquiry
  • inspection
  • observation
  • reperformance

PASSED AUD UCSB (23 decks)

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