Evidence and Risk Flashcards
Going Concern
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
Analytical Procedures
Not always appropriate or effective with Substantive Testing
Audit Evidence
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
Audit Evidence
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
Audit Procedures
Auditors focus first on Balance Sheet Accounts, then associated Income Statement items
Audit Procedures
Cash
- Assurance Level = High
- Acceptable Detection Risk = Low
Audit Procedures
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
Audit Procedures
Accounts Payable
- Review purchase orders/invoices
- Confirm with Vendors
- Income Statement Account – Expense
Audit Procedures
Inventory
- Examine purchase agreements
- Look at Board Minutes
- Is Inventory held as collateral?
- Income Statement Account – COGS
Audit Procedures
Additions & Subtractions
- Did cash-in transactions make it to cash receipts journal?
- Did cash-out transactions get proper approval?
Beginning - Ending Balances
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
Compliance with Laws & Regulations
- 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
Confirm
Test of Controls - RIIO
- Re- Perform
- Inquire
- Inspect
- Observe
Detection Risk - High Level
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
Detection Risk - Low Level
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
Evidence
- 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
Examine
Evidence that supports Managment Assertions
Post Audit Issue
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
Reconcile
Account for any difference between support and F/S
Segregation of Duties
Authorizing transactions, recording transactions, and maintaining custody of assets should be segregated.
Statement of Cash Flows
- Foot all balances – Check the Math
- Trace Cash Flow items to other Financial Statements
- Check classifications
- Operating Activities
- Investing Activities
- Financing Activities
- *
Statement of Cash Flows - Direct Method
Direct Method must disclose:
- Results as if you had used Indirect Method
- Non-Cash Transactions
- Cash and Cash Equivalents Definition
Statement of Cash Flows Indirect Method
Indirect Method must disclose:Interest Paid
- Income Taxes Paid
- Non-Cash Transactions
- Cash and Cash Equivalents Definition
Subsequent Events & Post-Audit Issues
- 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
*
Subsequent Events - Audit Issued
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
Substantive Procedures (TRACE)
- 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
Trace - Vouch
- Track Financial Statement data to evidence
- Did the invoice make it to the Financial Statements?
- Are the Financial Statements backed by support/invoices?
Verification
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
Tests of Controls
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
Control Risk
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
