audit exam 2

evidence, analytics, sampling

what is audit evidence?

any info gathered by an auditor to test whether an assertion is true or false

what are the 8 assertions?

1. accuracy

2. classification

3. completeness

4. cutoff

5. existence/occurrence

6. presentation

7. rights/obligations

8. valuation/allocation

what are the 8 types of evidence?

1. inspection of tangible assets

2. inspections of docs/records

3. observation

4. inquiry

5. confirmation

6. recalculation

7. reperformance

8. analytical evidence

what documents are more reliable than internal documents?

external documents

are original documents or copies more reliable?

original

observation is different from inspection…how?

observation is observing processes or behaviors

what type of evidence is informal?

inquiry. usually oral

what type of evidence is formal?

confirmation. usually written with third parties.

what is the difference between positive and negative confirmations?

positive confirmations: returned by third parties regardless of whether the amount being confirmed is correct
negative confirmations: returned by third party if the amount being confirmed is NOT correct

why does reperformance differ from recalculation?

it refers to replicating something the client did, not necessarily calculations.

an auditor must gather what type of evidence?

sufficient appropriate evidence

what does sufficient refer to?

the quantity of evidence (number of tests, sample size, etc)

what does appropriate refer to?

the quality of the evidence (relevance, reliability, etc)

is evidence conclusive?

no. it rarely is. it is more persuasive.

how do we gather audit evidence?

through audit tests (substantive and test of controls)

what are test of controls?

(i.e. circumstantial evidence)

indirect test of assertions

test passes → misstatements less likely

test fails → misstatement more likely

what are substantive tests?

(i.e. direct evidence)

direct test of assertions

test passes → no misstatement

test fails → misstatement

what are some sources of evidence?

1. management

2. accounting personnel

3. other client employees

4. the accounting system/files

5. third parties

6. the auditor (self generated)

what is analytical evidence?

any type of analysis of anything that allows me to identify patterns and/or anomalies that can be investigated

what type of analytical procedures are there?

preliminary analytics, substantive analytics, final analytics

what are preliminary analytics?

performed during audit planning

help develop understanding of client and identify risk factors

REQUIRED UNDER GAAP

what are final analytics?

performed at the end of the audit to make sure all the balances appear reasonable given all you have learned during the audit

REQUIRED UNDER GAAP

what are substantive analytics?

performed during the audit to test assertions for virtually any account. primary assertions tested include existence/completeness

what are the steps under substantive analytics?

1. develop expectations for the account balance in question

2. identification of material discrepancy or anomaly

3. investigation of all material discrepancies or anomalies

4. final evaluation of account balances and assertions

in substantive analytics, what are the type of expectations you can develop?

• trend: expected balance for the current period is the prior-period balance

• ratio: the expected ratio for the current period is the prior-period

• reasonableness: the expected balance for the current period is computed using a mathematical model (includes only current period info and some sort of “average”)

• regression: expected balance for the current period is estimated using an equation generated from statistical analysis that uses historical or current period data points to determine the exact relationships b/w multiple factors

what is precision in relation to expectations?

it’s the quality of the expectation. the closeness of the expectation to the “correct” amount. so…

• nature of the account

• strength of the relationship

• appropriateness of the expectation method

• level of disaggregation

• quality of the data

higher precision → more assurance

“correct” amount? what the balance SHOULD be, not necessarily what is in the account at the time

during the identification stage of substantive analytics, what is involved?

you determine a tolerability threshold (dollar amount or percentage, use professional judgement) and compare the expectation to the actual.

during the investigation stage of substantive analytics, what is involved?

discuss the discrepancy with client personnel (inquiry)
if explanation is reasonable, gather additional evidence to corroborate the client’s explanation for the discrepancy.

during the evaluation stage of substantive analytics, what is involved?

no material discrepancy → balance appears reasonable

material discrepancy and client explanation corroborated → balance appears reasonable
material discrepancy and client explanation cannot be corroborated → misstatement likely

analytical tests are used to produce what?

analytical evidence

analytical tests used to test assertions are considered ____ test

substantive

analytical tests are typically performed on every account in addition to??

any test of controls, tests of transactions, and/or test of details

what is test of transactions?

focus on individual transactions recorded throughout the period to confirm accuracy, validity, completeness, classification, and timing

what is test of details of balances?

focus on account balances to verify accuracy and validity of ending account balances in the financial statements.

what are the steps to sampling?

1. how many?

2. which items?

3. interpret sample results

what are characteristics of statistical sampling?

use of computer; must use random sampling; sampling risk is known b/c of computer

what are characteristics of nonstatistical sampling?

based on statistical techniques; no computer necessary; can use any sampling method; dont know exact sampling risk but can reasonably predict it

what are the three factors that influence sample size? (how many? step)

1. desire confidence level (DCL)

2. tolerable misstatement (TM)

3. expected misstatement (EM)

describe what desired confidence level does to determining sample size

can be three levels (high, moderate, low)

• high = 95% or 3

• moderate = 90% or 2

• low = 77% or 1

has positive association on sampling size

describe what tolerable deviation rate does to determining sample size

has a negative association on sampling size

describe what expected deviation rate does to determining sample size

has positive association on sampling size

in nonstatistical sampling, how do you determine desired confidence level?

n = (population $ / TM - EM) * DSL

in nonstatistical sampling, how do you determine which items to use?

doesn’t matter. doesn’t have to be random

in nonstatistical sampling, what is the sampling risk?

always 2 in this class. doesnt relate to DCL

when interpreting sample results, what is involved?

1. figure out sample results

2. project to the population

3. adjust for sampling risk (this is where we get our worst case scenario number)

then compare worst case scenario to TM

what are the two types of sampling used in auditing today?

1. test of controls

2. substantive tests

if you are testing controls, what are you trying to answer?

is a control activity reliable or not? a yes/no question.

what is attribute sampling?

used for yes/no questions in test of controls. select a sample of transactions and then examine each one for evidence of the control activity in question being applied. yes answers high? reliable control. no answers high? not reliable

a statistical method. some form of random selection required