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ACCT 422 Chapter 10
Terms in this set (57)
The quality of internal auditors' conclusions and advice depends on what?
Their ability to gather and evaluate evidence.
Evidence must be
Sufficient (enough->measure of the quantity), appropriate (relevant and reliable->quality), to support conclusions and advice
Evidence is persuasive rather than absolutely convincing
Due to the nature and extent of evidence and types of decisions to make
Conclusion/advice is formed at
Within reasonable length of time
Evaluate evidence with Professional Skepticism: I/A should
take nothing for granted
continuously question what they hear and see
critically assess audit evidence
Persuasive Audit Evidence
Enables the internal auditor to formulate well founded conclusions and advice confidently
Defining characteristics of persuasive audit evidence
Relevant and reliable (quality), sufficient (quantity)
Relevant audit evidence
Evidence is pertinent to the audit objective
Evidence logically support the internal auditor's conclusion / advice
Reliable audit evidence
Evidence came from a credible source
Evidence is obtained by the internal auditor directly
Sufficient audit evidence
Evidence is enough
Different but related pieces of evidence corroborate each other
Reduce/avoid audit risk
The risk of reaching invalid audit conclusions and /or providing faulty advice based on the audit work conducted
Professional skepticism means that internal auditors beginning an assurance engagement should:
a. Assume client personnel are dishonest until they gather evidence that clearly indicates otherwise
b. Assume client personnel are honest until they gather evidence that clearly indicates otherwise
c. Neither assume client personnel are honest nor assume they are dishonest
d. Assume that internal controls are designed inadequately and/or operating ineffectively
c. Neither assume client personnel are honest nor assume they are dishonest
Evidence is more reliable when it's:
From independent 3rd party instead of auditee personnel
Produced by process or system with effective controls instead of ineffective control
Obtained by internal auditor directly instead of indirectly
Documented instead of undocumented
Reliability of documentary evidence depends on its origin and the route it follows before being examined by the internal auditor
Timely instead of untimely
Evidence is more sufficient when it's:
Corroborated instead of uncorroborated or contradictory
From large samples instead of Small samples
Audit evidence is generally considered sufficient when
a. It is appropriate
b. There is enough of it to support well-founded conclusions
c. It is relevant, reliable, and free from bias
d. It has been obtained via random sampling.
B is the best answer. An internal auditor performing assurance services must obtain sufficient appropriate evidence to support well-founded conclusions.
Evidence is appropriate if it provides relevant and reliable support for the internal auditor's judgments. Appropriate evidence is sufficient when the internal auditor has obtained enough of it to support valid conclusions.
Which one of the following examples of documentary evidence generally is considered the most reliable?
a. A vendor's invoice obtained from the accounts payable department
b. A credit memorandum prepared by the credit manager
c. A receiving report obtained from the receiving department
d. A copy of a sales invoice prepared by the sales department
A is the best answer. The reliability of documentary evidence depends to a large extent on its origin and the route it follows before being examined by the internal auditor. A vendor's invoice comes from an outside third-party source. Credit memoranda, receiving reports, and copies of sales invoices are created internally and are not validated by a third party before being examined by the internal auditor.
High levels of documentary evidence reliability
Documents prepared by the internal auditor. Documents sent directly from a third party to the internal audito
Medium levels of documentary evidence reliability
Documents created by a third party, sent to the organization, and requested from the organization by the internal auditor. Documents created by the organization, sent to a third party, returned to the organization, and requested from the organization by the internal auditor
Low levels of documentary evidence reliability
Documents created by the organization and requested from the organization by the internal auditor.
Definition of audit procedures
Specific tasks performed by the internal auditor to gather the evidence required to achieve the prescribed audit objectives
Audit objectives specify what the engagement is intended to achieve
Nature of audit procedures
the types of tests the internal auditor performs to achieve objectives
Manual procedures, CAAT, or combination of the two
Extent of audit procedures
how much audit evidence the internal auditor must obtain to achieve objectives and the degree to which individual tests are to be conducted.
100%? A sample basis?
Timing of audit procedures
when the tests are conducted and the period of time covered by the tests
Is sample selected represent the entire period?
Is the test represent the right cut off?
Is operation tested consistent during a period of time?
Manual Audit Procedures
Computer-assisted Audit Techniques
Any automated audit technique, such as generalized audit software (GAS), test data generators, computerized audit programs and specialized audit utilities.
Application software tracing and mapping
Audit expert systems
Manual audit procedures - inquiry
Asking question to auditee or 3rd party to obtain oral or written responses. Indirect evidence. Limitation: rarely persuasive by itself. Interviews and survey's questionnaires
Manual Audit Procedures - Observation
Watching people, procedures, processes to see if certain controls are operated as designed. Direct evidence. Limitation: Can only observe at certain time, yet people may behave differently at different time.
Manual Audit procedures - inspection
Studying/examining documents & records/ tangible resources. Direct evidence. Limitation: Internal auditor's expertise.
Characteristics among effective interviewers include:
Professionalism (for example, prepared, respectful, courteous, on time).
Outstanding interpersonal and oral communication skills, including listening skills.
The capacity to display confidence and command respect without being arrogant.
An innate curiosity.
Objectivity (that is, remain impartial and refrain from interjecting personal opinions).
Which of the following statements regarding observation as an audit procedure is/are correct?
I. Observation is limited because individuals may react differently when being watched
II. Observation is more effective for testing completeness than it is for testing existence
III. Observation provides evidence about whether certain controls are operating as designed.
I and III. Observation does provide evidence about whether operating activities are aligned with prescribed policies. It is used, for example, to test segregation of duties. Individuals may, however, behave differently than they would otherwise when they know they are being observed. Observation generally is used to test existence and occurrence, not completeness.
Tracking backward: Document/record 1, or tangible resource (Exp.: Shipping record or physical inventory) generates Document/ record 2 (EXP.: Sales invoice or inventory on book). Vouching: is Doc/Rec #2 valid? (Any overstatements of revenues/assets?)
Tracking forward: Document/record 1, or tangible resource (Exp.: receiving report) generates Document/trecord 2 (exp.: purchases on book). Tracing: is Doc/Rec#2 complete? (any understatement of liabilities/expenses?)
Your audit objective is to determine that purchases of office supplies have been properly authorized. If purchases of office supplies are made through the purchasing department, which of the following procedures is most appropriate?
a. Vouch purchase orders to approved purchase requisitions
b. Trace approved purchase requisitions to purchase orders
c. Inspect purchase requisitions for proper approval
d. Vouch receiving reports to approved purchase orders
A is the best answer. Vouching involves the tracking of information backward from one document or record to a previously prepared document or record and is performed specifically to test the validity of documented or recorded information. In this case, the approved purchase requisitions serve as the authorization to prepare the purchase orders that will be sent to vendors of office supplies. Tracing purchase requisitions forward to purchase orders would not uncover instances of missing purchase requisitions.
Redoing controls or other procedures. Direct evidence regarding operating effectives.
Assessing information obtained during engagement by comparing the information with expectations identified or developed by the internal auditor.
Develop expectations, collect information, compare and assess
Analysis of common-size F/S
Analysis of future-oriented information (Actual vs. Budget/Forecast)
Obtaining direct written verification of the accuracy of information from independent 3rd parties.
Ask recipients to respond to auditor regardless of whether or not they believe the information provided (in confirmation letter) is correct
Can be a "blank confirmation" or "Agree/Disagree" confirmation
Ask recipients to respond only when they believe the information provided to them is incorrect
Example: The client's year end balance shows a $100,000 balance of accounts receivable to the customer. The auditor send out confirmation letter to the customer with this balance information and ask the customer to contact the auditor only if they disagree or have an issue with this balance or any information provided in the confirmation letter.
Think: what should auditor do if customers do not return confirmations as requested or the information received varies from client's record? (Use AR Aging Confirmation as an example)
If customers do not return confirmations to the auditor, the auditor may go to considerable lengths to obtain the confirmations, given the high quality of this form of evidence. If there is no way to obtain a confirmation, then the auditor's next step is to investigate subsequent cash receipts, to see if customers have paid for those invoices that were not confirmed. This is a strong secondary form of evidence that the accounts receivable outstanding at the end of the reporting period being audited were in existence at that time.
If the information received from a customer varies from the receivable amount listed in the company's receivable report, the auditor usually asks the company to reconcile the difference, which the auditor can then take further action on, as necessary.
A production manager of MSM Company ordered excessive raw materials and had them delivered to a side business he operated. The manager falsified receiving reports and approved the invoices for payment. Which of the following procedures would most likely detect his fraud?
a. Vouch cash disbursements to receiving reports and invoices
b. Confirm the amounts of raw materials purchased, purchase prices, and dates of shipment with vendors
c. Perform ratio and trend analysis. Compare the cost of raw materials purchased with the cost of goods produced
d. Observe the receiving dock and count materials received. Compare the counts with receiving reports completed by receiving personnel.
C is the best answer. Recorded purchases of raw materials would be increasing without a corresponding increase in cost of goods produced.
a. Vouching cash disbursements to receiving reports and invoices would be ineffective because the manager falsified receiving reports and approved the invoices for payment.
b. Confirmations from vendors would indicate that the raw materials had been purchased and shipped.
d. Observing the receiving dock and counting the materials received would be ineffective since the materials in question never reached the receiving dock. Also due to the limitation of observation it can only catch fraud should the fraudulent activity conducted during observation.
Internal auditors can use CAATs to directly test:
Controls built into computerized information systems, and
Data contained in computer files
To obtain indirect evidence about the effectiveness of the controls in the application that processed the data
Generalized audit software
Multipurpose software that can be used for general purpose such as record selection, matching, recalculation and reporting
Computer programs provided by a computer hardware manufacturer or software vendor and used in running the system. Can be used to :
Examine processing activities
Test programs, system activates, and operational procedures
Evaluate data file activity
Analyze job accounting data
Simulated transactions that can be used to test processing logic, computations and controls actually programmed in computer applications.
Test individual programs or an entire system. Includes:
Integrated test facilities (ITFs)
Base case system evaluations (BCSEs)
Application software tracing and mapping
Specialized tools that can be used to analyze the flow of data through the processing logic of the application software and document the logic, paths, control conditions and processing sequences
Can analyze both command language or job control statements and programming language. Includes program/system:
mapping, tracing, snapshots, parallel simulations, and code comparisons
Audit expert systems
Expert or decision support systems that can be used to assist IS (information systems) auditors in the decision-making process by automating the knowledge of experts in the field. Include:
Automated risk analysis, system software and control objectives software package
Allows IS auditors to monitor system reliability on a continuous basis and to gather selective audit evidence through the computer
Benefits of using GAS:
Little customization needed in various hardware/software environments
Tests on data can be performed independent from client's IT personnel
Large data files can be processed and analyzed deftly and efficiently
Frees auditors from routine audit tasks
Two predominant GAS programs used by internal auditors:
ACL (Audit Command Language)
IDEA (Interactive Data Extraction and Analysis)
An internal auditor is concerned that fraud, in the form of payments to fictitious vendors, may exist. Company purchasers, responsible for purchases of specific product lines, have been granted the authority to approve expenditures up to $10,000. Which of the following applications of GAS would be most effective in addressing the auditor's concern?
a. List all purchases over $10,000 to determine whether they were properly approved.
b. Take a random sample of all expenditures under $10,000 to determine whether they were properly approved
c. List all major vendors by product line. Select a sample of major vendors and examine supporting documentation for goods or services received
d. List all major vendors by product line. Select a sample of major vendors and send negative confirmations to validate that they actually provided goods or services.
C is the best answer. The purpose of the audit test is to determine the validity of cash disbursements, or more specifically, the validity of the vendors to which the payments are going. All expenditures, regardless of amount, should be supported by documentation indicating that goods or services were purchased and received. Lack of supporting documentation would be an indicator of fictitious vendors. Responses to confirmations sent to fictitious vendors are likely to indicate that the payments they received are for goods or services they provided.
The documents which record all audit evidence obtained during audit.
IIA Standard 2330: " Documenting Information requires internal auditors to record the evidence they accumulate as support for engagement outcomes."
Purposes of working papers
Aid in planning and performing the engagement.
Facilitate supervision of the engagement and review of the work completed.
Indicate whether engagement objectives were achieved.
Provide the principal support for the internal auditors' communications to the auditee, senior management, the board of directors, and appropriate third parties.
Serve as a basis for evaluating the internal audit function's quality assurance program.
Contribute to the professional development of the internal audit staff.
Demonstrate the internal audit function's compliance with The Institute of Internal Auditors'
Question: working paper is prepared primarily for whose benefit?
Auditee? BOA? Sr. Mgmt? Independent external auditors?
For the benefit of internal audit function
Working papers contents
what the engagement team expects to achieve
the procedures the team used to achieve its objectives
the engagement team's observations, or "pertinent statements of fact" that "emerge by a process of comparing what should be with what is"
conclusions reached by the team based on its test results
based on its conclusions and observations
Common types of working papers
Work programs, budgets, questionnaires, process maps or flowcharts, charts, graphs, and diagrams, agendas, memoranda, organizational information, source documents, accounting records,
Key characteristics of well-prepared working papers include:
Working paper formats, working paper files, at the end of an engagement, the files should contain only the final versions of the working papers completed during the engagement, each individual working paper should stand on its own merits.
Working paper formats should be standardized as appropriate to :
streamline the audit process,
facilitate consistent high-quality work across engagements, and
simplify review of the working papers,
but not overly standardized so that they inhibit internal auditor ingenuity and creativity.
Working paper files should be
complete and well organized
THIS SET IS OFTEN IN FOLDERS WITH...
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