Evidence and Risk

Question 1

Collection of evidence to support the opinion.

Answer 1

Evidence and Risk

Question 2

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

Answer 2

Evidence and Risk

Question 3

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.

Answer 3

Evidence and Risk

Question 4

Detection Risk which is decreased by gathering evidence.

Answer 4

Evidence and Risk

Question 5

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

Answer 5

Evidence and Risk

Question 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.

Answer 6

Evidence and Risk

Question 7

More Evidence collected

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

Answer 7

Evidence and Risk

Question 8

Auditors are there to verify that

Assets & Revenues are not overstated
Expenses & Liabilities are not understated

Exception - if the CPA Exam states that it is a tax-driven company flip them around

Answer 8

Evidence and Risk

Question 9

Cost vs. Benefit is a primary constraint.

Answer 9

Evidence and Risk

Question 10

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

Answer 10

Evidence and Risk

Question 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.

Answer 11

Evidence and Risk

Question 12

Third 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

Answer 12

Evidence and Risk

Question 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.

Answer 13

Evidence and Risk

Question 14

Trace (or Vouch)
Reconcile
Analytical Procedures
Confirmations
Examine evidence that supports management assertions.

(T.R.A.C.E.)

Answer 14

Evidence and Risk

Question 15

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

Answer 15

Evidence and Risk

Question 16

Assurance Level is High.

Acceptable Detection Risk is Low.

Answer 16

Evidence and Risk

Question 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

Answer 17

Evidence and Risk

Question 18

Review purchase orders/invoices

Confirm with Vendors

Corresponding Income Statement Account - Various Expenses

Answer 18

Evidence and Risk

Question 19

Examine purchase agreements

Look at Board Minutes

Is Inventory held as collateral?

Corresponding Income Statement Account - COGS

Answer 19

Evidence and Risk

Question 20

Should match last year’s ending balance.

Answer 20

Evidence and Risk

Question 21

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

Answer 21

Evidence and Risk

Question 22

Foot all balances - Check the Math

Trace Cash Flow items to other Financial Statements

Check classifications - Operating Activities Investing Activities Financing Activities

Answer 22

Evidence and Risk

Question 23

Interest Paid

Income Taxes Paid

Non-cash Transactions

Cash and Cash Equivalents Definitions

Answer 23

Evidence and Risk

Question 24

Results as if you had used Indirect Method

Non-cash Transactions

Cash and Cash Equivalents Definition

Answer 24

Evidence and Risk

Question 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.

Answer 25

Evidence and Risk

Question 26

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.

Answer 26

Evidence and Risk

Question 27

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.

Answer 27

Evidence and Risk

Question 28

REQUIRED When planning the audit (preliminary) REQUIRED When reviewing the audit (final) Analytical procedures may be also performed optionally along with the substantive testing. Use of Analytical Procedures in the audit must be documented.

Answer 28

Evidence and Risk

Question 29

Helps 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

Answer 29

Evidence and Risk

Question 30

Analytical Procedure focus is on dollar amounts (not internal controls) Analyzes Financial Data: Do Financial Statements Make Sense? Comparison of data between years

Answer 30

Evidence and Risk

Question 31

Current Ratio = Current Assets / Current Liabilities

Answer 31

Evidence and Risk

Question 32

Quick Ratio = Liquid Assets / Current Liabilities

Answer 32

Evidence and Risk

Question 33

Asset Turnover = Net Sales / Average Assets

Answer 33

Evidence and Risk

Question 34

Inventory Turnover = COGS / Average Inventory

Answer 34

Evidence and Risk

Question 35

Gross Margin % = Gross Margin / Sales

Answer 35

Evidence and Risk

Question 36

Ratios are Analytical Procedures

Answer 36

Evidence and Risk

Question 37

Budget vs. Actual comparisons are Analytical Procedures.

Answer 37

Evidence and Risk

Question 38

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

Answer 38

Evidence and Risk

Question 39

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

Answer 39

Evidence and Risk

Question 40

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? (PERCV)

Answer 40

Evidence and Risk

Question 41

Occurrence Cutoff Classification Completeness Accuracy

Answer 41

Evidence and Risk

Question 42

Occurrence Completeness Classification Accuracy

Answer 42

Evidence and Risk

Question 43

No it is an extended procedure. For 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.

Answer 43

Evidence and Risk

Question 44

First and foremost you need to understand management's rationale and methods for developing estimates before you can judge reasonableness. Next Auditor should formulate their own opinion on what a good estimate should be and compare it. Finally determine if subsequent events affect the estimate.

Answer 44

Evidence and Risk

Question 45

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).

Answer 45

Evidence and Risk

Question 46

Information pertaining to the current year's audit.

Answer 46

Evidence and Risk

Question 47

Information used for this audit and future audits which is updated as needed.

Answer 47

Evidence and Risk

Question 48

Must be kept for 5 years after the audit release date or according to regulations whichever is longer. Must be kept for 7 years under PCAOB Audit PCAOB audits also require an Engagement Completion Document

Answer 48

Evidence and Risk

Question 49

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

Answer 49

Evidence and Risk

Question 50

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.

Answer 50

Evidence and Risk

Question 51

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.

Answer 51

Evidence and Risk