Lec 7 Flashcards
What does CAS 500 say
Auditor should design and perform audit in such a way where they obtain sufficient and appropriate evidence to base an opinion on
what do sufficient and appropriateness relate to?
quality and quantity
Types of techniques
recalculation/reperformance, observation, confirmation, enquiry, inspection, analysis
what does it mean when evidence is low quality and what is the remedy
it means that it is nit sufficient and needs to be suplemented by high quality evidence
what is recalculation/reperformance
recalculate something that was previously done by the client
is recalculation high quality evidence?
yes
what are examples of recalculations
bank reconciliations or AR aging schedule
what is observation technique and give example
observing the actions of an employee at work. this could be the CFO signing cheques
is observation high or low quality and why
it is low quality because the actions of people can change when they know they are being observed - you can only be sure that this is being done this way while you are observing
what are the types of confirmation
positive, negative, blank, legal, bank, specific balance
does confirmation need to be performed on every audit
it SHOULD be performed, not must be - issue are with the feasibility of checking high volume and low dollar amount A/R
what should you do if you cannot get confirmation
need to have documentation explaining your reasoning on why you do not and what actions you took
are confirmations high or low quality and why
all are high quality besides negative confirmation because it does not require a reply
what are positive confirmations
an inquiry that requires the customer to respond, confirming the accuracy of an item - send inquiry twice and then seek other ways
what is the main use of positive confirmation
to proof the existence of A/R
what does the positive confirmation of 0 balance A/R test
it tests the assertion of completeness
what is negative confirmation
the inquiry for responded to only reply if they do not agree with the balance
what is a blank confirmation
positive confirmation where the respondent has to fill in the amount
what is legal confirmation
confirmation regarding any potential law suit - need to pay law firm
what is a bank confirmation
confirming the accounts and securities
all bank confirmations are blank confirmations
what are specific balance confirmation
done when auditee has business with government and a specific amount is check with each government department
how is valuation for A/R measured
its collectability
what are the two types of inspections
vouching and tracing
what is the process of vouching and what assertion does it prove
it is when you go from the source document to the proof - proves existence
example of vouching
going from a document to check if the inventory on the floor matches
when is vouching high quality and low quality
high quality when the document is prepared by a third party and low quality when prepared in house
what is the process of tracing and what assertion does it prove
tracing is when you go from inspecting the asset to confirming in on the document - this proves the assertion of completeness
example of tracing
when you count inventory and then ensure that everything is on the documents
what is the difference between observation and inspection
observation is when you look at a process while inspection involves looking at documents
what is the difference between substansive tests and internal control tests
substantive tests must be done every audit using the 6 methods of evidence while internal control tests do not need to be done but only need to be understood
how is valuation for inventory measured
on how salable it is using the lower cost or market method
what is the technique of enquiry and what strength of evidence is it
when you take statement by personnel of client - it is low quality evidence because they can be bias
what is the technique of analysis
rough calculations to help form an opinion
how does analysis differ from recalculation
recalculation is precise while analysis is approximate
what % of enquiry and analysis do soft procedures account for
45 to 50
what happens to misstatements caught by soft procedures?
they will be quantified by detailed procedures
where is information for continuing audits kept
it is kept at with the permanent files
what does it mean for evidence to be sufficient
it means that it has to be relevant and reliable
what does it mean for evidence to be relevant
it means that it must prove at least one of the assertions
what is the rank of reliability from most reliable to least
1 - auditor direct and personal knowledge
2 - external evidence
3 - external internal evidence
4 - internal evidence
5 - analysis
6 - spoken or written representation
what is auditor direct knowledge in terms of reliability
knowledge that is based on recalculations and inspections
what is external evidence in terms of reliability
documented evidence obtained from third parties
what is external-internal in terms of reliability
documents that were created externally bur processed and held internally
what is internal evidence in terms of reliability
evidence produced from client - can be used a lot if client internal control systems are proven to be satisfactory
what is analysis evidence in terms of reliability
used for risk identification and attention directing.
of data is specific it is reliable. if procedure is general, it is not reliable
what is spoken word evidence in terms of reliability
evidence that comes from directors or employees from enquiry - this evidence NEEDS to be backed by a second source
when is evidence considered sufficient
when it is enough data to support and persuade towards argument
what does more evidence do to detection risk
reduces it
can audit risk be affected by auditor?
no, only detection risk can
what is the audit program
most specific planning document and it outlines the specific procedures that will be used to guide the work
what is the nature, timing and extent in the audit program
nature - what type of evidence will be used
timing - when will procedures be performed
extent - size of sample
what are the two types of audit programs
internal control and balance audit
what is internal control in terms of the audit program
specific procedures used to obtain understanding of the clients control system
what is balance-based in terms of the audit program
procedures to get direct evidence on assertions made and balances of accounts
are permanent files in hard copy or online
hard copy and kept for multiple years
what is given to the proceeding auditor
- trial balances
- evidence you have done the audit proceedings properly
what are some basic rules on picking who to enquire
- pick a person who is knowledgeable about the topic
- pick a person who has not control over the account or incentive
what is an example of picking the right person to enquire
picking the production manager to ask about product warranties
what might the permanent working file contain
- incorporation details
- long term contracts
- management contracts
- continuity contracts
would the predecessor auditor share material such as the planning memo and risk assessments
no, those are the property of the previous auditor and they do not have to share
what are the substantive tests
enquiry, reperlfromance/calculation, confimation, inspection, analysis, observation
what are control tests
observation, reperformance, enquiry, inspections
