Evidence and Risk Flashcards
A majority of the auditor’s work in determining an audit involves the collection of?
Evidence
Evidence consists of?
- ) client accounting data
2. ) supporting documentation (from clients, 3rd parties)
Evidence has what type of relationship with detection risk?
Inverse
Detection risk is one aspect of audit risk an auditor can control through?
Nature, timing, and extent of audit procedures.
If a high level of detection risk is acceptable then?
- (N) less evidence is collected
- (T) interim testing acceptable
- (E) fewer transactions are verified
If a low level of detection risk is acceptable then?
- (N) more evidence collected
- (T) end of year balance testing
- (E) more transactions are verified
What are auditors there to verify?
- ) Assets and revenues are not overstated
2. ) Expenses and Liabilities are not understated
What is the exception on the CPA exam to what auditors are there to verify?
If the CPA exam states that it is a “tax-driven” company then:
- ) Assets and revenues are not understated
- ) Expenses and liabilities are not overstated
Auditors want evidence that is?
- ) Sufficient (Quantity)
2. ) Appropriate (Quality)
The 2 best types of audit evidence are?
- ) Observation
2. ) Originates from external parties
What is the weakest type of audit evidence?
Oral evidence from mgmt
What are substantive procedures? (TRACE)
(T) - Trace (R) - Reconcile (A) - Analytical Procedures (C) - Confirm (E) - Examine
Substantive procedures help to reduce?
The risk of material misstatement
Substantive procedures only test the accuracy of?
F/S - does not test I/C
The assurance level of cash is?
High
The acceptable DR of cash is?
Low
If A/R DR is high then what type of confirmation is used?
Negative confirmation - customer only responds if balance is materially wrong.
If A/R DR is low then what type of confirmation is used?
Positive confirmation - customer asked to confirm
What is the associated I/S account to A/R?
Revenue
What procedures should be performed for A/P?
- ) Review P.O.’s/invoices
2. ) Confirm w/vendors
What is the associated I/S account to A/P?
Expense
What procedures should be performed for inventory?
- ) Examine purchase agreements
2. ) Look at board minutes - is inventory held as collateral
What I/S account is associated w/Inventory?
COGS
What should you do to the beginning balances?
Make sure they match last years’ ending balances.
What are you checking for with additions and subtractions?
That cash in transactions make it o cash receipts journal and cash out transactions get proper approval
What is true of ending balances?
If beginning balances, additions and subtractions are ok then ending balances should be ok
What should be performed on the Statement of Cash Flows?
- ) Foot balances
- ) Trace cash flow items to other F/S
- ) Check classifications
What are the 3 classifications of a cash flow statement?
Operating activities
Investing activities
Financing Activities
The indirect method must disclose?
- ) Interest paid
- ) Income taxes paid
- ) Non-cash transactions
- ) Cash and cash equiv. definitions
The direct method must disclose?
- ) Results as if you had used indirect method
- ) Non-cash transactions
- ) Non-cash transactions
What are subsequent events and post-audit issues?
Notable events that occur after the B/S date and before the audit report is issued.
If the audit report has been issued what should the auditor do?
If situation that was present as of the B/S date the client should issue a disclosure to F/S users and/or revise the F/S.
What should auditor do if they forgot to perform a substantive procedure?
Determine if other substantive procedures performed served as a substitute. If not audit opinion could be jeopardized.
Analytical procedures are required when?
- ) Planning the audit
2. ) Reviewing the audit
What do analytical procedures help the auditor do?
- ) Determine if management assertions are reasonable
2. ) Devlop audit plan & expectations regarding the F/S
What do analytical procedures focus on?
On dollar amounts not I/C
What type of comparison do analytics perform?
Budget vs. Actual
What type of data does analytics use?
Financial (Comparison of data between years)
Non-financial (Use it to predict a F/S number)
What are some examples of non financial data used in analytics?
supply usage records comparison year to year such as truck fleet data
Analytics are efficient, but they are not…
Effective
What do management assertions do?
Help the auditor plan the audit and select substantive tests.
What are the management assertions on tests of account balances?
Presentation & disclosure Existence Rights & obligations Completeness Valuation & allocation
What are the management assertions on tests of transactions?
Occurrence Cutoff Classification Completeness Accuracy
What are the management assertions on tests of disclosures?
Occurrence
Classification
Completeness
Accuracy
What is not a basic audit procedure?
Testing of direct evidence. Consider the source document. (ex. loan covenant)
What is the first and most important thing you need to understand about management estimates?
Understand management’s rationale and methods for developing estimates before you can judge reasonableness.
What is second thing you must do when considering management estimates?
Formulate their own opinion on what a good estimate should be and compare.
What is the final consideration of management estimates?
Do any subsequent events affect the estimate?
Working papers are property of the?
Auditor
What form can working papers be in?
Paper or electronic
Working papers must include what?
Written audit program
What is a current file?
Info pertaining to CY audit
What is a permanent file?
Info used for this audit and future audits; updated as needed
How long must working papers be kept after audit release date?
5 years or longer according to regulations.
How long must working papers be kept under PCAOB?
7 years.
PCAOB audits also require what additional documentation?
Engagement completion document.
How many days after audit report release date can you subtract from the file?
60 days. You can add to the file, but cannot subtract after 60 days. 45 days for PCAOB audits.
