SELF-TEST DRILL (STD)1.Evidential matters supporting the financial statementsconsist of accounting records and other informationavailable to the auditor.Other information can befound in:
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Page 6 of 7AT.05052.Identify the nature of the evidential matter, (AR foraccounting records, OI for other information)Lawyer’s reply on status of legal casesMinutes of board and stockholders meetingsWorksheets in support of cost allocationsBenchmarkingInvoices, paid checks, vouchersThe following are the respective nature of evidentialmatter:a.OI, AR, OI, AR, ARb.AR, OI, AR, OI, ARc.OI, OI, AR, OI, ARd.AR, AR, OI, AR, AR3.Generally, what source of audit evidence would mostpersuasively support audit conclusions?a.Externalb.Inquiryc.Orald.Informal4.Which statement is incorrect regarding the auditevidence?a. The greater the risk, the more audit evidence islikely to be required.b. The higher the quality, the more may be requiredc. Merely obtaining more audit evidence may notcompensate for its poor quality.d. Obtaining audit evidence relating to a particularassertion is not a substitute for obtaining auditevidence regarding another assertion.
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Terms in this set (58)
Assertions about classes of transactions and Events during the Period
Occurrence
Completeness
Authorization
Accuracy
Cutoff
Classification
Assertions about classes of transactions and events relate to the transactions that flow through a particular business process and accumulate in one or ore financial statement accounts
Occurrence (validity)
Transactions and events that have been recorded have occurred and pertain to the entity.
Typical Accounts: Assets, liabilities, and equity interest exist.
Disclosed events and transactions have occurred and pertain to the entity.
Ex: management asserts that all revenue transactions recorded during the period were valid transactions.
Results in overstatement.
Completeness
All transactions and events that should have been recorded have been recorded.
Typical accounts: All assets, liabilities, and equity interest that should have been recorded have been recorded.
Ex: Client fails to record a valid revenue transaction.
Failure to meet completness results in an understatement.
Authorization
Relates to whether or not all transactions have been properly authorized.
The purchase of something should be approved.
Accuracy
Whether amounts and other data relating to recorded transactions and events have been recorded appropriately.
For example: proper depreciation method, or capitlization of an asset.
Cutoff
Relates to whether transactions and events have been recorded in the correct accounting period. Must ensure that transactions occurring near year-end are recorded in the financial statements in the proper period.
Classification
Concerned with whether transactions and events have been recorded in the proper accounts.
Ex: purchases are properly recorded as either assets or expenses.
Assertions about Account Balances at the Period End
Existence
Rights and Obligations
Completeness
Valuation and allocation
relate directly to the ending balances of the accounts included in the financial statements
Existence
the assertion about existence addresses whether ending balances of assets, liabilities, and equity interest included in the FS actually exist at the date of the financial statements.
Inventory on the balance sheet exists and is available for sale.
Rights and Obligations
Address whether the entity holds or controls the rights to assets included on the financial statements and that liabilities are the obligations of the entity.
Ex: management asserts that the entity has legal title or rights of ownership to the inventory.
Valuation and Allocation
Assertions about valuation or allocation address whether assets, liabilities, and equity interests included in the financial statements are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Ex: management asserts that inventory is at lower of cost or market value.
PPE is properly valued after depreciation expense.
Assertions about Presentation and Disclosure
This category of assertions relates to presentation of information in the financial statements and disclosures in the footnotes that are directly related to a specific transaction or account balance and those that apply to the financial statements in general.
Nature of Audit Evidence
refers to the form or type of information, which include accounting records and other available information.
Accounting Records: include the records of initial entries and supporting records.
Other information - minutes of meetings; confimations from third parties; industry analysts reports, comparable data about competitors; controls manuals; inofrmation obtained b te auditor from such audit pricedures as inquiry, observation, and inspection.
Sufficiency
is the measure of the quantity of audit evidence
Appropriateness
is a measure of the quality of audit evidence
Sufficiency and appropriateness of evidence
are interrelated.
The quantity of audit evidence needed is affected by the risk of material misstatement
the greater the risk of mm the more audit evidence and vise versa.
The higher the quality of evidence
the less evidence that may be required to meet the audit test.
the auditor relies on evidence that is persuasive rather than convincing in forming an opinion on a set of FS
This occurs because an audt must be completed in a reasonable amount of time and at a reasonable cost. the auditor reaches a conclusion about the account or class based ona asubset of the available evidence.
Second due to the nature of evidence, auditors must often rely on evidence that is not perfectly reliabile
Evidence is considered appropriate when it provides information
that is both relevant and reliable
Relevance
the relevance of audit evidence refers to its relationship to the assertion or to the objective of the control being tested.
Relying on information that is not relevant can lead to wrong conclusions.
Reliability
refers to whether a particular type of evidence can be relied upon to signal the true state of an assertion.
Reliable information is typically
knowldegeable independent source of the evidence - independent sources outside the entity are usually viewed as more reliable.
Effectiveness of internal control - when internal controls are effective evidenced generated is viewed as reliable and vise versa.
Auditors direct personal knowledge - obtained directly by the auditor considered to be more reliable than evidence obtained indirectly. Ex physical inspection of inventory
Documentary evidence - more reliable when it exists in documentary form (paper, electronic, etc)
Original Documents - more reliable then say photo copies
audit procedures
are specific acts performed by the auditor to gather evidence about whether specific assertions are being met.
There are three categories of audit procedures, each serving a purpose
Risk Assessment procedures,tests of controls, and substantive procedures
Risk Assessment Procedures
Used to obtain an understanding of the entity and its environment, including its internal control, to assess the risk of mm at the fs and relevant assertion levels
Tests of controls
Used to test the operating effectiveness of controls in preventing or detecting and correcting, material misstatements at the relevant assertion level
Substantive proedures
used to detect MM at the relevant assertion level. Sunstantive procedures include tests of details and substantive analytical procedures
A set of audit procedures prepared to test assertions is usually referred to
as an audit program
These types of evidence may be gathered during the application of risk assesssment procedures, toc, or substantive procedures.
Inspection of records or documents
inspection of tangible
assets
observation
inquiry
confirmation
recalculation
reperformance
analytical procedures
scanning
Inspection of Records or Documents
Consists of examining internal or external records or documents that are in paper form, electronic form, or other media. Makes up the bulk of the evidence gathered by the auditor.
Two issues are important in discussing inspection of records and documents
reliability and its relationship to specific assertions.
Reliability of Records or Documents
Evidence obtained from a knowledgeable source outside the entity is generally considered more reliable than evidence obtained solely from within the entity.
Internal document
are generated and maintained within the entity (have not been seen by any party outside the organization).
Ex: dupllicate sales invoices and shipping documents
External documents
documents originating within the entity but circulated to independent sources outside the entity
and
documents originating outside the entity but included in the clients accounting records
EX: of first remittance advices returned with cash receipts from customers and payroll checks
ex: second - bank statements and vendor invoices.
Reliability of external documents depends on a number of factors
reliability of controls over preparation and storage of internal documents
Documentary evidence related to assertions
relates directly to the occurrence and completeness assertions and to the direction of testing taken when documentary evidence is examined.
Direction of testing
between the accounting records and source documents is important when testing the occurrence and completeness assertions.
Vouching
refers to selecting an item for testing from the accounting journals or ledgers and then examining the underlying source document.
the direction of testing is from te journals or ledgers back to the source documents.
This provides evidence that items included in the accounting records have occurred. (not fictcious).
Tracing
refers to first selecting a source document and then following it into the journal or ledger.
The direction of testing in this case is from the source documents to the journals or ledger.
Testing in this direction ensures that transactions that occurred are recorded (completeness) in the accounting records.
Ex: tracing shipping documents to the related sales invoices and then to the sales journal.
Inspection of tangible Assets
Consists of physical examination of the assets. (considered reliable)
Involves the auditor inspecting or counting a tangible asset.
Provides assurance the asset exists.
may provide evidence on valuation by identifying obsolete or slow moving inventory.
No rights or obligations assertion.
Observation
Consist of looking at a process or procedure being performed by others. (these actions dont typically leave an audit trail that can be tested (no documents))
Ex: the counting of inventory
Considered not very reliable and must be collaborated.
Observation in the auditing sense consists of looking at a process or procedure being performed by others.
Inquiry
Consists of seeking information of knowledgeable persons within the entity or outside the entity.
Inquiries may range from formal written inquiries to informal oral inquiries.
May provide new or corroborative evidence.
the reliability of audit evidence obtained from inquiries is affected by the training, knowlede, and experince of the auditor performing the inquiry.
Must have corroborative evidence.
External Confirmation
Represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party. in papaer form or by electronic or other medium.
Inquiry
refer to unwritten questions asked of the client or of a third party
confirmation
refer to written requests for a wirtten reposne from a third party.
The reliability of evidence obtained through external confirmations may be affeccted by factors such as
the form of the confirmation,
prior experince with the entity
the nature of the information being confirmed
the intended respondent.
generally provide reliable evidence for the existence assertion and in testing certain financial statement components.
Recalculation/Reperformance
Consists of checking the mathematical accuracy of documents or records.
involves the independent execution by the auditor of procedures or controls that were originally performed by company personnel.
Analytical Procedure
consists of evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.
Ex: comparing accounts receivable balances from prior years.
the auditor makes such comparisons either ot identify accounts that may contain mm and require more investigation.
Analytical procedures can be used by an auditor to accomplish three purposes
Risk Assessment procedures - to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures
Substantive analytical procedures - are used as a substatntive procedure to obtain evidential matter about particular assertions related to account balances or classes of transactions
Final analytical procedures - are used as an overall review of the financial information int he final review stage of the audit.
The reliability of analytical procedures is a function of
the availability and reliability of the data used in the calculations
the plausibility and predictability of the relationship being tested
the precision of the expectation and the rigor of the investigation.
Scanning
is the review of accounting data to identify significant or unusual items. this includes searching for large and unusual items in the accounting records, as well as reviewing transaction data for indications of errors that have occurred.
High reliability
inspection of tangible assets, reperformance, and recalculation
medium reliability
inspection of records and documents, confirmation, analytical prcedures, and scanning
observation and inquiry
low reliability
Auditing standards require that
auditors perform substantive procedures for significant account balances and classes of transactions regardless of the assessed risk of mm.
Substantive procedures
include substantive analytical procedures and tests of details
For high-risk areas or highly material accounts, the auditors will
almost always perform some tests of details in addition to test of controls and substantive analytical procedures.
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