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ACC 4010 - Auditing > Chapter 5 > Flashcards

Chapter 5 Flashcards

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1
Q

What are the key assertions for account balances? (5)

A

Existence
Ownership
Completeness
Valuation
Presentation

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2
Q

What is the existence assertion for inventory?

A

The inventory that is recorded on the balance sheet physically exists

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3
Q

What is the ownership assertion for inventory?

A

Entity has legal title to inventory and inventory excludes items billed to customers or owned by others

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4
Q

What is the completeness assertion for inventory?

A

Inventory includes all items on hand, in transit, and stored at outside locations

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5
Q

What is the valuation assertion for inventory?

A

Inventory is properly valued at lower of cost or net-realizable value

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6
Q

What is the presentation assertion for inventory?

A

Inventory is properly classified as current asset and accounting policies appropriately disclosed

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7
Q

What level of assessment do auditors perform RMM for FS account balances and classes of transactions?

A

They perform it at the assertion level

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8
Q

What should auditors do to reduce audit risk and improve the overall efficiency of an audit (in relation to assertions)

A

Focus on concentrating the audit effort on assertions with the greatest RMM

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9
Q

What is the key risk of the existence assertion?

A

Overstatement
That something has been recorded that doesnt exist

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10
Q

Why is the key risk for the existance assertion overstatement?

A

You need to check that the company isnt just recording assets, liabilities, and equity that arent actually there.
You want to make sure that they arent OVERSTATING their financial position, by checking if these items actually do exist

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11
Q

What is the key risk for the ownership obligation?

A

Risk of misstatement due to recording assets or liabilities that the company doesnt actually own/owe.

The company could include things on the balance sheet that doesnt really belong to them (inventory held on consignment, receivables that were sold…)

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12
Q

What is the key risk for the completeness assertion?

A

RIsk of understatement

That something has not been recorded that should have been (ex: unrecorded liabilities)

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13
Q

What is the key risk for the accuracy, valuation, and allocation assertion? (all one assertion, thats just the name)

A

Risk of being miss valued

Items that arent properly measured/valued are usually for accounts where estimates are used to measure the balances (allowance for doubtful accounts, warranty provision…)

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14
Q

What is the key risk for the classification, presentation and disclosure assertion?

A

Risk of accounts/events not being accurately classified/presented

ex: amounts incorrectly aggregated or netted, or required disclosures are missing or not relevant

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15
Q

What is the audit objective of the “classification, presentation and disclosure” assertion?

A

For assets, liabilities, and equity to have been recorded in proper accounts and appropriately presented and disclosed.

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16
Q

What is the audit objective for the “completeness” assertion? (account balances)

A

All assets, liabilities, and equity have been recorded

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17
Q

What is the audit objective for the “accuracy, valuation, and allocation” assertion?

A

Assets, liabilities, and equity have been recorded at appropriate amounts

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18
Q

What is the audit objective of the “existence” assertion?

A

Assets, liabilities, and equity actually exist

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19
Q

What is the audit objective of the “ownership” assertion?

A

That the entity has legal rights to assets, and liabilities are obligations of entity

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20
Q

What are the key assertions for transactions? (5)

A

Occurrence
Completeness
Accuracy
Cut-off
Classification, presentation, and disclosure

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21
Q

What is the key risk of occurrence assertion?

A

Overstatement

That something has been recorded that didnt occur, or pertain to an entity.
ex: fake sales, or fake revenues to overstate profit

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22
Q

What is the audit objective of the occurrence assertion?

A

Revenues and expenses recorded have occured and pertain to the entity

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23
Q

What is the key risk of the completeness assertion?

A

Understatement

That something has not been recorded that should have been recorded (expenses not recorded to overstate profit)

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24
Q

What is the completeness assertions audit objective? (transactions)

A

All revenues and expenses have been recorded

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25
What is the key risk for the accuracy assertion? (transactions)
That something is not properly measured This commonly applied in measuring transactions, bad debt expense, warranty expense, impairment loss
26
What is the audit objective of the accuracy assertion? (transactions)
Revenues and expenses have been appropriately recorded
27
What is the key risk for cut-off assertion? (transaction)
That transactions are recorded in the wrong accounting period, especially near year end (revenues & expeneses might be purposefully recorded in the wrong period to manipulate earnings)
28
What is the audit objective of the cut-off assertion? (transactions)
Revenues and expenses have been recorded in the correct accounting period
29
What is the key risk for the "classification, presentation, and disclosure" assertion? (transactions)
That transactions and events are not properly classified and/or appropriately presented and disclosed (transactions are incorrectly aggregated or netted and/or required disclosures missing or not relevant and understandable)
30
What is the audit objective of the "classification, presentation, and disclosure" assertion? (transaction)
Revenues and expenses have been recorded in proper accounts and appropriately presented and disclosed
31
Is audit evidence cumulative?
Yes
32
What does an auditor need to support their assertions?
Sufficient appropriate evidence
33
Does audit evidence go both ways (support and contradicts)?
Yes, audit evidence is both information that corroborates the assertions, but also information that contradicts assertions
34
What is sufficiency a measure of? (audit evidence)
The quantity of evidence
35
What is appropriateness a measure of? (audit evidence)
Qua;ity of evidence
36
Is the quality and quantity of audit evidence related?
Yes they are interrelated, the quality will affect the quantity of audit evidence required.
37
What are the two aspects of audit evidence?
The quantity (sufficiency) and the quality (appropriateness)
38
What happens to the quantity of audit evidence the greater the RMM is?
The greater the RMM, the more evidence required to reduce audit risk to an acceptably low level
39
What two aspects is the sufficiency of audit evidence affected by?
RMM - the greater the RMM the more evidence required Quality - the higher the quality of evidence, the less quantity may be required
40
Is sufficiency for audit evidence black and white?
No, its a matter of professional judgement (subjective)
41
What are the two factors that affect the appropriateness of audit evidence?
Relevance Reliability
42
Explain the relevance factor on how it affects the appropriateness of gathering audit evidence
The audit procedure being preformed/evidence being gathered must be relevant to the assertion being tested
43
Explain the reliability factor on how it affects the appropriateness of gathering audit evidence
The reliability is determined by the souce, nature, and circumstances that the evidence was obtained. This determines whether the evidence can be relied upon to support the assertion
44
What are the different types of audit evidence?
External confirmations Documentary evidence Representations Verbal evidence Computational evidence Physical evidence Electronic evidence
45
What is external confirmation evidence?
Sent directly by auditor to third party requesting information Ex: bankers, lawyers, lenders
46
What are the two types of external confirmations?
Positive and negative
47
What is the difference between the positive and negative external confirmations?
Positive external confirmation - asks recipient to rely in all circumstances Negative external confirmation - asks the recipient to reply only if they disagree with the information provided
48
What is documentary evidence?
Includes supplier invoices and statements, bank statements, board minutes, legal correspondence and agreements
49
What is representations audit evidence?
Confirmations provided by others to support audit evidence: - legal letters from the clients lawyer confirmining legal matters - management representation letters where management confirms their responsibility for the FS and verbal statements they have made during the audit
50
What is verbal evidence?
Obtained when gaining understanding knowledge of client and internal control systems
51
Is verbal evidence enough evidence?
No its not sufficient on its own, but can be used to corroborate other forms of evidence
52
What do auditors have to do in relation to key discussions with their clients?
Document a summary of all key discussions and put it in the audit file
53
What is computational evidence?
obtained when the auditor verifies mathematical accuracy of the FS. Involves checking formulas and tracing amounts used in calculations to supporting documents
54
What is physical evidence?
Obtained physically by inspecting the clients tangible assets Done to verify the existance and completeness, look to see if assets appear to be saleable and functioning This may require assistance of independent experts to help assess the assets
55
What is electronic evidence?
Includes all data help in the clients IT systems, files sent by email to the auditor, and items that are scanned/faxed The ability to rely on electronic evidence depends on the strength of clients IT controls
56
Does the strength of electronic evidence depend on anything?
The strength of the clients IT controls
57
What are the three broad types of corroborating evidence?
Internally generated evidence Externally generated evidence held by client Externally generated evidence sent directly to auditor
58
Explain the internally generated evidence type of corroborating evidence
Client generates and provides to the auditor, considered LEAST reliable since it can easily be manipulated Ex: sales invoices, inventory count results, spreadsheets, minutes
59
Explain the externally generated evidence held by client type of corroborating evidence
Created by third parties but held by the client. Considered somewhat reliable since its still possible for the client to alter the evidence Ex: bank statements, supplier invoices
60
Explain the externally generated evidence sent directly to the auditor type of corroborating evidence
Auditor obtains directly from third parties, considered to be the most reliable since the client isnt involved and cant alter evidence Ex: bank, AR and AP confirmations, lawyers response to legal inquiry letter
61
What is the more reliable to least reliable type of corroborating evidence?
Externally generated evidence sent directly to auditor (most reliable) Externally generated evidence held by client (somewhat reliable) Internally generated evidence (least reliable)
62
When would an auditor need to utilize an expert?
If auditors dont have the knowledge or skills necessary to assess an account or transaction Ex: actuary or valuator
63
What are auditors responsible for when it comes to using experts?
Determine the scope of work Assessing their competence & objectivity Reviewing and assessing the reliability of their opinion Assessing the validity of the experts conclusion
64
Where does the ultimate responsibility regarding fair representation of FS rest with if an expert is included?
The ultimate responsibility remains with the auditor despite including experts, this does not diminish the auditors responsibility
65
Why should an auditor decline an audit (working with another auditor)
If they dont have the capacity to undertake the audit They need to be able to do the majority of the clients FS and be knowledgeable about the remainder
66
What are some examples of primary gathering evidence gathering procedures used?
Issuing external confirmations Inspecting documents Conducting inventory counts Observation and re-performance Recalculations Inquiry of client and third parties analytical procedures
67
What would issuing external confirmations be used for (assertion)?
Issued to third parties to confirm the EXISTANCE and details of account balances and transactions Existance (account balances)
68
What would inspecting documents be used for (assertion)?
Verify controls operating effectively and occurrence, completeness and proper recording of transactions Occurrence, completeness, accuracy
69
What would conducting inventory count be used for (assertion)?
Verify completeness of inventory, physically examining assets to verify the existence and condition Existence, completeness, valuation
70
What would observation and re-performance be used for (assertion)?
Confirm process and controls are operating as described (only provides evidence at one point in time) Supports occurrence & completeness
71
What would recalculations be used for (assertion)?
Check mathematical accuracy of clients records Accuracy & valuation
72
What would inquiry of client and third parties be used for (assertions)?
All assertions used to corroborate with other evidence obtained
73
What would analytical procedures be used for (assertions)?
To assess the plausibility/reasonableness of information recoreded in FS. Completeness, accuracy, valuation

ACC 4010 - Auditing (8 decks)

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