Audit test 1

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  1. Why do we demand assurance/auditing?
    • Users want to know if they can trust the financial statements.
    • User demand for reliable, relevant information is a consequence of:
    •     *Complexity
    •     *Remoteness
    •     *Time sensitivity.
  2. What is information risk?
    Information risk is the risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading.
  3. What do auditors have to be? (Qualities. Reduces information risk)
    • 1. Objective
    • 2. Ethical
    • 3. Independent
    • 4. Skeptical
    • 5. Knowledgeable/competent
  4. Purpose of a Financial Statement Audit
    *Provide FS users with an opinion about whether the FS are presented fairly, in all material respects, in accordance with the reporting framework. (can these FS be trusted and are they prepared per gaap?)

    *Audit report adds credibility to fs. We are independent 3rd party.
  5. Differences in independence in appearance and independence in fact:
    Independence in appearance: Outsider looking in sees no conflict of interest.

    Independence in fact: you are maintaining skepticism and objectivity.
  6. Understand fundamentally what is the role of the auditor and why a demand for their svcs?
    The role of the auditor is to tell users of the fs if they can trust the financial statements. There is a demand for the services because of the complexity of the companies, remoteness factor (user can't go to company to investigate), and a time sensitivity factor.
  7. Role of management in the financial statement and audit process
    • 1. Implements internal controls
    • 2. Conducts transactions
    • 3. Accumulates transactions into account balances
    • 4. Prepares financial statements
    • 5. Issues financial statements to users.
  8. What (in managements' role/side) provides evidence for the auditor? (general)
    • *Implementation of internal controls
    • Conducting transactions (and pprwk and evidence trail that leaves)
    • And, accumulates transactions into account balances.
  9. What is the auditor's role in the financial statement audit process (general)
    • Auditor:
    • Obtains evidence. Uses it to
    • Test management assertions against criteria (so we can)
    • Determine overall fairness of financial statements.
    • Issue audit report to accompany financial statements.
  10. What are the major phases of the audit
    (ch 1 & 2 slides)
    • Client acceptance/continuance and establishing understanding w/client
    • Preliminary engagement activities
    • Plan the audit (systematic process)
    • Consider and audit internal control
    • Audit business processes and related account
    • Complete the audit
    • Evaluate the results and issue audit report.
  11. List the 3 fundamental auditing concepts we discussed in class:
    • Audit risk
    • Materiality
    • Evidence
  12. Why must an auditor assess materiality?
    Because if every little detail is investigated in depth, an audit would cost too much and take to long. We perform risk based audits and establish materiality to determine where we should focus our efforts and how fine a filter we use.
  13. What are the 3 types of audit reports that an auditor may use?
    • 1. Unmodified/unqualified - Kind company wants. Is thumbs up.
    • 2. Qualified - =mostly fair, but there are some material misstatements.
    • 3. Adverse - bad. Statements are not fairly presented.
  14. Which authoritative body governs private companies?
  15. Why do auditors generally use a sampling approach to evidence gathering?
    Auditors must balance the cost of the audit with the need for precision.
  16. What is the concept of Audit Risk?
    The overall risk that a material misstatement exists in the financial statements and the auditor fails to detect it.
  17. The definition of auditing refers to auditing as a "systematic process of objectively obtaining and evaluating evidence regarding assertions…" What is meant by "systematic process"?
    There should be a well-planned approach for obtaining and evaluating evidence.
  18. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
    The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
  19. For publicly-held companies, which of the following is integrated into the audit of financial statements?
    For publicly-held companies, the audit of internal controls is integrated into the audit of financial statements.
  20. Why do auditors generally use a sampling approach to evidence gathering?
    Auditors must balance the cost of the audit with the need for precision
  21. Evidence is reliable if it
    Signals the true state of a management assertion.
  22. The auditor must be independent of the audit client unless
    None of the above—the auditor cannot lack independence.
  23. The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of
    The company's management.
  24. The Audit Committee consists of
    Members of the Board of Directors
  25. The authoritative body designed to promulgate standards concerning an accountant's association with audited financial statements of an entity that is required to file financial statements with the SEC is the
    Public Company Accounting Oversight Board
  26. Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of
    Professional skepticism.
  27. Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
    The inability to review the predecessor auditor's documentation.Response Feedback:Incorrect. The prospective client's unwillingness to permit inquiry of its legal counsel is the factor that would most likely cause a CPA not to accept a new audit engagement.
  28. Engagement letters include all of the following except:
    A list of adjusting journal entries.
  29. You requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on your decision concerning the
    Integrity of management.
  30. Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
    Correct! Firm policy that sets materiality at 4% of pretax income is not a qualitative factor that may affect an auditor's establishment of materiality. (b/c it is quantitative)
  31. Which of the following is not an audit procedure that is commonly used in performing tests of controls?
    Correct! Confirming is not an audit procedure that is commonly used in performing tests of controls.
  32. The achieved (actual) level of audit risk
    Can never be known with certainty.
  33. The risk of material misstatement differs from detection risk in that it
    Exists independently of the actions of the auditor.
  34. Which of the following is a source of detection risk?
    Correct! A non-representative sample is a source of detection risk.
  35. Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
    Management places substantial emphasis on meeting earnings projections.
  36. When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the
    Extent of substantive tests.
  37. Which of the following is not a typical analytical procedure?
    Comparison of the financial information with budgeted amounts.Response Feedback:Incorrect. Comparison of recorded amounts of major disbursements with appropriate invoicesis not a typical analytical procedure.
  38. In designing written audit programs, an auditor should plan specific audit procedures to test 
    Management assertions.
  39. In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion?
  40. Audit documentation prepared on audits of public clients is the property of the
  41. Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements?
    Analytical procedures.
  42. 1. (2 points) Which of the following procedures would an auditor most likely rely on to verifymanagement’s assertion of completeness?
    Comparing a sample of shipping documents to related sales invoices that can be tied to thetrial balance
  43. (2 points) When sending out positive accounts receivable confirmations, what are the two primaryassertions you are trying to satisfy?
    . Existence & Valuation
  44. (2 points) Which of the following would an auditor generally be most concerned with?
    The understatement of Accounts Payable
  45. If our largest concern with revenues is that they are overstated, what does that imply aboutour sample sizes for the tests of completeness versus occurrence?
    Our tests for occurrence would be larger than our tests for completeness because we are saying therevenue is recorded, but was want to verify if the transaction actually occurred. Our sample size would belarger on the occurrence side (from sales journal for instance), as we want to test it more thoroughly.
  46. (2 points) Auditors obtain evidence about the client's inventory through, among other procedures,observing the counting of inventory. What are some limitations "observation" has as an auditprocedure?
    Observation is watching the client perform their duties and observing the process and. The controls. Thisdoes give the auditor a good idea about the controls and e reliability of the process. However, it dos have limitations. When only observing, this tells us nothing about the accuracy or existence involved with the actual numbers and account balances. It is not detailed enough to be able to generally determine if there isa misstatement.
  47. Audit risk
    is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.
  48. The auditor's standard report states that that audit provides only ___________ __________ that the financial statements do not contain material misstatements.
    Reasonable assurance.
  49. ______  ______ implies some risk that a material misstatement could be present in the financial statements and the auditor will fail to detect it.
    Audit risk
  50. Why not more than reasonable assurance?
    Auditor uses knowledge about transactions and a sampling approach to examine transactions w/judgement b/c it would be too costly for the auditor to examine every transaction.
  51. What is materiality?
    It is the magnitude of a misstatement that would change the judgment of a reasonable investor.
  52. ____________ is the magnitude of a misstatement that would change the judgment of a reasonable investor.
  53. Who is responsible for the financial statements?
    • Management. This includes
    • preparation & fair presentation of fs in accordance w/ applicable reporting framework
    • Design & implementation and maintenance of internal controls relevant to prep and fair presentation.
    • Providing the auditor access to info and people necessary to complete the audit.
  54. Management makes what 9 assertions about the FS?
    • 1. Existence
    • 2. Occurance
    • 3. Completeness
    • 4. Authorization
    • 5. Accuracy
    • 6. Cutoff
    • 7. Classification
    • 8. Valuation
    • 9. Rights & Obligations
  55. So what is the auditor's job?
    • Gather evidence to test management's assertions about the fs.
    • Express an opinion on the fs based on their audit.
    •    *To do this must have competence, and capabilities to perform the audit, comply with ethical requirements, exercise skepticism, and exercise judgment.
  56. Evidence that assists the audtor in evaluating mgmt.'s fs assertions consists of:
    The underlying accounting data and any additional info available to the auditor whether originating from the client or externally.
  57. Relevance
    Is the info related to the specific assertion being tested?
  58. Reliability
    Can the info be relied upon to signal the true state of the specific assertion being tested?
  59. Professional skepticism
    This is an auditor's tendency not to believe management's assertions w/o sufficient corroboration.
  60. What are the 3 fundamental audit concepts?
    • 1. Materiality
    • 2. Audit risk
    • 3. Evidence.

    These influence the *scope* of an audit.
  61. Evidence can be collected in 3 stages. Must be relevant and reliable to be useable.
    • stages:
    • 1) Internal controls
    • 2) Transactions
    • 3) Account balances.
  62. The PCAOB sets the standards for auditing:
    Public companies
  63. ASB sets standards for:
    Auditing standards board. They set the auditing standards for non public companies.
  64. IAASB
    Sets standards in over 100 countries.
  65. GAAS stands for
    Generally accepted auditing standards?
  66. *Know GAAS standards and be able to recognize principles!*
    • General
    •     *Adequate Training
    •     *Independence in attitude
    •     *Exercise due Professional care in planning & performance.

    • Fieldwork  
    •      *Adequately Planned & assistants supervised.
    •      *Understand Internal controls to determine nature, timing, and extent.
    •      *Gather sufficient and competent Evidence.

    • Reporting  
    •       *Ensure everything presented According to GAAP.
    •       *Identify when principles not Consistantly applied
    •       *Express an opinion
    •       *Adequate Discussion

    Relevant and Reliable evidence.
  68. Who issues GAAS?
    AICPA ---->ASB===>GAAS 1947
  69. What does the PCAOB do?
    • Set standards for audits of public companies
    • Inspections
    • Investigations and disciplinary procedures
    • Research.
  70. How many generally accepted auditing standards are there? (GAAS)
    • 10.
    • Training, Independent, Professional, Planned, Internal (controls), Evidence, According (to GAAP), Consistently (applied principles), Express (opinion), Disclosures (adequate.)
  71. GAAS and SAAS are considered to be:
    the minimum standards of performance for an auditor.
  72. Three phases that relate to audit planning (ch 3)
    • Audit Planning:
    • 1. Client acceptance
    • 2. Preliminary Engagement Activities
    • 3. Plan the audit.
  73. Why is proper planning so important? (ch 3)
    • 1. Good planning mitigates risk of an inefficient audit (too much!)
    • 2. More importantly, mitigates risk of ineffective audit (incorrect opinion!)
  74. Who appoints the auditor?
    Audit committee
  75. Factors of client acceptance/continuance
    • Timing
    • Understanding client;do we want to work w/them?
    • Auditor must consider:
    •     Independence
    •     Firm's technical skills/knowledge/staffing
    •     Does the firm have enough staff free/open to do the audit on time?
    • Client considerations:
    •     Company's reputation
    •     Mgmt's reputation
    •     Financial stability and risks/special concerns
    •     Mgmt acknowledges and understands its resp. 
    • Relations w/predecessor auditor
    •     Why did they change?
    •      Mgmt integrity?
    •      Disagreements w/mgmt. on acctg issues?
    •      Communications w/corporate governance about fraud?
    •      View pred auditor's wp
  76. Continuing client retention
    Evaluate client retention periodically, like near audit completion or after significant event.
  77. What are 2 things what would cause us to question if we want to continue w/an audit client?
    • 1. Conflicts over accounting issues (did mgmt. side w/ our opinions?)
    • 2. Dispute over fees (are client's lowballing auditors?)
  78. Planning the audit
    • Understand who fs users are
    • engagement letter
    • staff engagement
    • consider role of internal audit
    • create initial audit work program
    • Consider involvement of audit committee
    • Perform preliminary analytical proc
    • Document an audit plan and prepare audit work programs.
  79. Documenting an audit plan
    basically documents if we do xyz, we feel we'll have enough evidence to feel comfortable issuing an opinion.
  80. Why do we need to understand the risks of the company?
    • If we are doing a risk based audit, we need to know what the risks are so we know where we need to focus our efforts more.
    •    Need to understand risks of company and industry.  And the client's and industry's financial history and trends.
  81. What affects audit team staffing requirements
    • Client's size and complexity
    • Level of risk
    • Industry or other expertise required
    • Personnel availability
    • Timing of the work to be performed
    • Independence requirements
  82. Terms of the engagement
    • Documented in the engagement letter.
    • Should include the objectives of the engagement, mgmt.'s resp, the auditor's resp, and the limitations of the audit.
    • Important to make sure there is no expectations gap.
  83. Things to consider w/internal audit function
    • What activities can they help w/on audit?
    • Are they competent and objective?
    •       CPA? Quality of work?
    •       Do they report to audit committee/independent.
    •       Materiality and risk (normally they help w/low risk low materiality items.)
    •       Auditor should supervise, review, eval, & test.
  84. The audit committee
    Subcommittee of the board of directors
  85. Determination of materiality requires
    professional judgment
  86. Steps for applying materiality in an Audit
    • 1. Determine materiality level for the overall financial statements. What is materiality?
    • 2. Determine tolerable misstatement. Allocate materiality to accounts.
    • 3. Evaluate the audit findings. Near end of audit.
  87. Applying materiality in an Audit: Step 1. Determine overall materiality.
    Consider both qualitative and quantitative factors. What is your threshold? Lowering threshold increases testing.
  88. Qualitative
    • Quality.
    • Material misstatements in py
    • Break even earnings
    • Mgmt turnover
    • Potential for fraud or illegal acts
    • Potential loan covenant violations
    • Higher than normal risk of bankruptcy.
  89. (materiality) Quantitative
    • Quantity.
    • Income before taxes
    • Income from continuing operations
    • Three year avg income
    • Total assets
    • Total revenues
    • Gross profits.
    • etc. Involves a number.
  90. Applying materiality in an audit: Step 2. Determine tolerable misstatement.
    Tolerable misstatement is the amt of planning materiality allocated to an account or class of transactions.
  91. Combined tolerable misstatement is generally greater than planning materiality b/c
    not all accounts will be misstated by their full tolerable misstatement allocation.
  92. Materiality not only affects planning and scoping of what we test, but also:
    how we treat what we find.
  93. Tolerable misstatement
    • Allocated to different accounts
    • Subset of materiality
    • Sum of misstatements must be LESS than materiality threshold
  94. Applying materiality in an Audit: Step 3. Evaluate Audit Findings
    • When audit evidence is gathered, auditor aggregates misstatements from each account or class or transaction (known and likely misstatements).
    • Then consider effect of misstatements not adjusted in prior period
    • Compares agg misstatement to planning materiality.
  95. What do you do if misstatement is greater than materiality?
    • 1) Additional testing -to know what adjustment, if any, should be made
    • 2) Require and adjustment by client
    • If they don't fix then:
    • 3) Modify audit opinion/qualify/adverse
    • or
    • 4) Walk away
    • 1) Risk assessment procedures (ch 4)
    • 2) Test of controls (ch 6 and 7)
    • 3) Substantive procedures (ch 5)
    •        *test of details
    •        *transactions
    •        *acct balances
    •       Substantive analytical procedures.
  97. What goes in the assurance bucket?
    • Evidence gathered from:
    • 1. Risk assessment procedures
    • 2. Test of controls
    • 3. Substantive analytical proc
    • 4. Remaining assurance needed from test of details.

    All of this to meet desired assurance.
  98. Engagement Risk!
    • Risk of client or 3rd party lawsuit
    • Risk of Negative Publicity
    • Basically an auditor's exposure to financial loss and damage to personal reputation. Related to if you want to accept a client.
  99. Business risk!
    • Before audit risk model, understand business risk.
    • Understand the business, it's environment, and where it's risks lay.
  100. Examples of business risk
    • Nature of entity and changes (i.e. acquisitions.)
    • External factors (industry regulations.)
    • Management (capable? ethical?)
    • Objectives and strategies
    • Measurement and performance
    • Business process.

    All of these factors can increase business risk. Understanding business risk lets us know where things are more likely to go wrong.
  101. Relationship of the entity's Business Risks to audit risk model
    • Assess entity's business risks---->
    • -->Relate those risks to what can go wrong at the class of transaction, account balance, or disclosure levels--------------->
    • --------------->Assess the risk of material misstatement.
  102. what times what = Audit risk
    RMM x DR =AR

    But Inherent risk x control risk = RMM (risk of material misstatement.)
  103. Inherent risk
    The risk that a material misstatement exists w/o considering a client's internal controls
  104. The risk that a material misstatement exists w/o considering a client's internal controls
    Inherent risk
  105. Control risk
    What we have left over after management puts controls into place. The risk that internal controls won't prevent or detect a material misstatement.
  106. Do we want low or high control risk?
  107. Detection risk
    The risk that the auditor is willing to accept that he or she will fail to detect and correct a material misstatement.

    This can never be 0.
  108. Audit risk
    • Risk that we'll issue a bad opinion. Always has to be set at low or very low because why would we accept a high risk we'll be wrong?
    • Auditor sets this risk.
  109. Audit risk=
    IRxCRxDr or RMMxDR
  110. We set ____ risk as auditor. We assess _____ (what?) as auditor, but can't control it.
    We set audit risk as auditor. We assess inherent risk and control risk but we can't control it.
  111. If RMM goes up, DR goes ___ and testing goes____
    DR goes down and testing goes up.
  112. If IR or CR goes up, DR goes ___________
    Dr goes down. Testing goes up.
  113. Higher DR means ________ testing
    Higher detection risk means less/lower testing.
  114. DR has an ______ relationship to amount of testing
  115. Limitations of the audit risk model
    • Desired level of audit risk may not be actually achieved.
    • It doesn't consider potential auditor error.
    • There is no way of knowing what the preliminary level of risk actually was.
  116. We focus on the high risk areas. What do you do when there is a change in risk?
    • *Change the (nature, timing, extent) scope of substantive procedures.
    • *Adjust the (experience) level of staff performing audit procedures
    • *Change scrutiny during review process (more scrutiny from management/partners, etc.)
  117. Inherent risk factors
    • Nature of client's business
    • Results from previous audit
    • Initial vs. repeat engagement
    • Related parties
    • Non-routine transactions
    • Judgment required
    • Management incentives
    • Significant (unexpected) changes between years.
    • Significant (unexpected) differences from industry data.
  118. AUDITOR'S RISK ASSESMENT PROCEDURES. How do we gather this evidence?
    • 1. Inquiries of management, Other entity personnel, and others outside the entity.
    • 2. Analytical procedures.
    • 3. Observation and inspection.
  119. Difference between Error and Fraud
  120. Sources of information about possible fraud?
    • Communications among audit team
    • Inquiries of mgmt. and others
    • Analytical procedures
    • Unexpected pd. end adjustments.
  121. Known vs unkown errors
    • Known- factual. No doubt.
    • Unknown-Judgmental or projected.
    • Likely=Judgmental. Differences in judgment
    • Estimate/Projected=Auditor's best estimate of misstatements. Projection of error in sample to population.
  122. Fraud Triangle
    • Incentive/Pressure (increases IR)
    • Opportunity (related to CR)
    • Attitude/Rationalization
  123. Is the auditor required to assess risk of fraud?
    • Yes. And risk of fraud increases testing.
    • It's not specifically part of the audit model, but it is part of CR and IR.
  124. Focus of the market--SAS No. 99
    • Audit team must brainstorm about fraud.
    • Assess fraud risk
    • Consider fraud in planning and performing the audit
    • Take specific steps when fraud is suspected
    • Document the work related to fraud.
  125. Steps to take when fraud is suspected
    • Get more evidence
    • Consider impact on rest of audit
    • Discuss w/mgmt. at least one level above fraud
    • Suggest client consult w/legal council.
  126. Occurance    (ch 5)
    • Same concept as existence, but one applies to balances and the other (this one) applies to events.
    • Item exists on record but not in actuality.
    • Testing sample comes from the records. Sales journal. A/r trial balance, a/p trial balance etc.
  127. Existence (ch 5) *similar to occurrence
    Deals with account balances. Something exists on record, but doesn't exist in reality or never occurred.
  128. Completeness  (ch 5)
    • Opposite of existence/occurrence.
    • w/completeness, item exists in reality/in balance or occurrence, however it is not showing on the records.  
    • Management assertion
    • Sample would come from the trigger points. Bill of lading/shipping documents (for sales), Receiving documents (for something we bought.) etc.
  129. Classification  (ch 5)
    • Management assertion.
    • Something is in the wrong account. (Classified incorrectly. Like there is a dollar in the dimes envelope.)
  130. Accuracy  (ch 5)
    • Management assertion
    • Clerical error. Involves typo, mathematical error. etc.
  131. Cutoff  (ch 5)
    • Did this transaction occur in this accounting period? It's not "going to be" ours at a later time, right?
    • Management assertion
  132. Rights and obligations  (ch 5)
    • Does this belong to the company?. Dr. Smedley's envelope wouldn't be allowed to be considered Dr. Schafer's balance sheet item.
    • Management assertion
  133. Authorization  (ch 5)
    • management assertion
    • Where transactions authorized?
  134. Valuation and allocation  (ch 5)
    • Management assertion
    • Judgment involved.
    • Should this inventory be valued for what you have it down as on the balance sheet, etc.
  135. Overstatement vs. Understatement. What are we most concerned with? (ch 5)
    • Assets? Concerned w/overstatement
    • Liabilities? Concerned w/understatement
    • Revenues? Concerned w/overstatement
    • Expenses? Concerned w/understatement
  136. Sales flow of information  (ch 5)
    • 1. Sales journal
    • 2. Sales invoice
    • 3. Shipping document

    • Occurrence would be vouched from 1 to 3.
    • Completeness would be traced from 3 to 1.
  137. Flow of info A/R cycle  (ch 5)
    • 1. A/R trial balance
    • 2. Sales invoice
    • 3. Shipping document (bol)

    • Existence= vouch from 1 to 3.
    • Completeness= trace from 3 to 1.
  138. Flow of info in purchasing cycle  (ch 5)
    • 1. Purchases journal
    • 2. Vendor invoice
    • 3. Receiving document

    • Occurrence/existence = vouch from 1 to 3
    • Completeness = trace from 3 to 1.
  139. Flow of info in accounts payable cycle  (ch 5)
    • 1. A/p trial balance
    • 2. vendor invoice
    • 3. receiving document

    • Existence/occurrence = vouch from 1 to 3
    • Completeness = trace from 3 to 1
  140. (ch 5) remember where you draw your sample from impacts what you can test with it. Drawing from Sales journal means you can test:
    Existence and occurrence, but you cannot test completeness. That needs to have a sample drawn from the shipping documents/bol.
  141. AUDIT EVIDENCE  (ch 5)
    All the information, from whatever source, used by auditor in arriving at the conclusions on which the audit opinion is based.
  142. Sufficiency of evidence:   (ch 5)
    Sufficiency is the quantity of the audit evidence
  143. Greater risk of misstatement requires a __________ quantity of audit evidence. Related to audit evidence sufficiency.  (ch 5)
    Larger quantity.
  144. Higher quality audit evidence results in a _________ quantity of audit evidence. Related to sufficiency of evidence. (ch 5)
    Smaller quantities are needed if the quality is higher.
  145. Appropriateness is a measure of the __________ of audit evidence  (ch 5)
    • Quality of evidence.
    • and, Relevance and Reliability affect the quality of evidence.
  146. Proper evaluation of evidence requires an understanding of:   (ch 5)
    • Types of evidence available
    • Relative reliability of available evidence.
  147. AUDIT PROCEDURES  (ch 5)
    • Specific acts performed by the auditor to gather evidence about whether specific assertions are being met. 
    •     3 types.
    •   1. Risk assessment procedures
    •   2. Test of Controls
    •   3. Substantive procedures
  148. Type of audit procedure:
    Risk assessment procedure  (ch 5)
    To obtain an understanding of entity and environment.
  149. Type of audit procedure:

    Test of Controls  (ch 5)
    Tests the operating effectiveness of controls
  150. Type of audit procedure  (ch 5)

    Substantive procedures
    Used to detect material misstatements at the assertion level. High level. Not as detailed as the test of details.
  151. AUDIT PROGRAM (ch 5)
    A set of audit procedures prepared to test assertions for a component of the financial statements

    • Audit program for accounts rec:
    • (header)Management assertions/ examples of audit procedures.
    • *Existence/ confirm receivables

    *Rights & oblig/ inquire if receivables have been sold or pledged.

    *Completeness/Agree controlling acct w/total of subsidiary acct or select shipping docs prior to y/e and ensure sales recorded.

    basically it is a guide of how to test specific assertions for a specific acct.

    *Presentation and disclosure/look for amounts due from related parties and evaluate recvbls for footnote disclosures.
  152. 9 categories of audit evidence  (ch 5)
    • 1. Inspection of tangible assets
    • 2. Reperformance
    • 3. Recalculation
    • 4. Confirmation
    • 5. Inspection of records or docs
    • 6. Analytic procedures
    • 7. Scanning
    • 8. Inquiries of the client
    • 9. Observation.
  153. RECALCULATION (ch 5)
    Determining the mathematical accuracy of documents or records
  154. REPERFORMANCE  (ch 5)
    The auditor's independent execution of procedures or controls that were originally performed as part of the internal control system.
  155. Confirmation  (ch 5)
    Process of obtaining a representation of information or of an existing condition directly from a third party.
  156. Inspection of tangible assets  (ch 5)
    Physical examination of tangible asset
  157. Observation  (ch 5)
    The process of watching a process or procedure being performed by others.
  158. Inquiry  (ch 5)
    often internal. Usually this is verbal while confirmation is external and written.
  159. Analytic procedures  (ch 5)
    Evaluations of financial info made by a study of plausible relationship among both financial and non financial data.
  160. Scanning  (ch 5)
    Review of accounting data to identify significant or unusual items
  161. Reliability of types of evidence  (ch 5)
    Higher = inspection of tangible assets, reperformance, recalculation.

    • Between: Inspection of records and docs, confirmation, analytical procedures, scanning.
    • Lower=Observation, inquiry.
  163. Know what procedure you would use to verify a given assertion!
    This relates to the audit program slide maybe. review that.
  164. Primary purpose of analytical procedures  (ch 5)
    • 1. Attention directing-
    •          areas or accts to focus on testing.
    • 2. Reduce level of detail tests
    •          Detail tests- indiv transactions level
    •          vs. substantive analytic proc - higher lev
  165. Preliminary analytical procedures  (ch 5)
    • Required.
    • Used to assist the auditor to better understand the business and to plan the scope of audit procedures.
  166. Substantive analytical procedures  (ch 5)
    • NOT required. (different!) These give us evidence to fill the bucket.
    • Used to obtain evidential matter about particular assertions related to account balances or classes of transactions.
  167. Final analytical procedures  (ch 5)
    • Required!
    • Used as an overall review of fin info in final review stage of audit. Gut check.
  168. Analytical procedures  (ch 5)  3 types
    • 1. Preliminary analytical procedures
    • 2. Substantive analytical procedures
    • 3. Final analytical procedures.
  169. Analytical procedures  (ch 5)
    • Examples
    • 1. Trend analysis - examines changes in acct over time.
    • 2. Ratio analysis - comparison across time or to a benchmark of relationships between FS accounts or between and account and non FS data.
    • 3. Reasonableness analysis - development of a model to form an expectation using financial data, non fin data, or both, to test acct balances or changes in acct balances between acctng pds
  170. Reasonableness analysis  (ch 5)
    • often do this when performing substantive analytics.
    •    Develop our own model or expectation of what it should be.
  171. Common analytical procedures  (ch 5)
    • Analytical proc create a picture of the conditions in order to think about mgmt. motivations and direct audit testing.
    •      Compare balances (prelim and final)
    •      Inventory turnover: obsolete inv
    •      Current ratio: ability to pay s/t obligations
    •      Debt to equity: compliance w/debt covenants.
    •      Accounts rec turnover: collectability of receivables and information for allowance.
  172. Substantive analytical procedures decision tree process  (ch 5)
    • 1. Develop an expectation
    • 2. Define a tolerable difference.
    • 3. Compare expectation to rec amt
    • 4. Is diff greater than tolerable diff? Yes?
    • 5. Investigate diff.
    • 6.why why not? acceptable? no? test more. propose adj, document results no matter what.
  173. Develop an expectation (ch 5)
    Auditing standards require the auditor to have an expectation whenever the analytical proc are used.
Card Set:
Audit test 1
2014-03-05 06:50:46
Audit test
Audit Test 1
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