The Nature of Audit Evidence Flashcards
Define audit evidence?
Information used by the auditor to arrive an the conclusion on which the audit opinion is based.
Information= contained in the accounting records and other information
T/F: Underlying accounting records do count as “audit evidence”
True. This include:
- Journals
- Legers
- Supporting Records (including spreadsheets)
- Checks, invoices, etc.
What is considered “other information” with respect to audit evidence?
- Minutes, various letters, confirmations, industry analyst reports, and anything else obtained by inquiry, observation, and inspection
What is the auditor’s primary objective?
Obtain sufficient appropriate audit evidence to be able to draw reasonable concussions on which to base the auditor’s opinion
Sufficient = Regarding quantity
Appropriate= Quality (relevance & reliability)
What are the five guidelines for reliability (reliability totem pole): (IMPORTANT)
MOST RELIABLE TO LEAST
1) Direct personal knowledge by the auditor is the most reliable (auditor “knows for a fact”… extremely rare)
2) Evidence obtained INDIRECTLY from INDEPENDENT outside sources (verify account balances such as cash balances, AR receivables, Investments, Notes Receivable)
3) Evidence obtained indirectly from within an entity under conditions of effective internal controls
4) Documentary evidence is more reliable than non-documentary evidence (verbal inquiries are non-documentary)
5) Original documents are more reliable than photocopies or faxes
What are “assertions”
When management roles out balance sheet, income statement, cash flows, THEY ARE making are making a number explicit or implicit STATEMENTS OF FACT.
AICPA breaks down financial statements into categories THAT WE CALL ASSERTIONS!!
What are the four assertions specific to “account balances at period end” - Balance Sheet related concepts
1) Existence (asset, liabilities, and equity interests exist)
2) Completeness- (all asset, liabilities, and equity interests that should have been recorded have been recorded. There are no omissions)
3) Rights and obligations- That the entity holds or controls the rights to its assets are obligations of the entity. Any restrictions to the assets or obligations for the liabilities must be disclosed.
4) Valuation and allocation- The asset liabilities, and equity interests are included I the financial statements at the appropriate amounts
What are the five assertions specific to “transactions or events during the period”- Income statement concepts
1) Occurrence- Validity of recorded transactions
2) Completeness- Addressing the risk of omission
3) Cutoff- Did they record in the right period?
- Did they record it too early which violates occurrence
- To fail to record it, fails completeness test
4) Accuracy- The amounts and other data have been recorded appropriately
What are the four assertions specific to “presentation and disclosure” - Footnotes and disclosures
1) Occurrence and rights and obligations- That the disclosed events and transactions have occurred and pertain to the entity
2) Completeness- That all disclosures that should have been included have been included. There are no omissions of required disclosures.
3) Classification and understandability- information is appropriately presented, described, and clearly expressed
4) Classification and understandability- Footnotes needs to be communicated clearly
We beat on the balance sheet like it’s a drum? What does that mean?
On continuing engagements, we audit both balance sheets presented. If we’ve tied down the beginning balance sheet from the prior year and ending balance sheet from the other. How far off can the income statement really be? NOT FAR.
How does the auditor test existence on the balance sheet?
Accounting records –> Supporting Evidence
To test completeness on the financial statements what direction will you go (on the balance sheet?
Supporting evidence –> Accounting Records
Can accounting data be sufficient audit evidence to support financial statements?
No, it is evidence but additional support must be obtained
