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85 Cards in this Set
- Front
- Back
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How many types of tests are there to determine if financial statements are fairly stated?
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5
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What do auditors use risk assessment procedures to do?
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they use risk assessment procedures to assess the risk of material misstatement, represented by the combination of inherent risk and control risk.
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What do the other 4 types of tests do?
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Oteher four types of tests represent further audit procedures performed in response to the risks identified.
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What are the 4 further types of audit procedures?
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1. tests of controls
2. Substantive tests of transactions 3. Analytical procedures 4. Tests of details of balances. |
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Why are tests of controls performed?
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To support a reduced assessment of controlrisk.
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What do auditors use analytical procedures and tests of balances to satisfy?
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Planned detection risk
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What do substantive tests of transactions affect and why?
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they affect both control risk and planned detection risk because they test the effectiveness of internal controls and the dollar amounts of transactions.
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What does the second standard of fieldwork require?
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The second standard requires the auditor to obtain an understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement in the client's financial statement.
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why are risk assessment procedures performed?
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they are performed to assess the risk of material misstatement in financial statements.
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Why does the auditor perform tests of controls, substantive tests of transactions, analytical procedures, and tests of details of balances?
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These are tested in response to the auditor's assessment of the risk of material misstatements.
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What is a major part of auditor's risk assessment?
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A major part of the auditopr's risk assessment procedures are done to obtain an understanding of internal control. Procedures to obntain an understanding of internal control focus on both design and implementation of internal controls and are used to assess control risk for each transaction related audit objective.
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What do procedures to obtain an understanding of internal control focus on and what are they used to assess?
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Procedures to obntain an understanding of internal control focus on both design and implementation of internal controls and are used to assess control risk for each transaction related audit objective.
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What is the auditor;s understanding of internal control used to assess?
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Control risk for each transaction related audit objective.
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What are some examples of how internal control is used to assess control risk.
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Examples are assessing the accuracy objective for sales transactions as low and the occurrence objective as moderate.
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What happens when control policies and procedures are determined to be effectively designed?
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When effectively designed the auditor assesses control risk at a level that reflects the relative effectiveness of those controls.
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What do auditors use analytical procedures and tests of balances to satisfy?
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Planned detection risk
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What do substantive tests of transactions affect and why?
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they affect both control risk and planned detection risk because they test the effectiveness of internal controls and the dollar amounts of transactions.
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What does the second standard of fieldwork require?
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The second standard requires the auditor to obtain an understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement in the client's financial statement.
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why are risk assessment procedures performed?
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they are performed to assess the risk of material misstatement in financial statements.
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Why does the auditor perform tests of controls, substantive tests of transactions, analytical procedures, and tests of details of balances?
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These are tested in response to the auditor's assessment of the risk of material misstatements.
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What does the auditor do to obtain sufficient approprite evidence of internal control assessment?
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They perform tests of controls.
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What can tests of control include?
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1. Make inquiries of appropritate client personnel
2. Examine documents, records, and reports 3. Observe client related activities 4. Reperform client procedures |
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Why do auditors perform system walkthroughs?
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auditors perform a system walkthrough as part of procedures to obtain an understanding to help them determine whether controls are in place.
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what is the walkthrough typically applied to?
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typically the walkthrough is applied to one or a few transactions and follows that transaction through the entire process. Example choose a sales transaction for system walkthrough of the approval process and follows that transaction through the credit approval process from initiation of the sales transaction through the granting of credit.
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What are tests of controls used to determine?
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Tests of control are used to determine whether these controls are effective and usually involve testing a sample of transactions. As a test of operating effectiveness of the credit appproval process auditor might examine a sample of 50 sales transactions through the year to determine whether credit was granted before shipment of goods.
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do procedures used to obtain an understanding of internal control typically provide sufficient evidence that a control is operating effectively?
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NO
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When is an exception to the rule that internal understanding tools aren't sufficient evidence they are operating correctly?
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When the controls are audomated.
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The amount of evidence required for tests of contorl depends on two things:
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1. The extent of evidence obtained in gaining the understanding of internal control
2. The planned reduction in control risk |
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How can an auditor verify recording of transactions?
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by performing tests of controls. If controls are in place over sales and cash receipts transactions, the auditor can perform tests of controls to determine whether the six transaction related audit objectives are being met for that cycle.
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What do substantive tests of transactions affect
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they affect audit assurance for sales and cash receipts transactions.
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Substantive tests
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procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances.
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What are the three types of substantive tests auditors rely on?
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substantive tests of transactions
2. Substatitive analytical procedures 3. Tests of details of balances. |
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What are substative tests of transactions used to determine?
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Substantive tests are used to determine whether all six transaction related audit objectives have been satisfied for each class of transactions.
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What happens when auditors are confident that all transactions were correctly recorded in the journals and correctly posted?
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They are confident that general ledger totals are correct.
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when do auditors often perform tests of controls?
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Can be performed separately from all other tests, but it's often more efficient to do them at the same time as substative tests of transactions because auditors can usually apply tests of controls involving documentation and reperformance to the same transactions tested for monetary misstatements.
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What do analytical procedures involve?
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They involve comparisons of recorded amounts to expectations developed by the auditor.
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Are analytical procedures required during the audit?
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Yes they are required during the planning and completion stages.
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What are the two most important purposes of analytical procedures in the audit of account balances?
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1. Indicate possible misstatements in the financial statements.
2. Provide substantive evidence. |
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How do analytical procedures differ during planning and completion?
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In the planning phase if an auditor calculates the gross margin they probably do it using interim data. Later, during tests of ending balances they will recalculate using full year data.
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What happens if auditors believe analytical procedures indicate a reasonable possibility of misstatement?
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If there's a reasonable indication of possible misstatement, they may perform additional analytical procedures or decide to modify tests of details of balances.
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What happens when auditor develops expectations using analytical procedurs and concludes the balance appears reasonable?
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When amounts appear reasonable, certain tests of details of balances may be eliminated or sample sizes reduced.
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What type of test do auditing standards consider analytical procedures?
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Auditing standards consider analytical procedures a type of substantive tests when they are performed to provide evidence about an account balance.
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What does the auditor's willingness to rely on substantive analytical procedures depend on?
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Depends on precision of the expectation developed by the auditor, materiality, and risk of material misstatement
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Tests of details of balances
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Focus on ending general ledger balances for both balance sheet and income statement accounts
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What is the primary emphasis of most tests of details of balances?
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these usually tend to focus on balance sheet accounts. Examples include confirmation of customer ablances for accounts receivable, physical exam of inventory, and examination of vendor invoices for accounts payable.
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Why are tests of ending balances essential?
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Because evidence is usually obtained by a source independent of the client, which is considered highly reliable.
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What must auditors test of details of balances satisfy?
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It must satisfy all balance related audit objectives for each significant balance sheet account.
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What do details of balances help to establish and what are they considered?
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they help establish the monetary correctness of the accounts they relate to and are substantive tests. For example, confirmations test for monetary misstatements in accounts receivable and are therefore substantive tests. Similarly, counts of inventory and cash on hand are also substantive tests.
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What do tests of controls help auditors do?
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They help auditors evaluate whether controls over transactions in the cycle are sufficiently effective to support the reduced assessment of control risk, and allow reduced substantive testing.
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What role do tests of control play in the basis for auditor's internal control over financial reporting audit report?
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They are the basis for auditor's report on internal control over financial reporting for large public companies.
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What are substantive tests of transactions used to verify?
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transactions reported in the journal and posted in the general ledger.
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What do analytical procedures emphasize?
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They emphasize overall reasonableness of transactions and general ledger balances./
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What do tests of details of balances emphasize?
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They emphasize teh ending balances in the general ledger
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What types of tests are typically used during an audit?
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Typically all five are used byt certain types may be emphasized depending on the circumstances.
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Are risk assessment procedures required in all audits?
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Risk assessment procedures are required in all audits to assess the risk of material misstatements while the other 4 types are peroformed in response to risks identified to provide basis for auditor's opinion.
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What are performed in an audit of internal control over financial erporting?
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ONLY risk assessment procedures, especially procedures to obtain an understanding of controls are used in an audit of internal controls over financial reporting
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What typically influences the auditor's choice of test?
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Typically influenced by availability of the 8 types of evidence, the relative costs of each type of test, the effectiveness of internal controls, and inherent risks.
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What an be said about types of evidence in relation to transactions or balances?
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More types of evidence, six in total, are used for tests of details of balances than for any other type of test.
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What type of tests involve physical examination and confirmation?
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Only tests of details of balances.
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What type of test includes inquiries of clients?
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ALL tests use inquiries of clients.
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When is documentation used?
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Documentation is used in every type of test except analytical procedures.
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when is reperformance used/
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Reperformance is used in every type of test except analytical proceudres. Auditors may reperform a control as part of a transaction walkthrough or to test a conttrol that is not supported by sufficient documentary evidence.
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When is recalculation used?
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Recalculation is used to verify the mathematical accuracy of transactions when performing substantive test of transactions and account balances when performing tests of details of balances.
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List the type of evidence in order of increasing cost:
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1. Analytical procedures
2. Risk assessment procedures 3. Tests of controls 4. Substantive tests of transactions 5. Tests of details of balances |
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Why are analytical procedures least costly type of audit evidence?
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Because of the relative ease of making calculations and comparisons.
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Risk assessment procedures are not as costly as other audit tests because
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an auditor can esily make inquiries and observations and perform planning analytical procedures. Examining things such as documents summarizing the client's business operations and processes and management and governance structure are relatively cheaper than other audit tests.
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Why are tests of controls low compared to substantive tests but costly compared to risk assessment?
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Because tehy involve inquiry observation, and inspection. They require testing to obtain evidence that a control is operating effectively especially when those tests of controls involve reperformance.
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Why do substantive tests cost more than tests of controls that do not include reperformance?
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Because the former often require recalculations and tracings.
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Why do costs of tests of details of balances cost more?
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Because of the cost of procedures such as sending confirmations and counting inventories. Because of high costs of details of balances auditors usually try to plan their audit to minimize their use.
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What does an exception in a test of control indicate?
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It indicates the likelihood of misstatements affecting the dollar value of the financial statements.
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What does an exception in a substantive test of transactions or a test of details of balances result in?
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A financial statement misstatement.
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When are auditors most likely to believe material dollar misstatements exist in financial statements?
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They are more likeyl to believe misstatements exist when control test deviations are considered to be significant deficiencies or material weaknesses. Auditors should then perform substantive tests of transactions or tests of details of balances to determine whehter material dollar misstatements have actually occurred.
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What do analytical procedures indicate?
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only indicate the likelihood of misstatements affecting the dollar vlue of the financial statements.
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What does unusual results in analytical procedures result in?
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Unusual fluctuations indicate an increased likelihood that financial misstatements exist without necessarily providing direct evidence of a material misstatement.
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When analytical procedures identify unusual fluctuations what should auditors do?
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Auditors should perform substantive tests of transactions or tests of details of balances to determine whether dollar misstatements have actually occurred.
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what should auditors do for accounts with small balances and minimal potential for material misststaments?
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Accounts such as supplies and prepaid expenses auditors should often limit their tests to substantive analytical procedures if they conclude accounts are reasonably stated.
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What is there often a trade off between?
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Tests of controls and substantive tests.
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What happens during planning stage?
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During planning stage, auditors decide whether to assess control risk below the maximum. When they do, they must then perform tests of controls to determine whether the assessed level of control risk is supported. If tests of controls support control risk assessment, planned detection risk in the audit model is increased and planned substantive tests can be decreased.
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Do auditing standards say anything about electronic information?
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They provide guidance for auditors of entities that transmit, process, maintain, or access significant information electronically.
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When a significant amount of evidence exists electronically what happens?
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It may not be practical or possible to reduce detection risk to an acceptable to reduce detection risk to an acceptable level by performing only substantive tests.
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Why is it harder to use electronic info?
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Because potential for imporper initiation or alteration of info may be greater if info is maintained in only electronic form.
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What should an auditor do if the info is all electronic?
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Auditor should perform tests of controls to gather evidence in support of an assessed level of control risk below max for affected financial statement assertions. Although substantive tests are required can be significantly reduced if results of tests of controls support the effectiveness of controls.
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Because if inherent consistency in IT processing what can an auditor do?
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Sometimes an auditor may reduce testing of an automated control because once they determine it is operating effectively, can focus subsequent tests on assessing whether any changes have occurred that will limit the effectiveness of the control.
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what might some tests of a IT control include?
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Might include determing if any changes occurred to the program and if changes were properly authorized and tested prior to implementation. This approach leads to significant audit efficiencies when auditor determines that automated controls tested in prior years aduit have not been changed and continue to be subject to effective internal controls.
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Who performs tests of an IT control?
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Often performed by an IT audit specialist. When auditors test manual controls that rely on IT generated reports, they must consider both the effectiveness of management's review and automated controls over teh accuracy of info in the report.
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