Procedures to Obtain Evidence M6 Flashcards
What are the methods used to develope Auditor’s expectation?
During Planning
- Trend Analysis: Compare current period to prior period. Used when amounts are predictable. Used with other audit procedures. Provides a low level of assurance.
- Ratio Analysis: Calculated based on known relationships among accounts and compared to prior periods. Analyzing data by segment or location. Used with other audit procedures. Provides a low level of assurance.
- Nonstatistical Predictive Modeling: Uses predictive model to estimate financial statement amount. Create expectation based on simple variables. Provides a low level of assurance.
- Regression Analysis: Advanced statistical technique that uses data from prior periods to predict the future. Creates expectation based on independent variables. Provides a low level of assurance.
What are the advantages of Regression Analysis?
- Provides an explicit, mathematically objective, and precise method of forming an expectation.
- Allows inclusion of a large number of independent variables
- Provides direct and quantitative measures of the precision of the expectation.
What are the different stages in analytical procedures.
Step 1: or Planning Phase: “develop an expectation of a balance or ratio by using relationships that are expected to exist”
Step 2: or Testing Phase: “Compare the client’s recorded balance or ratio with the expectation”
Step 3: “Determine whether the difference between the expectation and the recorded amount is reasonable”
Step 4: or Final Review Phase: “Investigate and evaluate significant differences from the expectation” Management or the Partner should do this step.
What is the objective of using analytical procedures?
Planning Phase:
Is to assist in planning the nature, timing, and extent of auditing procedures. Identify account balances with certain risk relevant to the audit.
Testing Phase: (As Substantive Test):
For some assertions, analytical procedures are more effective and efficient at providing an appropriate level of assurance than are tests of details.
Review Stage:
- Is to assist the auditor in assessing the conclusions reached and the overall financial statement presentation.
- Include consideration of the adequacy of evidence gathered in response to unusual or unexpected balances. Consider managers explanation.
- Assessment of a client’s ability to continue as a going concern.
What are the documentation requirements for performing Analytical procedures for substantive test?
- The auditor’s expectation, consider the interrelationships for financial information, and the consideration of non-financial information.
- The factors considered in developing that expectation.
How does an Auditor determine which analytical procedures to use?
- Consider the nature of the assertion tested.
- The other factors the auditor considers are the plausibility and predictability of the data relationship
- Availability and reliability of data used to develop the expectation.
- The precision of the expectation.
How does an auditor decide to use analytical procedures as substantiv test?
- Is based in part on the availability, reliability, and precision of the data used to develop expectations.
- Analytical procedures are not required to be used as a substantive test and are more likely to be used for accounts that are predictable.
Why would an Auditor use analytical procedures for a substantive test?
- To gain a more effective and efficient results than test of details can provide.
- To gain plausible relationships between financial and nonfinancial data impacting the account.
- Is used to test relationships among data (ratios) in the current period and the past period as well as the client’s main competitor.
- Gather evidence from Test of Details to corrorborate financial statement assertions
- Detect fraud that may cause the finacial statements to be misleading.
What is Test of Details used for?
- Is usually performed by an auditor to support the client’s ending balance or the specific details of transactions.
- Verification of documentary evidence.
What are the audit procedures used to gather audit evidence?
General category of various audit procedures used to gather audit evidence
- Reperformance
- Recalculation
- Examination: involves the physical inspection of documents, records, or tangible assets.
- Reconciliation: involves performing a comparison of financial amounts between two independent sources for agreement.
What are the relevant assertions to test clients transactions and events?
COVEUP
- Completeness
- Cut-Off
- Valuation, Allocation, and Accuracy
- Existence
- Understandability of Presentation and classification (disclosures)
What transaction account should Avail-for-Sale be recorded in? (OCI)
- Unrealized gains on available-for-sale securities should properly be recorded in other comprehensive income.
What is the purpose of A/R Confirmations?
- Confirmations of A/R satisfy assertions regarding existence, rights and obligations.
What are the 3 different types of Confirmations?
- Blank Confirmations: Provide the greatest assurance but lowest response because clients have to take the time to fill in their balance and mail it back.
- Positive Confirmations are more effective than negative confirmations because customers is asked to respond whether correct or not.
- Negative Confirmations provide lower response rate than positive confirmations because clients only are asked to respond if there is a discrepancy.
- Confirmations are not required if balances are immaterial, or reason to believe they will not be returned, or if Inherent Risk and Control Risk are very low.
How to respond to confirmation replies?
- Electronic client customer responses reliability can be increased by contacting the respondent directly to validate both their identity and the accuracy of the information in the confirmation response.
- Perform alternative procedures when confirmations responses are not received or when it is not practical to send out confirmations.
- Requesting a second manual confirmation when confirmations are not received.
