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AUDITING THEORY > AT - PERFORMING SUBSTANTIVE TESTS > Flashcards

AT - PERFORMING SUBSTANTIVE TESTS Flashcards

1
Q

What are substantive tests?

A

Substantive tests are audit procedures designed to SUBSTANTIATE THE ACCOUNT BALANCES OR TO DETECT MATERIAL MISSTATEMENTS IN THE FS. It has two types:

  1. Analytical Procedures
  2. Test of details
    a. Test of details of balances
    b. Test of details of transactions

The decision about which type of substantive test to use depends on the auditor’s judgment.

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2
Q

What are analytical procedures as part of substantive testing?

A

AP as ST enable the auditor to obtain corroborative evidence about a particular account, which involves COMPARISON OF FINANCIAL INFORMATION WITH AUDITOR’S EXPECTATIONS to determine the reasonableness of an account balance reported in a FS.

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3
Q

Which is more predictable, income statement or balance sheet accounts?

A

Income statement accounts are more predictable than balance sheet accounts.

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4
Q

What are tests of details?

A

ToD involves EXAMINING THE ACTUAL DETAILS MAKING UP THE VARIOUS ACCOUNT BALANCES.

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5
Q

What are test of details of balances?

A

It involves DIRECT TESTING OF THE ENDING BALANCE OF AN ACCOUNT. It is usually used when the account balances are affected by a large volume of relatively immaterial transactions

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6
Q

What are test of details of transactions?

A

It involves testing the transactions which give rise to the ending balance of an account. It is usually used when the account balances are composed of smaller volume of relatively material amounts.

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7
Q

Discuss the effectiveness of substantive testing.

A

The effectiveness of substantive testing is influenced by the NATURE, TIMING, AND EXTENT OF ST.

  1. NATURE of ST relates to the QUALITY of evidence. Auditor determines the appropriate quality of evidence needed to SUPPORT THE DESIRED LEVEL OF DETECTION RISK. The auditor should bear in mind that high quality evidence would also involve high costs, so he must strike a balance between the two.
  2. TIMING of ST
  3. EXTENT of ST relates to the AMOUNT of evidence needed to satisfy a particular objective, which is based on the auditor’s judgment.
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8
Q

Discuss the relationship between ST and ToC

A

Test of controls provide evidence that indicates a misstatement is LIKELY TO OCCUR.

Substantive testing provide evidence about the EXISTENCE OF A MISSTATEMENT in an account balance.

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9
Q

Explain Audit evidence.

A

Evidence refers to information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. It consists of:

  1. UNDERLYING ACCOUNTING DATA - accounting records underlying the FS.
  2. CORROBORATING INFORMATION - supports the underlying accounting data obtained from client and other sources.
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10
Q

What are the 2 main qualities of audit evidence?

A
  1. Sufficiency

2. Appropriateness

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11
Q

Explain sufficiency as a quality of audit evidence.

A

Sufficiency refers to the AMOUNT OF EVIDENCE that the auditor should accumulate, which is based on the auditor’s judgment considering the cost and the benefits derived. Factors considered in evaluating sufficiency of evidence include:

  1. Competence - more competent evidence, lesser amount of evidence needed
  2. Materiality of item examined - more material the item is, the more evidence is needed to support its validity
  3. Risk involved - more risk means more evidence needed
  4. Experience gained during a previous audit may indicate the amount of evidence needed.
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12
Q

Explain appropriateness as a quality of evidence.

A

Appropriateness measures the QUALITY, RELIABILITY, AND RELEVANCE of audit evidence.

  1. Relevance relates to the timeliness of evidence and its ability to satisfy the audit objective.
  2. Reliability relates to the objectivity of evidence and is influenced by its source and nature.

Evidence from INDEPENDENT OUTSIDE SOURCES are more reliable than those generated internally

Evidence generated internally is more reliable when internal control is effective

Evidence OBTAINED DIRECTLY BY THE AUDITOR is more reliable than that obtained from the entity.

Evidence in the FORM OF DOCUMENTS AND WRITTEN REPRESENTATIONS are more reliable than oral representations.

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13
Q

What are working papers?

A

Working papers are records kept by the auditor that DOCUMENTS THE AUDIT PROCEDURES APPLIED INFORMATION AND EVIDENCE OBTAINED, AND CONCLUSIONS REACHED. Its functions are:

  1. Support the audit opinion on FS
  2. Support auditor’s representation as to PSA compliance
  3. Assist auditor in planning, performance, review and supervision of the engagement
  4. Plan future audits
  5. Provide information useful in rendering other services
  6. Provide adequate defense in case of litigation
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14
Q

What are the important items that would be REQUIRED to be in an audit documentation?

A
  1. Discussions of SIGNIFICANT MATTERS with management and others
  2. Departation from basic principles or an essential procedure relevant in the audit and the alternatives performed
  3. Documentation of the nature,timing, and extent of audit procedures performed.
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15
Q

What are the classifications of working papers? Explain each.

A
  1. Permanent file - contains information of CONTINUING SIGNIFICANCE to the auditor in performing recurring audits.
  2. Current file - contains evidence gathered and conclusions reached relevant to the audit of a particular year.
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16
Q

Who owns working papers?

A

Working papers are the property of the auditor and the client has no rights to it.

Working papers may sometimes serve as a reference source for the client, but can never be a substitute for the client’s records.

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17
Q

What are the rules on confidentiality of the working papers?

A

Working papers cannot be shown to 3rd parties without the client’s permission. This rule, however, is overridden when by statute of law when:

  1. Disclosure is required when the working papers are subpoenaed by a court
  2. When there is a professional right to disclose, such as when the auditor defends himself when sued by client for negligence
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18
Q

How long should working papers be retained?

A

It should be retained for a period of time sufficient to meet the needs of the auditor and to satisfy any pertinent legal requirements of record retention.

Such retention period, however, should NOT BE SHORTER THAN FIVE YEARS from the report release date. Statutes, regulations, or the audit firm’s quality control policies may specify a longer retention period.

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19
Q

What is heading?

A

Heading identifies the working paper with such information such as the name of client, type or working paper, etc.

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20
Q

What is Indexing?

A

Indexing refers to the use of lettering/numbering system to aid in cross-referencing essential info.

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21
Q

What is cross-indexing / cross referencing?

A

It is used to provide a trail in reviewing the working papers.

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22
Q

What are tick marks?

A

It includes symbols that describe the audit procedures performed.

23
Q

What are accounting estimates as defined by PSA 540?

A

Accounting estimates are approximation of the amounts of an item in the absence of a precise means of measurement.

THE RISKS OF MATERIAL MISSTATEMENTS ARE GREATER WHEN ACCOUNTING ESTIMATES ARE INVOLVED.

24
Q

What are the auditor’s responsibilities when accounting estimates are encountered?

A

Auditor’s responsibility is to obtain SAE as to whether:

  1. Accounting estimate is PROPERLY ACCOUNTED FOR AND DISCLOSED
  2. Accounting estimate is REASONABLE UNDER THE CIRCUMSTANCES
25
Q

What are the approaches used by the auditor when obtaining SAE about accounting estimates?

A
  1. Reviewing and testing the process used by management to develop the estimate
  2. Make an independent estimate
  3. Review of subsequent events which confirm the estimate made
26
Q

What is a related party?

A

Related party refers to persons/entities that may have dealings with one another in which one party has the ability to exercise significant influence or control over the other party in making financial and operating decisions.

27
Q

What is management’s responsibility with regards to related parties?

A

Management is responsible for the IDENTIFICATION AND PROPER DISCLOSURE OF RELATED PARTIES AND TRANSACTIONS WITH SUCH PARTIES.

28
Q

What is the auditor’s responsibility with regards to related parties?

A

Auditor should obtain and review information provided by directors and management identifying names of all known related parties and transactions with such parties.

29
Q

What are some considerations by the auditor in determining whether there is a need for an auditor’s expert?

A
  1. Management has used a management’s expert
  2. Nature and significance of the matter and its complexity
  3. Risks of material misstatements in the matter
  4. Expected nature of procedures to respond to identified risks
  5. Availability of alternative sources of audit evidence
30
Q

What are the considerations by the auditor when evaluating the auditor’s expert?

A
  1. Competence and objectivity of the expert
  2. Understanding of the filed of the expertise
  3. Establish the terms of the agreement with the expert
  4. Evaluate the results of the work of the expert
31
Q

What are the rules on reliance of an expert’s work in the audit report?

A

If the audit opinion is UNMODIFIED, the auditor SHOULD NOT REFER TO THE WORK OF THE AUDITOR’S EXPERT.

If the audit opinion is MODIFIED, the auditor CAN MAKE REFERENCE TO THE EXPERT’S WORK if the auditor believes such reference is necessary for the readers to understand the reason for expression of a modified opinion. SUCH REFERENCE DOES NOT REDUCE THE AUDITOR’S RESPONSIBILITY.

32
Q

Discuss the consideration of the work of internal auditors.

A

Effective internal auditing can affect the nature, timing, and extent of the external auditor’s procedures. The auditor has to:

1. Make preliminary assessment of internal auditing
  Consideration of internal auditor's
  a. Competence
  b. Objectivity
  c. Due professional care
  d. Scope of function
  1. Evaluation and testing work of internal auditing
33
Q

May the external auditor be assisted by the internal auditor?

A

Yes, the external auditor can request the assistance of internal auditors in the performance of routine/mechanical audit procedures, provided that the external supervises and reviews the work of the internal auditors.

The auditor’s responsibility is NOT REDUCED BY ANY USE MADE OF INTERNAL AUDITING.

Auditor’s report on FS should NOT INCLUDE ANY REFERENCE TO THE WORK PERFORMED BY THE INTERNAL AUDITORS.

34
Q

T or F
Auditor must investigate further when the results of analytical procedures show significant differences that are not existed but do exist.

A

True.

35
Q

T or F
Auditor must investigate further when the results of analytical procedures show significant differences are expected but do not exist.

A

True.

36
Q

Auditors may decide to replace tests of details with analytical procedures when possible because the

a. AP are more reliable
b. AP are considerably less expensive
c. AP are more persuasive
d. ToD is difficult to interpret

A

b. AP are considerably less expensive

37
Q

Auditors try to identify predictable relationships when using AP. Relationships involving transactions from which of the following most likely would yield the highest level of evidence?

a. Accounts payable
b. Advertising Expense
c. Accounts Receivable
d. Interest Expense

A

d. Interest Expense

38
Q

T or F

Analytical procedures may be performed as test of control

A

False.

39
Q

Which of the following is the most costly audit test?

a. Analytical Procedure
b. Risk Assessment Procedure
c. Test of Controls
d. Tests of Details of Balances

A

d. Tests of Details of Balances

40
Q

Audit evidence obtained directly by the director will not be reliable if

a. auditor lacks the competence to evaluate the evidence
b. it is provided by the client’s attorney
c. client denies its veracity
d. it is impossible to obtain additional corroboratory evidence

A

a. auditor lacks the competence to evaluate the evidence

41
Q

Which of the following is correct about the working papers?

a. WP should not include documentation prepared by the client
b. Every matter the auditor considers in an audit must be documented in the WP
c. In determining the extent of WP documentation, it may be useful to consider what would be necessary to provide another auditor who has no previous experience with the audit an understanding of the detailed aspects of the audit
d. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit

A

d. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit

42
Q

For what minimum period should audit working papers be retained by the independent CPA?

a. for the period during which the entity remains a client of the independent CPA
b. for the period during which an auditor client relationship exists but more than 6 years
c. for the statutory period within which legal action may be brought against the independent CPA
d. for as long as the CPA is in public practice

A

c. for the statutory period within which legal action may be brought against the independent CPA

43
Q

What client information is needed by the auditors in creating lead schedules?

a. Interim statements prepared by the client
b. General ledger info including ending balances and beginning balances for accounts
c. schedule of adjusting entries made by the client for all balance sheet accounts
d. detailed transaction information that may explain changes in balance sheet accounts

A

b. General ledger info including ending balances and beginning balances for accounts

44
Q

Which of the following would an auditor generally perform to obtain assurance that accounting estimates are properly accounted for and disclosed?

a. Inquiry of management
b. Make an independent estimate for comparison with client’s
c. review of subsequent events
d. Obtain knowledge about the applicable financial reporting standards related to the accounting estimate

A

d. Obtain knowledge about the applicable financial reporting standards related to the accounting estimate

45
Q

Which of the following procedures would an auditor least likely perform when evaluating the reasonableness of management’s estimates?

a. Make an independent estimate for comparison with the client’s
b. Read the minutes of meetings of BoD
c. Review the test and process used by management
d. Review subsequent events which confirm the estimates made

A

b. Read the minutes of meetings of BoD

46
Q

Which of the following procedures would an auditor ordinarily perform first in evaluating management’s accounting estimates for reasonableness?

a. Develop independent expectations of management’s estimates
b. Consider the appropriateness of the key factors or assumption used in preparing the estimates
c. Test the calculations used by the management in developing the estimates
d. Obtain an understanding of how management developed its estimates

A

d. Obtain an understanding of how management developed its estimates

47
Q

Which of the following is not one of the primary reasons why auditors should be aware of related parties and transactions between such parties?

a. PFRS requires disclosure of the related party transactions if they are material
b. The existence of related parties or related party transactions may affect the FS and reliability of audit evidence
c. A related party transaction may be motivated by other than ordinary business considerations
d. PFRS requires that related party transactions be recorded in their equivalent arms-length transaction

A

d. PFRS requires that related party transactions be recorded in their equivalent arms-length transaction

48
Q

Most auditors assess inherent risk as high for related parties and transactions because

a. if the unique classification of RP transactions on the balance sheet
b. of the lack of independence between the parties
c. if the unique classification of RP transactions on the income statement
d. it is required by PFRS

A

b. of the lack of independence between the parties

49
Q

After determining that a related party transaction has in fact occurred, the auditor should

a. Add a separate paragraph to the auditor’s report to explain the transactions
b. Perform analytical procedures to verify whether similar transactions occurred but were not recorded
c. Obtain an understanding of the business purpose of the transaction
d. Substantiate that the transaction was consummated on terms equivalent to an arm’s length transaction

A

c. Obtain an understanding of the business purpose of the transaction

50
Q

When auditing related party transactions, an auditor places primary emphasis on

a. Ascertaining the rights and obligations of the related parties
b. Confirming the existence of the related parties
c. Verifying the valuation of the related party transaction
d. Evaluating the disclosure of the related party transaction

A

d. Evaluating the disclosure of the related party transaction

51
Q

Which of the following statements in relation to the preliminary assessment of internal auditing is false?

a. external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach
b. during the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that the internal auditing is relevant to the external audit of the FS in specific areas
c. Effective internal auditing will often allow a modification in the nature, timing and extent and even eliminate in its entirety some procedures performed by the external auditor
d. In some cases, after having considered the activities of internal auditing, the external auditor may decide that internal auditing will have no effect on external audit procedures

A

c. Effective internal auditing will often allow a modification in the nature, timing and extent and even eliminate in its entirety some procedures performed by the external auditor

52
Q

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal control because

a. audit programs, working papers and reports of internal auditors can often be used as a substitute
b. procedures performed by the internal audit staff may eliminate the independent auditor’s need for an extensive study and evaluation
c. work performed by internal auditors may be a factor in determining the nature, timing and extent of the independent auditor’s procedures
d. understanding of the internal audit function is an important substantive test to be performed by the independent auditor

A

c. work performed by internal auditors may be a factor in determining the nature, timing and extent of the independent auditor’s procedures

53
Q

An independent auditor might consider the procedures performed by the internal auditors because

a. They are employees whose work must be reviewed during substantive testing
b. Their work affects the cost-benefit trade off
c. They are employees whose work may affect the nature, timing and extent of audit procedures
d. Their degree of independence may be inferred from the nature of their work

A

c. They are employees whose work may affect the nature, timing and extent of audit procedures

AUDITING THEORY (17 decks)

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