Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AUD > Evidence and Risk > Flashcards

Evidence and Risk Flashcards

1
Q

What is the majority of an auditor’s work in determining an audit opinion?

A

Collection of evidence to support the opinion.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are two sources of audit evidence and examples of those sources?

A

Accounting Records - Checks, Invoices, Contracts, Subsidiary ledgers
Other information - Auditor developed, outside source such as confirmations, outside/inside such as bank statement, and client developed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Which aspects of Audit Risk can an auditor control?

A

Detection Risk which is decreased by gathering evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the primary constraint on audit evidence?

A

Cost vs. Benefit is a primary constraint.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What characteristics should audit evidence have?

A

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How does the quality of audit evidence vary depending on who has provided it?

A
  1. Best evidence: Observation of activity by auditor or auditor developed
  2. 2nd Best: Originates from External Parties and is sent directly to auditor (confirmations)
  3. generated by third party and provided to auditor by the client such as a bank statement.
  4. Weakest: client developed internally.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Which documents are the most persuasive and credible?

A

Third party documents are more persuasive and credible than internally-prepared docs (ie. AR confirmations).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are Audit Procedures (substantive testing)?

ICCORRIIA

A 
Inquiry
Confirmation
Observation
Recalculation
Reperformance
Inspection of tangible assets
Inspection of records
Analytical Procedures

ICORRIIA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
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.)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How is Cash audited?

A

Assurance Level is High.

Acceptable Detection Risk is Low.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How is Accounts Receivable audited?

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How is Accounts Payable audited?

A

Review purchase orders/invoices

Confirm with Vendors

Corresponding Income Statement Account - Various Expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How is Inventory audited?

A

Examine purchase agreements

Look at Board Minutes

Is Inventory held as collateral?

Corresponding Income Statement Account - COGS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How are beginning balances audited?

A

Should match last year’s ending balance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are Subsequent Events and what do they require?

A

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.

23
Q

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)?

A

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.

24
Q

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

A

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.

25
Q

When are Analytical Procedures required?

A

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.

26
Q

How do Analytical Procedures assist the auditor?

A

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

27
Q

What is the focus of Analytical Procedures?

A

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

Analyzes Financial Data: Do Financial Statements Make Sense?

Comparison of data between years

28
Q

How is the Current Ratio calculated?

A

Current Ratio = Current Assets / Current Liabilities

29
Q

How is the Quick Ratio calculated?

A

Quick Ratio = Liquid Assets / Current Liabilities

30
Q

How is the Asset Turnover calculated?

A

Asset Turnover = Net Sales / Average Assets

31
Q

How is the Inventory Turnover calculated?

A

Inventory Turnover = COGS / Average Inventory

32
Q

How is Gross Margin % calculated?

A

Gross Margin % = Gross Margin / Sales

33
Q

What type of testing are ratios?

A

Ratios are Analytical Procedures

34
Q

What type of procedure is a Budget vs. Actual comparison?

A

Budget vs. Actual comparisons are Analytical Procedures.

35
Q

List Common Types of Analytical Procedures

A

Ratio analysis

Budget vs. Actual comparison

Comparison of data between years

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

36
Q

How do management assertions affect the audit?

A

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

37
Q

What assertions do auditors test?

A

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)

38
Q

What assertions are tests for transaction classes?

CPA-CO

A 
Completeness
Period Cutoff
Accuracy
Classification
Occurrence
39
Q

For which assertions are disclosures tested?

RACU

A

Rights and Obligations and Occurrence

Accuracy and Valuation

Completeness

Understandability and Classification

40
Q

Is testing the validity of direct evidence a basic audit procedure?

A

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.

41
Q

How are Management Estimates audited?

A

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.

42
Q

Whose property are audit documentation (audit workpapers)? In what form must they be?

A

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).

43
Q

What is the Current File?

A

Information pertaining to the current year’s audit.

44
Q

What is the Permanent File?

A

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

45
Q

How long must audit workpapers be maintained?

A

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

46
Q

What is the primary requirement for audit workpapers besides being written?

A

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

47
Q

How should documents added to work papers be treated?

A

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.

48
Q

How should documents removed from workpapers be treated?

A

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.

49
Q

What are the assertions for account balances at year-end?

RACE

A

Rights and Obligations
Allocation and Valuation
Completeness
Existence

50
Q

What is the audit risk formula?

A

AR = IR X CR X DR

51
Q

In order to reduce audit risk, the auditor should respond to the assessed level of risk in what two ways?

A

Financial Statement level

Relevant assertion level

52
Q

How does assessing the financial statement level of risk help an auditor reduce audit risk?

A

The auditor will consider the users of the financial statements and if management has an incentive to overstate or understate results of operations.

53
Q

How does assessing the relevant assertion level of risk help an auditor reduce audit risk?

A

The auditor will consider the individual elements of financial reporting, and determine which assertions are most affected and what procedures will be most effective.

for example, inventory may present risk of theft, and therefore the concentration will rely on the existence assertion.

AUD (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions