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