Chapter 7 - Auditing

confirmation

the receipt of a written or oral response from an independent third party verifying the accuracy of information that was requested by the auditor. confirmations come from sources independent of the client. THEY ARE HIGHLY REGARDED. usually required by US auditing standards Three types of confirmation 1. positive confirmation with a request for information to be supplied by the recipient - recipient is requested to return the confirmation in ALL circumstances 2.Positive confirmation with the information to be included on the form - once again, the recipient is required to return the confirmation in ALL circumstances. 3. Negative confirmation - the recipient is requested to respond only when the information is incorrect.

supporting schedules

*** SEE FIGURE 4 Page 191 and 193 largest portion of working papers. includes detail schedules prepared by the client or the auditor in support of specific amounts on the financial statements. Major types include: Analysis - designed to show the entire activity in the general ledger account from the entire period under audit. ties together beginning and ending balances Trial balance or list - schedule consists of details that make up a year end balance of a general ledger account. Reconciliation of Amounts - type of schedule that supports a specific amount and is normally expected to tie the amount recorded in the clients records to another source of information Test of Reasonableness - schedule contains info that enables the auditor to evaluate whether the client's balance contains a misstatement considering the circumstances ***SEE FIGURE 4 ON PAGE 191 and PAGE 193

Auditors decisions on evidence accumulation

1. Which audit procedures to use? 2. What sample size to use? 3. Which items to select from the population? 4. When to perform the procedures? (1-3 months after year end)

Scan

A less detailed examination of a document or record to determine whether there is something unusual warranting further investigation Associated with ANALYTICAL PROCEDURES

Read

An examination of written information to determine facts pertinent to the audit Associated with INSPECTION

appropriateness of types of evidence

Effectiveness of a client's internal controls has a significant influence on the reliability of most types of evidence a specific type of evidence is rarely sufficient by itself to provide appropriate evidence to satisfy any audit objective

effects on technology

Evidence can be lost if there aren't any backup files. Electronic evidence may not exist. Commercial Audit Software - (ACL Software and Interactive Data Extraction and Analysis (IDEA) )

Inquire

ONLY associated with INQUIRES OF CLIENT

Observe

ONLY associated with OBSERVATION

Objectives of Working Papers

Overall objective of working papers is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS. Current years working papers should - 1. provide a basis for planning the audit 2. Record of the evidence accumulated and the results of the tests 3. Data for determining the proper type of audit report 4. Basis for review by supervisors and partners

Terms used in audit procedures

SEE PAGE 185... the flash cards following are of these terms

Retention of the Audit Documentation

Sarbanes Oxley requires auditors of PUBLIC companys to prepare and maintain audit working papers and other info related to any audit report in sufficient detail to support the auditors conclusions, for a period of NOT LESS THAN 7 YEARS Existing auditing standards require that records for audits of PRIVATE companies be retained FOR A MINIMUM OF 5 YEARS

Inspection

This is the auditors examination of the clients documents and records to substantiate the information that is or should be included in the financial statements. Documents can be classified as internal or external documents. Internal - a document that has been prepared and used within the clients organization and is retained without ever going to an outside party External - a document that has been in the hands of outside the client who is a party to the transaction being documented. but which is either currently in the hands of the client or readily accessible.

Compute

a calculation done by the auditor independent of the client. Associated with ANALYTICAL PROCEDURES

Recompute

a calculation done to determine whether a client's calculation is correct. Associated with RECALCULATION

Compare

a comparison of info in two different locations. should state which info is being compared in as much detail as possible. Associated with INSPECTION

Count

a determination of assets on hand at a given time. ONLY associated with PHYSICAL EXAMINATION

working trial balances

a listing of general ledger accounts and their year end balances

Appropriateness of evidence

a measure of the quality of evidence. here is a ranking of appropriateness from best to worst 1. Auditor direct knowledge 2. External evidence held by a third party 3. External evidence held by the client 4. Internal evidence obtained under a strong internal control. 5. internal evidence obtained under a weak internal control 6. oral representations made by management and employees **Evidence must be provided from a qualified source to be reliable. OBJECTIVE EVIDENCE is MORE reliable than evidence that requires considerable judgment. Timeliness is also a factor. the closer to the balance due date, the better.

Foot

addition of a column of numbers to dethermine whether the total is the same as the clients Associated with RECALCULATION

Current Files

all audit documentation in the year under audit This include - Audit Programs general info working trial balance adjusting and reclassification entries lead schedules supporting schedules

adjusting and reclassification entries

although these entries are discovered in the audit by the auditor, they must be approved by management. only those adjusting and reclassification entries that significantly affect the fair presentation of the financial statements must be made

Trace

an instruction normally associated with INSPECTION or REPORFORMANCE. will usually go hand in hand with a second instruction, such as compare or recalculate

Determinants of evidence persuasiveness

appropriateness Sufficiency Auditors must obtain sufficient, competent evidence

sample size factors

auditors expectations of misstatement and the effectiveness of the clients internal control.

reperformance

auditors independent tests of client accounting procedures or controls that were originally done as part of the entity's accounting and internal control system

lead schedules

each item on the trial balance is supported by a lead schedule which contains the detailed accounts from the general ledger making up the line item total

Permanent Files

intended to contain important data of a historical or continuing nature that is pertinent to the current audit Examples: 1. copies of company docs of importance such as bylaws, contracts, bond indentures, articles of incorporation 2. Analyses from previous years of accounts that have continuing importance to the auditor 3. Information related to the understanding of internal control and assessing control risk 4. Results of analytical procedures from previous years' audits.

Cost of types of evidence

most expensive - physical exam and confirmation moderately costly - documentation, analytical procedures, and reperformance Least expensive - observation, inquiries of the client, and recalculation.

inquiry of the client

obtaining of written or oral info from the client in response to questions from the auditor

Types of Evidence (what audit procedure to use?)

physical examination confirmation inspection analytical procedures inquiry of the client recalculation reperformance observation

Examine

reasonably detailed study of a document. Associated with INSPECTION

recalculation

rechecking a sample of calculations made by the client

audit programs

the detailed instructions for the entire are of evidence for an audit area

physical examination

the inspection or count of a tangible asset(normally for inventory and cash). if the document examined has no inherit value, the evidence is called DOCUMENTATION.

Sufficiency

the quantity of evidence obtained determines its sufficiency. Quantity is measured by the sample size the auditor selects.

Vouch

the use of documents to verify recorded transactions or amounts. Associated with INSPECTION

Audit Documentation

these are the records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement overall objective of this is to aid the auditor is providing reasonable assurance that an adequate audit was conducted in accordance with auditing standards. ***Working papers should include all the info the auditor considers necessary to conduct the audit adequately and to provide support for the audit report*** Audit documentation prepared during the engagement, including schedules prepared by the client for the auditor, is the property of the auditor.

analytical procedures

these use comparisons and relationships to determine whether account balances or other data appear reasonable. They are required during the planning and completion phases of all audits. Used in the following parts of the audit. 1. understand the client's industry and business - current year's unaudited info is compared with prior years audited info or industry data to highlight changes 2. Assess the entity's ability to continue as a going concern - often useful as an indication that the client company has financial problems 3. Indicate the presence of possible misstatements in the financial statements 4. Reduce detailed audit tests - when an analytical procedure reveals no unusual fluctuations, the implication is that the possibility of a material misstatement is minimized.

General Info

this includes audit planning memo, notes, and discussions with clients

observation

this is the use of senses to asses certain activities