Exam 2 - Chapter 7 -Audit Evidence Flashcards
What are the four audit evidence decisions that are needed to create an audit program?
(four decisions needed to affirm what and how much evidence to gather)
- Which audit procedures to use
- What sample size to select
- Which items to select from the population
- When to perform the procedures
What is an audit procedure?
Detailed instruction that explains the audit evidence to be obtained during the audit.
What is an audit program?
What is contained with?
List of audit procedures for an audit area or an entire audit
Usually includes:
- Sample sizes
- items to select
- timing of the tests
What are the two determinants of the persuasiveness of evidence?
Appropriateness
- Measure of quality of evidence
- relevance and reliability to meet audit objective.
Sufficiency
- Measure of sample size the auditor selects
- Measure of the individual items selected
What are the two main factors that contribute the sufficiency of evidence obtained?
-
Auditor’s expectation of misstatements
- If auditor feels that the likelihood of misstatements is high, a larger sample size should be taken
-
Effectiveness of client’s internal controls
- If client has effective internal controls, a smaller sample size may be needed
What is meant by the relevance of evidence in determining appropriateness?
Evidence must pertain to or be relevant to the audit objective
For example:
Auditor believes client is failing to bill customers after shipments are made.
It is not relevant to trace sales invoices to shipments (impossible to find unbilled shipments)
It is relevant to trace shipments to sales invoices in order to find unbilled
What are the six factors that determine the reliability of evidence in determining appropriateness?
- Independence of provider: Evidence obtained from outside entity is more reliable
- Effectiveness of client’s internal controls
- Auditor’s direct knowledge: Auditor should gather evidence/calculations directly
- Qualifications of individuals providing info
- Degree of objectivity: evidence that requires judgement is less effective
- Timeliness: evidence of BS items more effective if from period close to date of BS
Types of evidence:
- What is a physical examination?
- What type of audit objectives does this evidence meet?
- Inspection or count by auditor of a tangible asset.
- Meets existence objective: Verifies that asset exists
Meets completeness objective: ensures that existing assets are recorded
Types of audit evidence:
What is the difference in a physical examination and examination of documentation?
Examination of documentation = If object being examined as no inherent value
Example:
Examination of cancelled/not signed check = examination of documentation
Examination of signed check = Physical examination
Types of audit evidence:
- What is Confirmation
- When does US GAAP require the use of this evidence?
- Receipt of direct written response from a third party verifying the accuracy of information
- U.S. GAAP requires the confirmation of a sample of accounts receivable (not required for anything else but useful for many accounts)
Types of audit evidence:
- What is Inspection
- What are the two types of client documents?
Examination of the client’s documents and records to substantiate FS info.
Types of documents:
Internal document: Created by client; only useful if effective internal controls
External Document: Created by third party; vendor’s invoices, insurance policies, etc…
What is vouching?
What is tracing?
- What audit objectives do they satisfy
Vouching
When auditors starts with financial statement amounts and supports with documentation
Satisfies Occurence Objective
Tracing
When auditor uses financial documents and attempts to trace all the way to the financial statement
Satisfies completeness objective
Types of audit evidence:
- What are analytical procedures?
- When is this evidence necessary?
- Evaluations of financial information through relationships with other financial or non-financial info (think gross margin changes, and industry averages)
- Used extensively in practice, but required during the planning and completion stages of all audits
What are the purposes of analytical procedures as audit evidence?
Understand the client’s industry and business
Current unaudited info is compared to prior audited info or industry average
Assess the entity’s ability to continue as a going concern
Certain an. proc. can assess potential failure
Indicate the presence of possible misstattements
Auditor is able to find unusual fluctuation in financial data
Reduce detailed audit tests
If no evidence of misstatements is found; no need for further testing
Types of audit evidence:
- What are inquiries?
- What are recalculations?
Inquiry
Obtaining written/oral response from client to questions from auditor
Recalculation
Rechecking sample of calculations made by client
