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Audit > Evidence & Risk > Flashcards

Evidence & Risk Flashcards

1
Q

What is the relationship between Evidence and Detection Risk?

A

They have an Inverse relationship.

The one aspect of Audit Risk an auditor can control through (N)ature, (T)iming, (E)xtent of audit procedures.

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2
Q

How does a high level of acceptable Detection Risk affect an audit?

A

o Less Evidence collected
o (N) Less-competent Evidence collected
o (T) Interim testing acceptable (Internal Control should be strong, Business and transactions should be relatively stable & predictable)
o (E) Fewer transactions are verified

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3
Q

What should occur when a low level of Detection Risk is acceptable?

A

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

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4
Q

What are the primary risks in an audit for a typical for-profit company?

A

Auditor verify that
o Assets and Revenues are not overstated
o Expense and Liabilities are not understated

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

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5
Q

Which documents are the most persuasive and credible?

A

3rd party documents

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

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6
Q

What are Substantive Procedures?

A

Test substance/amounts/values.

Helps reduce risk of Material Misstatement

Only test accuracy of the Financial Statement and dollar amounts NOT Internal Controls

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7
Q

How is Cash audited?

A

Assurance Level = High

Detection Risk = Low

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8
Q

How is Accounts Receivable audited?

A

If Detection Risk is High? Negative Confirmation (Customer only responds if balance is materially wrong)

If Detection Risk is Low? Positive Confirmation used (Customer is asked to respond)

Corresponding Income Statement Account - Revenue

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9
Q

How is Accounts Payable audited?

A

Examine Purchase Orders/Invoices
Confirm with Vendors

Corresponding Income Statement Account - Expense

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10
Q

How is Inventory audited?

A

Examine purchase agreements
Look at Board Minutes
Is Inventory held as collateral?

Corresponding Income Statement Account – COGS

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11
Q

What are Subsequent Events and what do they require?

A

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.

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12
Q

How is a Statement of Cash Flows audited?

A

Foot all balances - Check the Math
Trace Cash Flow items to other Financial Statements Check classifications - Operating Activities, Investing Activities, and Financing Activities

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13
Q

When are Analytical Procedures required?

A

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.

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14
Q

How do Analytical Procedures assist the auditor?

A

o Determine if Management Assertions are reasonable

o Develop Audit Plan and expectations regarding the financial statements

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15
Q

What is the focus of Analytical Procedures?

A

Dollar amounts (not internal controls)

Analyzes Financial Data: Do Financial Statements Make Sense? Comparison of data between years

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16
Q

How is the Current Ratio calculated?

A

Current Assets / Current Liabilities

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17
Q

How is the Quick Ratio calculated?

A

Liquid Assets / Current Liabilities

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18
Q

How is the Asset Turnover calculated?

A

Asset Turnover = Net Sales / Average Assets

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19
Q

How is Gross Margin % calculated?

A

Gross Margin / Sales

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20
Q

What assertions do auditors test?

A

Perceive Orange County CA
(PERCV OCCCA OCCA)

P - Presentation and Disclosure
E - Existence (Tests overstatement)
R - Rights and Obligations
C - Completeness (tested understatment)
V - Valuation and Allocation
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21
Q

What assertions are tests for transaction classes?

A

Perceive Orange County CA
(PERCV OCCCA OCCA)

O - Occurrence
C - Cut Off
C - Classification
C - Completeness
A - Accuracy
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22
Q

For which assertions are disclosures tested?

A

Perceive Orange County CA
(PERCV OCCCA OCCA)

O - Occurrence
C - Classification
C - Completeness
A - Accuracy

23
Q

Working Papers must include

A

a written audit program

24
Q

How long must audit workpapers be maintained?

A

Longer of
o 5 years after Audit Release Date
o Regulation Requirements
o PCAOB Audit? 7 years

Engagement Completion Document required

25
Q

How many days after release of Audit Report does the auditor have to subtract/ delete from file?

A

60 days

SEC auditors PCAOB only allows 45 days

26
Q

What is the majority of an auditor’s work in determining an audit opinion?

A

Collection of evidence to support the opinion.

27
Q

Of what does audit Evidence consist?

A

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

28
Q

Which aspects of Audit Risk can an auditor control?

A

Detection Risk which is decreased by gathering evidence.

29
Q

Which aspects of Audit Risk can an auditor NOT control?

A

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

30
Q

What is the primary constraint on audit evidence?

A

Cost vs. Benefit is a primary constraint.

31
Q

What characteristics should audit evidence have?

A

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

32
Q

How does the quality of audit evidence vary depending on who has provided it?

A

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.

33
Q

What are the substantive tests that are most often performed?

A

Trace (or Vouch)
Reconcile Analytical Procedures
Confirmations
Examine evidence that supports management assertions. (T.R.A.C.E.)

34
Q

When performing audit procedures what should auditors focus on?

A

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

35
Q

How are beginning balances audited?

A

Should match last year’s ending balance.

36
Q

What is the general presumption for auditing Ending Balances?

A

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

37
Q

Under the Indirect Method what must be disclosed on a Statement of Cash Flows?

A

Interest Paid
Income Taxes Paid
Non-cash Transactions
Cash and Cash Equivalents Definitions

38
Q

Under the Direct Method what must be disclosed on a Statement of Cash Flows?

A

Results as if you had used Indirect Method
Non-cash Transactions
Cash and Cash Equivalents Definition

39
Q

What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?

A

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.

40
Q

What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?

A

The 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.

41
Q

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

A

Should determine if other substantive procedures performed served as a substitute. Otherwise support for their audit opinion could be jeopardized.

42
Q

How is the Inventory Turnover calculated?

A

Inventory Turnover = COGS / Average Inventory

43
Q

What type of testing are ratios?

A

Ratios are Analytical Procedures

44
Q

What type of procedure is a Budget vs. Actual comparison?

A

Budget vs. Actual comparisons are Analytical Procedures.

45
Q

List Common Types of Analytical Procedures

A

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

46
Q

How do management assertions affect the audit?

A

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

47
Q

Is testing the validity of direct evidence a basic audit procedure?

A

No it is an extended procedure.

Consider the source - if it’s externally prepared it’s more persuasive.

48
Q

How are Management Estimates audited?

A

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.

49
Q

Whose property are audit documentation (audit workpapers)? In what form must they be?

A

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)

50
Q

What is the Current File?

A

Information pertaining to the current year’s audit.

51
Q

What is the Permanent File?

A

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

52
Q

What is the primary requirement for audit workpapers besides being written?

A

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

53
Q

How should documents added to work papers be treated?

A

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.

54
Q

How should documents removed from workpapers be treated?

A

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.

Audit (8 decks)

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