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Questions and Answers
What is the primary purpose of audit documentation?
What is the primary purpose of audit documentation?
Which of the following is a characteristic of proper audit file identification?
Which of the following is a characteristic of proper audit file identification?
What must be clearly explained in the audit documentation alongside uses of tick marks?
What must be clearly explained in the audit documentation alongside uses of tick marks?
What type of documents would typically be found in the permanent files of an audit?
What type of documents would typically be found in the permanent files of an audit?
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Why is it essential for schedules in audit documentation to reconcile with the trial balance?
Why is it essential for schedules in audit documentation to reconcile with the trial balance?
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What is the primary purpose of obtaining corroborating evidence in an audit?
What is the primary purpose of obtaining corroborating evidence in an audit?
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Why is recalculation often performed using computer-assisted audit software?
Why is recalculation often performed using computer-assisted audit software?
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Which of the following is a limitation of observation in an audit?
Which of the following is a limitation of observation in an audit?
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What is one of the main reasons auditors need to plan their work effectively?
What is one of the main reasons auditors need to plan their work effectively?
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What distinguishes reperformance from recalculation in the auditing process?
What distinguishes reperformance from recalculation in the auditing process?
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Why should auditors carefully supervise assistants during an engagement?
Why should auditors carefully supervise assistants during an engagement?
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Which aspect of confidentiality is critical in audit engagements?
Which aspect of confidentiality is critical in audit engagements?
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In audit documentation, what is the significance of maintaining ownership of audit files?
In audit documentation, what is the significance of maintaining ownership of audit files?
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What is one of the primary purposes of audit documentation?
What is one of the primary purposes of audit documentation?
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Who retains ownership of the audit documentation prepared during an engagement?
Who retains ownership of the audit documentation prepared during an engagement?
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According to confidentiality rules, what information must auditors keep confidential?
According to confidentiality rules, what information must auditors keep confidential?
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Which of the following is an incorrect assumption about the purposes of audit documentation?
Which of the following is an incorrect assumption about the purposes of audit documentation?
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What should be included in the audit documentation to ensure compliance with auditing standards?
What should be included in the audit documentation to ensure compliance with auditing standards?
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What may happen if auditors share confidential client information without permission?
What may happen if auditors share confidential client information without permission?
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Which aspect of audit documentation helps auditors in justifying their audit findings?
Which aspect of audit documentation helps auditors in justifying their audit findings?
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What is a potential consequence of improperly managing audit documentation?
What is a potential consequence of improperly managing audit documentation?
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What role does audit documentation play during the review process by supervisors?
What role does audit documentation play during the review process by supervisors?
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Which of the following statements about audit documentation is false?
Which of the following statements about audit documentation is false?
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Which of the following best describes the ownership of audit files?
Which of the following best describes the ownership of audit files?
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What is a key aspect of confidentiality in audits?
What is a key aspect of confidentiality in audits?
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What should auditors consider when preparing audit documentation?
What should auditors consider when preparing audit documentation?
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In audit planning, which factor is least important in determining audit evidence collection?
In audit planning, which factor is least important in determining audit evidence collection?
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When selecting a sample size for audit procedures, which factor should be considered?
When selecting a sample size for audit procedures, which factor should be considered?
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Which audit procedure is focused on verifying cash disbursements?
Which audit procedure is focused on verifying cash disbursements?
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What decision must an auditor make concerning the auditing procedures?
What decision must an auditor make concerning the auditing procedures?
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During the audit planning stage, how does the type of firm being audited influence evidence collection?
During the audit planning stage, how does the type of firm being audited influence evidence collection?
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What is one consequence of inadequate audit documentation?
What is one consequence of inadequate audit documentation?
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What is one primary purpose of obtaining sufficient appropriate evidence in an audit?
What is one primary purpose of obtaining sufficient appropriate evidence in an audit?
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Which factor is crucial for the auditor when deciding whether to accept a new client?
Which factor is crucial for the auditor when deciding whether to accept a new client?
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Why is it important for auditors to understand the client’s business and industry?
Why is it important for auditors to understand the client’s business and industry?
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Which of the following is NOT one of the four key parts of initial audit planning?
Which of the following is NOT one of the four key parts of initial audit planning?
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What impact does information technology have on auditor responsibilities?
What impact does information technology have on auditor responsibilities?
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When should an auditor typically determine the terms of engagement with a client?
When should an auditor typically determine the terms of engagement with a client?
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What should the auditor consider about economic conditions when planning an audit?
What should the auditor consider about economic conditions when planning an audit?
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Which aspect is included in the auditor's overall strategy for the audit?
Which aspect is included in the auditor's overall strategy for the audit?
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What is a common misconception regarding maintaining client relationships in auditing?
What is a common misconception regarding maintaining client relationships in auditing?
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What could be a consequence of not understanding a client’s business adequately?
What could be a consequence of not understanding a client’s business adequately?
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Study Notes
Audit Practice and Procedures II - Week Four
- Audit Evidence: The foundation of any audit is the evidence obtained and evaluated by the auditor. The auditor must have the knowledge and the skill to accumulate sufficient appropriate evidence on every audit to meet the standards of the profession. Evidence is any information used by the auditor to determine if the audited information is stated in accordance with established criteria.
- Auditing Evidence Details: Includes information collected for reviewing a company's financial transactions, internal control practices, and other items necessary for the certification of financial statements by an auditor. The amount and type of auditing evidence considered vary considerably based on the type of firm being audited and the required scope of the audit.
- Key Takeaways: Auditing evidence is the information collected by an auditor to ascertain the accuracy and compliance of a company's financial statements. This evidence supports the company's claims and adherence to accounting laws of their legal jurisdiction. Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices and receipts. Auditing evidence must be sufficient, reliable, and relevant.
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Audit Evidence Decisions:
- Choosing audit procedures to use.
- Determining sample size for a given procedure.
- Selecting items from the population.
- Defining when to perform procedures.
- Audit Procedures: Detailed instructions explaining the audit evidence to be obtained during the audit. Procedures are sufficiently specific to allow auditors to follow instructions during the audit. These procedures often verify cash disbursements where the auditor will examine the cash disbursement journal, comparing the payee, name, date and amount with bank information.
- Sample Size: The auditor can vary the sample size from one item to all items in a population being tested. The decision on the right sample size depends on the auditor for each audit procedure, and varies by audit.
- Items to Select: Methods to select specific items from a population to test, e.g. a week's checks, largest amounts, random selection, or checks the auditor believes are most likely in error.
- Timing: An audit of financial statements usually covers a period such as a year. Audits are often not completed until weeks or months after the end of that period. The decision on when the audit should be complete depends on the client needs and usually is completed 1-3 months after year-end. Auditors often perform inventory counts closer to the balance sheet date
- Persuasiveness of evidence: The two determinants of persuasiveness are appropriateness and sufficiency.
- Appropriateness of Evidence: Is a measure of evidence quality, including relevance and reliability in meeting audit objectives related to transactions, account balances, and disclosures. It's improved by choosing relevant and reliable audit procedures, not necessarily a larger sample size
- Relevance of Evidence: Evidence must pertain to the audit objective being tested. In the case of a client failing to bill customers, auditors must trace shipping documents to duplicate invoices instead of the opposite which is not relevant
- Reliability of Evidence: Refers to the degree to which evidence can be trusted. Reliable evidence comes from independent sources (banks, attorneys , customers) and is more reliable than evidence which originates from within the entity (e.g purchase requisition.
- Effectiveness of Client's Internal Controls: Effective internal controls result in more reliable evidence.
- Auditor's Direct Knowledge: Evidence obtained by the auditor via physical examination, observation, recalculation or inspection is more reliable than evidence obtained indirectly.
- Qualifications of Individuals: Evidence is only as reliable as the individual providing it. An auditor needs to have the necessary qualifications and skills to evaluate the evidence
- Timeliness: Timeliness of evidence refers to when the evidence was accumulated. Evidence is more reliable when collected close to the balance sheet date. For example, counting marketable securities on the balance sheet date is more reliable than doing it two months previously.
- Sufficiency of Evidence: The quantity of evidence gathered, often determined by the sample size selected. Larger sample sizes usually indicate more sufficient evidence. The extent of the sampling and the effectiveness of internal controls influence the appropriate sample size in an audit.
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Types of Audit Evidence:
- Physical examination
- Confirmation
- Inspection
- Analytical procedures
- Inquiries of the client
- Recalculation
- Reperformance
- Observation
- Physical Examination: The inspection or count of a tangible asset. Useful for verifying existence of assets (inventory, cash, securities etc.)
- Confirmation: Obtaining a direct written response from a third party to verify accuracy information requested by the auditor.
- Inspection: Examining the client's documents, which may be in paper form, electronic, or other. Useful for substantiating information in the financial statements
- Analytical Procedures: Evaluating financial information by analyzing relationships among financial and non-financial data.
- Inquiry: Obtaining written or oral information from the client. This isn't always conclusive as it may be biased.
- Recalculation: Rechecking calculations performed by the client.
- Reperformance: The auditor independently testing client accounting procedures or controls. Comparing an invoice's price to an approved price list or performing the aging of accounts receivable.
- Observation: Observing a process or procedure performed by others. It is limited to the point when the observation is made and is not enough on its own.
- Appropriateness of Evidence Table: A table demonstrating the criteria to determine the appropriateness of types of evidence. (See page 24 of the document).
- Audit Documentation (Files): Documentation is the record of procedures, evidence and conclusions reached by the auditor. It includes all info the auditor deems necessary for the audit, and often stored in computer files.
- Purpose of Audit Documentation: The overall objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted. It provides a basis for planning, recording evidence and the results of tests, determining the proper types of audit report and a review basis for supervisors.
- Ownership of Audit Files: Audit documentation, including schedules prepared by the client, belongs to the auditor.
- Confidentiality of Audit Files: Auditors must maintain a confidential relationship with the client; client consent is required to share confidential information with any third parties
- Preparation of Audit Documentation: Documentation is prepared with sufficient detail for a different auditor to perform the same procedures.
- Permanent Files: Data that are historical or continuing in nature. These files include company documents, analyses from prior years, internal control info.
- Current Files: Includes all audit documentation related to the current year. This includes the audit program, general information and the working trial balance
- Adjusting and Reclassification Entries: These entries are made when material misstatements are found to be corrected (e.g obsolete inventory). They are prepared from client information.
- Supporting Schedules: The largest portion of audit documentation. These provide detailed supporting schedules of financial statement amounts prepared by the client or auditor. Examples of supporting schedules include analysis, trial balances, reconciliations and more.
Audit Planning
- Audit Planning: The auditor must plan the work and properly supervise any assistants. This is important to allow the auditor enough time to obtain appropriate evidence for the circumstances, to help keep audit costs reasonable, and to avoid misunderstandings.
- Reason for Planning: Ensure proper evidence for circumstances, keep audit costs reasonable, and avoid client misunderstandings.
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Initial Audit Planning: This process is performed in early stages of the audit and includes four things:
- Accept client and perform initial audit planning: Determining accepting a new or existing client, decisions by experienced staff to avoid excessive costs on those decisions.
- Understanding the client's business and its industry: Understanding the client's operations, industry risks and potential for risks of material misstatement.
- Identifying risks of material misstatement: Identify risks due to fraud, error or the environment. Assess the entity and its environment including its internal controls.
- Understanding client business and industry: Auditors need a good understanding of the client's business, the industry's factors, and the unique accounting requirements of that industry. Understanding the client's business and industry helps auditors understand how business risks might impact accounting data and procedures.
- Risk Assessment: Identifying risks and assessing the likelihood of material misstatement.
- Client Understanding (Business and Industry): Understanding the nature of the client's business and its industry helps determine the risks of material misstatement and the audit approach.
- Factors increasing client understanding needs: Recent significant declines in economic conditions, information technology connecting clients with customers, and increased global operations.
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Description
This quiz covers the essential concepts of audit evidence, including its importance and the various types utilized in audits. Understanding how to collect and evaluate evidence is critical for ensuring compliance in financial statements. Test your knowledge on auditing practices and procedures to enhance your skills in the field.
