Exam 2
General forms of audit evidence
1. Knowledge of client 2. Internal control quality 3. Accounting systems 4. Outside information
Evidence is more reliable when it...
1. is obtained from knowledgeable independent sources outside the client 2. the product of a system with effective internal controls 3. obtained directly by the auditor 4. provided by original documents 5. written as opposed to strictly oral THEME: Third party independent evidence is more reliable
Completeness assertion
All transactions and accounts that should be presented in the financial statements are included
Valuation
Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.
Existence assertion
Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period
What is the riskiest assertion for liabilities?
Completeness
Assertions
Completeness, Existence, Valuation, Obligations & Rights, Presentation
What is the riskiest assertion for assets?
Existence
What is the riskiest assertion for revenue?
Existence
Risk assessment procedures
Indicates when audit evidence is necessary and what kind of audit evidence is necessary
Audit evidence
Information used by the auditor in arriving at conclusions on which the audit opinion is based
The weakest form of audit evidence
Knowledge of client
Reliability
Nature and source of audit evidence; circumstances under which evidence is obtained
Can you compensate for having poor evidence by collecting more of the sample type of poor evidence?
No. Simply collecting more low quality evidence will not make the information sufficient.
The strongest form of audit evidence
Outside information
Assets are prone to what type of misstatement?
Overstatement
Revenue is prone to what type of misstatement?
Overstatement
Audit procedures
Procedures designed to obtain audit evidence related to material accounts and the relevant assertions for those accounts
Measure of appropriate evidence
Quality
Measure of sufficient evidence
Quantity
Relevance
Relationship to financial statement assertions being tested; Relationship to the objective of the control being tested
Describe the interrelationship of risk and evidence appropriateness and sufficiency
Risk dicatates what appropriateness (quality of the evidence) and sufficiency (quantity of the evidence) means, and appropriateness tells us when we have sufficient evidence
Tracing
Taking a sample of original source documents and ensuring that transactions related to source documents have been recorded in appropriate journal and general ledger
Vouching
Taking a sample of recorded transactions and obtaining original source documents supporting recorded transaction
Obligations and rights
The company holds or controls rights to the assets, and liabilities and obligations of the company at a given date.
Presentation
The components of the financial statements are properly classified, described, and disclosed
The auditor's objective
To plan and perform audits to obtain appropriate evidence that is sufficient to support the opinion expressed in the audit report
What method of directional testing is used for expenses?
Tracing
What method of directional testing is used for liabilities?
Tracing
Expenses is prone to what type of misstatement?
Understatement
Liabilities are prone to what type of misstatement?
Understatement
Tracing addresses ______
Understatement
What method of directional testing is used for assets?
Vouching
What method of directional testing is used for revenue?
Vouching
Sufficiency is directly related to ______
audit cost; risk↑ cost↑
How do auditors determine sufficiency
based on the risk of material misstatement
What is the riskiest assertion for expenses?
completeness
As the quality of evidence increases, the need for additional corroborating evidence ______
decreases
Vouching provides ______
evidence on the assertion that recorded transactions are valid
We need ______ evidence when RMM is assessed high
more
Vouching addresses ______
overstatement
Auditors determine what is appropriate based on....
related accounts/assertions and control objectives
Appropriate evidence is ______ & ______
relevant, reliable