Audit evidence =
Support for audit opinion
Hierarchy of audit evidence
"AEIO U-know it!" Auditor's direct personal knowledge and observation External evidence Internal evidence Oral evidence U-know it!
Vouching
Test for: Existence/occurrence
Looking for: Support
Risk: overstatement of things such as revenue and assets
“From land of accounting records to land of reality”
Tracing
Test for: Completeness
Looking for: Coverage
Risk: Understatement of things such as liabilities and expenses
“From land of reality to land of accounting records”
Positive vs. Negative confirm
Positive = ask party to agree or disagree and send response Negative = ask party only to respond if they disagree
Standard auditing procedures
"FIVE CARROT CARS" Footing, cross-footing, and recalculation Inquiry Vouching Examination/ inspection Confirmation Analytical procedures Re-performance Reconciliation Observation Tracing Cutoff review Auditing related accounts simultaneously Representation letter Subsequent events review
Auditing procedures to test Completeness
- Tracing
- Analytical review
- Observation
Auditing procedures to test Valuation, Allocation, and Accuracy
- Inspection of documentation
- Footing and cross-footing
- Recalculation
- Reconciliation
Auditing procedures to test Cutoff
- Cutoff procedures
Auditing procedures to test Existence and Occurence
- Confirmation
- Observation, inspection, and examination
- Vouching
Auditing procedures to test Rights and Obligations
- Inspection of documentation
Auditing procedures to test Understandability and Classification
- Inspection of documentation
- Review of disclosures
- Inquiry of management
What’s the first thing the person opening the mail should do when they receive a check?
Make copies of it! With copies sent to: 1. Cashier 2. AR dept. 3. Accounting dept.
Positive confirmations should be used when…
- large $ amounts
- expect errors/ disputes
- weak internal controls
Negative confirmations can be used if…
- low risk
- small balances
- expect the customers to pay attention
What is lapping? What is the best way to prevent it? To detect it?
Lapping is using today’s cash receipts to cover yesterday’s theft.
Prevent: Lock box system (don’t give them assess in the first place)
Detect: compare dollar amounts and dates on bank deposit slips with customer remittance credits recorded in AR ledger
What is kiting? How do you detect it?
Kiting is when you have cash recorded at two places at once. Write a check from one bank account (don’t record disbursement), but record the deposit.
Detect: bank transfer schedule- receiving bank receives before sending bank disburses
What are some clues that an asset may not exist?
- Company does not/ cannot insure the asset
- The company doesn’t pay taxes on it
- If you tour the plant/ inquire and it’s not there
How to determine the existence of Related Parties
- Evaluate controls for authorization/approval of related party transactions
- Ask for names of related parties
- Review entity’s SEC filings
- Review material transactions
- Review PY audit documentation
Clues that indicate a possible related party transaction
- Compensating balance agreements
- Loan guarantees
- Unusual, nonrecurring transactions near year-end
- Transactions based on terms that differ significantly from market terms
- Non-monetary exchanges
Ways to identify contingent liabilities
- review the minutes
- invoices from lawyers
- correspondence with taxing authorities
- bank confirms
- long-term leases
- client rep letter
- inquiry of lawyer
What is “clearly trivial”?
It does NOT equal not material
It is: inconsequential (individually and aggregated) when judged by any criteria of size, nature, or circumstance
Trick: if you’re not sure, then it’s not trivial!
When would a significant engagement deficiency exist?
- failed to obtain sufficient appropriate evidence
- reached an inappropriate overall conclusion
- report is not appropriate for the circumstances
- firm is not independent of the client
