Contrast audit evidence with evidence used by other professions
- use of evidence: effects of medicine, guilt or innocence of accused, fairly presented financial statements
- nature of evidence used: results of experiments, evidence and testimony by witnesses, evidence gathered by auditor third party and client
- party evaluating evidence: scientist, jury and judge, auditor
- certainty of conclusions: vary from uncertain to near certain, requires guilt beyond reasonable doubt, high level of assurance
- nature of conclusions: recommend or not recommend medicine, innocence or guilt of party, issue one of several alternate audit reports
- typical consequence of incorrect conclusions from evidence: distribution of ineffective or harmful medicine, guilty party is not penalized or innocent party is found guilty, statement users make incorrect decisions and auditor may be sued
Identify and explain four audit evidence decisions that are needed to create an audit program
- audit procedure: detailed instruction that explains the evidence to be obtained during the audit
- sample size: size of data that is being analyzed for procedure, varies from one to all
- items to select: must decide which items in the population to test
- timing: determines when the audit needs to be completed based on the time in the accounting period
- audit program: Audit procedures; sample size; items to select; timing
Describe characteristics that determine persuasiveness of evidence
- persuasiveness of evidence: the degree to which the auditor is convinced that the evidence supports the audit opinion, the two determinants of persuasiveness are the appropriateness and sufficiency of evidence
- appropriateness of evidence: measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives for transactions
Identify and apply the 8 types of evidence used in auditing
- physical examination: Inspection or count by auditor of a tangible asset
- confirmation: the receipt of a direct written response from a third party verifying the information
- inspection: auditors examination of clients documents and records to substantiate teh information that is or should be included in financial statements
- analytical procedures: evaluations of financial statements through analysis of plausible relationships among both financial and non-financial data
- inquiry: obtaining written or oral information from the client in response to questions from the auditor
- recalculation: Involves rechecking a sample of calculations make by the client
- reperformance: auditors independent tests of client accounting procedures or controls that were originally done as part of teh entitiy accounting and internal control system
- observation: consists of looking at a process or procedure being done or performed by others
Explain and apply analytical procedures and their purposes
- analytical procedures: required during in the planning phase, done during the testing phase of the audit as substantial test in support of account balances, also required during the completion phase of the audit; industry data, similar prior period data, client determined expected results, auditor determined expected results
Explain how auditors incorporate data analytics and other advanced technologies in an audit
- audit data analytics: allows auditors to obtain and evaluate audit evidence
- artificial intelligence: computers performing routine repetitive processes and learn patterns
- robotics: manufacturing uses robotics to streamline many processes
Explain and compute common financial ratios
- cash ratio: cash + marketable securities / current liabilities
- quick ratio: cash + marketable securities + net accounts receiveable / current liabilities
- current ratio: current assets/ current liabilities
- act rec. turnover: net sales / average gross receivables
- days to collect receive. : 365 / act rec turn
- inventory turnover: cogs / avg inventory
- days to sell inventory: 365 / inventory turnover
- debt to equity: total liabilities / total equity
- times interest earned: operating income / interest expense
- eps: net income / avg. com. shares outstanding
- gross profit percent: net sales - cogs / net sales
- profit margin: operating income / net sales
- return on assets: Income before taxes / avg total assets
- return on common equity: Income before tax - pref dividends / avg. stockholders
Describe the purposes of audit documentation
- purpose of audit documentation: aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with standards
Prepare organized audit documentation
- organized audit documentation: client name, period covered, description, preparer, date, index code, cross referenced, state the work performed, tick marks, fufill objectives, plainly stated conclusion