AUD — Auditing & Attestation (Core) | CHEAT SHEET

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INDEPENDENCE & PROFESSIONAL SKEPTICISM

Conceptual Framework (Threats & Safeguards)

Identify threat → 2. Evaluate significance → 3. Apply safeguard → 4. Accept/decline

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Two dimensions required: Independence *in fact* (actual) + Independence *in appearance* (third-party view)

Professional Skepticism vs. Judgment

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AUDIT RISK MODEL

AR = IR × CR × DR

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Key Relationships

• ↑ RMM (IR × CR) → ↓ DR needed → More/better evidence

• Strong controls → Higher tolerable DR → Less substantive work

• Low RMM → Higher DR acceptable → Minimal procedures needed

Risk Assessment Levels

• Financial statement level (pervasive): management override, going concern, industry downturn → Overall strategy adjustments

• Assertion level (specific): individual accounts → Targeted further procedures

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FURTHER PROCEDURES & EVIDENCE QUALITY

Tests of Controls vs. Substantive Procedures

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Substantive Procedure Types (Reliability Rank)

Physical inspection (inventory count, securities) — most reliable

Direct confirmation (bank balances, receivables) — external, third-party

Document examination (invoices, contracts, general ledger) — review source docs

Analytical procedures — relationships, ratios, trends — least reliable alone

Higher risk = higher-quality evidence needed (e.g., third-party > internal docs)

Timing Decisions

• Interim testing (before year-end) — OK for low-risk, strong controls

• Year-end testing — Required for high-risk, fraud risk, significant estimates

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MATERIALITY & JUDGMENTS

Materiality threshold = Auditor sets acceptable RMM level

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Qualitative factors also matter: related-party transactions, regulatory breaches, fraud, ratios.

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AUDIT PROCEDURES — QUICK DECISION TREE

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EVIDENCE EVALUATION & DOCUMENTATION

Sufficient, appropriate audit evidence required (AU-C 500)

• Sufficiency = quantity (sample size, number of procedures)

• Appropriateness = quality (relevance, reliability, source)

Audit documentation must be:

• Clear, organized, indexed

• Show conclusion reached

• Support the opinion issued

• Retained ≥7 years (5 for non-public clients)

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HIGH-YIELD THRESHOLDS & FORMULAS

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COMMONLY CONFUSED PAIRS

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Threat	Example	Safeguard
Self-interest	Owns stock in audit client	Divest; restrictions on financial interests
Self-review	Auditing own prior work (tax return → audit)	Separate engagement teams; QA review
Advocacy	Representing client in legal dispute	Withdraw from audit or litigation role
Familiarity	Long-term engagement partner relationship	Partner rotation (every 5 years for public)
Intimidation	Client threatens to fire if opinion qualified	Escalate to audit committee; consider withdrawal
Skepticism	Judgment
What	Questioning attitude	Decision-making process
When	Continuously throughout audit	At specific decision points
Example	Challenge management assertions	Determine materiality threshold
Component	Controlled By	Direction
Audit Risk (AR)	Auditor sets goal (typically ≤5%)	Target risk of wrong opinion
Inherent Risk (IR)	Client/environment	Given; complexity, fraud exposure
Control Risk (CR)	Client controls	Assess via control testing
Detection Risk (DR)	Auditor procedures	THE LEVER — adjust nature/timing/extent
Test of Controls	Substantive Procedure
Tests if control operates effectively	Tests if assertion is materially correct
Only performed if planning to rely on control	Always needed for significant risks
Attributes testing (sample size formulas)	Variables testing or analytical
Type	Definition	Use
Planning materiality	Quantitative benchmark (~5% net income or 1% sales)	Set scope; evaluate RMM
Performance materiality	~50–75% of planning materiality	Drive sample sizes
Trivial threshold	Aggregate uncorrected misstatements below this → not adjusted	~5% of planning materiality
Scenario	Procedure Type
Verify existence of physical asset	Inspection / observation
Confirm customer owes $ amount	Direct confirmation
Check if all sales invoiced	Tests of completeness (analytical or data analytics)
Verify accounts receivable aging	Recalculation + inspection of supporting docs
Test if control over cash receipts works	Test of control (attributes sampling)
Detect overstatement of inventory	Analytical procedures; cutoff testing
Concept	Threshold/Rule
Materiality	~0.5–5% of benchmark (income, sales, equity)
Performance materiality	~50–75% of planning materiality
Trivial/clearly trivial	~5% of planning materiality
Audit risk tolerance	≤ 5% (typically 1–5%)
Lead audit partner rotation (public)	Every 5 years
Audit documentation retention	≥ 7 years
Control reliance requires	Testing controls; cannot use untested controls
Pair	Distinction
Inherent risk vs. control risk	Inherent = raw risk; Control = can be reduced by controls
Detection risk vs. audit risk	DR = risk of failing to detect error; AR = risk of wrong opinion
Interim vs. year-end	Interim = before period end (allows control reliance); Year-end = more reliable for fraud