Flashcards in Audit Engagement Field Work Deck (59):
What are the 3 types of substantive testing?
Tests of transactions
Tests of details
What is the most persuasive evidence?
evidence that is externally generated and obtained by the auditor directly from the source
How can detection risk be reduced more than anticipated?
performing more substantive testing than planned
perform tests that provide better quality evidence
How far into the future must an auditor be concerned about a going-concern?
a reasonable period of time not to exceed 12 months from the balance sheet date
Why are substantive tests performed?
to reduce detection risk for an account balance or group of accounts so that audit risk for one or more relevant assertion is reduced to an acceptable level
What is meant by subsequent period?
the time between the balance sheet date and the date the audit report is issued
Which management assertion is being tested when an auditor starts with a reported balance and seek support through internal documentation?
vouching usually seeks to substantiate existance
Which management assertion is being tested when an auditor starts with transactions and traces the recording of those activities through the accounting system?
tracing seeks to substantiate completeness
What happens if the client does not sign a letter of representation?
this is a material lack of evidence and could lead to a qualified or disclaimer of opinion
the auditor could also withdraw
Other than disclosure what issue must an auditor verify in connection with related party transactions?
make sure the transaction actually occurred as indicated
How does an auditor go about searching for related-party transactions?
names of officers, subsidiaries, major investors on documentation supporting the transactions
transactions near the end of the year that had or could have had a significant impact on the F/S
transactions that do not conform to the standards, conditions, or terms of traditional transactions, such as loans without repayment schedules
Why are estimates of special concern to an auditor?
there is less objective evidence for accounting estimates
What 2 ways does an auditor go about substantiating the estimates found in the client F/S?
evaluate the system or method
evaluate the reasonableness of the estimate
How can the auditor gain evidence about the reasonableness of an estimate?
examine process used to develop the estimate
examine the methodology and accuracy of similar estimates
review subsequent events for additional info and support for the reasonableness of estimates
hire an outside specialist to evaluate the estimate
What signals might the auditor encounter that would indicate a possible going-concern situation?
recurring losses and negative cash flows from operations
negative working capital
need for troubled restructuring of debt
default on existing debt
major dollar amount lawsuits or pending lawsuits
declared but unpaid stockholder dividends
loss of key customers and/or vendors
What happens if a going-concern situation is discovered?
request managements plans as to how this doubt will be resolved or at least lessened and the company can remain in business for the next 12 months
What happens if an auditor is satisfied with the plans by management over a going-concern?
neither the audit report or the F/S are impacted
What happens if an auditor is not satisfied with the pans by management over a going-concern?
add an explanatory paragraph after the opinion paragraph
if the doubt is severe a disclaimer may be appropriate
What is the purpose of working papers?
indicates nature, extent, and timing of all the audit procedures that were performed
indicates sufficient appropriate evidence that was obtained from these procedures
indicates which member of the audit team were responsible for the procedures, including date, who reviewed and the date of review
How does the auditor decide on the nature an extent of documentation that is needed for each account being examined?
the RMM associated with the account balance or class of transactions
the extent of judgment that was exercised and conclusions that were reached
the nature of procedures performed and significance to the assertion
nature and extent of exceptions uncovered
Which members of management are supposed to sign the representation letter?
CEO, CFO and any other party with sufficient knowledge of the entity's F/S
When should the representation letter be signed?
the date that sufficient appropriate evidence has been obtained
In what respects does the representation letter relieve an auditor's other responsibilities?
no other responsibilities are relieved it is a required procedure
What are some steps an auditor takes after an engagement has been accepted?
visit predecessor auditor for a second time to review audit documentation from previous audit
make a preliminary assessment of the size of a material misstatement
for each group of accounts and for each management assertion, set an acceptable level of audit risk
assess the inherent risk of material misstatement occurring within the AIS
assess control risk
plan for securing sufficient appropriate evidence through substantive testing to reduce detection risk
What is an audit plan?
The audit plan is the document that proves the audit was properly designed and planned as required by GAAS
Why is an audit plan required?
The first standard of field work requires adequate planning. Also helps to keep costs reasonable and minimizes possible client misunderstandings.
When is an audit plan finalized?
The auditor does not know the extent of substantive testing until after the initial assessment of IR and CR. The audit plan is continually updated and revised in response to new info gathered during the audit so it is not finalized until the audit is compete.
What is the purpose of the management rep letter?
acknowledges management responsibility for the F/S
states its belief that the F/S are presented fairly in accordance with GAAP
states its responsibility for correcting any MM
indicates its responsibility for the design and implementation of programs and controls to prevent and detect fraud
documents certain representation made to the auditor during the audit engagement
What role does the audit committee perform within the entity?
responsible for hiring, firing, retention and compensation of the external auditor
liaison between BOD and the external auditor.
resource to the auditors for discussing significant transactions
oversees the work of the internal audit department
When are analytical procedures performed during an audit?
Required - preliminary stages, final stage
Maybe performed - as a substantive test
What action should an auditor take in response to a possible misstatement?
seek evidence to corroborate the MM
uncorrected misstatements by themselves may be immaterial but material in the aggregate the auditor must keep this in mind in evaluating the effects of misstatements on the F/S
What disclosure is required of related-party transactions?
the nature and the terms of the transactions
After issuing an opinion, the auditor discovers additional info about the client's F/S presentation not previously known by the auditor. What is the auditor's responsibility?
under normal conditions, an auditor has no further responsibility once an audit opinion has been rendered.
if the info about the F/S after the opinion, the auditor must evaluate whether the original opinion can be supported. if the validity of the opinion is in question the auditor must investigate the matter further
depending on the nature and materiality of the info, the auditor may need to notify the users of the F/S that the audit report may no longer be relied upon
Can a company disclose that the terms and conditions of a sale would be the same for a 3rd party as a transaction with a related-party sale that occurred during the year?
this type of disclosure is allowed though the claim must be substantiated.
if it can not be substantiated a scope limitation qualification may result
If an auditor reviews several significant contracts of the client, as well as 76 sales invoices. What documentation is required for this work?
For contracts either abstracts or copies
For invoices some indentification of them must be kept for example specific ID #'s or criteria for examination
list some of the conditions that would likely increase the assessment of the risk of fraud during substantive testing
transactions are not recorded timely
unsupported or unauthorized account balances or transactions
last-minuted adjustments in the financial records that significantly affect the financial results
evidence of certain employees' access to various portions of the AIS that is inconstant with their duties
How does an auditor use analytical procedures to develop expectations?
client historical financial info
client budget or forecast
financial and non-financial internal relationships
What type of testing might performed due to suspected fraud during an audit?
surprise inspection of physical assets
asset counts and inspections at or close to year-end
oral confirmations of certain large balances that have been previously confirmed only in writing
detailed review of large transactions
interviews with employees in high risk areas
analytical procedures and substantive testing of vulnerable assets
What types of representations are normally included in the management rep letter?
management responsibility for the F/S
that all records, data, and minutes have been made available to the auditor
that all material transactions have been properly recorded
that no fraud has occurred involving management with a significant role in internal control
that no fraud has occurred that would have a material impact on the F/S
that there is no knowledge of any allegations of fraud by any employees or third parties
that proper disclosure has been made of all related-party transactions, guarantees, contingencies, litigation issues, and similar items
how is credibility of evidence evaluated?
evidence is more reliable when it is obtained from knowledgeable independent sources
evidence that is generated internally is more reliable when the related controls imposed by the entity are effective
evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference
evidence is more reliable when it exists in documentary form
evidence provided by original documents is more reliable than evidence provided by photocopies or facsimiles.
What are the two types of occurrences examined in the subsequent period?
transactions and events that provide evidence about a balance or transaction that existed at the B/S date that requires adjustment in or disclosure to the F/S
When is the hiring of specialist normally encountered?
when dealing with situations that go beyond the expertise of the auditor such as
percentage of completion for long-term construction
valuation of specialized items such as art, jewelry and complex financial contracts
How does the hiring of specialist impact the audit report?
under normal conditions there is no impact on the audit report
if the work of the specialist has led the auditor to give an opinion other than unqualified, then the name of the specialist can be mentioned
When is the auditor required to inform those charged with governance?
questionable significant accounting policies and practices being used
alternative methods available for the accounting and disclose of material financial info
written and oral communications between the audit and the management of the company concerning significant issues, including disagreements
What info is found in the current file of the client's audit documentation?
the audit program
all evidence gathered to substantiate the opinion
explanation of all significant problems encountered during the audit and their resolution
What info is found in the permanent file of the client's audit documentation?
data that normally remains unchanged for a period of years and has ongoing applicability to the client's situation
general ledger account #'s
copies of bond indentures
copies of multi-year lease agreements
Who might server on a client's audit committee?
members of the BOD that are independent of managment
How does an auditor determine the reliability of a specialist?
inquire about educations, certification, licensing, client list and work references
as well as the independence though not absolutely required reliance is impacted
How much info should the auditor provide to the specialist about the assignment?
the specialist should understand what is needed and the use that will be made of the specialist's work
Which management assertions is being tested when an auditor seeks to determine whether any assets have been pledged as security for a loan?
presentation, disclosure and rights and obligations
What examples of conflicting or missing evidence would increase the assessment of the likelihood of fraud?
documents that appear to have been altered or changed
original documents are no longer available, so copies are the documents being used
significant unexplained items appear in certain reconciliations
inconsistent or vague responses are given by management and other employees to explain unusual differences found during analytical procedures
inventory and/or other significant assets are missing
Why is an auditor interested in the ID of all related-party transactions?
they must be disclosed so they need to be ID'd to verify the presentation and disclosure assertion
they increase the risk of misstatement due to fraud since they are generally not arm's-length transactions and increase the risk they are not valued the same as transactions with independent 3rd parties
List some examples of situations that might take place between the auditor and management that would probably increase the auditor's assessment of the likelihood of fraud in the F/S presentation.
restricting auditor access to records, facilities, employees or customers
undue audit time pressures imposed by management
unusual delays by management in providing requested info
unwillingness by management to allow the auditor to apply computer-assisted audit techniques in the client's AIS
unwillingness on the part of management to revise reported figures or disclosures as recommended by the auditor
What steps should the CPA take to ensure that the fair value determinations were appropriately handled?
review the company's controls used in determining fair value measurements
evaluate the expertise and experience of those individuals who where involved in the fair value determination
learn of any significant assumptions that were used to arrive at fair value
review the process used by the client to monitor and assess asset impairment amounts and any changes in the underlying assumptions that were used in arriving at fair value
How would the independent auditor go about corroborating the reported amount for a company building?
examine the valuation model for reasonableness and accuracy in computation. consider alternative valuation models and determine whether these models are more appropriate
make sure management's assumptions are consistent with market information, the economic environment, and any past experience.
look for any subsequent events that might assist in evaluation management's valuation method or amount
Why does the independent auditor make an assessment of the internal auditor?
it can influence the assessment by the external auditor of IR and CR
How is the competency of the internal auditor evaluated?
review job description of the internal auditor
consider the person's or group's education, training, certification and experience
examine some of the work produced by the internal auditor
reviews audit policies, procedures, programs and supervision activites
How is the objectivity of the internal auditor evaluated?
make certain the internal auditor is not prohibited from doing testing whenever and wherever considered necessary
ID whom the internal auditor reports