Audit Evidence, Management Assertions, and Audit Documentation

Vocabulary practice flashcards covering audit evidence, management assertions, audit procedures, analytical procedures, confirmations, and audit documentation standards.

Audit Evidence

All the information used by an auditor to arrive at conclusions on which the audit opinion is based, including accounting records, outside sources, and procedures like inquiry, observation, and inspection.

Sufficiency

The measure of the quantity or amount of audit evidence collected to reduce audit risk to an acceptably low level, influenced by the risk of material misstatement and the quality of evidence.

Appropriateness

The measure of the quality of audit evidence, encompassing both its relevance to the assertion tested and its reliability.

AU-C 500

The auditing standard that requires the auditor to design and perform audit procedures to obtain sufficient appropriate audit evidence to support audit conclusions and the audit opinion.

Management Assertions

Implicit or explicit claims made by management about the recognition, measurement, presentation, and disclosure of items in the financial statements.

Occurrence Assertion

A transaction-level assertion that recorded transactions and events actually happened and pertain to the entity during the period.

Completeness Assertion

An assertion that all transactions, assets, liabilities, and equity interests that should have been recorded have actually been recorded.

Accuracy Assertion

A transaction-level assertion that amounts and other data relating to recorded transactions have been recorded appropriately without mathematical errors.

Cutoff Assertion

A transaction-level assertion that transactions and events have been recorded in the correct accounting period.

Classification Assertion

A transaction-level assertion that transactions and events have been recorded in the proper accounts.

Existence Assertion

An account balance assertion that recorded assets, liabilities, and equity interests actually exist at the reporting date.

Rights and Obligations Assertion

An account balance assertion that the entity holds or controls the rights to its reported assets and that liabilities are legitimate obligations of the entity.

Valuation and Allocation Assertion

An account balance assertion that assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and resulting adjustments are properly recorded.

Presentation and Disclosure Assertion

An assertion that financial statement components are properly classified, described, and clearly disclosed.

Overstatement Risk

The risk that an account balance or transaction is recorded at an amount greater than what should have been reported, such as fictitious revenue or overvalued assets.

Understatement Risk

The risk that an account balance or transaction is recorded at an amount lower than what should have been reported or is omitted entirely, such as unrecorded liabilities.

Evidence Reliability Hierarchy

The ranking of audit evidence reliability from strongest to weakest: reperformance, confirmation, inspection of external documents, observation, and inquiry.

Inspection

An audit procedure involving the examination of internal or external records, documents, or tangible physical assets.

Observation

An audit procedure that consists of watching someone else perform a process or procedure, providing evidence limited only to the specific point in time observed.

Inquiry

An audit procedure involving seeking information from knowledgeable persons inside or outside the entity; it is never sufficient alone and must be corroborated.

Confirmation

Audit evidence obtained as a direct written response to the auditor from an independent third party.

Recalculation

An audit procedure that consists of checking the mathematical accuracy of documents or accounting records.

Reperformance

An audit procedure in which the auditor independently executes procedures or internal controls that were originally performed by the client.

Vouching

An audit testing procedure that begins with an entry in the accounting records and moves backward to source documents to test existence or occurrence.

Tracing

An audit testing procedure that begins with an original source document and follows it forward into the accounting records to test completeness.

AU-C 505

The auditing standard that addresses the auditor's use of external confirmation procedures to obtain audit evidence.

Positive Confirmation Request

A request that the confirming third party respond directly to the auditor indicating whether they agree or disagree with the stated balance or information.

Negative Confirmation Request

A request that the confirming party respond directly to the auditor only if they disagree with the information provided in the request.

Alternative Procedures

Audit procedures performed to obtain evidence when a recipient fails to respond to a positive confirmation request, such as examining subsequent cash receipts and shipping records.

Analytical Procedures

Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data.

Trend Analysis

An analytical procedure that compares financial information over multiple accounting periods to identify patterns or unusual fluctuations.

Ratio Analysis

An analytical procedure that calculates and evaluates relationships between financial statement line items and compares them to prior periods, budgets, or industry benchmarks.

Reasonableness Test

An analytical procedure in which the auditor independently develops an estimate of an account balance or expense and compares it to the client's recorded amount.

Precision

The measure of the potential effectiveness of an analytical procedure, representing how closely the auditor's expectation approximates the correct amount.

Disaggregation

The process of breaking down financial data into smaller, more detailed components (e.g., by month or asset class) to improve the precision of an analytical procedure.

Tolerable Difference

The maximum monetary difference between an auditor's independently developed expectation and the recorded balance that can be accepted without further investigation.

AU-C 230

The auditing standard governing audit documentation, specifying requirements to prepare working papers that provide a sufficient record of the basis for the audit report.

Audit Documentation

The written record of audit procedures performed, relevant audit evidence obtained, and conclusions reached by the auditor; also known as working papers.

Sarbanes-Oxley Retention Requirement

The statutory requirement mandating that audit documentation for public companies must be retained for at least $7$ years from the engagement completion date.

AICPA Document Retention Requirement

The professional standard requirement mandating that audit documentation for private companies be retained for a minimum of $5$ years.

Permanent Audit File

Audit documentation containing historical, legal, and operational data that continues to be relevant to recurring engagements over multiple years.

Current Audit File

Audit working papers and schedules that substantiate the testing, evidence, and conclusions specifically applicable to the current period's audit.

Working Paper Heading

The standardized header required on every audit schedule, consisting of client name, title/purpose, period covered/date, index number, preparer initials/date, and reviewer initials/date.

Tick Marks

Notations or symbols placed next to numbers or descriptions on a working paper to indicate that a specific audit step was performed, which must be defined in a legend.

Cross-Referencing

The indexing technique of linking working papers to related supporting schedules and audit program steps to provide an easily followable audit trail.