2 3 4 receipt written or oral response from

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Unformatted text preview: the client's use in the day-to-day operation of the business. 7-11 Internal documentation is prepared and used within the client's organization without ever going to an outside party, such as a customer or vendor. Examples: check request form receiving report payroll time card adjusting journal entry External documentation either originated with an outside party or was an internal document that went to an outside party and is now either in the hands of the client or is readily accessible. Examples: vendor's invoice cancelled check cancelled note validated deposit slip 7-8 7-12 Analytical procedures are useful for indicating account balances that may be distorted by unusual or significant transactions and that should be intensively investigated. They are also useful in reviewing accounts or transactions for reasonableness to corroborate tentative conclusions reached on the basis of other evidence. 7-13 The most important reasons for performing analytical procedures are the following: 1. Understanding the client's industry and business 2. Assessment of the entity's ability to continue as a going concern 3. Indication of the presence of possible misstatements in the financial statements 4. Reduction of detailed audit tests 7-14 The decrease of the current ratio indicates a liquidity problem for Harper Company since the ratio has dropped to a level close to the requirements of the bond indenture. Special care should be exercised by the auditor to determine that the 2.05 ratio is proper since management would be motivated to hide any lower ratio. The auditor should expand procedures to test all current assets for proper cutoff and possible overstatement and to test all current liabilities for proper cutoff and possible understatement. 7-15 Attention directing analytical procedures occur when significant, unexpected differences are found between current year's unaudited financial data and other data used in comparisons. If an unusual difference is large, the auditor must determine the reason for it, and satisfy himself or herself that the cause is a valid economic event and not an error or misstatement due to fraud. When an analytical procedure reveals no unusual fluctuations, the implication is minimized. In that case, the analytical procedure constitutes substantive evidence in support of the fair statement of the related account balances, and it is possible to perform fewer detailed substantive tests in connection with those accounts. Frequently, the same analytical procedures can be used for attention directing and for reducing substantive tests, depending on the outcome of the tests. Simple procedures such as comparing the current year account balance to the prior year account balance is more attention directing (and provides less assurance) than more complex analytical procedures; i.e., those which rely on regression analysis. More sophisticated analytical procedures help the auditor examine relationships between several information variables simultaneously. The nature of these tests may provide greater assurance than simple procedures. 7-9 7-16 The purposes of audit documentation are as follows: 1. To provide a basis for planning the audit. The auditor may use reference information from the previous year in order to plan this year's audit, such as the evaluation of internal control, the time budget, etc. 2. To provide a record of the evidence accumulated and the results of the tests. This is the primary means of documenting that an adequate audit was performed. 3. To provide data for deciding the proper type of audit report. Data are used in determining the scope of the audit and the fairness with which the financial statements are stated. 4. To provide a basis for review by supervisors and partners. These individuals use the audit documentation to evaluate whether sufficient appropriate evidence was accumulated to justify the audit report. Audit documentation are used for several purposes, both during the audit and after the audit is completed. One of the uses is the review by more experienced personnel. A second is for planning the subsequent year audit. A third is to demonstrate that the auditor has accumulated sufficient appropriate evidence if there is a need to defend the audit at a later date. For these uses, it is important that the audit documentation provide sufficient information so that the person reviewing an audit schedule knows the name of the client, contents of the audit schedule, period covered, who prepared the audit schedule, when it was prepared, and how it ties into the rest of the audit files with an index code. 7.17 The two criteria used by auditors of public companies when determining whether memos, correspondence, and other documents must be maintained in the audit files are as follows: 1. The materials are created, sent, or received in connection with the audit or review. 2. The materials contain conclusions, opinions, analyses, or financial data related to the audit or review. 7-18 The Sarbanes-Oxley Act of 2002 requires auditors of public companies to prepare and maintain audit sche...
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