Audit 4: Audit Evidence Flashcards by Sylwia Skoney

Appropriate Audit Evidence must be what…

Reliable and Relevant

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Hierarchy of Audit Evidence

Auditors direct knowledge

External Evidence

Internal Evidence

Oral Evidence

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Relevance of Evidence

example AR

AR confirmations are relevant to the existence of the receivables

but not valuation because it does not show if customer is going to pay

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Substantive Procedures are…

designed to detect material misstatements at the assertion level

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Substantive Procedures consist of..

Test of details

Substantive analytical procedures

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When must analytical procedures be used?

Planning and Final Review

Can be used in Substantive procedures portion but not required

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Some analytical procedures are..

Comparisons of Financial data

Ratio analysis

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Test of Details includes what procedures…

Directional Testing

External Confirmation

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Directional Testing is

Financial House going up or down

Vouching or Tracing

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When vouching what are you testing for…

Tracing…

Vouching… Existence=Fin stmts down

Tracing… Confirmation=Source documents up

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Financial House for Vouching and Tracing

Top to Bottom

Fin Stmts

Trial Balance

General Ledger

Subsidiary Ledger

Books of Original Entry

Source Documents

Execution of Event

Transaction Approved

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What is negative confirmation of external confirmation?

3rd party responds to auditor only if they disagree with information in request

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Standard Audit Procedures

FIVE CARROT CARS

Footing/Cross

Inquiry

Vouching

Examination

Confirmation

Analytical Procedures

Re-performance

Reconciliation

Observation

Tracing

Cutoff Review

Auditing Simultaneously

Rep Letter

Subsequent Events

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Relevant Assertions from Chapter are what mnemomic

COVER-U

Completeness

CutOFF

Valuation/Accuracy

Existence

Rights

Understandability

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What are the most important assertions of account balances?

CVER

Completeness

Valuation

Existence

Rights

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What are the most important assertions of Transactions and Events?

COVEU

Completeness

CutOFF

Valuation/Accuracy

Existence

Understandability

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What are the most important assertions of Presentation and Disclosure?

CVRU

Completeness

Valuation/Accuracy

Rights

Understandability

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What assertion do 
Tracing
Analytical Review
Observation 
procedures relate to?

Completness

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What assertion does Cutoff Procedures relate to ?

CutOff

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What assertion do 
Inspection
Footing
Independent Calculation
procedures relate to?

Valuation/Accuracy

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What assertion do
Confirmation
Observation
Vouching
procedures relate to?

Existence and Occurrence

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What assertion do Inspection procedures relate to?

Existence and Occurrence

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What assertion do
Inspection
Review
Inquiry of Mgmt 
procedures relate to?

Understandibility and Classification

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Why do auditors audit by transaction cycle?

They can gather information from related accounts at the same time.

So it is more efficient

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What is the most relevant assertion for the revenue cycle?

Existence- because likelihood revenue will be overstated is high

What is the most relevant assertion for the expense cycle?

Completeness- because not likely to make it to financial stmts

What are two types of fraud that can occur in the Cash Cycle?

Lapping-using today money to cover yesterdays theft Kiting-using checks between multiple accounts

What does inventory observation include

can include test counts of inventory But NOT a full count of inventory

What procedure is common to use on assets and revenue?

Vouch- Go down the financial house to check for existence

What procedure is common to use on liabilities and expenses?

Trace- Go up the financial house to make sure they make it to fin stmts

Engagement Quality review is..

PCAOB standards for another partner to look at the audit before it is released

Correcting Journal Entries

Need to know sometimes asked on test

Analytical procedures are most appropriate on what type of transactions?

on Income Stmt Transactions because they take place over time Not Balance sheet transactions

What is not considered an analytical procedure?

Statistical Sampling not involving comparison

Who should mail a check? Why?

Whomever signs the check should mail prevents defalcations

How to handle incoming cash and checks?

1st person receives and creates remittance listing NOT Allowed near journals Another person does this

Misstatements of cash occur when..

Disbursement date per books and receipt date per books are in different periods

To provide assurance that each voucher is only paid once what would auditor look for?

Stamped paid by check signer

Where should undistributed payroll checks go after being returned?

Should not go to payroll because they are the record keepers. Needs to go to independent party

What sort of opinion to issue if clients attorney cannot form a conclusion about pending litigation that could be material?

Unmodified and properly disclose it

What is important for an auditor to do with related party transactions? Why? Verify valuation? and/or Evaluating the disclosures?

You want to evaluate that they are disclosed Dont care about valuation since they are related party

Who should request inquiry of clients lawyer?

Client Mgmt due to client attorney privilege

Acid Test Ratio Equation

Cash+Mkt Sercurities+AR divided by Current Liabilities

Cash Ratio equation

Cash + Mkt Securities divided by Current Liabilities

AR Turnover equation Shows what?

Net Credit Sales divided by Average Net Receivables Shows number of times to collect in year. higher the better

Inventory Turnover equation Shows what?

COGS divided by Avg Inventory shows number of times inventory sold in a time period

Inventory Turnover in Days equation

365 divided by Inventory Turnover Number of days to turnover

Operating cycle equation

is AR Turnover in days plus Inventory turnover in days Shows # of days between acquisition of inventory and getting your money

Remittance Advice is...

payment for invoice

When there are many small balances that need to be confirmed with only a few likely to dispute what should auditor do?

Ask for Negative Response only

What is best way for auditor to value investment by the equity method?

Examine the audited financial stmts of the investee company

If original insurance policy document is not available for plant equipment what could this mean?

There is lien on plant equipment and lien holder has issurance

Bank confirmations check for what?

Bank Balances Contingent liabilities Pledged Collateral

You could tell of possible kiting occurs from what bank and book disbursement and receipt dates?

If Disbursement Date Per Bank is in period after Receipt Date Per Bank

How can you tell from bank and books disbursement and receipt dates IN TRANSIT items?

Disbursement Date per Books is in period prior Receipt Date per Bank

What should Purchasing department send to accounting department when nonconforming goods returned?

Debit Memo

Revenue cycle financial house top to bottom

``` FS TB GL Sales Journal SALES INVOICE BILL OF LEADING SALES ORDER Execution report Authorization of the event ```

Expenditure cycle financial house top to bottom

``` FS TB GL SL General Journal PURCHASE JOURNAL CHECK VOUCHER VENDOR INVOICE RECEIVING REPORT PURCHASE ORDER PURCHASE REQUISITION Execution event Authorization of the event ```

What does revenue cycle include?

sales revenue accounts receivable cash receipt

What does expenditure cycle include?

purchases accounts payable cash disbursement

What are the keywords for completeness?

``` CUT UP Completeness Unrecorded Trace Understatement Pre-numbered documents ```

What are the keywords for existence and occurrence?

``` VOVOC Vouch Observation Valid Overstatements Confirmations ```

What are the keywords for valuation, allocation and accuracy?

``` PPRR.... FCC Price testing Properly valued Recalculation Recomputing Fair Value Contra Accounts Credits ```

What are the keywords for Rights and obligations?

``` T-CREDD Title Canceled checks Receipts External confirmations Debt agreements Deed ```

What are the keywords for Classification and understandability

Properly Recorded | Properly Classified