Evidence & Procedures Flashcards
What are the two main characteristics audit evidence should have?
Sufficiency (quantity) and appropriateness (quality)
Appropriateness deals with relevance and reliability
What are some general rules governing evidence’s reliability?
(1) Independent sources are more reliable
(2) Internal evidence depends upon internal controls
(3) Evidence directly obtained by the auditor is better than evidence indirectly obtained
(4) Evidence is better in documentary form
(5) Original documents are better than copies
What degree of evidence is generally necessary to provide reasonable assurance for the auditor’s opinions?
Persuasive evidence (as opposed to conclusive)
Less than persuasive evidence is insufficient for reasonable assurance
What are assertions?
Assertions = representations made by management
What are some different kinds of assertions for classes of transactions and events?
(i) Occurrence
(ii) Completeness (all transactions for a class are recorded)
(iii) Accuracy
(iv) Cutoff (recorded in correct period)
(v) Classification
What are some different kinds of assertions for account balances?
(i) Existence
(ii) Rights/obligations (entity truly has rights to assets and obligations for liabilities)
(iii) Completeness
(iv) Valuation/allocation (assets, liabilities, and equities are recorded properly, including valuation allowances)
What are some different kinds of assertions for presentation and disclosure?
(i) Occurrence and rights/obligations
(ii) Completeness
(iii) Classification
(iv) Understandability
(v) Accuracy and valuation
What are relevant assertions?
Assertions that are helpful in determining whether a given account is accurate
What are the three different kinds of procedures done to obtain audit evidence?
(1) Risk assessment procedures
(2) Tests of controls
(3) Substantive procedures
What is a good way to think about the differences between the procedures done to get audit evidence?
The audit risk equation: AR = RMM x DR
Risk assessment procedures discern the RMM, while the other two (tests of controls and substantive procedures) are done to keep DR sufficiently low
What is important to know about different types of procedures, such as inspection, inquiry, reperformance, etc.?
Any one of them can be a risk assessment procedure, test of control, or substantive procedure depending on the context
What should an external auditor seek to understand about an entity’s internal auditing function?
He should discover whatever is relevant to his own external audit
Should take into account the internal auditor’s competence and objectivity
What are some procedures that determine whether internal audit activities are relevant to an external audit?
(1) Analyzing knowledge from prior audits
(2) Seeing whether they focus attention on financial or operating areas
(3) Understanding the scope of the internal audit
What are some important things to consider in determining an internal auditor’s objectivity?
Organizational status (whether internal auditor reports to a sufficiently high person, whether he interacts with TCWG)
Policies
Can an external auditor use an internal auditor to help perform the external audit?
Yes
Internal auditors must be supervised and their work reviewed, and the external auditor should cover certain things based on higher risk or more difficult judgment
What is the purpose of obtaining written representations from management?
- confirm oral representations
- document continuing validity of representations
- reduce misunderstandings
What should be included in an updating management representation letter?
Any info that mgmt has learned which would cause management representations to change, including events that change older financials
When should an auditor get updating representation letters from management?
(1) If a client requests a predecessor auditor to reissue his audit report (for showing comparative statements)
(2) For subsequent events procedures in SEC filings
What should written representations cover?
All periods covered by the auditor’s report (including past periods if the report is for comparative financials – even if current mgmt was not present then)
By what date should management representations be made?
Date of the audit report
What happens if management refuse to provide written representations?
A qualified opinion or (usually) a disclaimer from an opinion or departure from engagement
What are analytics?
Evaluations of financial information, especially of relationships among both financial and nonfinancial data
When is the auditor required to use analytics?
For initial planning and final review
Not required to be used as a substantive test, but still common
What is Benford’s Law?
Involves how frequently certain digits appear as the first digit in naturally occurring numbers
1 is most common, then 2, etc.
What is an important fact to keep in mind when doing analytics?
Income statement ratios are generally more predictable than balance sheet ones, since income statements reflect a given period of time
What are some cases which might require a specialist’s aid?
(1) Valuation (e.g. drugs, financial instruments, real estate, artwork)
(2) Physical characteristics (e.g. quantities of natural resources)
(3) Specialized techniques (e.g. actuarial figures for pensions)
(4) Interpretation (e.g. contracts or property titles)
What is the definition of a specialist for GAAS purposes?
A person/firm with special skill or knowledge in a field besides accounting or auditing
Are lawyers considered specialists?
If they are not serving the client (for litigation, claims, etc.), then yes
Can management engage or employ a specialist for the auditor?
Yes, the auditor can still use the specialist’s work if he is employed by mgmt
What should the auditor do if a specialist’s findings conflict with the financial statements?
He should keep trying to resolve the matter; if not resolvable, the auditor should qualify or disclaim an opinion
Should an auditor reference a specialist’s work?
Not normally – might be misinterpreted as a qualification of opinion, or a splitting of responsibility
How might a specialist be referenced in an audit report?
Perhaps in the explanatory paragraph, but only if necessary to clarify the paragraph itself (e.g. if specialist’s work is reason for adverse opinion)
Can be in explanatory paragraph for unqualified opinion too
What is the primary source of information for an auditor concerning the client’s litigation, claims, and assessments?
Management
What are some procedures the auditor should perform concerning litigation, claims, and assessments?
- Inquiry of mgmt for policies
- Obtain info on all legal items between the balance sheet date and the date when mgmt gives this legal info
- Examine documents
- Get assurance from mgmt in writing that all matters are disclosed, including probable contingent clams
How should the auditor include the client’s lawyer in determining litigation, claims, and assessments?
Auditor should request that mgmt make a letter of inquiry to the lawyer
Auditor should mail letter, and lawyer should respond directly to auditor
What information should be included in a letter of audit inquiry to the client’s lawyer?
(1) List of pending and threatened legal items (or a request for the lawyer to provide it)
(2) List (from mgmt) of unasserted legal claims/assessments which (i) are probable of being asserted and (ii) if asserted, are reasonably likely to be unfavorable
(3) Statement that mgmt will be notified by lawyer if some unasserted claim/assessment comes to his attention
(4) Request for lawyer to explain why if his response must be limited
(5) Any info on the change in lawyer, if applicable
For anything provided by mgmt, the lawyer is asked if he (dis)agrees
What should be included in a letter of audit inquiry to the client’s lawyer regarding the date of the lawyer’s response?
Letter should mention the date the lawyer ought to respond, including a request for the lawyer to specify the “effective date” of his response
- Effective date = latest date of period covered by lawyer’s response (which should try to be near the date of the audit report)
- Default “effective date” = actual date of the response
What is audit documentation?
The primary records for procedures done, evidence acquired, and conclusions reached
Also called working papers, or workpapers
What is the main purpose of audit documentation?
To support:
- the opinion expressed (or disclaimed)
- the representation in the audit report that it was conducted according to GAAS
What are some subsidiary purposes of audit documentation?
- help to plan the audit or modify the plan
- help new auditors to learn about an engagement by viewing prior period papers
- useful for quality control reviews
- assists successor auditor
What are tick marks?
Marks made on audit documentation to refer to some particular note
These serve the same general function as a footnote, except that the same note can be referenced in multiple places in the documentation
When is the latest date for documentation to be completed?
The auditor ought to do this reasonably quickly, but the latest is 60 days after the report release date
How long should audit documentation be retained?
Whatever legal or regulatory requirements demand
SOX requires retention for 7 years
Is the auditor permitted to dispose of any audit documentation before the end of the retention period?
No, none can be disposed between the documentation completion date and the end of the retention period (although additions can possibly be made)
What is the criterion for how much audit documentation there should be?
It should be enough for an experienced auditor to understand:
- procedures performed
- evidence obtained
- conclusions reached
- that accounting records comport with financial statements
Besides the usual audit information, what else should be included in audit documentation?
Assistants:
- who performed procedures (and the date they were performed)
- who reviewed the workpapers (and the date)
What are related-party transactions?
Transactions between entities that are related (e.g. parent-subsidiary)
What kinds of transactions should an auditor determine to be related-party transactions or not?
Loans between entities at favorable terms
Sales of property at favorable terms
Should the auditor consider related-party transactions as outside the ordinary course of business?
No – only if there is positive evidence to support it
What are some conditions which might bring about related-party transactions?
- overly optimistic forecast
- desire for earnings to look good
- industry is declining
- products becoming obsolete
