Chapter 5
An example of an analytical procedure is the comparison of A. Financial information with similar information regarding the industry in which the entity operates. B. Recorded amounts of major disbursements with appropriate invoices. C. Results of a statistical sample with the expected characteristics of the actual population. D. EDP generated data with similar data generated by a manual accounting system.
A
An example of audit evidence with a medium level of reliability is A. Scanning. B. Recalculation. C. Observation. D. All of these.
A
Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except: A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts) and similar data for the industry in which the entity operates. C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience. D. Study of the relationships of financial data with relevant nonfinancial data.
A
Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the: A. Difficulty and expense involved in testing a particular item. B. Assessment of control risk at a low level. C. Low inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness.
A
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct? A. Accounting records belong to the company being audited. B. Documentation of an auditor's understanding of the entity's internal control system is not necessary. C. Audit documents may be regarded as a substitute for the company's accounting records. D. The independent auditor may discard audit documents after two years.
A
Footing is an example of A. Recalculation. B. Confirmation. C. Inquiries. D. Analytical procedures.
A
In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion? A. Occurrence. B. Cutoff. C. Authorization. D. Classification.
A
To test for unsupported entries in the ledger, the direction of audit testing should start from the A. Ledger entries. B. Journal entries. C. Externally generated documents. D. Original source documents
A
Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence. B. Completeness. C. Authorization. D. Classification.
A
Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion? A. Auditor judgment. B. Materiality. C. Relative risk. D. Reasonable assurance.
A
Which of the following is the least persuasive documentation in support of an auditor's opinion? A. Schedules of details of physical inventory counts conducted by the entity. B. Notation of auditor's inferences drawn from ratios and trends. C. Notation of appraisers' conclusions documented in the auditor's working papers. D. Lists of negative confirmation requests for which no response was received by the auditor.
A
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales invoices. B. Observe the entity's distribution of payroll checks. C. Confirm a sample of recorded receivables by direct communication with the debtors. D. Review standard bank confirmations for indications of kiting.
A
Which of the following statements is generally correct about the appropriateness of audit evidence? A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements. B. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained. C. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection. D. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity.
A
Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business? A. Earnings per share. B. Return on total assets before interest and taxes. C. Accounts receivable turnover. D. Operating cycle.
A
Confirmation
A confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party) in paper form or by electronic or other media.
Why is appropriateness important for audit evidence? What qualities must evidence have to be considered appropriate?
Appropriateness is a measure of the quality of audit evidence. Evidence is considered appropriate when it provides information that is both relevant and reliable. Relevant evidence should be related to the assertion being tested. Reliable evidence can be relied upon to signal the true state of an assertion.
A set of audit procedures prepared to test assertions for a component of the financial statements is usually referred to as an _____________
Audit Program
Other information
Audit evidence that includes minutes of meetings; confirmations from third parties; industry analysts' reports; comparable data about competitors (benchmarking); controls manuals; information obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning.
An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by A. Availability of data aggregated at a high level. B. Relative effectiveness and efficiency of the tests. C. Timing of tests performed after the balance sheet date. D. Auditor's familiarity with industry trends.
B
Analytical procedures may be classified as being primarily which of the following? A. Tests of controls. B. Substantive procedures. C. Tests of ratios. D. Detailed tests of balances.
B
Audit documentation prepared on audits of public entities is the property of the A. Shareholders. B. Auditor. C. Management of the entity being audited. D. SEC.
B
Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Observation.
B
The auditor generally gives most emphasis to ratio and trend analysis in the examination of the A. Statement of Changes in Stockholders' Equity and Retained Earnings. B. Income Statement. C. Balance Sheet. D. Statement of Cash Flows.
B
The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should A. Consider the matter a scope limitation. B. Perform additional audit procedures to investigate the matter further. C. Intensify the examination with the expectation of detecting management fraud. D. Withdraw from the engagement.
B
The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence? A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined." B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence." C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather." D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it."
B
The permanent (continuing) file of an auditor's working papers most likely would include copies of the A. Bank statements. B. Debt agreements. C. Lead schedules. D. Attorney's letters.
B
The permanent audit file usually includes A. Working trial balance. B. Organizational chart. C. Audit plan. D. Audit programs.
B
The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general file. B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards. C. Ownership is determined by the legal statutes of the state where the auditor practices. D. Preparation is the responsibility of assistants whose work is reviewed by seniors, managers, and partners.
B
Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence. B. Completeness. C. Cutoff. D. Classification.
B
Which assertions may be tested for the "account balances" category of management assertions? A. Existence, accuracy, rights and obligations, completeness. B. Existence, rights and obligations, completeness, valuation and allocation. C. Occurrence, rights and obligations, completeness, valuation and allocation. D. Occurrence, accuracy, rights and obligations, completeness.
B
Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements? A. Tests of controls. B. Analytical procedures. C. Computer controls. D. Post-audit review of audit documents.
B
Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements. B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.
B
Which of the following types of documentary evidence should the auditor consider to be the most reliable? A. A sales invoice issued by the entity and supported by a delivery receipt from an outside trucker. B. Confirmation of an account payable balance mailed by and returned directly to the auditor. C. A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditor. D. A working paper prepared by the entity's controller and reviewed by the entity's treasurer.
B
Which statement concerning audit evidence is not valid? A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited. B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated. C. The auditor weighs the cost of obtaining evidence with its usefulness. D. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected.
B
You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases? A. Vouching transactions in accounting records to vendor invoices. B. Tracing vendor invoices to accounting records. C. Recalculation of vendor invoice amounts. D. Confirmation of customer accounts.
B
A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be A. $528,000. B. $540,000. C. $588,000. D. $600,000.
C
A confirmation is used to A. Verify the inventory count is correct. B. Verify that a control is being observed. C. Verify a representation from a third party. D. Verify that a specific trend is correct.
C
All of the following are typically in the current file except: A. Adjusting journal entries. B. Copies of the audit report. C. Chart of accounts. D. Lead schedules.
C
Analytical procedures are A. Never required. B. Required for planning, substantive testing, and overall review of the financial statements. C. Required for planning and overall review of the financial statements. D. Required during planning only.
C
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that A. Fraud exists within the relevant accounts. B. Internal control activities are not operating effectively. C. Additional tests of details are required. D. The communication with the audit committee should be revised.
C
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposes. B. Audit documents should be the primary support for the financial statements being examined. C. Audit documents should be considered as a substitute for the company's accounting records. D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
C
In creating lead schedules for an audit engagement, what financial information is needed to begin? A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balances. B. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year. C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information. D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries.
C
In determining whether transactions have been recorded, the direction of the audit testing should start from the A. General ledger balances. B. Adjusted trial balance. C. Original source documents. D. General journal entries.
C
Of the following, the most reliable type of evidence typically is: A. Confirmation. B. Inspection of records and documents. C. Reperformance. D. Observation.
C
Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditor. B. Correspondence between the auditor and third party vendors. C. Copies of company sales invoices inspected by the auditor. D. Computations made by the auditor.
C
Which assertions may be tested for the "transactions and events" category of management assertions? A. Existence, completeness, rights and obligations, accuracy, cutoff and classification. B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification. C. Occurrence, completeness, authorization, accuracy, cutoff and classification. D. Existence, rights and obligations, accuracy, authorization, and completeness.
C
Which of the following best describes the primary purpose of audit procedures? A. To detect all errors or fraudulent activities. B. To comply with generally accepted accounting principles. C. To gather corroborative evidence about management's assertions. D. To verify the accuracy of the balance sheet account balances.
C
Which of the following is not a typical analytical procedure? A. Study of relationships of the financial information with relevant nonfinancial information. B. Comparison of the financial information with similar information regarding the industry in which the entity operates. C. Comparison of recorded amounts of major disbursements with appropriate invoices. D. Comparison of the financial information with budgeted amounts.
C
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? A. Turnover of personnel in the accounting department. B. Objectivity of audit committee members. C. Square footage of selling space. D. Management's plans to repurchase stock.
C
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures? A. Relationships involving balance sheet accounts. B. Transactions subject to management discretion. C. Relationships involving income statement accounts. D. Data subject to audit testing in the prior year.
C
Which of the following types of audit evidence is the most persuasive? A. Prenumbered internal purchase order forms. B. Auditee worksheets supporting cost allocations. C. Bank statements obtained from the auditee. D. Auditee personnel responses to auditor inquiries.
C
Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and events. B. Assertions about account balances at the period end. C. Assertions about presentation and disclosure. D. None of these.
C
You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Accuracy.
C
You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Valuation or allocation.
C
A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2013. The number of subscribers increased steadily throughout the year and at December 31, 2013, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2013 and was increased to $12 for new members on April 1, 2013. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2013, would be approximately A. $179,400. B. $171,600. C. $164,400. D. $163,800.
D
All audit documentation should have a heading, which includes A. Name of the company under audit. B. Title of the working paper. C. Company's year-end date. D. All of these.
D
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of A. Tests of transactions and balances. B. A preliminary review of internal controls. C. Specialized audit programs. D. Analytical procedures.
D
An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor? A. The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. B. Twice as many accounts receivable were written off in the prior year than in the current year. C. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year. D. The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
D
Analytical procedures used in planning an audit should focus on identifying A. Material weaknesses in internal control. B. The predictability of financial data from individual transactions. C. The various assertions that are embodied in the financial statements. D. Areas that may represent specific risks relevant to the audit.
D
As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should A. Express an opinion that is qualified due to the inability of the company to continue as a going concern. B. Evaluate management's performance in causing this decline. C. Require footnote disclosure. D. Consider the possibility of an error in the financial statements.
D
Audit documentation A. Must be in electronic form. B. Must be in paper form only. C. Is not required, but is strongly recommended. D. May be in paper, electronic, or some other form.
D
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposes. B. Audit documents should be the primary support for the financial statements being examined. C. Audit documents should be considered as a substitute for the company's accounting records. D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
D
In designing written audit programs, an auditor should plan specific audit procedures to test A. Timing of audit procedures. B. Cost-benefit of gathering evidence. C. Selected audit techniques. D. Management assertions.
D
Procedures specifically outlined in an audit program are designed primarily to A. Assess risk for planning purposes. B. Detect all errors or fraudulent activities. C. Test internal control systems. D. Gather evidence about management's assertions.
D
The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general file. B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards. C. Ownership is determined by the legal statutes of the state where the auditor practices. D. Preparation is the responsibility of assistants whose work is reviewed by seniors, managers, and partners.
D
Which assertions may be tested for the "presentation and disclosure" category of management assertions? A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation. B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification. C. Occurrence, completeness, classification and understandability, cutoff and classification. D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.
D
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be well documented and cross-referenced in the audit documents. B. Be based on sources that are considered reliable. C. Bear a direct relationship to the audit assertion. D. Be persuasive enough to enable the auditor to form an opinion.
D
Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective internal control system provides more reliable audit evidence.
D
Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit? A. Quick assets divided by accounts payable. B. Accounts receivable divided by inventory. C. Interest payable divided by interest receivable. D. Total debt divided by total assets.
D
Which of the following statements concerning audit evidence is correct? A. Appropriate evidence supporting management's assertions should be convincing rather than persuasive. B. Effective internal controls contribute little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A company's accounting data cannot be considered sufficient audit evidence to support the financial statements.
D
The audit testing hierarchy is considered to be more effective and more efficient. Why?
Effectiveness: The auditor's understanding and testing of controls will enhance the auditor's ability to hone in on areas where misstatements are more likely to be found. Efficiency: Generally, tests of controls and substantive analytical procedures are less costly to perform than are tests of details.
Analytical Procedures
Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data.
Several factors may influence the reliability of evidence. Identify and describe two of these factors.
Evidence obtained directly by the auditor from an independent source outside the entity is usually viewed as more reliable than evidence obtained solely from within the entity. When the auditor assesses the entity's internal control as effective, evidence generated by that accounting system is viewed as reliable. Evidence obtained directly by the auditor is generally considered to be more reliable than evidence obtained indirectly or by inference. Audit evidence in documentary form is considered more reliable than verbal evidence. Audit evidence provided by original documents is considered more reliable than copies.
Inspection of records and documents
Examination of internal or external records or documents that are in paper form, electronic form, or other media.
Name two management assertions pertaining to the inventory account balance and explain why they are considered in an audit.
Existence: A company has an incentive to overstate inventory to improve the appearance of its balance sheet. Auditors can perform procedures, such as physical examination, to test that the company's stated liabilities actually exist. Rights: Auditors also need to ensure that the company has rights to its stated inventory. For instance, a company may be storing customer goods or holding goods on consignment; in these cases, the company does not actually hold the rights to the goods. Valuation: A company has an incentive to overvalue its inventory. Again, this improves the appearance of the balance sheet. Auditors should understand the possibility that some merchandise may be obsolete, may not be valued at the market cost, or may include improperly allocated costs. Completeness: A company's inventory may not be properly stated due to inappropriate exclusion of inventory items. The inventory may not include everything that should have been recorded. This event may occur with faulty internal controls, so auditors should be aware of this possibility.
Assertions
Expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.
Audit Evidence
Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.
Discuss the reliability of the types of audit evidence and identify the level of reliability for each type of evidence.
Inspection of the tangible assets, reperformance, and recalculation are generally considered of high reliability because the auditor has direct knowledge about them. Inspection of records and documents, scanning, confirmation, and analytical procedures are generally considered to be of medium reliability. The reliability of inspection of records and documents depends primarily on whether a document is internal or external, and the reliability of confirmation is affected by (1) the form of the confirmation, (2) prior experience with the entity, (3) the nature of the information being confirmed and (4) the intended respondent. Observation and inquiry (other than confirmation) are generally low-reliability types of evidence because both require further corroboration by the auditor. The reliabilities of the types of evidence are summarized below High Reliability 1. Inspection of tangible assets 2. Reperformance 3. Recalculation Medium Reliability 1. Inspection of records and documents 2. Scanning 3. Confirmation 4. Analytical procedures Low Reliability 1. Observation 2. Inquiry
Who is responsible for the financial statements? What does the term "assertions" mean? Identify the assertion categories and the specific assertions for each category.
Management is responsible for the fair presentation of its financial statements. Assertions are expressed or implied representations by management that are reflected in the financial statement components. Management assertions fall into the following categories: 1. Assertions about classes of transactions and events for the period under audit. Specific assertions for this category include: (1) occurrence, (2) completeness, (3) authorization, (4) accuracy, (5) cutoff, and (6) classification. 2. Assertions about account balances at the period end. Specific assertions for this category include: (1) existence, (2) rights and obligations, (3) completeness, and (4) valuation and allocation. 3. Assertions about presentation and disclosure. Specific assertions for this category include: (1) occurrence and rights and obligations, (2) completeness, (3) classification and understandability, and (4) accuracy and valuation.
Auditors obtain evidence about the inventory account through, among other procedures, observing the counting of inventory. What are some limitations "observation" has as an audit procedure?
Observation is limited to the point in time at which the observation takes place. In addition, entity personnel may act differently when the auditor is not observing them.
Inspection of tangible assets
Physical examination of the tangible assets.
The text discusses three main purposes for performing audit procedures. List and describe these three main categories of audit procedures and describe their purpose.
Risk assessment procedures: Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, in order to assess the risks of material misstatement at the financial statement and assertion levels. Tests of controls: Tests of controls allow the auditor to test the operating effectiveness of controls in preventing or, detecting and correcting, material misstatements at the assertion level. Substantive procedures: Substantive procedures are performed to detect material misstatements at the assertion level.
Sarah is auditing the sales of a new client. In one procedure Sarah performs, she begins with the original sales documents and then searches the accounting records to find the corresponding entry. What test is Sarah performing and what management assertion is she testing?
Sarah is tracing, which refers to first selecting an accounting transaction (a source document) and then following it into the journal or ledger. The management assertion being tested is completeness. Testing in this direction ensures that transactions that occurred are recorded in the accounting records.
Inquiry
Seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity.
Audit Procedures
Specific acts performed by the auditor in gathering evidence to determine if specific assertions are being met.
According to the text, what are the two functions of working papers?
Support for the auditor's report Document that the scope of the audit was adequate Working papers provide support for the auditor's report and aid in the conduct and supervision of the audit. The working papers are the focal point for reviewing the work of subordinates and quality control reviewers. As support for the auditor's report, the working papers also document that the scope of the audit was adequate. In particular, working papers document the auditor's compliance with the standards of fieldwork.
For an auditor, how are management assertions useful?
The assertions provide a framework within which the auditor plans the audit, designs audit procedures, obtains relevant evidence, and evaluates the appropriateness and sufficiency of the evidence. The management assertions help the auditor focus his or her attention on all the various aspects of transactions, account balances, and required disclosures that ought to be considered to ascertain fair presentation of financial statements to users.
For each of the following categories of analytical procedures, indicate (a) whether an auditor is required to use the procedure and (b) the purpose(s) of the procedure. Preliminary analytical procedures (risk assessment procedures) Substantive analytical procedures Final analytical procedures
The auditor is required to use preliminary analytical procedures to better understand the business and to help in planning the nature, timing, and extent of audit procedures. Substantive analytical procedures are not required but are commonly used to obtain evidential matter about particular assertions related to account balances or classes of transactions. Final analytical procedures are required as an overall review of the financial information in the final review stage of the audit.
Recalculation
The auditor's checking the mathematical accuracy of documents or records either manually or electronically.
Scanning
The auditor's exercise of professional judgment to review accounting data to identify significant or unusual items to test.
Reperformance
The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of computer-assisted audit techniques.
Audit Documentation (working papers)
The auditor's principal record of the work performed and the basis for the conclusions in the auditor's report. It also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work by providing the reviewer with written documentation of the evidence supporting the auditor's significant conclusions.
Stan is auditing First Financial Services and would like to use financial ratios to test the ability of First Financial Services to meet its current obligations. Identify two ratios that would help Stan in this task. Indicate how each ratio is calculated and what a high ratio would signify to Stan.
The current ratio is calculated as current assets divided by current liabilities. A high ratio indicates an entity's ability to pay current obligations. The quick ratio is calculated as liquid assets divided by current liabilities. It does not include inventory and prepaid items. A ratio greater than 1 generally indicates that the entity's liquid assets are sufficient to meet the cash requirements for paying current liabilities The operating cash flow ratio is calculated as cash flow from operations divided by current liabilities. The operating cash flow ratio provides a longer-term measure of the entity's ability to meet its current liabilities and a high ratio indicates a better ability to meet current liabilities with operating cash flow.
Reliability of evidence
The diagnosticity of evidence—that is, whether the type of evidence can be relied on to signal the true state of the assertion.
Explain the occurrence and completeness assertions. How does failure to meet each assertion affect the financial statements?
The occurrence assertion relates to whether all recorded transactions and events have occurred and pertain to the entity. The completeness assertion relates to whether all transactions and events that occurred during the period have been recorded. Failure to meet the completeness assertion results in an understatement in the related account, while invalid recorded amounts result in an overstatement in the related account.
When using analytical procedures, the auditor first needs to develop an expectation with which to compare recorded results. What is meant by "precision of the expectation," and what factors affect the precision of analytical procedures?
The quality of an expectation is referred to as the precision of the expectation. Precision is a measure of the potential effectiveness of an analytical procedure ; it represents the degree of reliance that can be placed on the procedure. Precision is affected by disaggregation, the plausibility and predictability of the relationship being studied, data reliability, and the type of analytical procedure used to form an expectation.
Accounting Records
The records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries, and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures.
Relevance of evidence
The relevance of audit evidence refers to its relationship to the assertion or to the objective of the control being tested.
In deciding to implement analytical procedures, what are some factors the auditor will consider in determining a tolerable difference between the expectation and the recorded amount?
The size of the tolerable difference depends on the significance of the account, the desired degree of reliance on the substantive analytical procedure, the level of disaggregation in the amount being tested, and the precision of the expectation.
Audit Data Analytics
Using analysis, modeling, and visualization to discover and analyze patterns, anomalies, and other information in data in the context of the audit.
Observation
Watching a process or procedure being performed by others.