ACCTG 403 Chapter 5

Consider an imaginary "Assurance Bucket" that needs to be filled with enough evidence to provide reasonable assurance to an auditor. Different kinds of evidence (____ ) can be used to add evidence to the bucket.

(Risk assessment procedures, tests of controls, substantive analytical procedures, etc.)

Assertions about presentation and disclosure:

- Accuracy and valuation, - classification and understandability, - occurrence and - *rights and obligations, - completeness.

There are three purposes for analytical procedures:

- Risk assessment - Substantive analytical procedures - Final Analytical Procedures

There are three important concepts related to audit evidence:

- The nature of audit evidence - The sufficiency and appropriateness of audit evidence - The evaluation of audit evidence

Assertions about balances at the end of the period:

- existence, - completeness, - rights and obligations, - valuation and allocation.

Classification & Understandability

- have you described something correctly - educational person can understand

Audit evidence quality/reliability hierarchy

1. Auditors knowledge 2. external documentary evidence 3. external internal evidence 4. internal documentary evidence 5. verbal and written representation

Substantive Analytical Procedures Steps

1. Expectation 2. tolerable difference 3. compare and investigate

Audit procedures are specifically required in 2 places in the audit

1. phasing stage 2. review stage

______ - Evaluate financial information by studying of plausible relationships among both financial and nonfinancial data.

Analytical procedures

____ is a measure of the quality of audit evidence, which is determined by its relevance and reliability.

Appropriateness

_____ should be organized so that audit team members and others can find evidence supporting FS accounts (Figure 5-6) Slide 6. All audit documentation is the property of the auditor, including documents prepared by the entity at the auditor's request. SOX requires audit documentation to be retained for a number of years from the completion date of the engagement.

Audit documentation

_____: Used as a final review of the financial information

Final Analytical Procedures

___ risk of misstatement requires a higher quantity of audit evidence.

Greater

entity name, title of working paper, year end balance

Headings

_____ of records and documents - Examine internal or external records.

Inspection

____ - Watch a process or procedure being performed by others.

Observation

______ - Determine the mathematical accuracy of documents or records.

Recalculation

______ - Independently execute procedures or controls.

Reperformance

_____: Used to assist the auditor in understanding the business and to plan the nature, timing, and extent of audit procedures

Risk assessment

________ - Review accounting data to identify significant or unusual items to test.

Scanning

_____: Used to obtain evidence about assertions

Substantive analytical procedures

___ is the measure of the quantity of audit evidence.

Sufficiency

Most public accounting firms maintain audit documentation in two types of files.

The permanent and current file

____ is agreeing source documents to a ledger

Tracing

_____ is agreeing a journal or ledger to the source documents

Vouching

Valuation & Allocation

all has been reported at its approiate amount

Occurrence

all i have reported did occur - claiming that it did actually happen

Cutoff

all is reported is in the correct period

Classification

all recorded is in the correct accounts

Accuracy

all was reported was apporiate amount

Rights & Obligations

all we listed is under the control of the company

There are different kinds of ___, including trend analysis, ratio analysis, and reasonableness analysis.

analytical procedures

Higher quality audit evidence results in a lower quantity of ___

audit evidence.

A set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an ___

audit program.

Assertions about balances at the end of the period is about

balance sheet accounts

Commonly confirmed information:

cash balances, accounts receivable, inventory on consignment, accounts payable, bonds payable, common stock outstanding, insurance coverage, and collateral for loans.

The last step is to _____. Compare the expectation to the recorded amount and investigate any differences greater than the tolerable difference.

compare and investigate

Expenses are usually (understated)

completeness

Tracing is usually

completeness

When differences are present in using analytical procedures for risk assessment procedures, corroborating evidence is not required; however, _____ is required when differences are present after performing final analytical procedures.

corroborating evidence

The ____ file contains: · Audit report and FS · Adjusting journal entries · Audit plan and programs · Working trial balance · Minutes of meetings · Working papers supporting accounts

current

To support their ___, audit documentation should: · Demonstrate how the audit complied with standards · Support the basis for the auditor's conclusions on each material assertion · Demonstrate that the accounting records agreed or reconciled with the FS

opinion

The ____ file contains: · Corporate charter · Important contracts · Chart of accounts · Internal control documentation · Organization chart · Terms of stock and bond issues · Prior years' analytical procedures

permanent

ratio analysis

return on equity financial ratio more effective in identifying risk

Audit documentation should be sufficient to enable a knowledgeable and experienced _____ to: · Understand the nature, timing, extent, and results of audit procedures, evidence obtained, and conclusions reached · Determine who performed and reviewed the work, and when

reviewer

Inspection of a ____ - Physically examine the asset.

tangible asset

Auditors should be ____ in searching for evidence and unbiased in their evaluation.

thorough

______ ______ indicate auditors actions

tick marks

Indexing and cross referencing providing a ______ from f/s to audit documents

trial

Assertions about transactions/events for a period under audit:

- occurrence, - completeness, - classification, - accuracy, - authorization - cutoff.

Included under the umbrella of "audit procedures" are:

- risk assessment - test of controls - substantive procedures

______ is defined as all the information, from whatever source, used by the auditor in arriving at the conclusions on which the audit opinion is based.

Audit Evidence

________ are defined as specific acts performed by the auditor to gather evidence about whether specific assertions are being met.

Audit Procedures

______ (working papers) has three functions: · To provide support for the audit report · To aid in the planning, performance, and supervision of the audit · To provide a basis for reviewing work of subordinates (or for quality control)

Audit documentation

______ is the auditor's record of the audit procedures performed, evidence obtained, and conclusions reached.

Audit documentation

_______ should include a written audit program detailing auditing procedures necessary to accomplish audit objectives.

Audit documentation

____ require the auditor to have an expectation whenever analytical procedures are used.

Auditing standards

______ - Obtain a representation of information from a third party.

Confirmation

_____ are often used during analytical procedures. They, generally, fall into four categories. · Short term liquidity ratios o Current ratio o Quick ratio o Operating cash flow ratio. · Activity ratios o Receivables turnover and days outstanding in A/R o Inventory turnover and days of inventory on hand · Profitability ratios o Gross profit percentage o Profit margin o Return on assets o Return on equity · Coverage ratios o Debt to equity ratio o Times interest earned ratio

Financial ratios

An ____ for Accounts Receivable may test: · Existence by sending confirmations · Rights and obligations by inquiring of management whether or not the receivables have been sold · Completeness by agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable control account · Valuation by testing the adequacy of the allowance for doubtful accounts

audit program

Assertions about presentation and disclosure is about

disclosures or 10-k

Authorization

everything is signed off by someone - was something cleared to happen

Accuracy & Valuation

everything is the right amount

Existence

everything listed does exist

Completeness

everything that did happen I told you

Assertions about transactions/events for a period under audit is about

income statement accounts

Very risk ->

more evidence

Revenues are usually (overstated)

occurence

Vouching is usually

occurence

_____ - Seek information of knowledgeable persons. The auditor should: · Consider their objectivity, experience, responsibility, and qualifications · Ask clear, concise, and relevant questions · Use open or closed questions appropriately · Listen actively and effectively · Consider the reactions and responses and ask follow-up questions · Evaluate the response

Inquiry

Proper evaluation of ____ requires an understanding of the types of evidence available as well as the relative reliability of available evidence.

evidence

The reliability of evidence obtained through ______ confirmations may be affected by: · The form of the confirmation · Prior experience with the entity · The nature of the information being confirmed · The intended respondent

external

quality evidence ->

external evidence

trend analysis

graph a balance over a period how it changes over time

The more independent a piece of evidence is, the ____ its reliability is (as a general rule)

higher

Audit documentation generally contains:

· Headings · Indexing and cross referencing · Tick marks

Counting/inspection of assets (inventory) is usually

existence or valuation & allocation

Auditing standards ______ can be developed using sources such as: · Financial and operating data · Budgets and forecasts · Industry publications · Competitor information · Management's analyses · Analysts' reports

expectation

The first step in using analytical procedures is to develop an ____.

expectation

reasonableness analysis.

more dealing with professional judgement

Some examples of the ____ of audit evidence: · Invoices · Contracts · Workstreets · Adjustments to financial statements · Spreadsheets supporting cost allocations · General and subsidiary ledgers · Records of initial entries and supporting records

nature

Some important aspects of ___ include: · Independent source outside the entity providing the data · The effectiveness of internal controls · If the auditor can have direct, personal knowledge of the evidence · Documentary evidence · Original documents

reliability

The next step is to define a _______. The size depends on: · the significance of the account · the desired degree of reliance on the substantive analytical procedures · the level of disaggregation in the amount being tested · the precision of the expectation

tolerable difference