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55 Cards in this Set
- Front
- Back
Evidence mix
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To obtain sufficient evidence in response to risks identified through risk assessment procedures, auditors employ a combination of the 4 remaining types of tests called evidence mix.
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List types of tests from least expensive to most expensive
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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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What do risk assessment procedures tell the auditor?
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Tells them the appropriate emphasis on each of the additional contorls.
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Designing the audit program what must you do?
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In addition to the section of the audit program that contains the risk assessment procedures performed in planning, the audit program for most audits is designed in three additional parts: test of controls, tests of transactions,, substantive analytical procedures, and tests of details of balances.
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What do tests of controls and substantive tests of transactions audit programs usually include?
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A descritpvie section documenting internal controls obtained druing performance of risk assessment procedures. Also likely to include a description or procedures performed to obtain an understanding of internal control and a description of the assessed level of control risk.
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What do audit procedures include?
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Test of both controls and transactions which vary depending on control risk. When controls are effective and control risk is assessed as low, auditor put heavy emphasis on tests of controls. Some tests of transactions will also be included.
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Auditors follow a 4 step approach to reduce assessed control risk what are the 4 steps?
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1. Apply the transaction related audit objective to the classes of trans being tested such as sales.
2. Identify key contro that should reduce control risk for each transaction related audit objective 3. Develop appropriate tests of controls for all internal controls that are used to reduce preliminary assessment of control risk below max. 4. For t=potential types of misstatements related to each trans related aduit objective develop appropriate substantive test of trans before considering deficiencies of internal control and expencted results of test of controls in step 3. |
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Analytical procedures
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Because they are inexpensive, many auditors perform them on all audits. Analytical procedures performed during substantive testing, such as for audit of A/R are typically more focused and extensive than those done as planning. The auditor is likely to use disaggregated data to increase precision of the auditor's expectations.
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If sales and accounts reveivable are based on predictable relationship with nonfinancial data what effect does that have on analytical procedures?
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If revenue billings are based on the number of hours professionals charge clients, such as in law firms and other organizations that provide services the auditor can estimate total revenue by multiplying hours billed by the average billing rate.
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Tests of details of balances design is
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typicaly the most difficult of the whole planning process because it is subjective and requires considerable professional judgement.
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What are the key decisions when designing tests of balances
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1. identify client bus risks affecting A/R
2. Set tolerable misstatement and assess inherent risk for A/R 3. Assess control risk for sales and collection cycle 4. Design and perform tests of controls and substantive tests of trans for sales and collection cycle 5. Design tests of a/r balances to satisfy balance related objectives. |
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Identify client business risks affecting a/r
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If any of the identified client business risks affect A/R they should be incorporated in the auditor's evaluation of inherent risk or control risk. These risks will then affet the appropriate extent of evidence.
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Set tolerable misstatement and assess inherent risk for A/R
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Adutiros must decide preliminary judgment about materiality for the audit as a whole and then allocate total to account balances to establish tolerable misstatement for each balance. For a lower tolerable misstatement, more testing of details is required.
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How is inherent risk assessed?
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Inherent risk is assessed by identifying any aspect of the client's history, environment, or operations that indicates a high likelihood of misstatement in the current year's financial statements. Considerations affecting I/R may apply to A/R include makeup of a/r, nature of client's business, initial engagement, and other i.r factors.
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What happens to evidence if inherent risk is assessed as high?
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Will result in high evidence collection.
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Assess control risk for sales and collection cycle
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Effective controls will reduce control risk and along with the amount of evidence required for substantive tests of trans and tests of details of balances. Inadequate controls will increase evidence necessary.
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Design and perform tests of controls and substantive tests of transactions for the sales and collections cycle
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Designed with the expectation that certain results will be obtained. These predicted results affect the design of tests of details of balances. For example, the auditor usually plans to do extensive tests of controls when control risk is assessed as low. This will premit less extensive testing of a/r balances.
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Design and perform analytical procedures for A/R balances
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Auditors perform substantive analytical procedures for an account surch as A/R for 2 purposes.
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Auditors perform substantive analytical procedures for an account surch as A/R for 2 purposes:
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1/ to identify possible misstatements in the account balance
2. to reduce detailed audit tests |
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What do results of substatnive analytical procedures do?
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These directly affect extent of tests of details of balances.
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Design tests of details of accounts receivable balance to satisfy balance related audit objectives
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the planned tests of detailed balances include audit procedures, sample size, items to select, and timing.
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What is a difficulty auditors face in designing tests of details of balances?
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the need to predict the outcome of the tests of controls, substantive tests of transactions, and analytical procedures before they are performed.
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Why is this necessary?
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This is necessary because the auditor should design tests of details of balances during the planning phase but the appropriate design depends on the results of other tests.
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In planning tests of details of balances what does the auditor predict?
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Usually predicts few or no exceptions in test of contros, substantive test of trans, and analytical procedures.
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If tests are not consistent with predictions what must auditors do?
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Auditors must change tests of details of balances as the audit progresses.
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What is one of the most challenging parts of auditing?
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Properly applying factors that affects tests of details of balances.
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Why is this hard?
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Because each is subjective. and requires considerable professional judgment.
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For risk assessment procedures related to obtaining background info about the client's business and industry pertain to the overall audit. What do they use the information for?
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First for assessing acceptable audit risk for the engagement as a whole, then for inherent risk for specific audit objectives, as they audit progresses, they will likely use the info when making decisions about tests of details of balances.
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What does the auditor do in regards to fraud risk?
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Auditor will first assess risk of fraud for the overall audit, and later consider whether any fraud risks exist that may affect fraud risk assessments for specific accounts and the audit procedures and sample sizes for tests of details of balances for accounts that are affected.
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What do auditing standards require in regards to the audit program?
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They requre the auditor to use a written audit program.
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What do audit procedures do?
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Most satisfy more than one objective and more than one audit procedure is used for each objective.
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How must tests of details of balances be designed?
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Must be designed to satisfy balance related audit objectives for each account and the extent of these tests can be reduced when transaction related audit objectives have been satisfied by tests of controls or substantive tests of transactions.
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Even when transaction related audit objectives are met, the auditor will still rely primarily on substantive tests of balances to meet the following balance related audit objectives:
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1. realizable value
2. rights and obligations |
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What do auditors use information obtained from risk assessment procedures relatedrelated to client acceptance and initial planning
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understanding client's business risks and performing analytical procedures. primarily to assess inherent risk and acceptable audit risk.
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How do auditors use assessments of materialify, acceptable audit risk, inherent risk, control risk, and identified fraud risks to develop
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overall audit plan and audit program.
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What should hte auditor have at the end of phase 1?
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They should have a well defined audit plan and specific audit program for the entire audit
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What are the objectives of phase 2? 2 objectives
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1. Obtain evidence in support of the specific controls that contribute to the auditor's assessed control risk including integrated adutis of internal control over financial reporting
2. Obtain evidence in support of the monetary correctness of transactions. |
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How is the first objective met?
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By performing tests of controls.
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How is the second onjective met?
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By performing substantive tests of transactions.
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What typically happens in stage 2?
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Typically both types of tests are done simultaneously on the same transactions.
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Because the results of tests of controls and tests of transactions help determine tests of balances
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they are often done 2-3 months before balance sheet date. this helps auditor to revise details of balance program for unexpected results in earlier tests and to complete the audit as soon as possible after the b.s. date.
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What does this approach allow management to do?
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Allows management an opportunity to correct control deficiencies in time to allow auditor testing of the newly implemented controls before year end.
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What are the 2 general categories of phase 3 audit procedures?
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1. Substantive analytical procedures that assess the overall reasonableness of transactions and balances.
2. Tests of details of balances, which are audit procedures to test for monetary misstatements in the balances in the financial statements. |
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Where are analytical procedures used and why?
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They are used wherever they are relevant becuase of their low costs.
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When are analytical procedures performed?
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Performed early, using preliminary data before year end as a means of planning and directing other audit tests to specific areas. But the greatest benefit from calculating ratios and making comparisons occurs after the client has finished preparing its financial statement.s
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When are analytical procedures ideally performed?
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Ideally performed before tests of details of balances so they can be used to determine how extenstively to test balances. Also used as part of performing tests of balances and during completion of the audit
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Perform additional tests for presentation and disclosure in phase 4
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the procedures auditors perform to support the 4 presentation and disclosure objectives are similar to audit procedures performed to support both transaction and balance related audit objectives.
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MAnagement implements internal controls to ensure all required footnotes and disclosures are included and amounts and other info disclosed are accurate this relates to what objective?
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This relates to the completeness and accuracy objective.
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Auditors perform substantive tests to obtain sufficient appropriate evidence that information disclosed in the footnotes reflects actual transactions and balances that have occured and represent rights and obligations of client. What audit objective does this related to?
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Occurrence and rights and obligations.
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They perform tests related to contingent liabilities and subsequent events when?
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In phase 4
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contingent liabilities are
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potential liabilities that must be disclosed completely and accurately in the co's footnotes.
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subsequent events represent
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events that occasionally occur after the b/s date but before issuance of financial statements and auditor's report, that have an effect on the financial statements.
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Auditors must gather the following evidence for the financial statements as a whole during the completion phase
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1. Perform final analytical procedures
2. Evaluate the going concern assumption 3. Obtain a client representation letter 4. Read information in the annual report to make sure that it is consistent with the financial statements |
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issue the audit report
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the type of audit report issued depends on evidence accumulated and audit findings
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communicate with audit committee and management
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required to communicate significant deficiencies in internal contorlto the audit committee or senior management. Auditing standards also require the auditor to communicate certain other matters to those charged with governance, such as the audit committee or similarly designated body upon completion of the audit if not sooner.
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