Evidence and Risk

Question 1

Going Concern

Answer 1

Auditors consider management’s plans when evaluating the ability of a company to continue as a going concern

• (1) dispose of assets
• (2) borrow money or restructure debt
• (3) reduce or delay expenditures
• (4) increase ownership equity

Question 2

Analytical Procedures

Answer 2

Not always appropriate or effective with Substantive Testing

Question 3

Audit Evidence

Answer 3

Auditors want evidence that is

• Sufficient (Quantity) - Cost vs. Benefit is a constraint
• Appropriate:
  
  • Relevant & Reliable (Quality)
  • BEST: Observation by Auditor
  • 2nd BEST: Originates from External Parties
    
    • Sent directly to auditor
    • WEAKEST: Oral Evidence from management

Question 4

Audit Evidence

Answer 4

3rd 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

Question 5

Audit Procedures

Answer 5

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

Question 6

Audit Procedures

Answer 6

Cash

• Assurance Level = High
• Acceptable Detection Risk = Low

Question 7

Audit Procedures

Answer 7

Accounts Receivable

• Acceptable Detection Risk is High?
  
  • Negative Confirmation Used
  • Customer only responds if balance is materially wrong
• Acceptable Detection Risk is Low?
  
  • Positive Confirmation Used
  • Customer asked to confirm
• Income Statement Account – Revenue

Question 8

Audit Procedures

Answer 8

Accounts Payable

• Review purchase orders/invoices
• Confirm with Vendors
• Income Statement Account – Expense

Question 9

Audit Procedures

Answer 9

Inventory

• Examine purchase agreements
• Look at Board Minutes
  
  • Is Inventory held as collateral?
• Income Statement Account – COGS

Question 10

Audit Procedures

Answer 10

Additions & Subtractions

• Did cash-in transactions make it to cash receipts journal?
• Did cash-out transactions get proper approval?

Question 11

Beginning - Ending Balances

Answer 11

Beginning Balance - Should match last year’s Ending Balance

Ending Balance - If Beginning Balance, Additions &
Subtractions are ok, then Ending Balances should also be ok

Question 12

Compliance with Laws & Regulations

Answer 12

• The auditor must perform procedures to identify any noncompliance with laws and regulations that may have a material effect on the financial statements
• Inspect correspondences with any regulatory authorities

Question 13

Confirm

Answer 13

Test of Controls - RIIO​

• Re- Perform
• Inquire
• Inspect
• Observe

Question 14

Detection Risk - High Level

Answer 14

High level of Detection Risk acceptable - Less Evidence collected

• (N) Less-competent Evidence collected
• (T) Interim testing acceptable
  
  • Opens door for incremental audit risk
  • Internal Control should be strong
  • Business and transactions should be
    relatively stable & predictable
• (E) Fewer transactions are verified

Question 15

Detection Risk - Low Level

Answer 15

Low level of Detection Risk acceptable - More Evidence collected

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

Question 16

Evidence

Answer 16

• Evidence has an Inverse relationship with Detection Risk
• Evidence is the one aspect of Audit Risk an auditor can control through (N)ature, (T)iming, (E)xtent of audit procedures - NET

Question 17

Examine

Answer 17

Evidence that supports Managment Assertions

Question 18

Post Audit Issue

Answer 18

If auditor discovers they forgot to perform a substantive procedure

• Determine if other substantive procedures performed served as a substitute
• Otherwise, support for their audit opinion could be jeopardized

Question 19

Reconcile

Answer 19

Account for any difference between support and F/S

Question 20

Segregation of Duties

Answer 20

Authorizing transactions, recording transactions, and maintaining custody of assets should be segregated.

Question 21

Statement of Cash Flows

Answer 21

• Foot all balances – Check the Math
• Trace Cash Flow items to other Financial Statements
• ​Check classifications
  
  • Operating Activities
  • Investing Activities
  • Financing Activities
• *

Question 22

Statement of Cash Flows - Direct Method

Answer 22

Direct Method must disclose:

• Results as if you had used Indirect Method
• Non-Cash Transactions
• Cash and Cash Equivalents Definition

Question 23

Statement of Cash Flows Indirect Method

Answer 23

Indirect Method must disclose:Interest Paid

• Income Taxes Paid
• Non-Cash Transactions
• Cash and Cash Equivalents Definition

Question 24

Subsequent Events & Post-Audit Issues

Answer 24

• Notable events that occur After Balance Sheet Date Before Audit Report is issued
• Auditor needs to make inquiries and assess if a Subsequent Event affects the audit report
  *

Question 25

Subsequent Events - Audit Issued

Answer 25

If Audit Report has already been issued * If situation that was present as of the Balance Sheet Date * Client should issue a disclosure to F/S users and/or revise the Financial Statements. * Regulatory agencies might need to get involved under some circumstances

Question 26

Substantive Procedures (TRACE)

Answer 26

* Help to reduce the risk of Material Misstatements * Only test accuracy of Financial Statements and dollar amounts – they don’t test Internal Controls * Trace * Reconcile * Anaultical Procedures * Confirm * Evidence

Question 27

Trace - Vouch

Answer 27

* Track Financial Statement data to evidence * Did the invoice make it to the Financial Statements? * Are the Financial Statements backed by support/invoices?

Question 28

Verification

Answer 28

Auditors are to verify that: * Assets & Revenues are not overstated * Expense & Liabilities are not understated * Exception – if the CPA Exam states that it is a “tax-driven” company, flip them around

Question 29

Tests of Controls

Answer 29

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including: * inquiries * inspections of documents * observation * reperformance of the application of a control

Question 30

Control Risk

Answer 30

Audit evidence about **control risk** is obtained by performing tests of controls that evaluate the effectiveness of specific controls. Methods of determining the effectiveness of the design and operation of a control include : * inquiry * inspection * observation * reperformance