Becker AUD 4.1 - Audit Evidence Flashcards Preview

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Flashcards in Becker AUD 4.1 - Audit Evidence Deck (27):
1

Auditors gather sufficient appropriate audit evidence to do what in the audit?

Provide reasonable assurance and express an opinion on the financial statements on:

1) whether it is fairly stated in accordance to an applicable financial reporting framework
2) Free from material misstatements due to fraud or error.

2

What are the 4 methods to gather audit evidence?

1) Risk assessment procedures
2) Tests of controls (tests on internal controls
3) Substantive procedures: detect material misstatement in the F/S and get the MGT to fix these.
4) Other Audit procedures

FYI - Audit evidence can be obtained by other sources:
i.e. Previous audits or Audit Firm's quality control procedures

3

Accounting evidence:

1) True or false: Account recordings by themselves alone do NOT provide sufficient support for audit opinion.

2) ____ consistency among the account records provides some evidence that the F/S are fairly stated.

1) True

2) INTERNAL

4

Name the 6 assertions.

Hint: Becker mnemonic COVERU

1) Completeness
2) Cutoff
3) Valuation, allocation, and accuracy
4) Existence and occurrence
5) Rights and obligations
6) Understandably and classification

5

1) "The entity holds or controls the rights to assets" relates to what type of Management Assertion about a ACCOUNT BALANCE balance at YEAR END?

2) "Liabilities are obligations of the entity" are management assertions that relate to what type of assertion about a ACCOUNT BALANCE balance at YEAR END?

3) "transaction and events have been properly recorded in proper accounts,"

Relates to what MGT assertion type?

4) Transactions that have been recorded have occurred and pertain to entity:

Relates to what MGT assertion type?

5) Amounts and other data related to transactions and events have been recorded appropriately:

Relates to what MGT assertion type?

1) "Rights and obligations" on account balances at YEAR END.

2) "Rights and obligations" on accounts balances at YEAR END.

3) Understandably and classification assertion

"in proper accounts" = classification

4) Existence and occurrence assertion

Existence: "have occurred"

5) Valuation, allocation, and accuracy assertion

"recorded appropriately" = valuation and accuracy

6

Which of the following is:

* Analytical procedure
* Statistical sampling / evaluate sample results
* Test of details procedures

a) Projecting the deviation rate of statistical sample to the population being used

b) Comparing relationships among data, such as inventory balances to recent sales activities

c) Reconciling physical counts to perpetual records and general ledger balances

d) Testing purchases, shipping, and receiving cutoff activities

e) Trend analysis on entity's past expenses along with current year's

f) Trend analysis on sales of competing firms (competing businesses) to develop a current year sales forecast for an entity.

g) Preparing a common-sized income statement and then comparing the entity's information to a corresponding industry average (bench-marking)

h) Projecting a deviation rate by comparing the results of statistical sample with actual population characteristics.

a) Statistical sampling / evaluate sample results

b) Analytical procedures

Hint: analytical procedures involves "Comparisons" and "Ratios" and "trend analysis" and anything that deal with finding "patterns" between two or more different documents. Also, "converting" of entity's financial data into a common-sized (standard-template-based) F/S for comparative purposes is analytical procedure. Documents usually that has numbers, like "square footage of warehouse" in relation to "cost of goods sold" or "sales volume"

c) Test of details

d) Test of details

e) Analytical procedures

f) Analytical procedures

g) Analytical procedures

h) Statistical sampling / evaluate sample results

7

1) Are pre-numbered reports completed by client employees are considered:

Internal evidence --or--
External evidence

2) Which is more reliable:

Internal evidence or external evidence?

3) Give 3 examples of External evidence

1) Internal evidence.
This barbecues it's created from inside the company's personnel

2) External evidence is more reliable because it is outside of company's control for possible manipulation / alteration

3) Examples:
a) Municipal property tax bills. This is issued outside the company. So no company manipulation here.

b) Prior months' bank statements obtained from client.

These bank statements are issued by the bank. Then mailed over to the Client company to have. So, no company manipulation here.

c) Receivable confirmations (negative and positive confirmations) from client's customers.

Self-explanatory. Information from outside the company to verify discrepancies or no discrepancies. No manipulation here by company's personnel.

8

Which of the following is:

Analytical procedure

Not analytical procedure

a) Ensuring that a rep letter signed by MGT is in the file

b) Reading the minutes of the board of directors' meetings for year under audit

c) Obtain letter concerning potential liabilities from client's attorney

d) Trend analysis on prior years and current year's sales volume

e) Comparing relationships among data, such as inventory balances to recent sales activities

f) Preparing a common-sized income statement and then comparing the entity's information to a corresponding industry average (bench-marking)

a) Not analytical procedure.
This because no comparison is going on.

b) Not analytical procedure.
This because no comparison is going on.

c) Not analytical procedure.
This because no comparison is going on.

d) Analytical procedures

e) Analytical procedures

f) Analytical procedures

9

Which of the following is a Subsequent event procedure that an auditor mostly do:

a) Investigate changes in capital stock recorded after year-end

b) Review tax returns prepared by management after year-end

c) Determine whether inventory ordered before year-end was included in the physical count

d) Payroll checks that were recorded before year but cashed after year end

f) Verifying new information on a new dollar amount to a Fire loss that needs an adjustment to the F/S before issuance. This Fire loss event happened before year-end

a) yes - this may require disclosure in footnotes in the F/S.

b) No - this is not an subsequent issue

c) Something recorded before year -end is not a subsequent event

d) Something recorded before year end is not a subsequent

f) Subsequent events - inform MGT to ensure new $$ amounts is recorded.

10

1) PCAOB standards state the relevance of audit evidence depends on what 2 things?

2) True or false: If audit procedures is designed to directly test an assertion and the evidence doesn't tell us anything about that assertion, the audit evidence would NOT be relevant.

3) Auditor's risk assessments affect Nature, Extent, and Timing of Audit procedure and relevance of audit evidence.

1)

* Design of audit procedure to see whether it is designed to TEST assertion directly

and whether it is DESIGNED to test for UNDERSTATEMENT or OVERSTATEMENT

AND

* Timing of Audit procedure

2) TRUE.

3) Auditor's risk assessments affect ONLY Nature, Extent, and Timing of Audit procedure. It does NOT affect audit evidence relevance.

11

Is scanning considered as "analytical procedure"?

Yes, since the auditor uses professional judgment to SEARCH for LARGE, SIGNIFICANT, or UNUSUAL items in the accounting records.

12

1) Hierarchy of audit evidence from MOST reliable to LEAST reliable.

2) Does a strong, effective internal controls improve the reliability of internal evidence?

3) Name 6 examples of internal evidence.

1)
a) Auditor's Direct personal knowledge & personal observation

b) External evidence: documentation from outside the organization that is either sent to the Auditor (confirmation) or sent to the client company to be held (bank statements)

c) Internal evidence

d) Oral evidence

2) Yes

3)
a) Purchase orders
b) Sales orders
c) General ledgers (may not be reliable subject to MGT override and human errors
d) Management reports (may not be reliable because the MGT may make the information vague or it's altered).
e) Shipping documents
f) Receiving reports

13

What is the difference between Positive confirmation and Negative confirmation?

1) Positive confirmation: The 3rd party agrees or disagrees with information in the request sent by the auditor.

2) Negative confirmation = 3rd party respond directly to the auditor only if 3rd party disagrees with the info in the request.

14

1) True or false: Identifying reasonable explanations for unexpected differences before talking to client management helps develop expectations.

2) Why analytical procedures showing patterns of unusual changes without explanation to its cause be considered not effective to develop expectations?

1) True.
This because it creates the expectation to see what the management is going to explain on what is going on with these differences and see if MGT explanation is reasonable.

2) Expectations cannot be developed when there is no explanation on why there are these unusual change patterns. You cannot create expectations from unclear data.

15

Analytical procedures are more appropriate when testing:

Income statement accounts
or
Balance sheet accounts?

Income statement accounts.

Reason:
1) Analytical procedures usually involves comparing numbers over time to see a trend or change patterns.
2) Income statement accounts represent transactions over period of time.
3) Whereas: Balance sheet account represents amounts at a point in time.

16

Which of the following Balance sheet accounts is:

* Vouched to supporting documents
* Recalculated

a) Acquire and dispose fixed assets

b) Long-term debt transactions

c) Payroll and benefit liabilities

a) Vouched to supporting documentation

b) Vouched to supporting documentation

c) Recalculated

17

1) What are the 3 types of audit evidence?

2) Directly obtained evidence from auditor provides more persuasive evidence than evidence obtained indirectly.

Name the methods that the auditor does to directly obtain evidence.

1)
* Accounting records: checks, records of electronic transfers, invoices, contracts, journal entries, worksheets

* Corroborating evidence:meeting minutes, confirmations, industry analysis' reports, data about competitors, and information obtained via Observation, Inquiry, and inspection

* Evidence in electronic

2)
* Observation
* Physical examination or examining the data
* Inspection
* Recalculatoin

18

1) What is the issue with electronic form documentation?

2) How does the auditor handles the issue of electronic form documentation?

1) Electronic documentation may not be retrievable indefinitely.

2) Auditor consider the time during which information exists or available in order to determine Nature, Extent, and Timing of auditing procedures.

19

Which item is an:

External Document
or
Internal document:

a) Purchase orders
b) Shipping documents
c) General ledgers
d) Management reports
e) Sales orders
f) Receiving reports
g) Bank statements
h) Bills of lading
i) A/R confirmations
j) Vendor invoices
k) Packing slips

a) Internal

b) Internal

c) Internal

d) Internal

e) internal

f) internal

g) External

h) External - Bills of lading is a document issued by the Carrier (outside of company) which details a shipment of merchandise and gives title of that shipment to a specified party.

i) External - A/R confirmations are external because the company is getting confirmation from its customers

j) External - Vendor invoices: a document given to company by an outside vendor (like an outside supplier selling supplies to company)

k) External slips - Packing slips: a shipping document that accompanies delivery packages usually inside an attached shipping pouch or inside the package itself. it includes a detail of contents inside the package. This is created by someone outside the company.

20

Which F/S yields more predictable relationships (and high level audit evidence) when applying analytical procedures:

Income statement accounts
or
Balance sheet accounts?

Income statement accounts, such as any kind of expense and revenues.


Balance sheet accounts are not predictable because for example:
* A/P affected by client company payments that could happen at any time the client decides to pay the A/P
* A/R is affected by receiving customer payments
* Allowance for doubtful accounts affected by write-offs of specific receivables.

21

Pass key

(Just flip over to read)

Proper auditing terminology:

If question asks for Audit Procedures,

You should use these words:
* Foot
* Cross foot
* Inquire
* Vouch
* Examine
* Inspect
* Review
* Confirm
* Analyze
* Recalculate
* Reconcile
* Observe
* Trace

22

1) If the results of an analytical procedure shows unexpected differences, the auditor should consider that the F/S may contain a ___ ___.

2) If audit trails of computer-generated transactions exist only for a short-time, the auditor should adjust the ____ of his/her audit procedures accordingly.

3) Based on 2) above does that situation heighten auditor's concern whether F/S has misstatement or not?

4) The decision to whether or not to use analytical procedures as substantive tests is based in part on what 3 things used to develop expectations?

5) Transaction volume recorded just before and just after the year-end be a factor that affects auditor's decision in using analytical procedures as an substantive tests?

1) MATERIAL MISSTATEMENT.

2) TIMING

3) It does not heighten concern for material misstatement existing in the F/S.

4)
* Availability
* Reliability
* Precision

5) No.
Transaction volume is not a factor in deciding to use analytical procedures as substantive test.

23

1) Analytical procedures is required in which phase:

Planning
Final Review
Substantive testing

2) Analytical procedures in the Planning phase is used for what purpose?

3) Analytical procedures in the Final Review stage is to do what?

4) Analytical procedures in substantive procedures is to do what?

5) What affects the most on the reliability of data for analytical procedures?

1) Planing phase
and
Final review phase

Analytical procedures ARE OPTIONAL in substantive testing phase.

2) Understand the entity and its environment.

Used for RISK MEASUREMENT to tell the auditor to problem areas the plan the audit more on.

3) To assist the auditor in the FINAL review of the OVERALL REASONABLENESS of ACCOUNT BALANCES.

4) Obtain audit evidence about SPECIFIC MANAGEMENT ASSERTION.

5) Whether internal controls are strong and effective to improve the data's reliability.

24

1) Which of the following is to:

Audit Cash balance
or
Audit Statement of Cash flows:

a) Vouch a sample of cash receipts and disbursements for the last few days of the current year.

b) Reconcile cutoff bank statement to proof of cash to verify

c) Confirm the amounts included in the statement of cash flows with the entity's financial institution

d) Reconcile amounts included in Statement of Cash flows to other Financial statement amounts.

2) If an auditor has doubts about the sufficiency of the evidence (like on inventory valuation) to support management assertion, what does the auditor do to eliminate this doubt?

3) Do you acquire more statements/ representation from MGT in regards to the insufficiency of valuation of an account?

4) If there is no additional evidence to eliminate doubt on let's say valuation of inventory, the auditor could decide to issue a qualified opinion or a disclaimer of opinion depending on ____.

a) Audit cash balance

b) Audit cash balance

c) Audit cash balance

d) Audit Statement of cash flow

2) Gather more audit evidence to eliminate the doubt.

3) No. MGT representations tends to have a bias in them. Relying more on them and getting more of it does not aid the audit.

4) Materiality.

Is the the lack of additional evidence be material enough (it's a big matter) to influence users decisions on the F/S.

25

1) If client sold less merchandise to customers with poor credit ratings, then what happens to the allowance of doubtful accounts as a % of receivables?

2) Improved control activities relating to recording of cash receipts result in

Decrease in A/R
or
Increase in A/R

in current year compared to prior year?

3) Does improving controls on A/R affect allowance for doubtful accounts?

4) If A/R increased and allowance for doubtful accounts as % of A/R remain the same, what is the likely cause for this?

1) It will decrease in order to reflect the lower level of estimated bad debts

2) Decrease in A/R
Not increase.

3) No affect on allowance for doubtful accounts

4) The likely cause = open a second retail outlet (or store) where the collection rate on A/R on new store is the same as the old outlet (or store).

26

What are the likely causes for annual revenues and expenses to be drastically different in current year compared to prior year?

1) Error: placing unrealized gains or losses from available for sale in Income statement (IS) and not in Other comprehensive income (OCI)

2) Error: Expense off the entire cost of purchasing of a fixed asset instead of capitalizing in it as an asset.

3) Recording a huge amount of Revenue when in fact it is supposed to be Unearned revenue (example: magazine subscriptions sales that was mistakenly recorded as earned revenue not unearned revenue.

27

What is valuation, allocation, and accuracy assertion?

Explain why that the process of a company's control over the need to approve credit before shipping a good sold to a customer is considered as "Valuation and allocation and accuracy" assertion?

1) The amount is recorded in the proper period.

2) This is because the company needs to properly record something first in a period before proceeding to record something else.

Example: Approving credit deals with accounts receivable collection. The control here is to make sure that the Company really can collect cash on a receivable from a customer that is really going to pay for it.

So it is like this:
1) Approve the credit first
2) Then record the sale of goods to be shipped to customer.
3) Sometime later: the company gets the cash on the receivable.