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90 Cards in this Set

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Evidence
any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. The evidence varies greatly in the extent to which it persuades the auditor whether financial statements are fairly stated.
How does Auditor evidence vary?
The evidence varies greatly in the extent to which it persuades the auditor whether financial statements are fairly stated.
What does evidence for auditor's inculde?
It includes information that are highly persuasive such as auditor's count of marketable securities and highly persuasive information, such as responses to questions of client employees.
Who uses evidence?
The use of evidence is not unique to auditors, evidence is also used extensively by scientists, lawyers, and historians.
What is a large part of what auditor's do?
Gathering evidence is a large part of what auditors do.
What do auditors use evidence for?
They use evidence to draw conclusions.
What do auditors use evidence for?
Determine whether statements are fairly presented.
What is the nature of evidence auditors use?
Various types of evidence are used generated by the auditor, third parties, and the client
Who is the party who evaluates the evidence in an audit?
THe auditor
In an audit what is the cetainty of conclusions from evidence?
High level of assurance
What is the nature of conclusions from an audit
Issue one of several alternative types of audit reports
What are typical consequences of incorrect conclusions about audit evidence?
Statement users make incorrect decisions and the auditor may be sued.
What is a major decision facing every auditor?
Determining the appropriate types and amounts of evidence needed to be satisfied that the client's financial statements are fairly stated.
What are the 4 decisions about what evidence to gather and how much of it to accumulate?
1. WHich audit proceedures to use
2. What sample size to select for a given procedure
3. Which items to select from a population
4. When to perform the procedures.
What is an audit procedure?
An audit procedure is the detailed instruction that explains the audit evidence to be obtained during the audit. It is common to spell out these procedures in sufficiently specific terms so the auditor can follow these instructions during the audit
Once the audit procedure is selected what can the auditor do?
They can vary the sample size from one to all the items in the population being tested. The decision of how many items to test is made by the auditor for each audit precedure.

In an audit procedure to verify cash dispursements, suppose 6600 checks are recorede. The auditor may select a sample size of 50 checks for comparison to the cash disbursements journal.
AFter determining the sample size what must the auditor do?
The auditor must decide which items in the population to check.

What are ways they can pick items to check?
1. Select a week and examine first 50 checks
2. Select 50 checks with the largest amounts
3. Select checks randomly
4. SElect some checks that they think are most liekly to be in error.

For example if they are going to select 50 cancelled checks from 6600 for comparison with cash dibursements there are several ways to do so.
What time period does an audit of financial statements usually cover/
1 year
When is an audit completed?
Typically an audit is not completed until several weeks or months after teh end of the period. The timing varies from early in the accounting period to long after it has enede. Timing decision is affected by when the client needs the audit to be completed. Usually client wants it completed 1-3 months after year end.
When does the SEC require the public companies file adited financial statemnets?
The SEC requires all public companies file audited financials with the SEC within 60-90 days of the company's financial year end depending on the size of the company.
What is an audit program?
The list of all audit procedures for an audit area or an entire auidt.
What does the audit program always include?
The audit program always includes a list of audit procedures and usually includes sample sizes, items to select, and timing of the tests. Normally there is an audit program, including several audit procedures, for each component of the audit. There will be an audit program for a/r, one for sales, ect.
How is software used in development of audit programs?
MAny auditors use electronic auditing programs to generate audit programs. These software programs help an auditor address risks and other audit planning considerations and select apropriate auditing procedures.
What do auditing standards require in regards to evidence?
They reuquire the auditor to accumulate sufficient appropriate evidence to support the opinion issued.
What must he evidence do before the audit is complete?
The evidence must persuade the auditor that the opinion is correct with a high level of assurance.
What is appropriateness of evidence?
A measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives for classes of transactions, account balances, and related disclosures. If evidence is considered ahighly apprpritae it is a great help in persuading the auditor that financial staements are fairly presented.
Does a larger sample affect appropriatenss?
No can't be improved. Only way to improve is by selecting audit procedures that are more relevant or provide more reliable evidence.
What is true about evidence relevance?
Evidence must pertain to or be relevant to the audit objective before it can be appropriate. Relevance can only be considered in terms of specific audit objectives, because evidence may be relevant for one audit objective but not for a different one. Most evidence is relevant for 1 but not all
What is reliabilty of evidence?
Reliability of evidence refers to the degree to which evidence can be believeable or worthy of trust. Like relevance, if evidence is considered reliable it is a great help in persuading the auditor that financial statements are farily stated.
What are the 6 characteristics reliabilty and appropriateness are based off of?
1. Independence of provider
2. Effectiveness of client's internal controls
3. Auditor's direct knowledge
4. Qualifications of individuals providing this information
5. Degree of objectivity
6. Timeliness
characteristics reliabilty and appropriateness
1. Independence of provider
Evidence obtained from a source outside the entity is more reliable than that obtained from within. Similarly, documents that originate from outside the client's organization, such as life insurance poilcy, are more reliable than that which originate within the co and have never left the org.
characteristics reliabilty and appropriateness
2. Effectiveness of client's internal controls
When a client's internal controls are effective, evidence is more reliable than when they are weak. If internal controls over sales and billing are effective, the auditor can obtain more reliable evidence from sales invoives and shipping documents than if controls were inadequate.
characteristics reliabilty and appropriateness
3. Auditor's direct knowledge
Evidence obtained directly by the auditor through physical examination, observation, recalculation, and inspection is more reliable than info obtained indirectly. If auditor calculates gross margin and compares with previous period more convinced than if the controller does.
characteristics reliabilty and appropriateness
4. Qualifications of individuals providing info
Although the source of info is independent, the evidence will not be reliable unless the individual providing it is qualified to do so. THerefore, communications from attorneys and bank confirmations are more highly regarded than a/r confirmations from persons not familiar with business world. Evidence obtained directly through the auditor may not be reliable if the auditor lacks qualifications to evaluate the evidence. Such as if they are examining diamonds they don't know difference between diamonds and glass.
characteristics reliabilty and appropriateness
5. Degree of objectivity
Objective evidence is more reliable than evidence that requires considerable judgement to determine whether it is correct. Examples of objective evidence include confirmation of a/r and bank balances, physical count of securities and cash, and adding (Footing) a list of accounts payable to determine whether it agrees with balance in general ledger. Examples of subjective include a letter writte by a client's attorney discussing likely outcome of outstanding lawsuits against the co

It is important when valuing the reliability of subjective evidence that the qualifications of the individual providing the evidence.
What must you keep in mind when evaluating subjective evidence
It is important when valuing the reliability of subjective evidence that the qualifications of the individual providing the evidence.
Characteristics of reliability and appropriateness
6. Timeliness
The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible. For income statement accounts it is more reliable if there is a smple from the entire eriod under audit rather than just the part of the period.
What determines sufficiency of audit evidence?
the quantity of evidence obtained determines its sufficiency. Sufficiency of evidence is measured primarily by the sample size the auditor selects. For a given audit procedure the evidence obtained from a sample of 100 is ordinarily more sufficient than from a sample of 50.
What are the 2 most important factors when determining the appropriate sample size in audits?
1. Auditor's expectation of misstatements
2. Effectiveness of the client's internal controls
In addition to sample size what affects sufficiency of evidence?
The individual items tested affect the sufficiency of evidence. Samples containing population items with large dollar values, items with a high likelihood of misstatements, and items that are representative of the population are usually considered sufficient. Most auditors consider samples insufficient that contain only the largest dollar items from the population unless there items make up a large portion of the total population amount.
How is the persuasiveness of evidence determined?
Persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency, including the effects of the factors influencing appropriateness and sufficiency.

A large sample is only persuasive if it is relevant to the audit objective. A sample os only 1-2 highly appropriate evidence also typuicaly lacks persuasion. Must meet both appropriateness and sufficiency.
What is a major item in the financial statements and what must the auditor do before issuing an opinion?
Inventory. Auditor must be reasonably persuaded that inventory is not materially misstated so they must obtain sufficient amount of relevant and reliable evidence about inventory.
What must be considered when making decisions about audit evidence?
Both persuasiveness and cost must be considered
What is the audtor's goal in regards to audit evidence?
The goal is to obtain a sufficient amount of appropriate evidence at the lowest possible cost. However, cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample.
According to auditing standards what is audit documentation?
Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement
What should audit documentation include?
Audit documentation should include all the information the auditor considers necessary to conduct the audit and to provide support for the audit report
What is the overall objective of audit documentation?
Overall objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with auditing standards.
What 4 things does audit documentation provide?
1. Basis for planning the audit
2. A record of evidence accumulated and the results of the tests
3. Data for determining the proper type of audit report
4. A basis for review by supervisors and partners
How does audit documentation help as a basis for planning the audit?
If the auditor is to plan an audit adequately, the necessary info must be avail in the audit files. The files may include such diverse planning info as descriptive info about internal control, a time budget for individual audit areas, the audit program, and the results of the preceding year's audit.
How does audit documentation serve as a record of evidence accumulated and results of the tests?
Aduit documentation is the primary means of documenting that an adequate audit was conducted in accordance with auditing standards. If the need arises, the auditor must be able to demonstrate to regulatory agencies and courts that the audit was well planned and adequately supervised; evidence accumulated was appropriate and sufficient; and the audit report was proper, considering the reults of the audit.
What shoud the audit documentation do when procedures involve sampling?
The documentation should identify the items tested. They should also document significant audit findings, actions taken to address them, and the basis for the conclusions reached.
How does audit documentationhelp data for determining the proper type of audit report?
Audit documentation provides an important source of information to assist the auditor in deciding whether sufficient evidence was accumulated to justify the audit report in a given set of circumstances. Useful for evaluating whether financial statements are fairly staed.
How does audit documentation serve as a basis of review for supervisors and partners
Primary frame of reference used by supervisory personnel to review the work of assistants. Careful review by supervisors also provides evidence audit was properly supervised.
What general function do audit documentation files serve?
Basis for preparing tax returns, filings with the SEC, and other reports. Source of info for issuing communications to management and those charged with governance, such as audit committee, concerning various matters such as internal control deficiencies or operational recommendations
Who do audit documentation prepared during the audit belong to?
Audit documentaton including schedules prepared by the client for the auditor si the property of the auditor. Only time any one else can view the files is when they are subpoenaed by a court as legal evidence. Audit files are retained on CPA's premises for future reference.
What is rule 301 of Code of Professional Conduct state?
A member shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client.
What type of information do auditors review during an audit that causes confidentiality to be an issue?
Receive info on officers' salaries, product pricing and advertising plans, product cost data. If auditors were to divulge this info their relationship with management would be strained.
What do auditing standards say of retention requirements for private companies?
5 years
What does SOX require as far as documentation retention for public companies?
SOX requires them to prepare and maintain audit files and other info related to any audit report in sufficient detail to support the auditor's conclusions for a period of not less than 7 years. The law makes willful destruction of audit documentation within the 7 year period a criminal offense subject to financial fines and imprisonment up to 10 years.
What documentation does the SEC require public companies to maintain?
Requires working papers or other documents that form the sbasis of the audit of company's annual financial statements or review quarterly statements
Also requires memos, correspondence, communications, other documents and records, including electronic records, related to the audit or review.
How are is audit documentation organized?
They start with general information such as corporate data in permanent files and end up with financial statements and audit report. In the middle are audit files and supporting auditor's tests.
What are permanent files?
Permanent files contain data of historical or continuing nature pertienet to the current audit.
Examples of permanent evidence
extracts or copies of such company documents of continuing importance such as articles of incorporation, bylaws, bond indentures, and contracts.
2. Analyses of previous years accounts that have continuing importance to the auditor
3. Information related to understanding internal control and assessing control risk.
4. The results of analytical procedures from previous years audits.
Why is it importatnt for the audit report to include permanent files such as extracts or copies of such company documents of continuing importance such as articles of incorporation, bylaws, bond indentures, and contracts.
Because each of these documents is significant for as many years as it is in effect.
Why is it importatnt for the audit report to include permanent files such as Analyses of previous years accounts that have continuing importance to the auditor
Having this info in permanet files allows auditor to concentrate on analyzing only the changes in the current year's balance while retaining the results of previous years audits in a form accessible for review.
Why is it importatnt for the audit report to include permanent files such as information related to understanding internal control and assessing control risk
This includes organization charts, flowcharts, questionnaires. These records are used as a starting point for documenting theauditor's understanding of the control system, since aspects of the systems are often unchanged from year to year.
Why is it importatnt for the audit report to include permanent files such as The results of analytical procedures from previous years audits.
Among these are ratios and %'s computed by auditor. This info is useful in helping the auditor determine whether there are unusual changes in current account balances that should be investigated more thoroughly
What do current audit files include?
All documentation applicable to the year under audit.
What are current audit files
1. Audit program
2. General information
3. Working trial balnce
4. ADjusting and reclassification entries
5. Supporting schedules
What is the audit program
Auditing standards require a written audit program for every audit. This is maintained in a separate file to improve coordination and integration fo parts of the audit. Each auditor intials or electronically signs the program for audit procedures and indicates the date of the audit.
What general information is included in current files?
SOme audit files include current period info of general nature rather than evidence designed to support specific financial statement amounts. This includes audit planning memos, abstracts or copies of BOD meetings.
working trial balance
listing of general ledger accounts and year end balances.
How is the working trial balance used
THe technique used by many firms is to have auditor's working trial balance in same format as financial statements. Each line item on trial balance is supported by a lead schedule containing detailed accounts from general dedger making up total.
What happens as far as adjusting and reclassification entries?
When material misstatements are discovered financial statements must be corrected. EVen though adjusting entries are prepared by auditor must be aproved by client because management has primary responsibility for fair presentation of statements.
Why are reclassification entries frequently made in financials?
To present accounting info properly, even when general ledger balances are correct. A cmmon example is reclassification for financial statemen purposes of material credit.
How do auditors decide if an adjusting or reclassification is needed?
They only do entries that significantly affect fari presentation of statements. Auditors decide based on materiality while keeping in mind that several immaterial misstaements that are not adjusted can equal up to a material misstatement.
What is the largest portion of audit documentation?
Supporting schedules prepared by client or auditors in support of specific amounts on financial statement.
What are some supportin schedules prepared by auditors?
1. ANalysis
2. Trial balance or list
3. Reconciliation of amounts
4. Tests of reasonableness
5. Summary of procedures
6. Examination of supporting documents
7. Informational
8. Outside documentation
Analysis supporting schedule
An analysis is designed to show activity in a general ledger account during the entire period under auidt, tying together beginning and ending balances. Common characteristic of these accounts is significance of activity in account during the year. Analysis has cross references in other audit files.
TRial balance or list supporting schedule
COntains all the details that make up a year end balance of a general ledger account. Differs from an analysis in that it includes only those items making up the end of the period balance. Common examples include trial balances or lists in support of a/r, a/p ect.
Reconciliation of amounts -supporting schedule
A reconciliation supports a specific amount and is normally expected to tie the amount in client;s records to another source of info. Example reconciliation of cash balances with bank statements.
TEsts of reasonableness supporting schedule
A test of reasonableness schedule contains info that enables the auditor to evaluate whether the client's balances appear to include a misstatement considering the circumstances of engagement. Tests are primarily analytcal procedures.
Summary of procedures supporting schedul
Summarizes results of a specific audit procedure. Documents the extent to which testing mistatements are found and auditor's conclusions based on the testing.
Examination of supporting documents
A number of special purpose schedules are designed to show detailed tests performed such as documents examined during tests of controls and substantitive tests of transactions. These schedules don't tie into general ledger because purpose is document the tests performed and results. Must state positive or negative conclusion of the results.
Informational supporting schedle
This type of schedule includes information as opposed to audit evidence. These schedules include information for tax returns and SEC form 10-K and data such as time budgets and client's working hours, which are helpful in administration of engagement.
OUtside documentation supporting schedules
Much of the content of audit files consists of outside documentation gathered by the auditors. Such as confirmation reolies and copies of client agreements.
Audit documentation should possess certain characteristics 5
1. Each audit file should be properly identified with information such as client's name, period covered, description of contents, intials of preparer, and index code.
2. Audit documentation should be indexed and cross-referenced to aid in organization and filing.
3. Completed audit documentation must clearly indicate the audit work performed. This is done in 3 ways: 1. By written statement in form of memorandum, 2. By initialing auditing procedures in audit program, and 3. by notations directly on the schedules known as tick marks.
4. Audit documentation should include sufficient info to fulfill objectives for which it was designed. Auditor must know their goals.
5. Conclusions that were reached about segment under consideration must be plainly stated.
What must auditors do when audit evidence is only avail electronically?
Must evaluate how this affects their ability to gather sufficient appropriate evidence.
What are some audit software programs?
ACL and Interactive DAta Extraction Analysis (IDEA)
Why do auditors use engagement management software?
It is used to organize and analyze audit documentation. Using this software an auditor can prepare a trial balance, lead schedules, supporting documentation, and financial statements as well as doing performance ratio analysis