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62 Cards in this Set

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What are the 8 types of evidence an auditor can choose from?
1. Physical Examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Recalculation
7. Reperformance
8. Observation
Physical examination is
the inspection or count by the auditor of a TANGIBLE asset. Most often associated with inventory and cash but can also be used for verification of securities, notes receivable, and tangible fixed assets.
In order to qualify for physical examination what must the item have? What if it does not possess this?
Inherent value. If an object being examined lacks inherent value, the evidence is called documentation. For example, a check, before it is signed, is a document; after it is signed, it becomes an asset; and when it is cancelled, it becomes a document again. For correct auditing terminology, physical examination of the check can only occur when it is an asset.
What affect does physical examination have on the existence objective
Physical examination is a direct means of verifying that an asset actually exists (physical objective)
What affect does physical examination have on the completeness objective
To a lesser extent than the physical examination, it confirms existing assets are recorded. (Completeness)
How useful is physical examination and why?
Generally it is an objective means of ascertaining both the quality and description of the asset and is considered one of the most reliable and useful pieces of audit evidence.
What affect does physical examination have on the rights and obligation objective?
It does not provide sufficient evidence to verify that existing assets are owned by the client.
What affect does physical examination have on the realizable value?
Generally auditor is not qualified to judge qualitative factors such as obsolescence or authenticity (realizable value objective)
What affect does physical examination have on the accuracy objective
Proper valuation for financial statement purposes usually cannot be determined by physical examination.
What term is typically associated with physical examination?
Count-A determination of assets on hand at a given time. This term should be associated only with the type of evidence defined as physical examination.
Count
Count-A determination of assets on hand at a given time. This term should be associated only with the type of evidence defined as physical examination.
Confirmation
describes the receipt of a direct written response from a third party verifying the accuracy of information that was requested by the auditor.
In confirmation who is the request made to?
It is made to the client and the client asks the third party to respond directly to the auditor.
Why does the client respond to the auditor in confirmation?
They respond to the auditor so the confirmation comes from sources independent of the client. Because they are independent, they are a highly regarded and often used type of evidence.
What is the drawbacks of using confirmation?
Confirmations are relatively costly to obtain and may cause some inconvenience to those who are asked to supply them.
Who decides whether or not to use confirmatons? What affects the decision?
Auditors decide whether or not to use confirmations depending on the reliability needs of the situation as well as the alternative evidence available.
When are confirmations not typically used?
They are not usually used in the audit of fixed assets. USually not used to verify individual transactions between organizations because an auditor can use documentation for that.
What does US GAAP require in regards to confirmation?
US GAAP requires that when practical and reasonable, confirmation must be used on a sample of accounts receivable.
Why does US GAAP require confirmation be used to test a portion of accounts receivable?
Because A/R usually represent a significant balance on the financial statements and confirmaton are highly reliable type of evidence. IFRS does not have this requirement.
What types of information are commonly tested using confirmation?
Cash in bank - source bank
Marketable securities- investment custodian
A/R-customer
A/P-Creditor
N/P-lender
Advances from customer-customer
Shares outstanding-registrar and transfer agent
Insurance coverage-insurance company
Contingent liabilities-Bank, lendor, and client's legal council.
For a confirmation to be considered reliable evidence what must happen?
They must be controlled by the auditor from the time they are prepared until they are returned. If the client controls preparation, does the mailing, or receives responses, auditor has lost control and with it independence; thus reducing the reliability of the evidence.
What terms are used with physical examination?
Touch, see, ect.
What term is typically associated with confirmation?
Confirm
Positive confirmation
Request a response whether it is correct or not. These can be blank or non-blank. More reliable
Negative confirmation
Requires a response only if incorrect.
Documentation is
the auditor's inspection of the client's documents and records to substantiate the information that is, or should be, included in the financial statements.
What are the documents the auditor examines
The documents examined by the auditor are the records used by the client to provide information for conducting its business in an organized manner, and may be in paper form, electronic form, or other media.
How much documentation evidence exists? Why?
Because each transaction in the client's organization is normally supported by at least one document, a largevolume of this type of evidence is usually avail.
How often is documentation used? Why?
It is widely used as evidence in audits becuase it is usually readily available at a relatively low cost.
Internal document
A document that has been prepared and used within a client's organization and is retained without ever going to an outside party. Internal documents include duplicate sales invoives, employees' time records, and inventory receiving reports.
External document
A document that has been handled by someone outside the client's organization who is a party to the transaction being documented but which are either currently held by the client or are readily accessable. Examples include cancelled notes payable, insurance policies, and vendor invoices. Some documents, such as cancelled checks originate with the client, go to an outsider, and are finally returned to the client.
What affects an auditors willingness to accept a document as reliable evidence?
The primary determinant is whether internal or external and, when internal, whether it was created and processed under conditions of effective internal control. Internal documentation created and processed under conditions of weak internal control may not constitute reliable evidence.
Why is an auditor more willing to accept external documentation?
Because external documents have been in the hands of both the client and another party to the transaction, there is some indication that both members are in agreement about hte informationa nd the conditions stated on the document. Therefore, some external documents are considered more reliable evidence than internal ones.
Vouching - Associated with what type of evidence?
Documentation. When auditors use documentation to support recorded transactions or amounts, the process is often called vouching. To vouch recorded acquisition transactions, the auditor might, for example, verify entries in the acquisitions journal by examining supporting vendors' invoices and receiving reports and thereby satisfy the occurrence objective.
Tracing
When an auditor traces from receiving reports to acquisitions journal to satisfy completeness objective.
What terms are associated with documentation?
Examine, Read, Trace, Compare, vouch
Examine
A reasonably detailed study of a document or record to determine specific facts about it. Used with documentation
Read
An examination of written information to determine facts pertinent to an audit. Documentation
Trace
An instruction normally associated with documentation and or reperformance
Compare
A comparison of information in 2 different locations. The instructions should state whihc information is being compared in as much detail as possible. Documentation
Vouch
The use of documents to verify recorded transactions or amounts. Documentation
Analytical procedures
Use comparisons and relationships to assess whether account balances or other data appear reasonable compared to auditor's expectations.
When are auditors required to use analytical procedures?
During the planning and completion phase of all audits.
How do analytical procedures help understand client's industry and business?
By conducting analytical procedures in which the current year's unaudited information is compared with prior years audited info or industry data, changes are highlighted. These changes can represent important trends or specific events, all of which will influence audit planning.
How do analytical procedures help auditors assess the entity's ability to continue as a going concern?
Analytical procedures are often a useful indicator for determining whether the client has financial problems. Certain analytical procedures can help the auditor assess the likelihood of failure. For example, if a higher than average ration of long term debt to net worth is combined with a lower than average ratio of profits to total assets, a relatively high risk of financial failure may be indicated.
How do analytical procedures indicate the presence of possible misstatements in financials?
Significant unexpected differences between the current years unaudited financial data and other data used in comparisons are commonly called unusual fluctuations. Unusual fluctuations occur when significant differences are not expected but do exist. Or when significant differences are expencted but do not exist. In either case, the presence of an accounting misstatement is one possible reason for the unusual fluctuation. If it is large, the auditor must determine the reason and be satisfied that the cause is a valid event and not a misstatement.
What are analytical procedures used to do
They are attention directing becuase it results in more detailed procedures in the specific audit areas where misstatements might be found.
How do analytical procedures reduce detailed audit tests?
WHen an analytical procedure reveals no unusual fluctuations, this implies the possibility of material misstatements is minimized. In such cases, the analytical procedure constitutes substantitive evidence in support of the fair statement of the related account balances and it is possible to perform fewer detailed tests in connection with those accounts. In other cases, certain audit procedures can be eliminated, sample sizes can be reduced, or timing of procedures can be moved farther away from the balance sheet date.
Inquiries of the client
Inquiry is the obtaining of written or oral information from the client in response to questions from the auditor. Although considerable evidence is obtained from the client through inquiry, it usually cannot be regarded as conclusive because it is not from an independent source and may be biased in the client's favor. Therefore, when the auditor obtains evidence through inquiry, it is normally necessary to obtain corroborating evidence through other procedures.
Recalculation
Involves rechecking a sample of calculations made by the client. Rechecking client calculations consists of testing the client's arithmetical accuracy and includes such procedures as extending sales invoices and inventory, adding journal and subsidiary records, and checking the calculation of depreciation expense and prepaid expenses.
Reperformance
the auditor's independent tests of client accounting procedures or controls that were originally done as part of the entity's accounting and internal control system. REcalcualation involves checking a computation, reperformance involves checking other procedurs. For example, the auditor may compare the price of an invoice to an approved price list, or may reperform the aging of accounts receivable.
Observation
Use of senses to assess client activities. Throughout the engagement with the client, auditors have many opportunities to use their senses-sight, hearing, touch, and smell- to evaluate a range of items. Auditors may tour plant to obtian general impression of the client's fcailities, or watch individuals to ensure they are performing tasks correctly. Generally not sufficient because risk of client personnel changing behavior because of auditor's presence. Must be corroborative with other evidence.
What are the 2 most expensive types of evidence?
physical examination because it requires auditors presnece when client is counting.
confirmation because auditor must carefully follow procedures in confirmation preparation mailing, receipt, and follow up of nonresponses and exceptions.
Which procedures are moderately costly?
Documentation, analytical procedures, and reperformance
What are the 3 least costly audit evidence
observation, inquiries of the client, and recalcuation
What is the overall audit objective in regards to evidence?
The overall objective is to obtain persuasive evidence at a minimum cost to verify that accounts are materially correct.
What 4 things must an auditor decide in regards to evidence collection?
1. Which audit procedures to use to satisfy each balance-related and audit objective
2. What the sample size should be for each procedure
3. Which items from the population to include in the sample
4. When to perform each procedure.
What terms are associated with analytical procedures?
Scan0a less detailed examination of a document or record to determine whether there is something unusual warranting further investigation.
Compute-A calculation done by the auditor independent of the client.
WHat terms are associated with recalculation?
Recompute-a calculation done to deterime whether a client's calculation is correct.
Foot-additon of a column of numbers to determine if the total is the same as the client's
What term is associated with reperformance
trace
What term is associated with observation
Observe-the act of observation should be associated with the type of evidence defined as observation
What term is associated with inquiries of client
Inquire-the act of inquiry should be associated with the type of evidence defined as inquiry.