Evidence & Procedures Flashcards
What are the two main characteristics audit evidence should have?
Sufficiency (quantity) and appropriateness (quality)
Appropriateness deals with relevance and reliability
What are some general rules governing evidence’s reliability?
(1) Independent sources are more reliable
(2) Internal evidence depends upon internal controls
(3) Evidence directly obtained by the auditor is better than evidence indirectly obtained
(4) Evidence is better in documentary form
(5) Original documents are better than copies
What degree of evidence is generally necessary to provide reasonable assurance for the auditor’s opinions?
Persuasive evidence (as opposed to conclusive)
Less than persuasive evidence is insufficient for reasonable assurance
What are assertions?
Assertions = representations made by management
What are some different kinds of assertions for classes of transactions and events?
(i) Occurrence
(ii) Completeness (all transactions for a class are recorded)
(iii) Accuracy
(iv) Cutoff (recorded in correct period)
(v) Classification
What are some different kinds of assertions for account balances?
(i) Existence
(ii) Rights/obligations (entity truly has rights to assets and obligations for liabilities)
(iii) Completeness
(iv) Valuation/allocation (assets, liabilities, and equities are recorded properly, including valuation allowances)
What are some different kinds of assertions for presentation and disclosure?
(i) Occurrence and rights/obligations
(ii) Completeness
(iii) Classification
(iv) Understandability
(v) Accuracy and valuation
What are relevant assertions?
Assertions that are helpful in determining whether a given account is accurate
What are the three different kinds of procedures done to obtain audit evidence?
(1) Risk assessment procedures
(2) Tests of controls
(3) Substantive procedures
What is a good way to think about the differences between the procedures done to get audit evidence?
The audit risk equation: AR = RMM x DR
Risk assessment procedures discern the RMM, while the other two (tests of controls and substantive procedures) are done to keep DR sufficiently low
What is important to know about different types of procedures, such as inspection, inquiry, reperformance, etc.?
Any one of them can be a risk assessment procedure, test of control, or substantive procedure depending on the context
What should an external auditor seek to understand about an entity’s internal auditing function?
He should discover whatever is relevant to his own external audit
Should take into account the internal auditor’s competence and objectivity
What are some procedures that determine whether internal audit activities are relevant to an external audit?
(1) Analyzing knowledge from prior audits
(2) Seeing whether they focus attention on financial or operating areas
(3) Understanding the scope of the internal audit
What are some important things to consider in determining an internal auditor’s objectivity?
Organizational status (whether internal auditor reports to a sufficiently high person, whether he interacts with TCWG)
Policies
Can an external auditor use an internal auditor to help perform the external audit?
Yes
Internal auditors must be supervised and their work reviewed, and the external auditor should cover certain things based on higher risk or more difficult judgment
What is the purpose of obtaining written representations from management?
- confirm oral representations
- document continuing validity of representations
- reduce misunderstandings
What should be included in an updating management representation letter?
Any info that mgmt has learned which would cause management representations to change, including events that change older financials
When should an auditor get updating representation letters from management?
(1) If a client requests a predecessor auditor to reissue his audit report (for showing comparative statements)
(2) For subsequent events procedures in SEC filings
What should written representations cover?
All periods covered by the auditor’s report (including past periods if the report is for comparative financials – even if current mgmt was not present then)
By what date should management representations be made?
Date of the audit report
What happens if management refuse to provide written representations?
A qualified opinion or (usually) a disclaimer from an opinion or departure from engagement
What are analytics?
Evaluations of financial information, especially of relationships among both financial and nonfinancial data
When is the auditor required to use analytics?
For initial planning and final review
Not required to be used as a substantive test, but still common
What is Benford’s Law?
Involves how frequently certain digits appear as the first digit in naturally occurring numbers
1 is most common, then 2, etc.
