Chapter 3: Section 1

Question 1

What must auditors have in order to reach a valid opinion?

Answer 1

Enough of the right kind of evidence

Question 2

Auditors perform tests to obtain evidence throughout the audit. What does such testing usually reuqire?

Answer 2

Number of verification techniques

Question 3

What is the acronym for verification techniques?

Answer 3

AEEIOUR

Question 4

What is the A for in AEEIOUR?

Answer 4

Analytical procedures

Question 5

What is the first E for in AEEIOUR?

Answer 5

Enquiry

Question 6

What does the 2nd E stand for in AEEIOUR?

Answer 6

External confirmation

Question 7

What does enquiry mean in AEEIOUR?

Answer 7

Asking questions and confirming facts.

Question 8

What does External confirmation mean in enquiry?

Answer 8

Confirmation with third parties for values or conditions

Question 9

What does the I stand for in AEEIOUR?

Answer 9

Inspection

Question 10

What does the inspection mean in AEEIOUR?

Answer 10

Inspection of records or other documents - sometimes called ‘vouching’ - as well as physical inspection of tangible assets

Question 11

What does the O stand for in AEEIOUR?

Answer 11

Observation

Question 12

What does the observation mean in AEEIOUR?

Answer 12

Observation of staff performing various activities

Question 13

What does the U stand for in AEEIOUR?

Answer 13

recalcUlation

Question 14

What does recalcUlation mean as a verification technique?

Answer 14

Recalculation of items and amounts

Question 15

What does the R stand for in AEEIOUR?

Answer 15

Re-performance

Question 16

What does re-performance mean as a verification technique?

Answer 16

Re-performance of activities and procedures (ISA 500)

Question 17

What are analytical procedures?

Answer 17

Evaluations of financial info made by a study of financial and non-financial data

Question 18

What 3 activities do analytical procedures comprise of?

Answer 18

1. Comparison of actual with budget
2. Calculation of ratios and explanations to support them
3. Credibility checks and proof in total

Question 19

What can comparison of actual with budget be done for?

Answer 19

Across different business unit or even with similar firms and industry averages
Should be performed across a variety of time frames

Question 20

What could comparison of actual with budget work for?

Answer 20

Absolute amounts,
Percentages like profit margin or
Even indicators such as receivables days

Question 21

What can be done in relation to calculation of ratios?

Answer 21

Calculating the ratios e.g., net and gross margins and explanations to support them e.g., 10% in increase in expenditure coming from 10% more sales activity

Question 22

What is an example of credibility checks?

Answer 22

Looking at a year’s revenue for a manufacturer and dividing it by the number of workings days to get a ‘feel’ for implied level of daily activity

Question 23

What is an example of proof in total?

Answer 23

Such as relationship of payroll costs to the number of employees and their likely average pay

Question 24

A variety of methods can be used to perform analytical procedures ranging from what?

Answer 24

Simple comparisons to complex analysis using statistics, on a company level, branch level or individual account level

Question 25

What is the choice of procedures when it comes to analytical procedures a matter for?

Answer 25

Is a matter for the auditors' professional judgement

Question 26

Auditors are required to use analytical procedures as part of what process and as part of what stage of the audit?

Answer 26

As part of the risk assessment process at the planning stage of the the audit

Question 27

What must auditors use analytical procedures as part of the risk assessment process at the planning stage of the audit to do?

Answer 27

1. Identify risk areas 2. Determine the nature, timing and extent of procedures

Question 28

What may the auditor use analytical procedures as?

Answer 28

Substantive procedures

Question 29

What are some of the number of factors auditors should consider when deciding whether to use analytical procedures as substantive procedures?

Answer 29

1. Whether the procedures are suitable to obtain evidence about the relevant assertions (given the assessed risk for those assertions) 2. Whether the data the auditor is using is reliable, available and relevant.

Question 30

What must the auditor do when analytical procedures identify significant fluctuations or unexpected relationships?

Answer 30

Auditor must investigate by obtaining adequate explanation from management and appropriate corraborative evidence

Question 31

What must investigations due to analytical procedures identifying significant fluctuations or unexpected relationships start with and then do?

Answer 31

Enquiries to management and then confirmation of management's responses

Question 32

When can all these verification techniques be used?

Answer 32

In a variety of different circumstances

Question 33

What are tests of control?

Answer 33

Tests to obtain evidence about the effective operation of the accounting and internal control systems

Question 34

Which verification techniques can be used to test controls?

Answer 34

In general, with exception of analytical procedures and external confirmations, verification techniques EIOUR can all be used to test controls

Question 35

What is substantive testing?

Answer 35

Audit procedures designed to detect material misstatements in the financial statements

Question 36

What does substantive testing comprise of?

Answer 36

Tests of detail of classes of transaction, account balances and disclosures and analytical procedures

Question 37

When performing tests of controls, what must we do if we trust the controls in place within the system and what will the results of this resting provide?

Answer 37

We can test them Results will provide some assurance that output of such systems can be used to produce the entity's financial statements

Question 38

Testing controls alone, however, is not enough to form an opinion. True or false?

Answer 38

True

Question 39

Why is testing controls alone not enough to form an opinion?

Answer 39

Due to various limitations of internal controls

Question 40

Since testing controls alone is not enough to form an opinion, what do we need to make sure?

Answer 40

The actual balances and amounts themselves, which have been included in the financial statements, can be trusted (rather than processes used to generate them)

Question 41

What is testing the actual balances and amounts to see if they can be trusted rather than processes used to generate them referred to as?

Answer 41

Substantive testing

Question 42

How often will substantive testing be carried out during an audit?

Answer 42

Will always be carried out to come extent during an audit

Question 43

Even if we trusted the controls in place, what would we still do?

Answer 43

Use an amount of substantive testing to supplement this with the extent dependent on the outcome of tests of control

Question 44

When would the level of substantive testing be increased?

Answer 44

If we could place little or no assurance on controls (or, in case of smaller entity, controls were not cost-effective)

Question 45

What is the acronym to remember for substantive testing?

Answer 45

AEIOU

Question 46

(To note for exam not content) What is important to note about test of controls and substantive testing in the exam?

Answer 46

Already seen the sort of procedures auditors make use of when performing both test of control and substantive test but are sometimes difficult to tell apart and could form part of a question in the assessment

Question 47

What ISA shows another way the auditor has of performing substantive tests?

Answer 47

ISA 520 Analytical Procedures

Question 48

What does ISA 520 Analytical Procedures say about the auditor having another way of performing substantive tests?

Answer 48

The objectives of the auditor are to obtain relevant and reliable audit evidence when using substantive analytical procedures

Question 49

(To note for exam - not content)

Answer 49

In exam likely to be asked to determine the most appropriate mixture of tests of control and substantive testing and justify your selections e.g., just substantive procedures or both