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Flashcards in Evidence and Risk Deck (51):
1

Collection of evidence to support the opinion.

Evidence and Risk

2

Evidence consists of client accounting data and supporting documentation from client or from third parties.

Evidence and Risk

3

Evidence has an inverse relationship with Detection Risk

The one aspect of Audit Risk an auditor can control through (N)ature (T)iming (E)xtent of audit procedures.

Inherent Risk and Control risk are outside of auditor's control.

Evidence and Risk

4

Detection Risk which is decreased by gathering evidence.

Evidence and Risk

5

Inherent Risk and Control Risk are outside of an auditor's control.

Evidence and Risk

6

Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong.

Business and transactions should be relatively stable and predictable.

(N) Less-competent Evidence collected
(T) Interim testing acceptable
(E) Fewer transactions are verified.


Evidence and Risk

7

More Evidence collected

(N) More-competent Evidence collected
(T) End of year balance testing
(E) More transactions are verified

Evidence and Risk

8

Auditors are there to verify that

Assets & Revenues are not overstated
Expenses & Liabilities are not understated

Exception - if the CPA Exam states that it is a tax-driven company flip them around

Evidence and Risk

9

Cost vs. Benefit is a primary constraint.

Evidence and Risk

10

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

Evidence and Risk

11

Best evidence: Observation of activity by auditor.

2nd Best: Originates from External Parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement)

Weakest: Oral evidence from management.

Evidence and Risk

12

Third party documents are more persuasive and credible than internally-prepared docs

Auditor Knowledge = Most Persuasive

3rd Party info given to auditor

3rd Party info given to client

Internally-prepared doc

Evidence and Risk

13

Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don't test internal controls.

Evidence and Risk

14

Trace (or Vouch)
Reconcile
Analytical Procedures
Confirmations
Examine evidence that supports management assertions.

(T.R.A.C.E.)

Evidence and Risk

15

Auditors focus first on Balance Sheet Accounts then associated Income Statement items

Evidence and Risk

16

Assurance Level is High.

Acceptable Detection Risk is Low.

Evidence and Risk

17

If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong.

If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance.

Corresponding Income Statement Account - Revenue

Evidence and Risk

18

Review purchase orders/invoices

Confirm with Vendors

Corresponding Income Statement Account - Various Expenses

Evidence and Risk

19

Examine purchase agreements

Look at Board Minutes

Is Inventory held as collateral?

Corresponding Income Statement Account - COGS

Evidence and Risk

20

Should match last year's ending balance.

Evidence and Risk

21

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

Evidence and Risk

22

Foot all balances - Check the Math

Trace Cash Flow items to other Financial Statements

Check classifications - Operating Activities Investing Activities Financing Activities

Evidence and Risk

23

Interest Paid

Income Taxes Paid

Non-cash Transactions

Cash and Cash Equivalents Definitions

Evidence and Risk

24

Results as if you had used Indirect Method

Non-cash Transactions

Cash and Cash Equivalents Definition

Evidence and Risk

25

Subsequent events occur after the Balance Sheet Date but before the audit report is issued.

Auditor needs to make inquiries and assess if they affect the audit report.

Evidence and Risk

26

If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement.

Regulatory agencies might need to get involved under some circumstances.

Evidence and Risk

27

If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute.

Otherwise support for their audit opinion could be jeopardized.

Evidence and Risk

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REQUIRED When planning the audit (preliminary)

REQUIRED When reviewing the audit (final)

Analytical procedures may be also performed optionally along with the substantive testing.

Use of Analytical Procedures in the audit must be documented.

Evidence and Risk

29

Helps the Auditor:

Determine if Management Assertions are reasonable

Develop audit plan

Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

Evidence and Risk

30

Analytical Procedure focus is on dollar amounts (not internal controls)

Analyzes Financial Data: Do Financial Statements Make Sense?

Comparison of data between years

Evidence and Risk

31

Current Ratio = Current Assets / Current Liabilities

Evidence and Risk

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Quick Ratio = Liquid Assets / Current Liabilities

Evidence and Risk

33

Asset Turnover = Net Sales / Average Assets

Evidence and Risk

34

Inventory Turnover = COGS / Average Inventory

Evidence and Risk

35

Gross Margin % = Gross Margin / Sales

Evidence and Risk

36

Ratios are Analytical Procedures

Evidence and Risk

37

Budget vs. Actual comparisons are Analytical Procedures.

Evidence and Risk

38

Ratio analysis

Budget vs. Actual comparison

Comparison of data between years

Use of non-financial data to predict expected values for financial data

Evidence and Risk

39

Management assertions help the auditor to plan the audit and select substantive tests.

Evidence and Risk

40

Presentation - Cutoff Classification - Is it in the right period and category?
Existence/ Occurrence - Did it happen? Does it exist?
Rights & Obligations - Does the company own them?
Completeness - Was everything recorded?
Valuation - Are they worth the amount at which they are recorded?

(PERCV)

Evidence and Risk

41

Occurrence

Cutoff

Classification

Completeness

Accuracy

Evidence and Risk

42

Occurrence

Completeness

Classification

Accuracy

Evidence and Risk

43

No it is an extended procedure.

For example you don't have to take a loan covenant document and go search out that it's a valid loan covenant. Instead you consider the source - if it's externally prepared it's more persuasive.

Evidence and Risk

44

First and foremost you need to understand management's rationale and methods for developing estimates before you can judge reasonableness.

Next Auditor should formulate their own opinion on what a good estimate should be and compare it.

Finally determine if subsequent events affect the estimate.

Evidence and Risk

45

Audit workpapers are the property of the auditor.

They can be paper or electronic.

They must include a WRITTEN audit program (either paper or electronic).

Evidence and Risk

46

Information pertaining to the current year's audit.

Evidence and Risk

47

Information used for this audit and future audits which is updated as needed.

Evidence and Risk

48

Must be kept for 5 years after the audit release date or according to regulations whichever is longer.

Must be kept for 7 years under PCAOB Audit

PCAOB audits also require an Engagement Completion Document

Evidence and Risk

49

Any experienced auditor should be able to look at your work and understand what you did.

Evidence and Risk

50

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

Evidence and Risk

51

After the audit report is released the firm has 60 days to subtract from the file.

You can still add to the file if you document it but you cannot delete any information after 60 days.

Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.

Evidence and Risk