Module 4
evidence collection procedures
(1) search and verification - inspecting assets, confirming receivables, and observing counting of inventory, etc. (2) internal inquiries and comparisons - discussions with personnel and ratio analysis, etc.
client representation letters
- should be addressed to the auditor dated no earlier than the date of the auditor's report - should be signed by the CEO and the CFO - representations from management aren't substitutes for auditing procedures - should be obtained for all periods being reported on - management refusal precludes and unqualified opinion and results in a disclaimer
repairs and maintenance
An analysis of repairs and maintenance may detect an understatement of PP&E, whereas an analysis of PP&E may detect an overstatement of PP&E. Expenditures that make the asset more productive or extend its useful life should be capitalized in the asset account or as a debit to accumulated depreciation.
nonresponse
a failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.
negative confirmation request
a request that the confirming party respond directly to the auditor only if the confiming party disagrees with the information provided in the request. May be used when: combined assessed level of inherent and control risk is low, large number of small balances, and no reason to believe recipients are unlikely to give adequate consideration.
related-party transactions
a transaction in which one party has the ability to influence significantly the management or operating policies of the other party, to the extent that one of the transacting parties might be prevented from pursuing fully its own separate interests
further audit procedures
additional procedures that are performed based on the results of the auditors' risk assessment procedures. Include tests of controls, detailed tests of transactions, balances, and disclosures, and substantive analytical procedures
Completeness and cutoff
all transactions and events have been recorded for completeness, attempt to determine whether certain transactions that should have been recorded were not recorded. Typical procedures: trace from source docs to recorded entries; analytical procedures; omissions; cutoff - proper period
accounting estimate
an approximation of a monetary amount in the absence of a precise means of measurement. used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation.
omitted procedure
an auditing procedure that the auditor considered necessary in the circumstances existing at the date of the audit of financial statements, but which was not performed
external confirmation
audit evidence obtained as a direct written response to the auditor from a third party (confirming party), either in paper form or by electronic or other medium.
substantive procedure
audit procedure designed to detect material misstatements at the assertion level. Comprise tests of details (classes of transactions, account balances, and disclosures) and substantive analytical procedures. Can increase assurance by modifying: nature - more effective procedures; timing - year-end rather than interim date; and extent - use a larger sample size.
risk assessment procedures
audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels
intangible assets
audited similar to PP&E - goodwill is not amortized, it is tested for impairment annually, research and development expenditures are expensed as incurred.
arm's length transaction
conducted on such terms and conditions between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests
analytical procedures
evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. Also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Required during risk assessment to identify aspects of which the auditor was unaware and assist in assessing the risks to provide a basis for designing and implementing responses in the assessed risks. Required near the end of the audit to corroborate audit evidence obtained during the audit and assist the auditor in drawing reasonable conclusions to base the audit opinion. Limitations: guidelines for evaluation may be inadequate; difficult to determine changes due to misstatement and due to random change; cost-based accounting records hinder comparisons between firms of different compositions; accounting differences hinder comparisons; and they only present circumstantial evidence that a significant difference will lead to additional audit procedures, not a direct detection of material misstatement.
subsequent events
events occurring between the date of the financial statements and the date of the auditor's report that require adjustment of, or disclosure in, the financial statements
fraud risk factors
events or conditions that indicate an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicate attitudes or rationalizations to justify a fraudulent action.
subsequently discovered facts
facts that become known to the auditor after the date of the auditor's report that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor's report
relevant assertion
financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. Determination of whether an assertion is relevant is made without regard to the effect of controls
internal auditing
independent, objective assurance and consulting activity designed to add value and improve an organization's operations. Helps an organization accomplish its objective by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes
specialist
individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence
audit evidence
information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Includes both information contained in accounting records underlying the financial statements other information. Sufficiency is measure of quantity of audit evidence - affected by the auditor's assessment of risks of material misstatement and also quality of the evidence. Appropriateness is the measure of the quality, its relevance and reliability in providing support for conclusions on which opinion is based. Validity based on - (1) evidence from independent sources provides more assurance (2) information from direct personal knowledge more persuasive (3) assertions developed under effective internal control
fraud
intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are the subject of an audit. For financial statement audits intentional misstatements include - misstatements arising from fraudulent financial reporting and misappropriation of assets.
fraudulent financial reporting
material misstatement of financial statements by management with the intent to mislead financial statement users
appropriateness of audit evidence
measure of the quality of audit evidence, relevance and reliability in providing support for conclusions on which the auditor's opinion is based
sufficiency of audit evidence
measure of the quality of audit evidence. Quantity of evidence needed is affected by the auditor's assessment of the risks of material misstatement and by the quality of such audit evidence
Presentation and disclosure
proper disclosures are presented and that financial statement amounts are properly classified. Typical procedure: consider completeness of disclosures
assertions
representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur
positive confirmation request
request that the confirming party respond directly to the auditor providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request
control risk
risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and could be material will not be prevented, or detected and corrected, on a timely basis by internal controls.
detection risk
risk that procedures performed by the auditor to reduce audit risk to an acceptable low level will not detect a misstatement that exists and that could be material
risk of material misstatement
risk that the financial statements are materially misstated prior to the audit. Includes inherent and control risk.
scanning
type of analytical procedure involving the auditor's use of professional judgment to review accounting data to identify significant or unusual items
audit procedures
used as risk assessment procedures, tests of controls, and substantive procedures. Types - inspection of records or documents, inspection of tangible assets, observation, inquiry, confirmation, recalculation, reperformance, and analytical procedures.
plausible relationships
when developing expectations, derived from: information in prior periods; anticipated results such as budgets and forecasts; relationships among elements of financial information; industry information; and relevant non-financial information.
revenue is recognized
when: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, seller's price is fixed, or collectibility is reasonably assured.
Valuation, allocation, and accuracy
whether proper amounts are recorded. typical procedures: foot schedules; agree schedules balances to general ledger balances; agree financial statement balances to schedules; consider valuation method of account; and consider related accounts
Existence or occurence
whether recorded transactions and balances actually exist, not valuation, but whether they should have been recorded. typical procedures: confirmation - begins with recorded amounts; inspection; and vouch transactions - recorded transactions back to supporting documentation
Rights and obligations
whether the client owns the rights to the assets and liabilities are its obligations. typical procedures: vouch transactions; and authorization
exception to external confirmation request
response that indicates a difference between information requested to be confirmed, or contained in the entity's records, and information provided by the confirming party
written representation
written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written reorientations, for purposes of this section, do not include financial statements, the assertions therein, or supporting books and records