External Audit Quiz Ch. 5
Format of Audit Documentation
- heading - indexing and cross-referencing - tick marks
The size of the tolerable difference depends on:
- significance of account - desired degree of reliance on substantive analytical procedures - level of disaggregation in amount being tested - precision of expectation
Content of Audit Documentation
-Demonstrate how the audit complied with auditing and related professional practice standards. -Support the basis for the auditor's conclusions concerning each material financial statement assertion. -Demonstrate that the underlying accounting records agreed or reconciled with the financial statements -Include a written audit program detailing auditing procedures necessary to accomplish audit objectives. -Enable a knowledgeable and experienced reviewer to: Understand the nature, timing, extent, and results of audit procedures, evidence obtained, and conclusions reached. Determine who performed and reviewed the work, as well as the dates of the work and reviews
assertions for end of period balances, and related disclosures
-existence -completeness -classification -accuracy, valuation, and allocation -presentation rights and obligations
Relationship of Audit Evidence to the Audit Report
-financial statements -management assertions about components of financial statements -audit procedures -provide evidence on the fairness of the financial statements -auditor reaches a conclusion based on the evidence -audit report
Assertions about classes of transactions and events
-occurrence -completeness -classification -accuracy -presentation -authorization -cutoff
Forms of Audit Evidence
-oral information (inquiry) -visual info (observation) -paper documents -electronic info (documents or data from IT/external source)
The reliability of evidence obtained through confirmations is directly affected by factors such as:
-the form of the confirmation. - Prior experience with the entity .- The nature of the information being confirmed. - The intended respondent.
Audit Documentation functions
1. To provide support for the audit report. 2. To aid in the planning, performance, and supervision of the audit. 3. To provide a focal point for reviewing work of subordinates; to provide a basis for quality reviews
Concepts of Audit Evidence
1. form of audit evidence 2. sufficiency and appropriateness of audit evidence 3. evaluation of audit evidence
audit program
A set of audit procedures prepared to test assertions for a component of the financial statements
presentation (balances)
Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework
accuracy, valuation, and allocation
Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.
Develop an Expectation
Auditing standards require the auditor to have an expectation whenever analytical procedures are used
corroboration
Auditors must corroborate explanations by obtaining sufficient appropriate audit evidence linking the explanation to the difference and substantiating that the information supporting the explanation is reliable
analytical procedures
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.
(external) confirmation
Evidence obtained as a direct written response to the auditor from a third party (paper, electronic, or other medium such as direct access to information held by a third party)
Audit Evidence
Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based.
Factors that affect the reliability of audit evidence
Knowledgeable independent source Effectiveness of internal control Auditor's direct personal knowledge Documentary evidence (paper or electronic).Original documents
Evaluation of Audit Evidence
Proper evaluation of evidence requires an understanding of the Types of evidence available Relative reliability of available evidence An auditor should be thorough in searching for evidence and unbiased in its evaluation
Audit Procedures
Specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met.
Tracing (completeness)
The auditor take the sample from supporting documents (representing that an item exists) and looks at the journal or ledger to determine if the item has been included in the financial records.
Reperformance
The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control
cutoff
Transaction and events have been recorded in the correct accounting period
presentation (transaction)
Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.
Completeness (Balances)
all assets, liabilities, and equity interests that should have been recorded have been recorded
current files
all audit files applicable to the year under audit
Authorization
all transactions and events have been properly authorized
Completeness (Transactions)
all transactions and events that should have been recorded have been recorded
accuracy
amounts and other data relating to record transactions and events have been recorded appropriately and related disclosures have been appropriately measured and described
vouching (occurrence)
an audit procedure in which an auditor selects an item of financial information, usually from a journal or ledger, and follows its path back through the processing steps to its origin
trend analysis
analysis of changes in an account over time
existence
assets, liabilities, and equity interests exist
permanent files
auditors' files that contain data of a historical or continuing nature pertinent to the current audit such as copies of articles of incorporation, bylaws, bond indentures, and contracts
heading
client name, title of the working paper, and client's year-end date
Inspection of records and documents
evidence obtained from external documents is more reliable than evidence obtained from internal documents
Quantification
involves determining whether the explanation or error can explain the observed difference
reasonable analysis
involves forming an expectation using a model
Relevance
its relationship to the assertions or to the objective of the control being tested
Sources of Audit Evidence
management, external info source and other external parties, and auditor
Appropriateness
measure of the quality of audit evidence
tick marks
notations made next to work paper items indicating auditor/reviewer actions
indexing and cross-referencing
notations that provide a trail from financial statements to audit documents
Audit Documentation
record of the audit procedures performed, relevant audit evidence, and conclusions the auditor reached
Evaluation
the auditor should evaluate the results of the substantive analytical procedures to conclude whether the desired level of assurance has been achieved
ratio analysis
the comparison, across time or a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data
Rights and Obligations
the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
sufficiency of audit evidence
the measure of the quantity of audit evidence
observation
the process of watching a process or procedure being performed by others
occurrence
transactions and events that have been recorded have occurred and pertain to the entity
Final Analytical Procedures
used as an overall review of the financial information in the final review stage of the audit
Preliminary Analytical Procedures
used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures
Substantive Analytical Procedures
used to obtain evidential matter about particular assertions related to account balances or classes of transactions
reliability
whether a particular type of evidence can be relied upon to signal the true state of an assertion
possible causes of significant differences
-accounting changes -economic conditions or events -errors -fraud
classification (balances)
Assets, liabilities, and equity interests have been recorded in the proper accounts
inquiry
Consider the knowledge, objectivity, experience, responsibility, and qualifications of the individual to be questioned.• Ask clear, concise, and relevant questions.• Use open or closed questions appropriately.• Listen actively and effectively.• Consider the reactions and responses, then ask follow-up questions. • Evaluate the response
inspection of tangible assets
Physical examination of the tangible assets.
Recalculation
determining the mathematical accuracy of documents or records
Classification (transactions)
transactions and events have been recorded in the proper accounts