Chapter 7

Common data cleaning problems

- Dates in different formats -Date problems when company acquires another company Dates must be in a consistent format before ADA is applied

What step follows planning the ADA? Considering the relevance and reliability of data used. Evaluating results and concluding whether the purpose of the ADA has been achieved. Performing the ADA. Accessing and preparing the data for ADA.

Accessing and preparing the data for ADA.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the Accounting records to the source documents. Cash receipts journal to the sales journal. Source documents to the accounting records. Sales journal to the cash receipts journal.

Accounting records to the source documents. tracing from accounting records to source documents tests for overstatements (the existence assertion). For example, an auditor might trace from the sales journal to support such as sales invoices, shipping documents and customers' orders.

When performing ADA as a risk assessment procedure, a notable item: is indicative of a risk of material misstatement not previously identified by the auditor. is indicative of a higher risk of material misstatement than anticipated by the auditor. provides information useful in designing procedures to address the risk of material misstatement. All of these answer choices describe notable items.

All of these answer choices describe notable items.

2.Access and prepare the data for purpose of the ADA.

Auditor needs to determine that the data is complete - Check that it agrees to the GL/FS - Clean up data, format it correctly - Make sure the data is the same data used to prepare FS

As a result of analytical procedures, 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 Include an additional paragraph in the audit report due to the inability of the client company to continue as a going concern. Consider the possibility of a misstatement in the financial statements. Evaluate management's performance in causing this decline. Require footnote disclosure.

Consider the possibility of a misstatement in the financial statements.

Which of the following presumptions is correct about the reliability of audit evidence? Information obtained indirectly from outside sources is the most reliable audit evidence. Effective internal control provides more assurance about the reliability of audit evidence. To be reliable, audit evidence should be convincing rather than persuasive. Reliability of audit evidence refers to the amount of corroborative evidence obtained.

Effective internal control provides more assurance about the reliability of audit evidence. AU-C 500 indicates that effective internal control provides more assurance about the reliability of audit evidence than ineffective control.

Regression Analysis

Looking for notable items, focus on the risk and test the portion that is trivial/not in line with expectations

Documentation of relevance and reliability of information obtained from the client ???

Nature of the date Source of the daa Process used to product the data Matters the auditor might consider in determining the nature, timing, extent of procedures to perform regarding whether data is sufficiently reliable Procedures regarding data reliability and auditor may consider performing

An auditor is using regression analysis to investigate battery expense for a computer manufacturer that purchases batteries. Which of the following would be a good choice of independent variable for the regression? Revenues. Number of employees. Square footage of manufacturing space. Number of computers sold.

Number of computers sold.

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 Consider the matter a scope limitation. Perform additional audit procedures to investigate the matter further. Withdraw from the engagement. Intensify the examination with the expectation of detecting management fraud.

Perform additional audit procedures to investigate the matter further.

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the Cash receipts journal to the sales journal. Sales journal to the cash receipts journal. Sales invoices to the shipping documents. Shipping documents to the sales invoices.

Shipping documents to the sales invoices. tracing from shipping documents to sales invoices will reveal whether the items shipped (and presumably sold) have been recorded, as evidenced by the existence of sales invoices.

A key aspect of testing the completeness of a data set is: determining that every customer has a transaction. the data has information from customers in data files from two different divisions. checking the numerical continuity of the data. the data contains misstatements.

checking the numerical continuity of the data.

A key aspect of preparing the data for ADA is: determining the validity of data obtained from an external source. evaluating the reliability of internally generated evidence. determining if the data is complete. determining the source of the data.

determining if the data is complete.

An auditor is using ADA as a substantive test to validate accounts receivable because consumers are poor at responding to confirmations. In this case, the auditor validates the receivable by: vouching the receivable back to sales orders. tracing shipping documents to bills of lading. finding electronic evidence that the receivable is supported by subsequent cash receipt in the same amount. finding electronic evidence of strong internal controls.

finding electronic evidence that the receivable is supported by subsequent cash receipt in the same amount.

A "false positive" is: another term for a notable item. indicative of a higher risk of material misstatement. incorrectly identified as a notable item and requires no further response to identify new or higher risks. a notable item that requires further investigation.

incorrectly identified as a notable item and requires no further response to identify new or higher risks.

When performing ADA as a substantive test, the auditor: uses ADA to match electronic information that otherwise would have been audited manually. uses ADA to identify high-risk transactions and balances and then audits those high-risk items with traditional audit tests. relies solely on the client's system of internal controls. uses ADA to identify breakdowns in the client's system of internal control.

uses ADA to match electronic information that otherwise would have been audited manually.

Data is incomplete if it does not

•Contain key elements of the analysis, such as unique ID numbers for personnel when auditing payroll related applications or •Unique customer numbers when auditing receivables.

Check if the data is complete by-

•Determine if the data set agrees with the general ledger. •No gaps in the sequence of prenumbered documents in the audit file. •Auditing revenues and identifies gaps in the sequence of prenumbered sales invoices - may be facing a completeness problem, even if the file reconciles with the general ledger.

Audit Data Analytics as Substantive Test

•Most likely perform ADA as a substantive test when the auditor has performed tests of controls and concluded the entity has: 1.Strong IT general controls, including strong access controls 2.Strong IT application controls 3.Strong controls over electronic data interchange and exchange of electronic

Audit Data Analytics (ADA)

•Used as a risk assessment tool, as a test of controls, as a test of details, or to help form a conclusion regarding virtually any audit assertion.

5 Steps in Performing ADA

1.Plan the ADA. 2.Access and prepare the data for purpose of the ADA. 3.Consider the relevance and reliability of the data used. 4.Perform the ADA. 5.Evaluate the results and conclude whether the purpose and specific objectives of performing the ADA have been achieved.

ADA as a Risk Assessment Procedure

The auditor has obtained an understanding of the system of internal control, and perhaps performed tests of controls, to assess the reliability of data used in performing ADA.

Which of the following is an example of data that needs to be cleaned before it can be analyzed? The data has dates in two different formats (MM/DD/YY and DD/MM/YY). The data has information from customers in data files from two different divisions. The data comes from a system with poor internal controls. The data contains misstatements.

The data has dates in two different formats (MM/DD/YY and DD/MM/YY).

An auditor is performing a cluster analysis and sorts a client's customers into groups based on the aging of accounts receivable. The auditor is most likely auditing which of the following assertions? Existence. Rights and obligations. Valuation and allocation. Completeness.

Valuation and allocation.