Podcast
Questions and Answers
What type of audit evidence is considered the most reliable?
What type of audit evidence is considered the most reliable?
- Audit evidence in documentary form (correct)
- Audit evidence from photocopies
- Audit evidence inferred from calculations
- Audit evidence obtained indirectly
Which form of external confirmation requires a guarantee of response from the respondent?
Which form of external confirmation requires a guarantee of response from the respondent?
- Written confirmation
- Negative confirmation
- Positive confirmation (correct)
- Email confirmation
In what situation is audit sampling applied?
In what situation is audit sampling applied?
- When not all sampling units have a chance of selection
- When 100% of the items will be examined
- When seeking to verify all audit objectives
- When less than 100% of items are reviewed (correct)
Why is original documentation more reliable than photocopies in audits?
Why is original documentation more reliable than photocopies in audits?
Which of the following is NOT a typical use of external confirmations?
Which of the following is NOT a typical use of external confirmations?
What is the primary objective of audit sampling?
What is the primary objective of audit sampling?
Which of the following factors is critical for effective audit risk assessment?
Which of the following factors is critical for effective audit risk assessment?
How does the reliability of audit evidence change when it is indirectly obtained?
How does the reliability of audit evidence change when it is indirectly obtained?
Which type of audit evidence is generally considered the most reliable?
Which type of audit evidence is generally considered the most reliable?
What type of audit evidence would be considered least reliable?
What type of audit evidence would be considered least reliable?
Which of the following best describes substantive testing procedures?
Which of the following best describes substantive testing procedures?
Which method would provide the most reliable audit evidence regarding financial transactions?
Which method would provide the most reliable audit evidence regarding financial transactions?
What approach does an auditor use to obtain an understanding of the entity's internal controls?
What approach does an auditor use to obtain an understanding of the entity's internal controls?
Which type of document is considered more reliable in an audit?
Which type of document is considered more reliable in an audit?
Which substantive testing procedure involves checking the arithmetic accuracy of financial documents?
Which substantive testing procedure involves checking the arithmetic accuracy of financial documents?
Which factor is part of the engagement risk factors for auditors?
Which factor is part of the engagement risk factors for auditors?
What must an auditor do when engaging a client with high engagement risk?
What must an auditor do when engaging a client with high engagement risk?
Which component of the audit risk model must be set inversely to environment risk?
Which component of the audit risk model must be set inversely to environment risk?
What does inherent risk reflect in the context of audit risk?
What does inherent risk reflect in the context of audit risk?
How should auditors address high detection risks according to the audit risk model?
How should auditors address high detection risks according to the audit risk model?
Which of the following is a limitation of the audit risk model?
Which of the following is a limitation of the audit risk model?
What type of documentation is crucial for demonstrating that an audit was performed according to quality control standards?
What type of documentation is crucial for demonstrating that an audit was performed according to quality control standards?
In the context of audit risk, materiality must consider which factor?
In the context of audit risk, materiality must consider which factor?
Which of these is NOT a typical component of audit documentation?
Which of these is NOT a typical component of audit documentation?
What does control risk assess in an audit?
What does control risk assess in an audit?
Which factor should an auditor consider when determining the level of substantive testing required?
Which factor should an auditor consider when determining the level of substantive testing required?
Which is a primary concern of the audit risk model when evaluating management's motivations?
Which is a primary concern of the audit risk model when evaluating management's motivations?
Why is audit documentation considered a continuous process?
Why is audit documentation considered a continuous process?
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Study Notes
Quality Control in Auditing
- Experienced auditors conduct quality control reviews and inspections in line with ISQC 1, governing audits and assurance engagements.
- External inspections must comply with applicable legal and regulatory requirements.
Nature of Audit Documentation
- Audit documentation can be recorded on paper, electronically, or through other media.
- Common forms include audit programs, analyses, memoranda, summaries, confirmation letters, checklists, and significant correspondence.
- May contain abstracts or copies of entity records, specific contracts, or agreements.
- Documentation requires a structured format with proper referencing, emphasizing that it is a continuous process.
Audit Risk Model Overview
- Audit risk is defined as the risk of issuing an unqualified opinion on materially misstated financial statements.
- Auditors initially assess engagement risk to determine a suitable level of audit risk, which is inversely related to engagement risk:
- Higher engagement risk necessitates a lower audit risk and more rigorous audit procedures.
- Lower engagement risk allows a higher level of audit risk.
Audit Risk and Materiality
- Audit and engagement risks relate to factors that may challenge an auditor's conclusions.
- Materiality varies based on the financial health of the entity; material transactions for struggling companies may not be for financially healthy ones.
- Auditors must understand societal expectations, identify high-risk areas, and develop methodologies to allocate materiality assessments.
Components of the Audit Risk Model
- Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)
- Inherent Risk refers to the likelihood of transactions being recorded in error, with higher risks associated with complex and estimation-based transactions.
- Control Risk indicates the efficacy of a client's controls in deterring or identifying misstatements.
Detection Risk in Auditing
- Detection risk is the risk that substantive audit procedures will not reveal material misstatements.
- This risk is within the auditor's control and is critical for audit planning, influencing the extent of substantive work.
Limitations of the Audit Risk Model
- Assessing inherent risk is challenging and can skew overall audit risk evaluations.
- Audit technology lacks precision, rendering strict, independent assessments of each risk component difficult.
- Many auditors use the model functionally, rather than strictly mathematically.
Reliability of Audit Evidence
- Direct audit evidence obtained by the auditor (e.g., observing controls) is more reliable than indirect evidence (e.g., inquiry).
- Documentary evidence is deemed more reliable, and original documents hold greater credibility over copies.
Types of Substantive Testing Procedures
- Procedures include inspection of records, tangible assets, observation, inquiries, confirmation, recalculation, re-performance, and analytical procedures analyzing significant ratios.
Risk Assessment Procedures
- Auditors perform risk assessments through inquiries of management and others to understand operational contexts and internal controls.
- External confirmation techniques can include positive (mandatory reply) and negative confirmations (reply only if disagreement).
Uses of External Confirmations
- Commonly utilized to verify bank balances, accounts receivable, stock held by third parties, title deeds, investments, loans, and accounts payable balances.
Audit Sampling
- Involves applying audit procedures to a sample of items rather than the entire population, ensuring each unit has a selection chance.
- Aims to evaluate characteristics of selected items to inform conclusions about the larger population.
- Requires consideration of specific objectives and appropriate combinations of audit procedures to meet those objectives.
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