l5 : audit evidence & assertions

Question 1

what is directional testing?

Answer 1

a way of collecting audit evidence to check that it lines up with financial statements. checks for existence (whether there has been overstatement of assets) & completeness (whether there has been understatement of liabilities).

Question 2

what are the two criteria that audit evidence must be?

Answer 2

• sufficient (enough)
• appropriate (relevant & reliable)

Question 3

what is controls testing in relation to audit evidence?

Answer 3

testing systems & processes. detects whether internal processes are effective at detecting / preventing misstatements.

Question 4

what is substantive testing in relation to audit evidence?

Answer 4

testing the numbers in financial statements. auditor gathers evidence to identify misstatements and verify that FRs are complete, relevant & accurate.

Question 5

state the 7 types of audit assertions.

Answer 5

Completeness
Accuracy
Valuation
Existence
Cut off
Obligations & rights
Presentation & disclosure

Question 6

explain completeness as a type of audit assertion.

Answer 6

has everything been included that needs to be included?

Question 7

explain accuracy as a type of audit assertion.

Answer 7

have things been calculated correctly?

Question 8

explain valuation as a type of audit assertion.

Answer 8

have assets, impairments, stocks etc been valued correctly, in line with relevant policies?

Question 9

explain existence as a type of audit assertion.

Answer 9

is the asset really existent? has there been an overstatement?

Question 10

explain cut off as a type of audit assertion.

Answer 10

are the entries in the correct period?

Question 11

explain obligations & rights as a type of audit assertion.

Answer 11

do they actually have rights over this asset?

Question 12

explain presentation & disclosure as a type of audit assertion.

Answer 12

how is it laid out in the account? is it laid out correctly?

Question 13

how does the audit review process work?

Answer 13

test & review the riskiest areas. team members carry out assertions. incharge reviews teams work. manager reviews incharges work. partner reviews managers work.

Question 14

what are the 5 methods to test audit assertions?

Answer 14

Analytical procedures
Enquiry
Inspection
Observations
U do it (recalcUlate)

Question 15

explain analytical procedures as a type of audit procedure.

Answer 15

auditor caluclates an expectation for balances based on :
- prior periods
- budgets & forecasts
- industry info
- predictive estimates

Question 16

explain enquiry as a type of audit procedure.

Answer 16

auditor asks relevant person for info about process, control or balances. enquiry alone isnt sufficient - oral evidence is weak. uses open questions. eg. how did you calculate this balance?

Question 17

explain inspection as a type of audit procedure.

Answer 17

inspect relevant documents to back up balances. relevant docs include :
- confirmations from bank
- purchase invoices
- sales invoices
- supplier statements
- bank reconciliation

Question 18

explain observations as a type of audit procedure.

Answer 18

observing a process or procedure. often used in controls testing. eg. observe inventory count / reconciliation being performed

Question 19

explain u do it / recalculate as a type of audit procedure.

Answer 19

reperform important procedures or recalculate balances. used for the accuracy assertion (cAvecop). eg. count items during stock count, reperform bank reconciliation, calculate dep expense