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SU 10
Evidence- Objectives and Nature
94
Accounting
Undergraduate 4
06/01/2015

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Term
primary purpose of collection of evidence
Definition
to test management's assertions related to the balance and disclosures reported on the F/S.
Term
sufficiency and appropriateness of evidence
Definition
judged by the auditor based on the acceptable level of detection risk. This judgment is based on the level to which the auditor wishes to restrict the RMM and the assessments of inherent and control risks.
Term
third standard of field work
Definition
The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the F/S under audit.
Term
audit evidence
Definition
all information used by the auditor in arriving at the conclusion on which the audit opinion is based
Term
types of audit evidence
Definition
accounting records
initial entries (manual or electronic)
supporting records: checks/EFTs, invoices, contracts, G/L and S/Ls, journal entries, worksheets, spreadsheets, and reconciliations., meeting minutes, confirmations, industry analyst reports, data about competitors, controls manuals, and information from persuasive audit evidence.
Term
Are difficulty and cost of obtaining evidence valid reasons for omitting tests?
Definition
No.
Term
nature of assertions
Definition
F/S implicitly or explicitly include management's assertions about the fair presentation of information- recognition, measurement, presentation, and disclosure. Most auditor work consists of obtaining and evaluating evidence about management's assertions.
Term
sufficiency
Definition
quantity of evidence.
Greater RMM = greater required evidence.
Higher evidence quality = less required.
Term
appropriateness
Definition
quality of evidence
Term
quality
Definition
relevance and reliability
Term
Evidence is more reliable when...
Definition
Obtained from knowledgeable sources outside the entity
Generated under effective IC
Obtained directly by the auditor
Exists in documentary form.
Consists of original documents
Term
risk assessment procedures
Definition
used to obtain an understanding of the entity and its environment, including IC. Obtaining the understanding permits the auditor to assess the RMMs at the F/S and relevant assertion level.
Term
tests of controls
Definition
test operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level.
Term
When are tests of controls required?
Definition
When the auditor's risk assessment is based on an expectation of the operating effectiveness of controls.
When substantive procedures alone do not provide sufficient appropriate evidence.
Term
substantive procedures
Definition
are used to detect material misstatements at the relevant assertion levels. They include tests of detail of transaction classes, account balances, and disclosures, and substantive analytical procedures.
Should be performed for all relevant assertions about each material transaction class, account balance, and disclosure.
Term
inspection of records or documents
Definition
examination of records or documents
Term
inspection of tangible assets
Definition
physical examination of assets to test existence; accompanies observation of inventory counts
Term
observation
Definition
looking at a process or procedures being performed
Term
inquiry
Definition
seeking information from knowledgeable persons
Term
confirmation
Definition
obtaining a representation about information or an existing condition directly from a 3rd party
Term
recalculation
Definition
checking mathematical accuracy
Term
reperformance
Definition
independent execution of procedures or controls
Term
analytical procedures
Definition
evaluations of financial and nonfinancial data made by a study of plausible relationships among both types of data
Term
electronic environment
Definition
Some information may exist only in electronic form or only at a certain moment of time in e-commerce and with image processing systems, neither of which leave source documents
Term
auditor's responses to electronic env.
Definition
Performing audit procedures using computer-assisted audit techniques (CAATs)
Requesting the entity to retain certain information
Performing audit procedures at the moment when information exists
Term
completeness tests
Definition
from shipping documents to sales account (where they should be recorded
Term
existence/occurrence tests
Definition
opposite direction (from journals to physical items)
Term
confirmation process
Definition
Selecting items for confirmations
Designing the request
Communicating the request to the appropriate 3rd party
Obtaining the response
Evaluating the information, or lack of it, provided by 3rd party about the audit objectives, including its reliability
Term
How does the auditor use the audit risk assessment?
Definition
To determine the appropriate audit procedures, including confirmation.
Term
greater assessed RMM
Definition
greater assurance needed from substantive procedures and the less likely confirmation is needed
Term
When is confirmation used?
Definition
If the entity has entered into an unusual confirmation and the assessed RMM is high, the auditor should consider confirming the terms of the transaction w/3rd parties in addition to examining documents.
Term
confirmation assessment
Definition
Auditor should assess whether the evidence provide by confirmations reduces audit risk to an acceptably low level. The materiality of the account balance and the RMM should be considered. If the evidence provided by confirmations alone is not sufficient, additional procedures should be performed.
Even properly designed confirmation requests do not address all assertions w/equal effectiveness.
When obtaining evidence for assertions not adequately addressed by confirmations, the auditor should consider other audit procedures to complement or replace confirmation procedures.
Term
What assertion do confirmations address?
Definition
Confirmation requests can be designed to provide evidence for the completeness assertion, but are not always. Their
effectiveness in this regard depends on whether the auditor selects items from an appropriate population.
Term
designing confirmation requests
Definition
The auditor should exercise an appropriate level of professional skepticism throughout the confirmation process.
Requests should be specific to particular audit objectives.
Assertions addressed and the factors likely to affect the reliability of the confirmations should be considered.
Term
factors affecting the design directly related to reliability of the evidence obtained
Definition
Form of the request
Prior experience on the audit or similar engagements
Nature of information being confirmed
Intended respondent
Term
positive confirmation
Definition
requests a reply regardless of whether the respondent agrees w/the information stated. It may ask the respondent to state whether s/he agrees w/information given or ask for other information, such as a blank form.

Provides evidence only when respondents respond.
Term
blank form
Definition
account balance; help verify the information provided.
Term
negative confirmation
Definition
requests recipient to respond only if s/he disagrees w/information stated.
Term
When is a negative confirmation used?
Definition
Used when assessed RMM is low, large number of small balances involved, and auditor has no reason to believe that the recipients are unlikely to consider them.

Returned negative confirmation requests provide evidence, while unreturned ones rarely provide significant evidence about assertions other than existence.
Term
consideration for designing audit requests
Definition
When designing requests, the auditor should consider the types of information respondents will most likely confirm. Nature of the information may directly affect the reliability of evidence obtained and the response rate.

The auditor also should consider
Requesting confirmation of the terms of unusual agreements or transactions as well as the amounts
Ascertaining whether oral modifications were made to agreements.
Term
direct the confirmation request to a knowledgeable 3rd party
Definition
Information about the respondent's competence, knowledge, motivation, ability, willingness to respond, objectively, or freedom from bias may affect the design of the request and the evaluation of the results, including the determination as to whether other procedures are necessary.
Term
performing confirmation procedures
Definition
auditor should control confirmation requests and responses during the performance of procedures
Term
control
Definition
direct communication between the intended recipient and the auditor to minimize possible bias because of interception and alteration of the requests or responses.
Term
What happens when responses other than mailed written communications are received?
Definition
Additional evidence may be required to support their validity.
Term
oral confirmations
Definition
should be documented in audit documentation; should be written if significant
Term
follow-up on positive confirmations
Definition
When using positive confirmations, the auditor should usually follow up with a second and, if applicable, a third request to parties who did not respond.
Term
alternative procedures
Definition
When the auditor has not received replies to positive confirmation requests, s/he should apply alternative procedures to the nonresponses to reduce audit risk to an acceptably low level.
Term
Omission of alternative procedures may be warranted when...
Definition
Auditor has not identified unusual qualitative factors or systematic characteristics related to the nonresponses
Given testing for overstatement, treating the aggregate nonresponses as 100% misstatements would not affect the auditor's decision about whether the F/S are materially misstated.
Term
nature of alternative procedures
Definition
varies w/account and assertion
Term
evaluation of evidence provided by confirmations and alternative procedures
Definition
Evaluation is done to determine whether sufficient appropriate evidence has been obtained about all the applicable F/S assertions.
Term
What if evidence provided by confirmations and alternative procedures is not sufficient and appropriate?
Definition
If the evidence gathered is not sufficient and appropriate, the auditor should request additional confirmation or extend other tests.
Term
accounts receivable (A/R)
Definition
are the entity's claims against customers arising from the sale of goods or services in the normal course of business.
They include the loans of a financial institution.
Term
Is confirmation of A/R a GAAS?
Definition
Yes.
Term
When is confirmation of A/R not needed?
Definition
They are immaterial;
Confirmation would be ineffective; or
Assessed RMM is low, and that level, together with the evidence expected to be obtained from other tests of details or substantive analytical procedures is sufficient to reduce audit risk to an acceptably low level.

Auditor must document why A/R were not confirmed.
Term
audit documentation/working papers
Definition
must be prepared to provide a clear understanding of the work performed, audit evidence obtained and its source, and the conclusions reached.
Working papers provide principal support for the representation that the audit is in accordance with GAAS and the opinion expressed.
The auditor should document who performed the audit work and the date such work was complete and who reviewed specific audit documentation and the date of such review.
Term
working papers serve other purposes, including...
Definition
Assisting the audit team to plan and perform the audit
Assisting new auditors to understand the work performed
Assisting audit supervisors
Demonstrating the accountability of the audit team
Retaining a record of matters of continuing significance to future audits
Assisting inspectors, peer reviewers, and quality control reviewers.
Assisting a successor auditor
Term
documentation should allow auditors to...
Definition
Procedures performed under GAAS or other requirements
Results and evidence obtained
Significant conclusions
That the accounting records agree with the audited information
Term
form, content, and extent of documentation determined by...
Definition
RMM of an assertion related to a transaction class, account, or disclosure.
Extent of judgment involved in performing the work and evaluating the results.
Nature of the auditing procedures.
Significance of the evidence obtained.
Nature and extent of the exceptions identified.
Need to document a conclusion or the basis for a conclusion not readily determinable from other audit documentation.
Term
tickmarks
Definition
used to document work performed and issues uncovered during the field work. A legend should define the tickmarks.
Term
unique reference number
Definition
identifies its use and location; for each page. These are also used to cross-reference information on other working papers.
Term
components of working papers
Definition
audit plans, analyses, memoranda, confirmations, letters of representation, abstracts or copies of documents, schedules, and commentaries. Documentation may be on paper or electronic or other media.
Term
working trial balance
Definition
used to record used to record the year-end ledger balances prior to audit. Reclassifications and adjustments are accumulated on the trial balance to reflect the final audited balances.
Term
lead schedules
Definition
summaries of detailed schedules
Term
permanent files
Definition
schedules, documents, and records with continuing significance for a specific client. Articles, bylaws, and contracts.
Term
current files
Definition
schedules and analyses that related to the current year under audit.
Term
significant audit findings or issues to be documented include:
Definition
Identification of items tested to determine the operating effectiveness of controls or to perform tests of details that consist of inspection of documents or confirmations. Source and specific selection criteria should be stated.
Evidence that the F/S or disclosures may be materially misstated.
Evidence of a need to revise the assessments of RMMs and the responses to them.
Difficulty in applying necessary auditing procedures
Other findings that could result in modification of the report
Audit adjustments
Term
auditor should complete the assembly of the final audit file...
Definition
within 60 days following the report release/documentation completion date.
Do not discard documentation after release date.
Can add to it, but must document who, when, and why.
Term
ownership and confidentiality
Definition
Working papers belong to the auditor.
Copies of documentation may be made available to the client if the validity and independence of the audit are not undermined.
Keep audit documentation at least 5 years past audit date.
Auditor should take reasonable steps to preserve the confidentiality of documented client information, including prevention of unauthorized access.
Term
PCAOB AS 3
Definition
Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement, to understand the work performed and conclusions reached and to determine who performed and reviewed the work and the relevant dates.
Term
PCAOB AS 3 Additional Information
Definition
The auditor must identify all significant findings or issues in an engagement completion document.
Audit documentation must be retained for 7+ years from report release date.
A complete and final set of audit documentation should be assembled for retention as of document completion date not more than 45 days after report release date.
Don't discard documentation, but can add it.
AS 3 silent on audit documentation ownership and confidentiality.
Term
CAATs
Definition
uses of software by the auditor; Many auditors use PCs to perform audit functions more efficiently and effectively. For this purpose, auditors must select tasks appropriate for PC capabilities and software for these tasks.
Term
advantages of CAATs
Definition
Auditor can work independently of auditee.
Confidentiality of audit procedures.
Audit work does not depend on availability of personnel.
Auditor has access to records at remote sites.
Term
disadvantages of CAATs
Definition
Auditor must have a working understanding of the computer system.
Supervisory review may be more difficult.
Term
interrogation (CAAT)
Definition
directly accessing the entity's database
Term
scanning (CAAT)
Definition
searching for certain types of records, items, etc.
Term
predictive models (CAAT)
Definition
identify high-risk areas
Term
extraction (CAAT)
Definition
using input/output routines to provide hard copy and reformat data
Term
Other CAAT audit procedures
Definition
Applying statistical sampling item selection and analysis routines.
Preparing F/S and other reports with spreadsheet routines
Illustrating analyses w/graphs/pictorial displays
Writing customized audit plans
Storing audit plans, routines, and results electronically
Implementing other types of audit procedures and analyses electronically
Preparing and storing audit documentation
Communicating data through networks
Term
specialized audit software is used for...
(CAAT)
Definition
comparing source code with object code to detect unauthorized program changes, analyze unexecuted code, or generate test data.
Term
embedding code in the entity's programs is used for...
(CAAT)
Definition
to routinely extract/select certain transactions or details to be recorded in a file accessible only by the auditor.
Term
expert systems software is used for...
(CAAT)
Definition
to automate the knowledge and logic of experts in certain to help an auditor w/decision making and risk analysis
Term
generalized audit software (GAS)
Definition
software that is written to interface with many different client systems; useful for both tests of controls and substantive procedures
Term
GAS may be used to perform...
Definition
Sampling and selecting items
Testing extensions, footings, and calculations
Examining records
Summarizing and sorting data
Performing analytical procedures
File access and reorganization
Term
advantages of GAS
Definition
Independent of the client's programs and personnel.
Less computer expertise is needed compared w/writing original programs.
It can run on a variety of systems.
Term
disadvantages of GAS
Definition
Some software packages may process only sequential files.
Modifications may be necessary for a specific audit.
Audit software cannot examine items not in machine-readable form.
It has limited in an online, real-time system.
Term
leading GAS softwares
Definition
ACL and IDEA

Audit Command Language (ACL) snd Interactive Data Extraction and Analysis (IDEA) software.
Term
major functions performed by leading GAS softwares (ACL and IDEA)
Definition
Aging of A/R
Duplicate identification.
Exploration.
Gap identification.
Joining and merging.
Sampling.
Sorting.
Stratification.
Summarization.
Total fields.
Term
artificial intelligence (AI)
Definition
computer software designed to perceive, reason, and understand
Term
expert systems
Definition
business applications of AI. Expert systems are interactive.
Expert systems allow auditors and accountants to perform their duties in less time and with more uniformity.
Term
What can an expert system be used for?
Definition
to choose an audit plan, select a test sample type and size, determine the level of misstatement, perform analytical procedures, and make a judgment based on the findings.
Term
neural networks
Definition
to choose an audit plan, select a test sample type and size, determine the level of misstatement, perform analytical procedures, and make a judgment based on the findings.
Term
expert systems vs. neural networks
Definition
An expert system initiates a human expert and relies on many programmed rules, but a neural network has a generalized learning capacity.
Term
specialized audit software
Definition
written to fulfill a specific set of audit tasks. Purposes and users of the software are well-defined before the software is written.
Term
Why was specialized audit software developed?
Definition
Unavailability of alternative software
Functional limitations of alternative software
Efficiency considerations
Increased understanding of systems
Opportunity for easy implementation
Increased auditor independence and prestige
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