Chapter 7

Characteristics of confirmation

1. receipt directly by auditor 2. written or electronic response 3. from independent third party 4. requested by auditor

What are the types of audit evidence? PICARIRO

1. Physical examination 2. Inquiries of client 3. Confirmation 4. Analytical procedures 5. Recalculation 6. Inspection 7. Reperformance 8. Observations

Hierarchy of reliability of evidence: Level one

1. Physical examination $$$ 2. confirmation $$$ 3. Inspection of external doc $$ 4. recalculation 5.REperformance

Completed audit documentation must clearly indicate the audit work performed. This is accomplished in three ways:

1. by a written statement in the form of a memorandum, 2. by initialing the audit procedures in the audit program, 3.and by notations directly on the schedules(tickmarks)

6 characteristics of reliability?

1. independence of provider: outside source more reliable 2. Effectiveness of clients internal controls 3. Auditors direct knowledge: examination from audiot thought physical examination, recalculation, and inspection is more reliable 4. Qualifications of individuals, providing information: auditor needs to have qualifications for specific engagements 5. Degree of objectivity 6. Timeliness: I/S- entire period B/S close to the balance sheet date

What are the four major audit evidence procedure that must be made in every audit?

1. which audit procedure to use. 2. what sample size to select for a given procedure there are 4: select a week to examine, select with largest amount, select randomly, select what auditor thinks are most likely to be error. 3. which items to select from the population 4. when to perform the procedure

Level two:

1.Inspection of internal doc with good internal controls 2. observation 3. Analytical procedures with adequate dates$$

Level three:

1.inspection internal doc where internal controls are weak 2. inquiries of client 3. Broad analytical; procedures

Compute

A calculation done by auditor independent client. Evidence: Analytical procedures ex:Compute inventory turnover ratios and compare with those of previous years as a test of inventory obsolescence.

Compare

A comparison of information in two different locations. The instruction should state which information is being compared in as much detail as practical. Evidence: Inspection ex:Select a sample of sales invoices and compare the unit selling price as stated on the invoice to the list of unit selling prices authorized by management

Count

A determination of assets on hand at a given time. Evidence: physical examination ex:Count a sample of 100 inventory items and compare quantity and description to client's counts..

Trace

An instruction normally associated with inspection or reperformance. The instruction should state what the auditor is tracing and where it is being traced from and to. Often, an audit procedure that includes the term trace will also include a second instruction, such as compare or recalculate. Inspection: Trace a sample of sales transactions from sales invoices to the sales journal, and compare customer name, date, and the total dollar value of the sale. RePerformance: Trace postings from the sales journal to the general ledger accounts.

Inspection has two types of documentation

Internal doc: check request form, receiving report,payroll time record and adjusting journal entry. External doc: vendors invoice, canceled checks, canceled note, validated deposit slip.

Inquiry

The act of inquiry should be associated with the type of evidence defined as inquiry. Evidence: inquiries of client ex:Inquire of management whether there is any obsolete inventory on hand at the balance sheet date

Observe

The act of observation should be associated with the type of evidence defined as observation. Evidence: observation ex:Observe whether the two inventory count teams independently count and record inventory counts.

Vouch

The use of documents to verify recorded transactions or amounts. Evidence: Inspection ex:Vouch a sample of recorded acquisition transactions to vendors' invoices and receiving reports.

What are important reasons for performing analytical procedures?

Useful for indicating account balances that may be distorted by unusual or significant transactions and that should be intensively investigated. 1. understanding the clients business and industry 2.assessment of the entity ability to continue as a going concern 3. indication of the presence of possible misstatements in the financial statements 4. reduction of detailed audit tests

Recompute

a calculation done to determine whether a clients calculation is correct. Evidence: Recalculation ex:Recompute the unit sales price times the number of units for a sample of duplicate sales invoices and compare the totals with the calculations.

Scan

a less detailed examination of a document or record to determine whether there is something unusual warranting further investigation. Evidence: Analytical Procedures ex:Scan the sales journal, looking for large and unusual transactions.

Working trial balance

a listing of the general ledger accounts and their year end balances

Examine

a reasonably detailed study of a document or record to determine specific facts about it. Type of evidence: inspection ex:Examine a sample of vendors' invoices to determine whether the goods or services received are reasonable and of the type normally used by the client's business.

Foot

addition of a column of numbers to determine whether the total is the same as the clients Evidence: recalculation ex: Foot the sales journal for a 1-month period and compare all totals with the general ledger.

Read

an examination of written information to determine facts pertinent to audit. Evidence: inspection ex:Read the minutes of a board of directors meeting and summarize all information that is pertinent to the financial statements in an audit file.