SU 07 Audit Evidence Flashcards
What is the relationship between control risk and substantive testing
Direct
(lower control risk = less substantive testing required)
When does the initial assessment of controls occur
During audit planning
What are the types of substantive procedures
- Test of details
- analytical procedures
Tests of details
Tests for misstatements - sampling or data analytics involved
Analytical procedures
compares the expected results to the actual
Simplest form of analytical procedures
ratio analysis
What is the purpose of the evidence collected by an audit
“The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.”
What is the purpose of audit procedures
to test (and gather evidence about) management assertions regarding the financial statements
Categories of assertions
Transactions and events
account balances
presentation and disclosure
What assertions address classes of transactions and events
- Occurrence
- Completeness
- Accuracy
- Cutoff
- Classification
What assertions address account balances (at period end)
- Existence
- rights and obligations
- completeness
- accuracy (valuation and allocation)
What assertions address presentation and disclosure?
- Occurrence
- rights and obligations
- completeness
- Classification (and understandability)
- Accuracy (and valuation)
What assertion is tested using tracing
Completeness - tracing the process of documentation forward from source dogs to financial statements
What assertions are tested using vouching
Existence or occurrence- working backwards from what is recorded in the statements to original documentation
What makes evidence quality evidence
It must be sufficient and appropriate based on the acceptable detection risk (RMM - IR - CR)
What makes for sufficient evidence
there needs to be enough quantity (volume) of evidence given the RMM
what is the relationship between quantity of evidence and RMM
Direct - higher RMM = more evidence required lower equal s less
How does the quality of evidence effect the quantity of evidence needed
Inverse connection
- higher quality evidence requires less quantity
What makes for appropriate evidence
quality of evidence - determined by relevance and reliability
What makes evidence reliable
- good source (independent of and external to client ideal)
- produced under proven effective IC
- obtained directly by auditors
- documentary
- consists of original documents (not photocopies)
Factors to consider regarding appropriate evidence
- evidence must be PERSUASIVE (convincing is not required/ always possible)
- cost benefit analysis is acceptable but not a reason to omit necessary tests)
- insufficient testing could result in a charge of negligence
What do tests of controls look at
whether internal controls are implemented and operating effectively
why have analytical procedures been judged ineffective for providing evidence regarding cash-related assertions
Because it’s too fluid and you can’t pinpoint where the inaccuracy occurred. Also businesses generally have a volatility of cash because people may charge or not
Standard audit procedures for gathering evidence
- inspection (records or documents)
- Inspection (physical assets)
- observations (processes/ procedures)
- inquiry (from knowledgeable sources)
- confirmation (with 3rd party)
- Recalculation (for mathematical accuracy)
- Re-performance (of procedures/ controls)
- Analytical procedures (relationships between data)
CAATs
Computer-assisted audit techniques
GAS
generalized audit software
confirmations
requests for information from 3rd parties
Confirmation process
- select items to confirm (use sampling)
- design request
- communicate request to 3rd party
- received response
- evaluate response (for meaning and reliability)
- Alternate Procedures for Non-Responses (PRN)
What accounts must be confirmed with 3rd parties?
Accounts receivable
Bank accounts
if not done must document why, what alternative procedures were used
What assertions can be addressed with confirmations
- existence
- rights and obligation
- completeness (BUT ONLY IF WELL DESIGNED)
What assertions can NOT be tested with confirmations
Valuation
- 3rd party unlikely to be an expert
Using bank confirmation to test completeness
Ineffective - only accounts listed are confirmed so does not test existence of other accounts unknown to 3rd party
Positive confirmation
requests a response either to confirm or correct information
Negative confirmation
Requests a response only if 3rd party has corrects/ disagrees with info
requires auditor control to determine if non-responses are confirmation of correctness or just lack of response)
Who keeps custody of the confirmations
auditor, never the client
Who keeps custody of the confirmations
auditor, never the client
Electronic confirmation option
confirmation.com
What is risk-based auditing
Prioritizing gathering evidence regarding high-risk accounts
now automated in audit software
what is the rule about using email confirmations
must do a follow-up call to verify the right person answers the email (pertinent questions to confirm identity)
What types of accounts are high-risk
- Where numbers are easily manipulated (significant estimates involved)
- large accounts
- history of misstatement/fraud (revenue account)
What are automatically high-risk accounts
Inventory
Cash
Considerations for risk-based auditing
Consider
- what accounts are high risk
- what management assertion needs to be tested
- what standard audit procedure would you use to test the assertion
Auditing procedures to test completeness
- Tracing (inspection)
- analytical review
- observation
Audit procedures to test Cut-off
Cut-off procedures, inspect transactions before and after year-end for proper recognition
Audit procedures to test Accuracy
- inspection of documentation
- checking footing and cross footing
- recalculation of accounts (esp. estimates)
- reconciliation of supporting docs to general ledger
Audit procedures to test existence and occurrence
- Confirmation with 3rd party
- observation, inspection, examination
- vouching
Audit procedures to test rights and obligations
Inspection of documentation
Audit procedures to test classification (and understandability)
- Inspection of supporting documents
- review of related disclosures
- inquiry of management re: disclosures
How to pick the right procedure when there are options
- one that will gather sufficient and appropriate evidence
- the most efficient option available
