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AUD CPA > Audit Evidence Ivory Book Tidrick > Flashcards

Audit Evidence Ivory Book Tidrick Flashcards

1
Q

What is the performance principle?

A

To obtain reasonable assurance, which is a high, but not absolute, level of assurance.
The auditor plans the work and properly supervises any assistants.
Determines and applies appropriate materiality level or levels throughout the audit.
Identifies and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and tis environment, including the entity’s internal control.
Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.

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2
Q

What is the definition of audit evidence?

A

All the info used by the auditor in arriving at the conclusions on which the audit opinion is based and includes the info contained in the accounting records underlying the FSs and other info.

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3
Q

What is included in audit evidence?

A

Accounting records and other info (such as minutes of meetings, confirmations, industry analysts’ reports.

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4
Q

What does “sufficient” mean?

A

Refers tot the quantity of evidence that is needed

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5
Q

how much evidence is required for a reasonable basis for an opinion?

A

That depends on the quality of the evidential matter. The quantity of evidence required is directly related to the risk of misstatement (the greater the risk, the more evidence is needed) and inversely related to the quality of evidence (the higher the quality, the less evidence is needed).

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6
Q

What does “appropriate” mean?

A

Refers to the quality of the evidence that is available (where quality consists of relevance and reliability).

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7
Q

What is the rank of reliability?

A

Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly of inference.
Evidence is more reliable when obtained from independent (knowledgeable) sources outside the entity.
Evidence generated internally is more reliable when the related controls are effective.
Evidence is more reliable when it exists in documentary form.
Evidence provided by original documents is more reliable than evidence based on photocopies/faxes.

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8
Q

what does substantive mean?

A

Means to verify. Searching for material misstatements.

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9
Q

What is audit risk?

A

Probability that auditor fails to modify opinion on F/Ss that are materially misstated.

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10
Q

Describe detection risk?

A

Detection risk is the only component within the auditor’s direct influence and which is essentially “set” by specifying the nature, timing, and extent of the auditor’s substantive audit procedures.

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11
Q

Describe nature, timing and extent:

A

Nature: What specific procedures should the auditor perform? These procedures should be responsive to the planned level of detection risk and consist of 1)test od details and 2) substantive analytical procedures.
Timing: When should the auditor perform the procedures, at an “interim” date (before the books are closed) or at “final” (after the books are “‘closed”, that is, at or after the BS date.
Extent: What size should the auditor’s samples be? (since the work is performed on a “test basis”, should the sample sizes be relatively large, or can small sample sized be justified.

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12
Q

What is the menu of specific substantive audit procedures?

A 
Inspection of records/documents
Inspection of tangible assets
 Observation
Inquiry
confirmation
Recalculation
Reperformance
Analytical procedures
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13
Q

What are the main 5 assertions?

A 
Presentation and disclosure
Existence or occurrence
Rights and obligations
Completeness
Valuation or allocation
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14
Q

What are the 2 categories of substantive audit procedures?

A

Test of details

Analytical procedures

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15
Q

What is tests of details?

A

These procedures indicate that the entity’s recorded FS items are fairly state or not.
Tests of ending balances
Tests of transactions

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16
Q

what are analytical procedures?

A

Evaluations of financial info through analysis of plausible relationships among both financial and nonfinancial data. it involves analyzing trends and interrelationships- the key is developing a meaningful expectation to compare to the entity’s recorded amount.

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17
Q

Analytical procedures serve 3 distinct purposes:

A

As a tool for planning
As substantive evidence
As a final review to assess appropriateness of conclusions

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18
Q

Analytical procedures are required when?

A

Required in audit planning and as a final review.

Not required as substantive evidence when used during fieldwork.

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19
Q

What are 4 important liquidity ratios?

A 
Working Capital=CA-CL
Current Ratio=CA/CL
Quick Ratio (acid-test ratio)=(cash+marketable securities+A/R)/current liabilities
Current cash to debt ratio=net cash from operations/average current liabilities
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20
Q

What are the 5 activity ratios?

A

Asset Turnover=net sales/average total assets
Receivable turnover=net(credit)sales/average trade receivable (net)
Number of days sales in receivables=365 days/receivable turnover
Inventory turnover=COGS/Average inventory
number of days sales in inventory=365 days/inventory turnover.

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21
Q

To test completeness, you start at

A

Source documents

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22
Q

Audit documentations is often referred to as?

A

Working papers

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23
Q

what is the purpose of audit documentation?

A

provides the principal support for the auditor’s report (including procedures performed and conclusions reached)

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24
Q

AICPA’s standard on “audit documentation” requires that the audit documentation be understandable for:

A

Audit documentation should permit an experienced auditor without prior connection to the audit to understand the work done.

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25
Q

What should be the report release date?

A

defined as the date the auditor grants the entity permission to use the auditor’s report.

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26
Q

What are the document completion date for nonissuers and issuers?

A

The auditor should complete the assembly of the final audit file no later than 60 days after the “report release date” (PCAOB specifies 45 days.

27
Q

After the document completion date, is the auditor allowed to add or delete audit documentation?

A

must not delete audit documentation before the end of the retention period; may add to the documentation but must document the changes made, by whom, when, reasons for the change, and the effect on the auditor’s conclusions.

28
Q

What is included in a permanent file?

A

description of client’s inducsty, brief history of client, and a description of the client’s facilities. important legal documents, long tem contracts, leases, labor contract,

29
Q

Current year’s audit files would include?

A

audit plan, memoranda, confirmations, attorney letters, analyses and schedules.

30
Q

What is a lead schedule?

A

The audit working paper that reflects the major components of an amount reported in the FSs.

31
Q

confirmation is what kind of auditing procedure?

A

Substantive auditing procedure

32
Q

What are the 2 types of confirmation requests?

A

Positive and negative

33
Q

Describe positive confirmation:

A

Where a response is required whether or not the other party agrees with the client’s recorded amount. Requires second (or possibly third) requests to follow up for non responses. if no response is obtained, the auditor must perform “alternate procedures”

34
Q

Describe negative confirmation:

A

Where a response is only requested if the recipient disagrees with the stated amount. Usually requires a larger sample size than would positive confirmations.

35
Q

In what situations may an auditor justify using negative confirmations?

A

there is a large number of small accounts
Control risk is assessed as low (that is, IC is effective
the recipients are expected to be attentive to the request and respond if warranted.

36
Q

What is the auditor’s objective in regards to estimates?

A

The auditor’s objective is to evaluate the reasonableness of any such estimates relative to the requirements of GAAP.

37
Q

What might an auditor do to obtain an understanding of how the estimate was made?

A

Inquire of appropriate personnel to obtain an understanding of how management developed the estimate
Review and test the process used by management
Develop an independent expectation for corroboration
Review subsequent events for additional evidence regarding estimates.

38
Q

When obtaining the lawyer letter, send a “letter of inquiry” to those lawyers who have rendered litigation related services. What is the primary purpose?

A

the primary purpose of the lawyer’s letter is to corroborate management’s responses to the auditor’s inquiries.

39
Q

If there is a limitation in the lawyer’s response, it is a:

A

scope limitation sufficient to prevent issuing an unqualified opinion.

40
Q

The primary source of info to be reported about litigation, claims, and assessments is the:

A

Client’s management.

41
Q

If management is unwilling to sign the representations letter it would be considered a:

A

scope limitation

42
Q

What should be the date of the management rep letter?

A

Should be dated the same as the date of the auditor’s report.

43
Q

What are the audit procedures used to identify the existence of related parties?

A

inquire mgmt. as to any related entities
Review prior year’s working papers for continuing engagements
Inquire of the predecessor auditors
Review any applicable SEC filings which list related parties
Review stockholder listings to identify major stockholders

44
Q

If related party transactions are identified and are material, the auditor should apply any procedures deemed necessary to understand the nature of the transactions and their effect on the FS:

A

Obtain an understanding of the business purpose of the transaction
Determine whether the transaction has been authorized by those charged with governance
Evaluate the reasonableness of amounts to be disclosed.

45
Q

What are subsequent events?

A

Event occurring between the date of the FSs and the date of the auditor’s report.

46
Q

What kind of subsequent event require adjustment?

A

Where such an event provides better info about material circumstances already in existence as of the BS date
For example- a lawsuit that could only be estimated at the balance sheet date was settled for a fixed amount prior to the issuance of the audit report.

47
Q

What kind of subsequent event required disclosure only?

A

where disclosure is necessary so that the FSs will not be misleading, even though unrelated to circumstances existing at the BS date.
For example-after the BS date a tornado wiped out the company’s facilities and the company had no casualty insurance. (obviously this would be relevant to prospective investors)

48
Q

What is kiting?

A

Refers to an overstatement of the true cash balance at year end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between cash accounts.

49
Q

what is a positive confirmation?

A

Request a response whether the individual customer agrees or disagrees with the stated balance

50
Q

What is negative confirmation?

A

Request a response only if the individual customer disagrees with the stated balance.

51
Q

What happens if no response if received to a positive confirmation?

A

The auditor should send a second confirmation request, and perform alternative procedures if still no response is received.

52
Q

What would constitute as alternative procedures if no response if received to a positive confirmation?

A

Subsequent cash receipts (did they pay in Jan or Feb)

Inspect underlying documents- POs, invoice..

53
Q

What is lapping?

A

an attempt to cover up a theft of a given customer’s payment on A/R, where a clerk applies a later customer’s payment to the wrong customer’s account (repeatedly) until the scam usually ends by writing off someone’s account as uncollectible.

54
Q

If an auditor is able to verify the ending inventory but is unable to verify the beginning inventory for a first year audit, what should the auditor do?

A

The auditor may give an opinion on the BS and disclaim an opinion on the IS, statement of retained earnings, and the statement of cash flows (due to the inability to verify COGS)

55
Q

What is a hedge?

A

It is a defensive strategy designed to protect an entity against the risk of adverse price or interest-rate movements on certain of its assets, liabilities, or anticipated transactions. A hedge is used to avoid or reduce risks by creating a relationship by which losses on certain positions are expected to be counterbalanced in whole or in part by gains on separate positions in another market.

56
Q

What is credit risk?

A

Risk of loss caused by a counterparty’s failure to meet its obligation

57
Q

what is market risk?

A

adverse changes due to market forces (interest rates, currency exchange rates, price changes)

58
Q

What duties should be segregated? CAR

A

Custody
Authorization
Recording

59
Q

Why is completeness assertion is a major concern for liabilities?

A

Because management presumably may have an inventive to understate the company’s true liability position.

60
Q

When is the best time to do a search for unrecorded liabilities?

A

Towards the end of fieldwork to provide the best chance of detecting any significant unrecorded liabilities.

61
Q

What are comfort letters?

A

may help underwriters or others having a statutory due diligence defense to establish a reasonable investigation-due diligence.

62
Q

Are comfort letters filed with the SEC?

A

No, comfort letters are not required and are not filed with the SEC.

63
Q

What kind of assurance does Capsule financial info give?

A

At most, can give negative assurance; in some cases, may be required to structure comments as procedures and findings.

64
Q

What does sufficient and appropriate refer to?

A

Sufficient refers to the quantity

Appropriate refers to the quality

AUD CPA (29 decks)

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