External Audit Quiz Ch. 5

Format of Audit Documentation

- heading - indexing and cross-referencing - tick marks

The size of the tolerable difference depends on:

- significance of account - desired degree of reliance on substantive analytical procedures - level of disaggregation in amount being tested - precision of expectation

Content of Audit Documentation

-Demonstrate how the audit complied with auditing and related professional practice standards. -Support the basis for the auditor's conclusions concerning each material financial statement assertion. -Demonstrate that the underlying accounting records agreed or reconciled with the financial statements -Include a written audit program detailing auditing procedures necessary to accomplish audit objectives. -Enable a knowledgeable and experienced reviewer to: Understand the nature, timing, extent, and results of audit procedures, evidence obtained, and conclusions reached. Determine who performed and reviewed the work, as well as the dates of the work and reviews

assertions for end of period balances, and related disclosures

-existence -completeness -classification -accuracy, valuation, and allocation -presentation rights and obligations

Relationship of Audit Evidence to the Audit Report

-financial statements -management assertions about components of financial statements -audit procedures -provide evidence on the fairness of the financial statements -auditor reaches a conclusion based on the evidence -audit report

Assertions about classes of transactions and events

-occurrence -completeness -classification -accuracy -presentation -authorization -cutoff

Forms of Audit Evidence

-oral information (inquiry) -visual info (observation) -paper documents -electronic info (documents or data from IT/external source)

The reliability of evidence obtained through confirmations is directly affected by factors such as:

-the form of the confirmation. - Prior experience with the entity .- The nature of the information being confirmed. - The intended respondent.

Audit Documentation functions

1. To provide support for the audit report. 2. To aid in the planning, performance, and supervision of the audit. 3. To provide a focal point for reviewing work of subordinates; to provide a basis for quality reviews

Concepts of Audit Evidence

1. form of audit evidence 2. sufficiency and appropriateness of audit evidence 3. evaluation of audit evidence

audit program

A set of audit procedures prepared to test assertions for a component of the financial statements

presentation (balances)

Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework

accuracy, valuation, and allocation

Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

Develop an Expectation

Auditing standards require the auditor to have an expectation whenever analytical procedures are used

corroboration

Auditors must corroborate explanations by obtaining sufficient appropriate audit evidence linking the explanation to the difference and substantiating that the information supporting the explanation is reliable

analytical procedures

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

(external) confirmation

Evidence obtained as a direct written response to the auditor from a third party (paper, electronic, or other medium such as direct access to information held by a third party)

Audit Evidence

Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based.

Factors that affect the reliability of audit evidence

Knowledgeable independent source Effectiveness of internal control Auditor's direct personal knowledge Documentary evidence (paper or electronic).Original documents

Evaluation of Audit Evidence

Proper evaluation of evidence requires an understanding of the Types of evidence available Relative reliability of available evidence An auditor should be thorough in searching for evidence and unbiased in its evaluation

Audit Procedures

Specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met.

Tracing (completeness)

The auditor take the sample from supporting documents (representing that an item exists) and looks at the journal or ledger to determine if the item has been included in the financial records.

Reperformance

The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control

cutoff

Transaction and events have been recorded in the correct accounting period

presentation (transaction)

Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Completeness (Balances)

all assets, liabilities, and equity interests that should have been recorded have been recorded

current files

all audit files applicable to the year under audit

Authorization

all transactions and events have been properly authorized

Completeness (Transactions)

all transactions and events that should have been recorded have been recorded

accuracy

amounts and other data relating to record transactions and events have been recorded appropriately and related disclosures have been appropriately measured and described

vouching (occurrence)

an audit procedure in which an auditor selects an item of financial information, usually from a journal or ledger, and follows its path back through the processing steps to its origin

trend analysis

analysis of changes in an account over time

existence

assets, liabilities, and equity interests exist

permanent files

auditors' files that contain data of a historical or continuing nature pertinent to the current audit such as copies of articles of incorporation, bylaws, bond indentures, and contracts

heading

client name, title of the working paper, and client's year-end date

Inspection of records and documents

evidence obtained from external documents is more reliable than evidence obtained from internal documents

Quantification

involves determining whether the explanation or error can explain the observed difference

reasonable analysis

involves forming an expectation using a model

Relevance

its relationship to the assertions or to the objective of the control being tested

Sources of Audit Evidence

management, external info source and other external parties, and auditor

Appropriateness

measure of the quality of audit evidence

tick marks

notations made next to work paper items indicating auditor/reviewer actions

indexing and cross-referencing

notations that provide a trail from financial statements to audit documents

Audit Documentation

record of the audit procedures performed, relevant audit evidence, and conclusions the auditor reached

Evaluation

the auditor should evaluate the results of the substantive analytical procedures to conclude whether the desired level of assurance has been achieved

ratio analysis

the comparison, across time or a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data

Rights and Obligations

the entity holds or controls the rights to assets, and liabilities are the obligations of the entity

sufficiency of audit evidence

the measure of the quantity of audit evidence

observation

the process of watching a process or procedure being performed by others

occurrence

transactions and events that have been recorded have occurred and pertain to the entity

Final Analytical Procedures

used as an overall review of the financial information in the final review stage of the audit

Preliminary Analytical Procedures

used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures

Substantive Analytical Procedures

used to obtain evidential matter about particular assertions related to account balances or classes of transactions

reliability

whether a particular type of evidence can be relied upon to signal the true state of an assertion

possible causes of significant differences

-accounting changes -economic conditions or events -errors -fraud

classification (balances)

Assets, liabilities, and equity interests have been recorded in the proper accounts

inquiry

Consider the knowledge, objectivity, experience, responsibility, and qualifications of the individual to be questioned.• Ask clear, concise, and relevant questions.• Use open or closed questions appropriately.• Listen actively and effectively.• Consider the reactions and responses, then ask follow-up questions. • Evaluate the response

inspection of tangible assets

Physical examination of the tangible assets.

Recalculation

determining the mathematical accuracy of documents or records

Classification (transactions)

transactions and events have been recorded in the proper accounts