Flashcards in AUD-Evidence and Risk Deck (51)
What is the majority of an auditor's work in determining an audit opinion?
Collection of evidence to support the opinion.
Of what does audit Evidence consist?
Evidence consists of client accounting data and supporting documentation from client or from third parties.
What is the relationship between Evidence and Detection Risk?
Evidence has an inverse relationship with Detection Risk
The one aspect of Audit Risk an auditor can control through (N)ature, (T)iming, (E)xtent of audit procedures.
Inherent Risk and Control risk are outside of auditor’s control.
Which aspects of Audit Risk can an auditor control?
Detection Risk, which is decreased by gathering evidence.
Which aspects of Audit Risk can an auditor NOT control?
Inherent Risk and Control Risk are outside of an auditor's control.
How does a high level of acceptable Detection Risk affect an audit?
Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong.
Business and transactions should be relatively stable and predictable.
(N) Less-competent Evidence collected
(T) Interim testing acceptable
(E) Fewer transactions are verified.
What should occur when a low level of Detection Risk is acceptable?
More Evidence collected
(N) More-competent Evidence collected
(T) End of year balance testing
(E) More transactions are verified
What are the primary risks in an audit for a typical for-profit company?
Auditors are there to verify that
Assets & Revenues are not overstated
Expenses & Liabilities are not understated
Exception – if the CPA Exam states that it is a “tax-driven” company, flip them around
What is the primary constraint on audit evidence?
Cost vs. Benefit is a primary constraint.
What characteristics should audit evidence have?
Appropriate: Relevant & Reliable (Quality)
How does the quality of audit evidence vary depending on who has provided it?
Best evidence: Observation of activity by auditor.
2nd Best: Originates from External Parties and is sent directly to auditor (or failing that, items are generated by third party and provided to auditor by the client, such as a bank statement)
Weakest: Oral evidence from management.
Which documents are the most persuasive and credible?
Third party documents are more persuasive and credible than internally-prepared docs
Auditor Knowledge = Most Persuasive
3rd Party info given to auditor
3rd Party info given to client
What are Substantive Procedures?
Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don't test internal controls.
What are the substantive tests that are most often performed?
Trace (or Vouch)
Examine evidence that supports management assertions.
When performing audit procedures, what should auditors focus on?
Auditors focus first on Balance Sheet Accounts, then associated Income Statement items
How is Cash audited?
Assurance Level is High.
Acceptable Detection Risk is Low.
How is Accounts Receivable audited?
If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong.
If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance.
Corresponding Income Statement Account - Revenue
How is Accounts Payable audited?
Review purchase orders/invoices
Confirm with Vendors
Corresponding Income Statement Account – Various Expenses
How is Inventory audited?
Examine purchase agreements
Look at Board Minutes
Is Inventory held as collateral?
Corresponding Income Statement Account – COGS
How are beginning balances audited?
Should match last year's ending balance.
What is the general presumption for auditing Ending Balances?
If Beginning Balance, Additions, Subtractions are OK, then Ending Balances should also be OK.
How is a Statement of Cash Flows audited?
Foot all balances – Check the Math
Trace Cash Flow items to other Financial Statements
Check classifications - Operating Activities, Investing Activities, Financing Activities
Under the Indirect Method, what must be disclosed on a Statement of Cash Flows?
Income Taxes Paid
Cash and Cash Equivalents Definitions
Under the Direct Method, what must be disclosed on a Statement of Cash Flows?
Results as if you had used Indirect Method
Cash and Cash Equivalents Definition
What are Subsequent Events, and what do they require?
Subsequent events occur after the Balance Sheet Date, but before the audit report is issued.
Auditor needs to make inquiries and assess if they affect the audit report.
What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?
If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date, client should issue a disclosure to financial statement users and/or revise the financial statement.
Regulatory agencies might need to get involved under some circumstances.
What should an auditor do if they discover they have forgotten to perform a substantive procedure?
If auditor discovers that they forgot to perform a substantive procedure, auditor should determine if other substantive procedures performed served as a substitute.
Otherwise support for their audit opinion could be jeopardized.
When are Analytical Procedures required?
REQUIRED When planning the audit (preliminary)
REQUIRED When reviewing the audit (final)
Analytical procedures may be also performed optionally along with the substantive testing.
Use of Analytical Procedures in the audit must be documented.
How do Analytical Procedures assist the auditor?
Helps the Auditor:
Determine if Management Assertions are reasonable
Develop audit plan
Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement