Identify the 3 purposes that might be served by performing analytical procedures.
1. Audit planning (required). 2. As a form of substantive evidence (not required). 3. A final review (required).
Identify the 2 categories of substantive tests of details.
Tests of Ending Balances Tests of Transactions.
How might the auditor's decisions about the nature of audit procedures lower detection risk?
Choosing audit procedures that provide a stronger basis for conclusions will lower detection risk.
How might the auditor's decisions about the extent of audit procedures lower detection risk?
Increasing the sample sizes for audit testing will lower detection risk.
Identify the 4 considerations that determine the effectiveness and efficiency of analytical procedures used for substantive purposes.
Nature of the assertion; Plausibility and predictability of the relationship; Availability and reliability of data; and Precision of the expectation.
List the 2 broad categories of substantive procedures.
Tests of details Substantive analytical procedures.
What is the only component of the audit risk model that the auditor controls?
Define analytical procedures.
Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
How might the auditor's decisions about the timing of audit procedures lower detection risk?
Moving the auditor's important substantive procedures away from an interim date (before year-end) to year-end will lower detection risk.
List the three broad categories of assertions under AICPA professional standards.
Account balances at the end of the period (there are 4 assertions related to the balance sheet); Classes of transactions and events during the period (there are 5 assertions related to the income statement); Presentation and disclosure (there are 4 assertions related to the footnotes applicable to any of the financial statements).
What are the AICPA's guidelines to rank the reliability of audit evidence?
1. Direct personal knowledge by the auditor is the most reliable audit evidence. 2. Evidence obtained from an independent outside source is the next most reliable. 3. Evidence obtained from the entity under effective internal control is next. 4. Documentary evidence is more reliable than verbal responses to inquiries (and original documents are more reliable than faxes and photocopies).
List the four assertions about presentation and disclosure (footnotes).
Occurrence and Rights and Obligations; Completeness; Classification and Understandability; and Accuracy and valuation.
Define audit evidence.
All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information.
Describe what the rights and obligations assertion means.
It means that the company has all the rights associated with its reported assets and all the obligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed.
List the four assertions about account balances at the end of the period (balance sheet).
Existence; Completeness; Rights and obligations; and Valuation and allocation.
List the five assertions about classes of transactions and events during the period (income statement).
Accuracy; Occurrence; Completeness; Cutoff; and Classification.
Describe what the completeness assertion means.
It means that there are no omissions of transactions that should have been reported.
Implicit or explicit statements of fact by management that are associated with the entity's financial statements.
What is meant by "sufficient" and "appropriate" when "Sufficient Appropriate Audit Evidence" is mentioned?
"Sufficient" refers to the quantity of evidence that is required; and "Appropriate" refers to the quality of the evidence involved, in terms of "relevance" and "reliability."
Describe what the existence (occurrence) assertion means.
It means that the recorded transactions are valid economic events of the period in which they are reported, i.e., the recorded transactions/items are properly recorded.
Describe what the valuation or allocation assertionmeans.
It means that the dollar amounts attributed to the elements of the company's financial statements are appropriate and in accordance with GAAP (or other applicable financial reporting framework).
What are substantive procedures?
Procedures performed to detect material misstatements at the relevant assertion level; these consist of tests of details and substantive analytical procedures.
List the three categories of audit procedures.
Risk assessment procedures; Tests of control; and Substantive procedures.
What are risk assessment procedures?
Procedures performed to obtain an understanding of the entity and its environment, including internal control, to assess the risk of material misstatement, whether due to fraud or error.
What are tests of control?
Procedures performed to obtain information about the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the relevant assertion level.
What is meant by the term factual misstatements?
Misstatements for which there is no doubt.
What is meant by the term projected misstatements?
The auditor's best estimate of misstatements in populations suggested by audit sampling. (The AICPA formerly used the term likely error for this concept.)
A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and that which is required for the item to be in accordance with the applicable reporting framework.
What matters must be documented by the auditor in connection with the evaluation of misstatements?
1. The threshold for determining what is viewed as clearly trivial. 2. All misstatements accumulated during the audit (and whether they have been corrected). 3. The auditor's conclusion as to whether any uncorrected misstatements are material (individually or in the aggregate), and the basis for that conclusion.
Describe the auditor's responsibility to accumulate misstatements identified during the audit.
The auditor should accumulate identified misstatements, except for those that are clearly trivial. (Clearly trivial means clearly inconsequential.)