audit ch6

reliability

depends on how evidence is gathered and its source

reperformance

done to determine the procedure/control is operating as designed

additional procedures

if the result is not within an acceptable range (a material variance), the auditor will perform ___________________ to determine if the account is materially misstated

- testing operation of internal control procedures - focusing on tests of transactions - no significant changes are expected

interim testing is feasible when...

current workpapers

prepared for each engagement and are often arranged in account order

- engagement complied with PCAOB/GAAS and firm standards - supports auditor conclusions - demonstrates underlying accounting records agreed with statements - facilitates planning, performance, and supervision - basis for review of the quality of work - aids in planning following year's audit

primary objectives for documentation

closed confirmation

relying on other party to reconcile their information to ours

permanent file

set up during the first engagement, all documents are a continuing nature are included, should be reviewed each year and irrelevant items should be removed

smaller

the more significant account and/or the greater the risk of misstatement, the __________ the acceptable range

inverse (better quality = less you gather)

the relation between sufficient and appropriate is...

good, medium or low

the use of analytical procedures is appropriate when examining transactions and accounts that have __________ internal controls and where the risk of material misstatement is _________________

false (mistakes already fixed)

true or false: review notes are included in the workpapers

- direct tests of year end account balances - directional tests to detect fraud - double entry bookkeeping (complementary accounts) - linked accounts - examine account balance and nonaccounting item to test consistency - areas with strong internal control

ways to increase audit efficiency

- three line heading of client name, title, and balance sheet date - initials of auditor and the date - initials of the reviewer and date - references to related workpapers - documentation - tick marks and legends - description of tests and results - conclusion

well-developed audit workpaper should contain...

reliability and relevance

when assessing the appropriateness of evidence, auditors consider its...

relevance

whether the evidence relates to the assertion the auditor is testing

auditors will rationalize not digging into anomalies, must lock in a range to test

why should auditors define acceptable range before computing client analytical procedures

audit documentation

written record of the planning and performance of audit work, the procedures performed, evidence obtained, and conclusions reached by the auditor

tracing (reprocessing)

- auditor analyzes source documents to determine what the journal entry should be - they then go to the journal where the expected entry should be recorded - tests for COMPLETENESS, used for accounts more likely to be understated

vouching

- auditor traces recorded transactions from journals back to the underlying source documents - provides evidence of EXISTENCE/OCCURRENCE, used for accounts more likely to be overstated

observation

- can be time consuming and employees know they're being watched and act differently - makes it difficult to generalize evidence obtained - halo effect can be useful

confirmation

- letters sent to external parties asking them to provide information from their records (open format) or to check provided client information against their records, and then respond directly back to the auditor - reliable if they come from independent external parties

tests of transactions

- reconcile source documents with recorded accounting information- typically journal entries - they are directional tests where the auditor can test different assertions

inspecting documents

- requires auditors to assess the reliability of documents if they intend to rely on them - external documents, if received directly from an independent outside party, are usually reliable - in some cases, internal documents themselves may not provide sufficient appropriate evidence and auditors should try to corroborate with other sources

recalculation

- tests client computations for footing/cross footing, testing extensions, and recomputing estimated accounts - first thing you do with any schedule is to foot and cross foot it

inquiry

- used extensively, especially early in the audit to gain an understanding of the client, operations, internal controls, accounting systems, etc. - flexible and efficient, but generally considered not persuasive and should be corroborated by other sources of evidence

analytical procedures

- used to identify relationships in the accounting records and financial statements that are counter to auditor expectations (anomalies) - in order to develop expectations, an auditor must have knowledge of the client and its industry

inspecting assets

- verifies existence of tangible assets and may also identify visible impairment or obsolescence (valuation) - weak for ownership and completeness

interim date

A date at which audit evidence is collected earlier than the balance sheet date.

appropriateness of audit evidence

A measure of the quality of audit evidence, and includes both the relevance and reliability of the evidence.

cutoff period

A period of time usually covering several days before and after the client's balance sheet date.

scanning

A type of analytical procedure involving the auditor's review of accounting data to identify significant or unusual items to test.

tick marks

Abbreviations and symbols used by auditors to document the work they have performed and any issues identified during their work.

footing

Adding a column of figures to verify the correctness of the client's totals.

directional testing

An approach to testing account balances that considers the type of misstatement likely to occur in the account balance and the corresponding evidence provided by other accounts that have been tested. The auditor normally tests assets and expenses for overstatement, and liabilities and revenues for understatement, because: (1) the major risks of misstatements on those accounts are in those directions, or (2) tests of other accounts provide evidence of possible misstatements in the other direction.

auditor's specialist

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor's specialist may be either an auditor's internal specialist (who is a partner or staff, including temporary staff, of the auditor's firm or a network firm) or an auditor's external specialist.

management's specialist

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the client to assist management in preparing the financial statements.

indirect evidence

Audit evidence that requires a linkage of inferences to provide assurance about the assertion being tested, that is, one or more inferences are made. Examples include inferences made when using analytical procedures as audit evidence.

direct evidence

Audit evidence that requires only one inference to reach a conclusion about the assertion being tested. Usually that inference is that the sample taken is representative of the population as a whole.

disaggregation

Breaking data down into their component parts, such as different time periods, geographical locations, customer type, or product lines.

cross footing

Checking the agreement of the cross-addition of a number of columns of figures that sum to a grand total.

audit adjustment

Correction of a misstatement of financial statements that was, or should have been, proposed by the auditor, whether or not recorded by management, that could, either individually or when aggregated with other misstatements, have a material effect on the company's financial statements.

quantification

Determining whether management's explanation for observed differences can, in fact, account for the observed difference.

significant findings or issues

Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached on an audit.

sufficiency of evidence

Measure of the quantity of audit evidence.

corroboration

Obtaining sufficient evidence that management's explanation is accurate.

cutoff tests

Procedures applied to transactions selected from those recorded during the cutoff period to provide evidence as to whether the transactions have been recorded in the proper period.

recalculating estimated amounts

Recomputing an amount that the client has already estimated, such as recomputing the allowance for doubtful accounts based on a formula related to the aging of accounts receivable ending balances.

tests of extensions

Recomputing items involving multiplication.

reasonableness test

The development of an expected value of an account by using data partly or wholly independent of the client's accounting information system.

roll forward period

The period between the confirmation date and the balance sheet date.

accounting records

The records of initial accounting entries and supporting records.

related party transactions

Transactions that a client has with other companies or people who may be related to either the client or client's senior management.