When is audit evidence gathered during an audit?
The auditor gathers audit evidence when performing:
- Risk assessment procedures
- Tests of controls
- Substantive procedures
- Other audit procedures
What factors should be considered when evaluating the reliability of audit evidence?
The following factors should be considered when evaluating the reliabilty of audit evidence:
- The auditor’s direct personal knowledge (e.g., from observation, examination, inspection, or recalculation) provides more persuasive evidence than knowledge obtained indirectly
- Evidence obtained from independent external sources is more reliable than internally generated evidence
- Evidence sent directly to the auditor is more valid than evidence received and held by client
- Internal evidience generated under strong, effective internal controls is more reliable than that generated under weak controls
- Evidence in documentary form is more reliable than oral evidence
- Consistency among evidence provides a greater degree of assurance
- The accuracy and completeness of information produced by the client should be evaluated
How is the relevance of evidence determined?
To be relevant, evidence must relate to the F/S assertions under consideration.
PCAOB standards state that the relevance of audit evidence depends on the design and timing of the audit procedure.
What influences the auditor’s decision regarding the sufficiency of evidential matter?
- The risk of material misstatement
- The quality of audit evidence
List some of the standard auditing procedures used in mosts audits
FIVE CARROT CARS
F - FOOTING, crossfooting, and recalculation
I - INQUIRY
V - VOUCHING
E - EXAMINATION/inspection
C - CONFIRMATION
A - ANALYTICAL procedures
R - REPERFORMANCE
R - RECONCILIATION
O - OBSERVATION
T - TRACING
C - CUTOFF review
A - AUDTING related accounts simultaneously
S - SUBSEQUENT events review
What should the direction of testing be if the auditor is concerned about the existence of occurence assertion?
Vouching backward from the accounting records (F/S, journal entries, etc.) to source documents provides evidience of existence or occurence.
What should the direction of testing be if the auditor is concerned about the completeness assertion?
Tracing forward from source documents to the accounting records (i.e., F/S, journal entries, etc.) provides evidence of completeness
Which departments are responsible for preparing the sales order, approving the sales order, preparing the bill of lading, and preparing the invoice?
Sales department: prepares the sales order
Credit department: Approves the sales order
Shipping department: Prepares the bill of lading
Billing department: Prepares the invoice
Which department should approve write-offs of uncollectible accounts?
The treasure’s department should approve write-offs of uncollectible accounts.
A listing of cash receipts should be sent to which three departments?
The cashier, accounts receivable (billing), and general accounting departments should each receive a copy of the cash receipts listing.
What are some common audit procedures related to the revenue cycle?
Audit procedures related to the revenue cycle might include:
- Trace a sample of shipping documents to sales invoices and the sales journal (completeness)
- Vouch a sample of sales transactions from the sales journal to the shipping documents (existence)
- Examine sales transactions from shortly before and after year-end for recording in the proper period (cutoff)
- Confirmation of a sample of accounts receivable (existence)
- Testing of the allowance for uncollectible accounts (valuation)
Compare and contract positive, negative, and blank confirmations
Positive confirmations:
- Customer is requested to return confirmation to the auditor
- Should be used when: accounts are large, errors are expected, or items are disputed
Negative confirmations:
- Customer is requested to reply only if amount stated by auditor is incorrect. Should be used when; combined assessed level on inherent and control risk is low, a large number of small balances are being confirmed, and recipients are not expected to disregard the confirmations
Blank confirmation
- A positive confirmation that does not include the balance, instead requesting the recipient to provide this information. Blank confirmations provide greater assurance but may result in lower response rates.
In a purchase transaction, which departments are responsible for preparing the purchase order, preparing the receiving report, recording the payable, approving the invoice, signing the check, and mailing the check?
Purchasing department: Prepares the purchase order
Receiving department: Prepares the receiving report
Accounts payable department: Records the payable and approves the invoice
Treasure’s department: Signs and mails the check
What documents should be compared before an invoice is approved for payment, and why?
The purchase order, receiving report, and vendor invoice should be compared before an invoice is approved for payment. This is to ensure that the company does not pay for goods that were not ordered or that were ordered but not received.
What are some common audit procedures related to the expenditure cycle?
Audit procedures related to the expenditure cycle might include:
- Performing a search for unrecorded liabilities (completeness)
- Accounts payable confirmations (existence)
- Examination of purchases before and after year-end for recording in the proper period (cutoff)
When might accounts payable confirmations be used, and to whom would they be sent?
Accounts payable confirmations might be used when:
- Internal control is weak
- There are disputed amounts.
- Monthly vendor statements are not available
They would be sent to vendors with small or zero balances, because errors often involve unrecorded liabilities
Note: Confirmation of recorded accounts payable will not provide evidence regarding unrecorded liabilties, but confirmations sent to vendors with zero (or small) balances might provide such evidence
Deifine lapping
Delaying the recording of cash receipts to conceal the theft of cash.
Define kiting
Overstatement of bank balances by transferring cash between banks and reporting the amount in both bank balances simultaneously.
What are the primary audit procedures used to test the existence, completeness, and valuation of cash?
Primary audit procedures include:
- Standard bank confirmations sent to all banks with which the client has done busines during the year
- Testing of the year-end bank reconciliation
What are some audit procedures related to the inventory cycle?
Audit procedures related to inventory might include:
- Observe the physical inventory count
- Performing test counts and tracing into the inventory report
- Performing cutoff testing of purchases and sales
- Verifying appropriate presentation and disclosure
- Inquiring about obsolete or damaged goods
What are some common audit procedures related to the investment cycle?
Audit procedures related to long-term investments might include:
- Confirmation of securities held and unsettled transcations (existence).
- Physical inspection and count of securities (existence)
- Evaluation of presentation and disclosure in the F/S
- Recomputation of gains, losses, amortization, dividend income, and interest income (valuation)
- Review of the minutes of board of directors’ meeting
- Inquiry of management (supplemented by a representation letter) regarding intent and ability to hold versus sell securities (classification)
What are some audit procedures related to the property, plant, and equipment cycle?
Audit procedures related to property, pland and equipment might include:
- Vouching additions and reviewing requirements (existence)
- Reviewing repair and maintencance expenses (completeness and classification)
- Perfoming cutoff tests (cutoff)
- Recalculating depreciation and gain or loss on disposals (valuation)
What functions should be segregated related to payroll and personnel?
ARC
The following duties should be segregated”
A - AUTHORIZATION (human resources, supervisory staff, timekeeping, and cost accounting)
R - RECORDKEEPING (payroll department)
C - CUSTODAY of assets (treasurer)
List some common audit procedures for payroll
Audit procedures related to payroll may include:
- Evaluate segregation of duties
- Observe payroll distribution, use of time cards, etc.
- Test direct deposit transfers and underlying employee authorizations
- Vouch time on payroll summaries to time cards and approved time reports.
- Compare total recorded payroll with total payroll checks issued
- Tests extensions and footings of payroll
- Verify pay rates and payroll deductions with employee records from personnel
- Recalculate gross and net pay on a test basis
- Recalculate any year-end accruals
- Compare payroll costs with standards or budgets
