Evidence and Risk Flashcards
(108 cards)
1
Q
What is the majority of an auditor’s work in determining an audit opinion?
A
Collection of evidence to support the opinion.
2
Q
Of what does audit Evidence consist?
A
Evidence consists of client accounting data and supporting documentation from client or from third parties.
3
Q
What is the relationship between Evidence and Detection Risk?
A
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.
4
Q
Which aspects of Audit Risk can an auditor control?
A
Detection Risk which is decreased by gathering evidence.
5
Q
Which aspects of Audit Risk can an auditor NOT control?
A
Inherent Risk and Control Risk are outside of an auditor’s control.
6
Q
How does a high level of acceptable Detection Risk affect an audit?
A
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.
7
Q
What should occur when a low level of Detection Risk is acceptable?
A
More Evidence collected
(N) More-competent Evidence collected
(T) End of year balance testing
(E) More transactions are verified
8
Q
What are the primary risks in an audit for a typical for-profit company?
A
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
9
Q
What is the primary constraint on audit evidence?
A
Cost vs. Benefit is a primary constraint.
10
Q
What characteristics should audit evidence have?
A
Sufficient (quantity)
Appropriate: Relevant & Reliable (Quality)
11
Q
How does the quality of audit evidence vary depending on who has provided it?
A
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.
12
Q
Which documents are the most persuasive and credible?
A
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
13
Q
What are Substantive Procedures?
A
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.
14
Q
What are the substantive tests that are most often performed?
A
Trace (or Vouch) Reconcile Analytical Procedures Confirmations Examine evidence that supports management assertions.
(T.R.A.C.E.)
15
Q
When performing audit procedures what should auditors focus on?
A
Auditors focus first on Balance Sheet Accounts then associated Income Statement items
16
Q
How is Cash audited?
A
Assurance Level is High.
Acceptable Detection Risk is Low
A lot of sub testing because a lot of inherent risk
17
Q
How is Accounts Receivable audited? Significance if DR is high or DR is low
A
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
*For AR always think of confirmations!!!
18
Q
How is Accounts Payable audited?
A
Review purchase orders/invoices
Confirm with Vendors
Corresponding Income Statement Account - Various Expenses
19
Q
How is Inventory audited?
A
Examine purchase agreements
Look at Board Minutes
Is Inventory held as collateral?
Corresponding Income Statement Account - COGS
20
Q
How are beginning balances audited?
A
Should match last year’s ending balance.
21
Q
What is the general presumption for auditing Ending Balances?
A
If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.
22
Q
How is a Statement of Cash Flows audited?
A
Foot all balances - Check the Math
Trace Cash Flow items to other Financial Statements
Check classifications - Operating Activities Investing Activities Financing Activities
23
Q
Under the Indirect Method what must be disclosed on a Statement of Cash Flows?
A
Interest Paid
Income Taxes Paid
Non-cash Transactions
Cash and Cash Equivalents Definitions
24
Q
Under the Direct Method what must be disclosed on a Statement of Cash Flows?
A
Results as if you had used Indirect Method
Non-cash Transactions
Cash and Cash Equivalents Definition
25
What are Subsequent Events and what do they require?
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.
26
What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?
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.
27
What should an auditor do if they discover they have forgotten to perform a substantive procedure?
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.
28
When are Analytical Procedures required?
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.
29
How do Analytical Procedures assist the auditor?
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
30
What is the focus of Analytical Procedures?
Analytical Procedure focus is on dollar amounts (not internal controls)
Analyzes Financial Data: Do Financial Statements Make Sense?
Comparison of data between years
31
How is the Current Ratio calculated?
Current Ratio = Current Assets / Current Liabilities
32
How is the Quick Ratio calculated?
Quick Ratio = Liquid Assets / Current Liabilities
33
How is the Asset Turnover calculated?
Asset Turnover = Net Sales / Average Assets
34
How is the Inventory Turnover calculated?
Inventory Turnover = COGS / Average Inventory
35
How is Gross Margin % calculated?
Gross Margin % = Gross Margin / Sales
36
What type of testing are ratios?
Ratios are Analytical Procedures
37
What type of procedure is a Budget vs. Actual comparison?
Budget vs. Actual comparisons are Analytical Procedures.
38
List Common Types of Analytical Procedures
Ratio analysis
Budget vs. Actual comparison
Comparison of data between years
Use of non-financial data to predict expected values for financial data
39
How do management assertions affect the audit?
Management assertions help the auditor to plan the audit and select substantive tests.
40
```
What assertions do auditors test?
Presentation / cutoff
Existence / occurence
Rights and Obligations
Completeness
Valutation
```
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)
41
What assertions are tests for transaction classes?
Occurrence
Cutoff
Classification
Completeness
Accuracy
42
For which assertions are disclosures tested?
Occurrence
Completeness
Classification
Accuracy
43
Is testing the validity of direct evidence a basic audit procedure?
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.
44
How are Management Estimates audited?
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.
45
Whose property are audit documentation (audit workpapers)? In what form must they be?
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).
46
What is the Current File?
Information pertaining to the current year's audit.
47
What is the Permanent File?
Information used for this audit and future audits which is updated as needed
Affects more than one year
Balance sheet items
48
How long must audit workpapers be maintained?
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
49
What is the primary requirement for audit workpapers besides being written?
Any experienced auditor should be able to look at your work and understand what you did.
50
How should documents added to work papers be treated?
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.
51
How should documents removed from workpapers be treated?
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.
52
When does an auditor mention a specialist?
When a specialist's findings do not support the assertions found in the financial statements
Also when there is an explanatory paragraph
53
What is the auditor's resonsibility?
Find sufficient, appropriate audit evidence to corroborate management's assertions
They try to find risks of material misstatement to help determine the nature, timing, and extent of audit tests
54
What is included in a management representation letter?
When should it be dated?
What happens if not received?
Pg. 5-36
* U-PERCV
* Dated, no earlier than audit report date: WHEN you get sufficient, appropriate audit evidence
* CEO/CFO
* Emphasizes mgmt's responsibility for the F/S
* Mgmt is not deliberately concealing any info that might affect auditor's opinion
* Scope limit if not received
* Important matters are also included such as no fraud or illegal acts, mintues of board directors meetings are complete, no pending legal matters, and all financial records are available
55
Are analytical procedures mandatory?
Yes, in the beginning and end of audit.
It is optional for during the audit
56
Who does an auditor go to find records of dividend income of pubicly held investments?
From investment services and not the SEC
57
What is an example of a scope limit?
When mgmt has restricted the scope of an audit
Not merely when they cannot explain something
58
When do "subsequent events" occur?
| Pg. 5-42
After the balance sheet date, but before the auditor's report
59
Name the 2 types of subsequent events
| Pg. 5-42
Type 1: Conditions that exist at the balance sheet date; Recognized and Adjusted
Type 2: Condition did not exist at the balance sheet date; Not recognized and disclosed
60
When must subsequent event be evaluated?
| Pg. 5-42
* Minutes of board of directors' meeting occuring after year-end
* Inquiry of the client's legal counsel after the balance sheet date
* Interim reports may show unusual transactions after year-end
* Inquiry of client
* Changes in long term debt after year-end
61
What are considered related parties?
| Pg 5-39
* Loans at zero or unusually low interest rates
* Sales at prices far above or below fair market value
* Large, non-recurring transactions occuring close to balance sheet date
* Loan guarantees
* Compensating balance arrangements
Should be material
62
How do you establish existence of securities, and who do you confirm to?
By confirming to an independent custodian since they are the owner of the security
63
When applying procedures at an interim date, what must the auditor consider?
The incremental audit risk involved, and whether performance of interim procedures is cost effective
64
Lead Audit VS Retaining audit papers
| Years?
3 & 5 years
5 & 7 years
65
How do you audit the statement of cash flows?
Reconcile the amounts to the other financial statements' amounts
66
Which account is prone to frequent accounting errors?
Repairs and Maintenence expense because confused if expensed (understatement) or capitalized (overstatement)
67
Procedures when customer doesn't respond to positive or blank confirmation Pg. 5-15
When reconciliation of aggregate balances proves difficult?
* Send second confirmation
* Ask client to contact customer and request response
* Review cash receipts in subsequent period
* Inspect shipping documents
* Examine customer correspondence with client
* Consider audit adjustment
*Use confirmation of single invoices; makes it easier for a response in the confirmation
68
What are anayltical procedures used for in the beginning of the audit?
What about end of audit?
Identify area that represent specific risks relevant to the audit
Assis the auditor when forming overall conclusions about the financial statements
69
What type of transactions reveal a related-party transaction
A large, non-reoccuring transaction just before balance sheet date
70
How do you verify that transactions affecting INVENTORY are recorded in the proper period?
Review cutoff of sales & returns
| Purchases and purchase returns
71
Significance of increasing equity in debt/equity ratio
Increase profits
72
Significance of lower inventory in inventory turnover ratio
A larger percentage of sales occurred, therefore decreasing inventory
73
For confirmation, who will have information for you about the number of shares issued and outstanding
What about comfirming the authorization of stock rights and warrants
Transfer agent or registrar
Board of directors
74
Under SSARS, when can unaudited personal financial plans deviate from GAAP?
If they will not be used to obtain credit
75
Appropriate audit evidence must have what characteristics?
Relevance: relevant to mgmt assertions
Validity (Reliability): good source
76
Income statement VS balance sheet characteristics
Evaluates the company's performance and consider how future cash flows might look
Sales - expenses
Presents information about the financial strength of the company
Assset, liability, and owner's equity
77
How do you audit statement of CASH FLOWS? Why?
Reconcie the amounts on the statement of cash flows to the information on the two source statements
Derived entirely from transactions affecting balance sheet and income statement
78
Kiting VS Deposits / Transfers in transit with disbursemennt and receipt date
After year end {only per book} and before year end {per book or per bank} in an attempt to overstate cash
Before year end {only per book} and after year end {only per bank}
79
What is a negative confirmation? Pg. 5-15
If fewer than last year does it mean there is misstatement?
```
Customer asked to respond only if amount incorrect
No need to respond
For small balances
Implicit evidence
Can be many/few customers
Low RMM
```
No, its could mean that there are fewer errors
80
How do you test for the existence an ownership of a publicly traded stock
What about bonds
Confirm number of shares owned by an independent custodian
Confirm with trustee
81
If investment is properly classified and described, what do you look for?
Look at current and non current
82
What does an analysis of the aged trial balance look at?
Provides evidence to accounts that may be uncollectible which addresses the net realizable value
83
Bank Reconciliation: How to find?
a) Balance per bank VS per books
b) Deposits in transit
c) Outstanding checks
a) Confirm with bank; trace bank recon to cutoff statement VS Compare to general ledger
b) Cash RECEIPTS journal; think unusual delay and cutoff
c) Cash DISBURSEMENTS journal; think unusual delay and cutoff
84
If there is a suggestion that there is a lapping of AR of cash receipts, how would it be audited?
* Confirm with outside party
* Look at cash receipts journal and corresponding daily deposit slips
* Check dates
85
How do you determine that items counted are include in the inventory listing?
Reconcile
86
How do you establish the completeness of receivables?
Look at sales cutoff tests for the month FOLLOWING year-end
87
How do you establish that the client has right to record receivables?
Look at agreements
88
Segregation of Duties (Revenue Cycle) Pg. 4-9
a) Sales clerk
b) Credit Manager
c) Warehouse clerk
a) Accepts orders from customers and prepares written sales orders (record)
b) Approves customer credit (authorize)
c) Holds goods in inventory awaiting requests for shipment (custody)
89
Possbile errors and fraud Pg. 4-53
a) Invoices are sent for shipped goods but not recorded in journal
b) Invoices are sent for shipped goods , recorded, but not posted to customer account
c) Customer check are received for less than customers' full acct balance
d) Customer checks are misappropriated BEFORE being forwarded to cashier
e) Customer checks are misappropriated AFTER being forwarded to cashier
f) Invoices for goods sold are posted to incorrect customer accounts
a) Compare daily sales summaries with invoices
b) Invoices compared with AR ledger
c) Compare AR ledger with deposit slip
d) Confirm
e) Compare AR ledger with deposit slip
f) Confirm
90
Audit objectives VS procedure Pg. 5-52
a) Example of an investments are properly described and classified
b) Example of a recorded investment which is properly valued at fair market value at the balance sheet date
a) Look at current and non current investment portfolio; also look at AR balance for amounts due from officer and employees
b) Confirmation
91
What should an auditor examine in their workpapers?
| Pg. 5-31
```
C Comment on Exceptions
C Conclusions
H Heading
I Initials
TTickmarks
```
92
Audit Working Papers Pg. 5-57
a) Looking at current years borrowing
b) Current years reduction with date
c) Current years reduction without date
d) How to find ending balance
a) Agreed to loan agreement, validated bank deposit ticket, and board of directors' authorization
b) Agreed to canceled check and BOARD OF DIRECTOR'S AUTHORIZATION
c) Agreed to canceled checks and lender's monthly statements
d) Confirmation
93
Which assertion test overstatements? What other terms should be associated with this?
Which assertion tests understatements? What other terms should be associated with this?
Existence; Vouching, confirmation, observation; Book to source; invoices to shipping
Completeness; Cutoff testing, tracing, shipping to invoices; Source to book
94
Earnings per share VS Gross Profit
Include all expenses
Only include COGS
95
What is cost of goods sold and what would make it increase or decrease?
The cost of the inventory when it is SOLD
When it increases, it would decrease inventory
96
SIM: Substantive Testing Pg. 11-39
a) Auditor sent a letter to the company's outside attorney
b) The auditor scanned the repairs and maintenance account for unusually large amounts
a) Inquiry
| b) Analytical Procedure
97
SIM: Letter of Audit Inquiry to attorney Pg. 11-41
a) When do you update the report date
b) When do you update the legal response
c) If they dont mention the case
d) If they mention case but there in no amount
e) Case was tentatively settled
f) Case was settled
a) After
b) Before
c) No impact on the FS
d) Disclose in footnotes; emphasis of matter
e) Settlement is disclosed but not accured
f) Settlement is accured
98
SIM: Confirmations Pg. 11-59
a) What if AP system is unable to confirm balances unless there is PO numbers
b) If not sure about an invoice
c) Can you complete working papers without all positive confirmations?
a) Check shipping documents and cash collections
b) Verify additional invoices
c) Yes, it is often not possible to receive ALL positive confirmations
99
What is a good audit procedure for determining the existence of unrecorded liabilities
Think about completeness and cutoff because liability is omitted
100
What is the assertion that pertains to the renewal of note payable?
Presentation and disclosure; have to decide if current or non current liability
101
What does aging of AR mean to the auditor?
Determines the valuation assertion
Estimates losses
102
Basic Accounting Equation
Asset = Liability + Equity
103
Which assertion determines whether transactions have been recorded?
Which assertion determines to audit AP?
Completeness
Completeness, to see if liabilities are ommitted
104
What if management representation letter not included in review?
Then the auditor should withdraw
105
Significance of giving a unmodified opinion
The auditor is confident that no material misstatemnts exist in the financial statements
106
Which board do you use for unaudited statements?
SSARS
107
a) Control risk
b) Detection risk
c) Inherent risk
a) The risk that material misstatement that could occur in an assertion will not be prevented or dected by the enity's internal contol
b) The risk that our audit procedures performed by the auditor will not detect a material misstatement
c) The susceptibility of an assertion to a material misstatement, assuming that there are no related controls
108
What procedures should an auditor perform during a risk assessment stage of a financial statement audit?
A Analytical procedures
I Icq
I Inspection
O Observation
