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2014 CPA Study Flashcards > 2014 NINJA Flashcards - AUD > Flashcards

2014 NINJA Flashcards - AUD

1
Q

What should be included for the Auditor’s address?

A

The City and State where located

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2
Q

What is Management Responsible for in regards to the Financial Statements?

A

Preparation and Fair Presentation of Financial Statements in accordance with the Applicable Financial Reporting Framework

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3
Q

What is Management Responsible for in regards to Internal Control?

A

Internal Control Design, Implementation, Maintenance

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4
Q

What are the headings in the Audit Report for an Unmodified Opinion?

A

(TIM-AA) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion

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5
Q

What are the headings in the Audit Report for an Modified Opinion?

A

(TIMA-BA) Title; Introduction; Management Responsibility; Auditor Responsibility; Basis for (Modified) Opinion; Audit Opinion

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6
Q

In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the headings?

A

(TIM-AA EMO) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion; Emphasis-of-Matter; Other-Matter

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7
Q

What are the requirements for referencing a Component Auditor in the Audit Report?

A

Component Financial Statements must be prepared using same Financial Reporting Framework as the Group Financial Statements; Component Auditor must have performed audit in accordance with GAAS or PCAOB Standards.

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8
Q

What must the Group Engagement Partner do if they assume responsibility for the Component Auditor’s work?

A

Perform additional audit procedures; Be involved in Component Auditors work; Perform Risk Assessment procedures; Assess Risk of Material Misstatement

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9
Q

What standards govern SSARS engagements?

A

Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)

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10
Q

Which clients can have compilation engagements?

A

Non-SEC (non-public) registrants only.

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11
Q

What is a Compilation?

A

Accountant puts together financial statements with information PROVIDED BY MANAGEMENT. No opinion is expressed and no assurances are given. Independence is not required.

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12
Q

What disclosures are required for Compilation engagements?

A

Disclosures not necessary must state that they are not included

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13
Q

What standards govern Review engagements?

A

SSARS (Statements on Standards for Accounting and Review Services)

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14
Q

What type of assurance is given in a Review engagement?

A

Reviews give limited assurance.

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15
Q

What procedures are required for Review engagements?

A

Analytical procedures are required for reviews. Compare results to documented predictions.

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16
Q

What is a Review engagement?

A

Financial statements are presented with no opinion expressed- and limited assurances are given. Independence is required for a review engagement.

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17
Q

What is a Forecast?

A

A prospective financial statement that uses normal circumstances. General and limited use allowed.

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18
Q

What is a Projection?

A

A prospective financial statement using hypothetical situations. Only limited use by the client is allowed.

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19
Q

What are the requirements for Agreed Upon Procedures?

A

Independence is required; Only limited use by the client is allowed.

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20
Q

What disclosures are required for remote likelihood of losses?

A

No disclosure required.

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21
Q

What disclosure is required for a probable loss contingency?

A

Accrue if estimable. Emphasis-of-Matter paragraph if not estimable.

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22
Q

What disclosure is made if a loss contingency is reasonably possible?

A

Auditor assesses need for Emphasis-of-Matter paragraph based on loss likelihood.

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23
Q

How is a gain contingency reported?

A

Gain contingencies are not reported.

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24
Q

How does an immaterial GAAP issue affect the audit opinion?

A

It doesn’t. Opinion is Unmodified.

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25
Q

How does a very material GAAP issue affect the Audit Report?

A

Modified-Adverse Opinion is issued. Emphasis-of-Matter paragraph is added after Opinion paragraph.

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26
Q

How do GAS standards compare to GAAS?

A

GAS is more strict than GAAS.

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27
Q

What is required under the Single Audit Act?

A

An audit performed under governmental auditing standards (GAS). A report on internal control is required. GAAS and GAS don’t require the I/C report.

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28
Q

What is Audit Sampling?

A

Taking part of a population- subjecting it to audit procedures- projecting results to a population

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29
Q

What are the characteristics of Statistical Sampling?

A

Based on formulas Helps find an appropriate audit sample Helps evaluate evidence obtained Helps evaluate results and quantify Sampling Risk

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30
Q

What are the characteristics of Non-Statistical Sampling?

A

Based on human decision Equally acceptable as Statistical Sampling

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31
Q

What are the characteristics of Substantive Tests?

A

Variables sampling Probability proportionate to size sampling

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32
Q

What type of sampling are Control Tests?

A

Attribute Sampling

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33
Q

What is Sampling Risk?

A

Risk that your sample isn’t representative of population Can happen even if audit is done properly

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34
Q

What is the risk of assessing Control Risk too high?

A

A risk of Control Testing - Auditor works to make Control Risk lower More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency Audit ends up being effective (correct result)- but you do more work

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35
Q

What is the risk of assessing Control Risk too low?

A

A risk of Control Testing - Complement to Confidence Level Inverse relationship to Sample Size Higher accepted risk of assessing Control Risk too low = Smaller Sample Lower accepted risk of assessing Control Risk too low = Larger Sample

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36
Q

What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

A

Leads to higher Detection Risk - Fewer substantive tests Sample understates Control Risk This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness. Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it

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37
Q

What is the risk of Incorrect Acceptance?

A

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated Hurts audit effectiveness Wrong conclusion reached Efficient- but not effective

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38
Q

What is the risk of Incorrect Rejection?

A

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated Hurts audit efficiency Wrong recommendations given Effective- but not efficient

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39
Q

What is Non-Sampling Risk?

A

Risk of human (auditor) missing an error Also called exception- error or deviation.

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40
Q

How does Sampling Risk compare to Non-Sampling Risk?

A

Sampling Risk deals with the chance that your audit sample is flawed Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed

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41
Q

What is Attribute Sampling?

A

Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amounts For example- 5 invoices out of 100 were not properly paid. Error rate is 5% Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.

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42
Q

How do you determine if Control Procedures are operating properly or not operating properly?

A

Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors

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43
Q

What is the Tolerable Rate?

A

Error rate in population that you are willing to accept/tolerate Inverse relationship to Sample Size Higher Tolerable Rate = Smaller Sample Lower Tolerable Rate = Larger Sample If you’re willing to accept a higher probability that errors exist- there is less pressure on the sample

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44
Q

What is the Expected Population Error Rate?

A

What Error Rate are you expecting? - Judgment call- based on experience Direct relationship to Sample Size More errors = Larger Sample Less errors = Smaller Sample

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45
Q

What is the basic premise of Attribute Sampling?

A

Attribute in the sample gives information about the entire audit population Used to estimate Internal Control error rate

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46
Q

For what is the Expected Population Deviation (error) Rate used?

A

Used to determine initial level of Control Risk

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47
Q

What is the Allowable Risk of Over-reliance?

A

Risk of Assessing Control Risk too low Gives you the Sampling Risk

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48
Q

When is Attribute sampling used?

A

Attribute sampling is only useful when there is documented evidence (an audit trail) to test Use when the existence of an error needs to be verified or debunked

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49
Q

What is Classic Variable Sampling?

A

Testing for a dollar amount Value in sample gives information about value in entire population.

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50
Q

What functions are used in conjunction with Classic Variable Sampling?

A

Mean Per Unit = Sample Average x Number in Population Stratification - Decreases effect of variance in population and reduces sample size

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51
Q

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

A

A form of Variable Sampling Does NOT use Standard Deviation Auditor focuses on a dollar amount Larger or more valuable items get picked more often as part of the sample

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52
Q

What is Projected Misstatement?

A

Misstatement found in sample - have to project it to remainder of population

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53
Q

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

A

PPS: Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design Classic Variables Sampling: Easy to expand sample size- Selecting zero and negative balances easy

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54
Q

What factors affect sample size?

A

Tolerable rate for error - Inverse relationship with sample size Risk of assessing Control Risk too low - Inverse relationship with sample size Expected population error rate - Direct relationship with sample size Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.

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55
Q

What is the formula for Audit Sampling?

A

SER + ASR < TER SER = Sample Error Rate ASR = Allowance for Sampling Risk TER = Tolerable Error Rate

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56
Q

What is Allowance for Sampling Risk?

A

The amount that you add to the Sampling Error Rate to get some cushion for your sample. As high as you think the population error rate could go based on experience.

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57
Q

What is the Tolerable Error Rate?

A

The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective If population error rate is more than TER- do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing

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58
Q

What are the steps to develop a sampling plan?

A

Determine Test Objective - for example- have sales shipments been billed? Define Population and Deviation - take a sample of shipping document- trace forward to see if billed Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate. Select Sampling Technique

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59
Q

After a Sampling Plan is developed- what are the steps in sampling?

A

Perform the Sampling Plan Evaluate Results Document Results

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60
Q

What is Systematic Sampling?

A

Every certain # of a population is selected Population needs to be randomly ordered Primary advantage is that population doesn’t require pre-numbering

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61
Q

What is Sequential Sampling?

A

Also called Stop or Go sampling Each audit step determines the next step

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62
Q

What is Discovery Sampling?

A

Audit is testing an area that is so crucial that zero population errors can be tolerated Any phony employees on payroll?

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63
Q

How does Block Sampling compare to other sampling methods?

A

Easy to implement- but is the worst method of sampling.

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64
Q

What is the primary duty of an auditor?

A

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

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65
Q

What is the auditor’s responsibility for detecting theft or fraud?

A

Auditors are *not* responsible for detecting theft or fraud. Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.

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66
Q

When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?

A

The earlier the auditor is hired- the better for audit planning and efficiency.

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67
Q

When can audit procedures be performed at interim dates?

A

If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates. The auditor then reviews changes in the balances at year-end.

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68
Q

When can an auditor accept an engagement offered after the year is already closed?

A

The auditor can take the engagement if they are able to overcome the limitations of the engagement.

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69
Q

For what does an auditor use professional skepticism?

A

To plan the scope of the audit To plan the objectives of the audit

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70
Q

How can analytical procedures be performed in audit planning?

A

The auditor can compare actual versus forecasted numbers.

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71
Q

What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?

A

If issues relating to predecessor auditor’s work on previous Financial Statements come up during the current audit- Auditor must have client’s permission to discuss the issue.

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72
Q

What questions must an auditor ask with respect to procedures carried out by assistants?

A

Were they adequately performed? (Review the working papers) Are the results consistent with the audit report?

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73
Q

How is audit strategy mapped out?

A

Auditor determines what the reporting objectives are. Auditor determines the scope of the audit.

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74
Q

Describe the key components of maintaining auditor independence.

A

Auditor must be independent in fact and appearance Honesty No direct financial interest No indirect material financial interest

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75
Q

Describe Due Professional Care

A

Technical abilities mirror those held by peers in the profession Follow GAAS Standards Obtain a Reasonable Level of Assurance Maintain Reasonable Level of Skepticism Supervise Audit Staff Review judgment at every level

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76
Q

What should an auditor do prior to accepting an audit engagement?

A

Review the previous financial statements Speak to third parties Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

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77
Q

What questions should be asked by an auditor prior to taking an engagement?

A

Note: must have permission of client to contact predecessor auditor (no permission = no engagement) Why the Auditor Change? Any Serious Discussions with Audit Committee? How is Management Integrity? Disagreements? How was Internal Control? Understand Industry or Be Willing to Learn Consider Scope Limitation - Limited evidence available = no engagement

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78
Q

What should be included in an audit engagement agreement?

A

Note: must be written Objectives of Engagement Limitations of Engagement Responsibilities of Management - Provide written assertions Responsibilities of Auditor - Limited error/fraud responsibility Expectations of Access to Records Financial Statements (and Disclosures) are Management’s Responsibility Compliance with Laws Internal Control

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79
Q

What is management’s responsibility with respect to the financial statements?

A

Management is responsible for financial statements and adequacy of disclosures. Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation

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80
Q

What is the purpose of the Audit Committee?

A

Responsible for Hiring Auditor Oversees Internal Control Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan Acts as Liaison Between Auditor and the Board Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

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81
Q

How is Audit Risk calculated?

A

Inherent Risk x Control Risk x Detection Risk Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report Based on Auditor Judgment Measured in both Qualitative and Quantitative

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82
Q

Describe Control Risk

A

Risk that internal control will not detect error or fraud Auditor cannot control this.

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83
Q

Describe Inherent Risk.

A

Which transactions have a higher level of risk? Auditor cannot control

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84
Q

Describe Detection Risk.

A

Will the auditor fail to detect a material misstatement? Auditor CAN control Do testing at year-end Increase substantive testing Run more effective tests

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85
Q

What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?

A

Less Acceptable DR = Run More Substantive Tests More Acceptable DR = Run Less Substantive Tests More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR) Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)

86
Q

What are quantitative measurements versus non-quantitative measurements with respect to risk?

A

Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges

87
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

88
Q

What is the auditor’s responsibility with respect to fraud and illegal acts?

A

Assess the RISK that such things will lead to material misstatements Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee) Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)

89
Q

What are the three factors that affect/influence fraud?

A

Fraud is born out of: Rationalization Incentive Opportunity (RIO)

90
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

91
Q

What red flags may indicate higher risk in an audit?

A

Management compensation tied to stock Aggressive financial forecasting Former auditor disagreed with Management Records not available for audit Current audit procedures may need to be reconsidered if red flags exist.

92
Q

Describe the characteristics of a Fraud Risk Factor.

A

Has been observed in similar situations Does NOT necessarily mean that there is a material weakness in internal control Leads to an auditor taking action

93
Q

What does an examination of internal control accomplish with respect to illegal acts?

A

Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts

94
Q

What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?

A

Strives to make audit engagement procedures less patterned and predictable Re-evaluates management’s application of accounting procedures Finds and assigns audit personnel with relevant skills in this area

95
Q

What should be documented with respect to fraud risk factors in an audit?

A

Any fraud risks identified that could lead to material misstatement Audit procedures performed to assess risks Nature of communication made to audit committee and company management Disclosure to third parties regarding fraud not normally the auditor’s responsibility Fraud by management should normally be reported to the audit committee- NOT the SEC.

96
Q

What was the effect of the SOX Act of 2002?

A

Created PCAOB Designates Officer responsibility for internal control Must disclose significant internal control weaknesses to auditor and audit committee Must disclose any level of fraud discovered by employees with internal control responsibilities

97
Q

What is the Hierarchy of Authoritative Literature?

A
  1. Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)
98
Q

What quality control activities are undertaken by CPA firms with audit practices?

A

Firm Leadership exhibits quality and leads by example and sets the tone for the organization Firm should Monitor and document that its policies and procedures are being followed Firm should have Relevant Ethical Requirements Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality Firm should have competent and ethical personnel Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

99
Q

Which literature governs Compilation services?

A

SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only

100
Q

What is the independence requirement for Compilations?

A

Independence NOT required for Compilations No Internal Control work allowed No assurance given

101
Q

What type of assurance is provided by a Compilation?

A

Compilations are not an assurance service. No assurance is provided.

102
Q

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE assurance.

103
Q

What is the independence requirement for a Review?

A

Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed

104
Q

For compilations and reviews- what knowledge must a service provider have?

A

Must have an understanding of the client industry.

105
Q

What are attestation services?

A

CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required

106
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

107
Q

Describe the limitations on Prospective Financial Statements?

A

Report is restricted to specified users. Agreed-upon procedures are implemented.

108
Q

What is the role of the Group Engagement Team?

A

Develop Audit Strategy; Communicate with Component Auditors; Perform work on the Consolidation Process; Evaluate Audit Conclusions; Understand work of Component Auditors;

109
Q

Who is on the Group Engagement Team?

A

Firm Partners; Group Engagement Partner; Audit Staff

110
Q

Who establishes the Materiality threshold for the Component Auditor?

A

The Group Engagement Team; The Materiality threshold must be lower than the Group Materiality threshold

111
Q

What is the Group Engagement Partner responsible for?

A

Group Audit Engagement Direction - Supervision - Performance and the Audit Report

112
Q

What is the role of a Component Auditor

A

Audit a component of the entity

113
Q

What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Financial Materiality?

A

Audit the Financial Information

114
Q

What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Risk of Material Misstatement?

A

Perform Audit Procedures

115
Q

What should the Group Engagement Team do if a Component Auditor audits a Non-Significant Component?

A

Analytical Procedures performed at Group Level

116
Q

Why does an Auditor do if they suspect legal proceedings could contribute to a Material Misstagement?

A

Contact Client external counsel through a Letter of Inquiry

117
Q

What is the majority of an auditor’s work in determining an audit opinion?

A

Collection of evidence to support the opinion.

118
Q

Of what does audit Evidence consist?

A

Evidence consists of client accounting data and supporting documentation from client or from third parties.

119
Q

What is the relationship between Evidence and Detection Risk?

A

Evidence has an inverse relationship with Detection Risk The one aspect of Audit Risk an auditor can control through (N)ature (T)iming (E)xtent of audit procedures. Inherent Risk and Control risk are outside of auditor’s control.

120
Q

Which aspects of Audit Risk can an auditor control?

A

Detection Risk which is decreased by gathering evidence.

121
Q

Which aspects of Audit Risk can an auditor NOT control?

A

Inherent Risk and Control Risk are outside of an auditor’s control.

122
Q

How does a high level of acceptable Detection Risk affect an audit?

A

Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong. Business and transactions should be relatively stable and predictable. (N) Less-competent Evidence collected (T) Interim testing acceptable (E) Fewer transactions are verified.

123
Q

What should occur when a low level of Detection Risk is acceptable?

A

More Evidence collected (N) More-competent Evidence collected (T) End of year balance testing (E) More transactions are verified

124
Q

What are the primary risks in an audit for a typical for-profit company?

A

Auditors are there to verify that Assets & Revenues are not overstated Expenses & Liabilities are not understated Exception - if the CPA Exam states that it is a tax-driven company flip them around

125
Q

What is the primary constraint on audit evidence?

A

Cost vs. Benefit is a primary constraint.

126
Q

What characteristics should audit evidence have?

A

Sufficient (quantity) Appropriate: Relevant & Reliable (Quality)

127
Q

How does the quality of audit evidence vary depending on who has provided it?

A

Best evidence: Observation of activity by auditor. 2nd Best: Originates from External Parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement) Weakest: Oral evidence from management.

128
Q

Which documents are the most persuasive and credible?

A

Third party documents are more persuasive and credible than internally-prepared docs Auditor Knowledge = Most Persuasive 3rd Party info given to auditor 3rd Party info given to client Internally-prepared doc

129
Q

What are Substantive Procedures?

A

Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don’t test internal controls.

130
Q

What are the substantive tests that are most often performed?

A

Trace (or Vouch) Reconcile Analytical Procedures Confirmations Examine evidence that supports management assertions. (T.R.A.C.E.)

131
Q

When performing audit procedures what should auditors focus on?

A

Auditors focus first on Balance Sheet Accounts then associated Income Statement items

132
Q

How is Cash audited?

A

Assurance Level is High. Acceptable Detection Risk is Low.

133
Q

How is Accounts Receivable audited?

A

If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong. If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance. Corresponding Income Statement Account - Revenue

134
Q

How is Accounts Payable audited?

A

Review purchase orders/invoices Confirm with Vendors Corresponding Income Statement Account - Various Expenses

135
Q

How is Inventory audited?

A

Examine purchase agreements Look at Board Minutes Is Inventory held as collateral? Corresponding Income Statement Account - COGS

136
Q

How are beginning balances audited?

A

Should match last year’s ending balance.

137
Q

What is the general presumption for auditing Ending Balances?

A

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

138
Q

How is a Statement of Cash Flows audited?

A

Foot all balances - Check the Math Trace Cash Flow items to other Financial Statements Check classifications - Operating Activities Investing Activities Financing Activities

139
Q

Under the Indirect Method what must be disclosed on a Statement of Cash Flows?

A

Interest Paid Income Taxes Paid Non-cash Transactions Cash and Cash Equivalents Definitions

140
Q

Under the Direct Method what must be disclosed on a Statement of Cash Flows?

A

Results as if you had used Indirect Method Non-cash Transactions Cash and Cash Equivalents Definition

141
Q

What are Subsequent Events and what do they require?

A

Subsequent events occur after the Balance Sheet Date but before the audit report is issued. Auditor needs to make inquiries and assess if they affect the audit report.

142
Q

What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?

A

If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement. Regulatory agencies might need to get involved under some circumstances.

143
Q

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

A

If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute. Otherwise support for their audit opinion could be jeopardized.

144
Q

When are Analytical Procedures required?

A

REQUIRED When planning the audit (preliminary) REQUIRED When reviewing the audit (final) Analytical procedures may be also performed optionally along with the substantive testing. Use of Analytical Procedures in the audit must be documented.

145
Q

How do Analytical Procedures assist the auditor?

A

Helps the Auditor: Determine if Management Assertions are reasonable Develop audit plan Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

146
Q

What is the focus of Analytical Procedures?

A

Analytical Procedure focus is on dollar amounts (not internal controls) Analyzes Financial Data: Do Financial Statements Make Sense? Comparison of data between years

147
Q

How is the Current Ratio calculated?

A

Current Ratio = Current Assets / Current Liabilities

148
Q

How is the Quick Ratio calculated?

A

Quick Ratio = Liquid Assets / Current Liabilities

149
Q

How is the Asset Turnover calculated?

A

Asset Turnover = Net Sales / Average Assets

150
Q

How is the Inventory Turnover calculated?

A

Inventory Turnover = COGS / Average Inventory

151
Q

How is Gross Margin % calculated?

A

Gross Margin % = Gross Margin / Sales

152
Q

What type of testing are ratios?

A

Ratios are Analytical Procedures

153
Q

What type of procedure is a Budget vs. Actual comparison?

A

Budget vs. Actual comparisons are Analytical Procedures.

154
Q

List Common Types of Analytical Procedures

A

Ratio analysis Budget vs. Actual comparison Comparison of data between years Use of non-financial data to predict expected values for financial data

155
Q

How do management assertions affect the audit?

A

Management assertions help the auditor to plan the audit and select substantive tests.

156
Q

What assertions do auditors test?

A

Presentation - Cutoff Classification - Is it in the right period and category? Existence/ Occurrence - Did it happen? Does it exist? Rights & Obligations - Does the company own them? Completeness - Was everything recorded? Valuation - Are they worth the amount at which they are recorded? (PERCV)

157
Q

What assertions are tests for transaction classes?

A

Occurrence Cutoff Classification Completeness Accuracy

158
Q

For which assertions are disclosures tested?

A

Occurrence Completeness Classification Accuracy

159
Q

Is testing the validity of direct evidence a basic audit procedure?

A

No it is an extended procedure. For example you don’t have to take a loan covenant document and go search out that it’s a valid loan covenant. Instead you consider the source - if it’s externally prepared it’s more persuasive.

160
Q

How are Management Estimates audited?

A

First and foremost you need to understand management’s rationale and methods for developing estimates before you can judge reasonableness. Next Auditor should formulate their own opinion on what a good estimate should be and compare it. Finally determine if subsequent events affect the estimate.

161
Q

Whose property are audit documentation (audit workpapers)? In what form must they be?

A

Audit workpapers are the property of the auditor. They can be paper or electronic. They must include a WRITTEN audit program (either paper or electronic).

162
Q

What is the Current File?

A

Information pertaining to the current year’s audit.

163
Q

What is the Permanent File?

A

Information used for this audit and future audits which is updated as needed.

164
Q

How long must audit workpapers be maintained?

A

Must be kept for 5 years after the audit release date or according to regulations whichever is longer. Must be kept for 7 years under PCAOB Audit PCAOB audits also require an Engagement Completion Document

165
Q

What is the primary requirement for audit workpapers besides being written?

A

Any experienced auditor should be able to look at your work and understand what you did.

166
Q

How should documents added to work papers be treated?

A

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

167
Q

How should documents removed from workpapers be treated?

A

After the audit report is released the firm has 60 days to subtract from the file. You can still add to the file if you document it but you cannot delete any information after 60 days. Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.

168
Q

If Internal Control is poor and a company’s accounting practices are sloppy - which risk is higher?

A

Control risk increases with poor Internal Controls and sloppy accounting practices.

169
Q

If Internal Control is poor - what is the effect on the audit?

A

Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.

170
Q

What does Internal Control provide reasonable assurance for?

A

Internal control provides reasonable assurance that Material misstatements will be prevented Reliability/integrity of financial statements will be preserved Assets are protected against misuse

171
Q

What is required in an examination of Internal Control under Sarbanes-Oxley?

A

CEO/CFO must disclose Internal Control deficiencies Management must provide assessment of Internal Control Management must certify Financial Statements

172
Q

What is the relationship between Internal Control and Substantive Testing?

A

Inverse Relationship Stronger Internal Controls - Less Testing Needed Weaker Internal Controls - More Testing Needed

173
Q

What are the 3 objectives of Internal Control?

A

Reliability of Financial Reporting Operational Efficiency/Effectiveness Compliance with Law and Regulations

174
Q

What are the 5 components of Internal Control?

A

Control Environment Risk Assessment Information and Communication Monitoring Control Activities

175
Q

What is the purpose for a Control Environment assessment?

A

Sets tone for the entire company

176
Q

What are the components of the Control Environment?

A

Integrity/Ethics of Management Competence of Management Organizational Structure Human Resource Policies Assignment of Authority/Responsibility Management’s Style (riskier with a dominant/aggressive individual) Board/Audit Committee involvement

177
Q

What does an auditor’s assessment of Detection Risk determine?

A

Detection Risk determines nature- timing- and extent of audit procedures.

178
Q

What determines the acceptable level of Detection Risk?

A

Risk of material misstatement determines acceptable level of Detection Risk

179
Q

What items could increase the risk of material misstatement?

A

Rapid growth in the company. The methods management uses to identify risk- estimate its significance and assess the likelihood of occurrence Major changes to operations- personnel- systems- IT- products- corporate organization- and foreign operations.

180
Q

What happens when Control Risk is assessed to be at the maximum level?

A

No Internal Control testing is performed. All audit procedures are increased in intensity to compensate for increased risk.

181
Q

What happens when Control Risk is below the maximum level?

A

Auditor tests Internal Controls. Auditor evaluates Control Risk based on tests Auditor adjusts substantive tests accordingly Weaker Internal Control - More substantive tests Stronger Internal Control - Less substantive tests

182
Q

Describe some common examples of Control Activities.

A

Performance Reviews Information Processing Physical Controls Segregation of Duties

183
Q

What should an auditor understand with respect to Information and Communication on an audit?

A

Understand Client’s Major transaction classes Transaction initiation Support records/documents Transaction processing Financial Statement internal reporting process Financial Statement external reporting process

184
Q

How must an auditor document understanding of Internal Control?

A

Through written documentation such as Internal Control memos- flowcharts- and questionnaires

185
Q

What questions should be asked to determine the risk of material misstatement?

A

Were all transactions recorded? Were they timely? Measured appropriately? Recorded in correct period? Presented and disclosed properly? Did Management communicate their responsibilities?

186
Q

What is the purpose of testing Internal Controls?

A

Auditor needs reasonable assurance that controls are functioning as designed and effective Internal Control Testing should be strong as (IRON) so that nothing gets past them Inquiry - Interview company personnel Re-performance - Can it be replicated? Observation - Watch the control be applied INspection - Dig into the details/documents If results are as expected- substantive procedures do not need to be adjusted

187
Q

When can controls tested by an auditor in a prior year be used in the current year’s audit assessment?

A

Controls tested by auditor in a prior year can be used in the current year’s audit assuming they are re-tested every third year Exception If the control has changed since the last audit

188
Q

What happens if Internal Controls are deficient?

A

Control Risk increases Scope of substantive procedures increases Detection Risk decreases Material Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence

189
Q

What is a Material Weakness?

A

Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.

190
Q

What does Tracing test?

A

Tests Completeness Starts with source document and traces forward to the journal entry.

191
Q

What does Vouching test?

A

Tests Existence. Starts with a journal entry and searches for a voucher or source document to support the entry.

192
Q

What activities represent Segregation of Duties?

A

Non-compatible duties performed by separate individuals- such as Authorization of asset disbursement vs. Recording of Assets vs. Custody of assets If supporting audit evidence doesn’t exit - use Observation and Inquiry Accounting should be segregated from Production

193
Q

With respect to signing checks - how are duties segregated?

A

Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS Tip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves

194
Q

With respect to custody of assets - how should duties be segregated?

A

Employees who have custody of assets should not also RECORD those assets Someone in charge of petty cash should not also control the petty cash records Treasury Department (custodians) should NOT have record keeping duties They control assets and should not be able to adjust any recording of those assets

195
Q

What are the limitations on Control Activities?

A

Controls can’t stop collusion or bad judgment Management can override controls Cost vs. Benefit relationship of Internal Control

196
Q

What is required if a Material Weakness is identified?

A

A written report to management is required. Report declaring that no material weaknesses were found is allowed Previous weaknesses reported that still exist should be reported again Should be reported no later than 60 days after audit report release date If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given

197
Q

What is the effect of a Significant Deficiency? What is it?

A

A significant deficiency adversely affects a company’s ability to report in the financial statements according to GAAP. A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount

198
Q

What must occur if a Significant Deficiency is identified?

A

If a Significant Deficiency is identified- a written report to management required Report declaring that no significant deficiencies exist is not allowed Previous deficiencies reported that still exist should be reported again Should be reported no later than 60 days after the audit report release date

199
Q

What is a Control Deficiency?

A

A control is not operating as intended.

200
Q

What must an auditor ask if using the work of third parties?

A

Are they competent? Are they objective?

201
Q

What must an auditor understand with respect to internal auditors?

A

Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports They should not be asked to make any decisions or judgments

202
Q

What is required in an examination of Internal Control under Sarbanes-Oxley?

A

CEO/CFO must disclose deficiencies Management must provide assessment of Internal Controls Management must certify Financial Statements

203
Q

What is the relationship between Internal Control and Substantive Testing?

A

Has inverse relationship Stronger Internal Control results in LESS substantive testing Weaker Internal Control leads to MORE substantive testing

204
Q

What are the three objectives of Internal Control?

A

Reliability of Financial Reporting Operational Efficiency/Effectiveness Compliance with Law and Regulations

205
Q

What are the five components of Internal Control?

A

Control Activities Risk Assessment Information and Communications Monitoring Control Environment

206
Q

What are the components of the Control Environment?

A

Integrity/Ethics of Management Competence of Management Organizational Structure Human Resources Policies Assignment of Authority/Responsibility Management’s Style (riskier with a dominant/aggressive individual) Board/Audit Committee involvement

207
Q

What happens when Control Risk is below the maximum level?

A

Auditor tests Internal Controls. Auditor evaluates Control Risk based on tests Auditor adjusts substantive tests accordingly Weaker Internal Control - More substantive tests Stronger Internal Control - Less substantive tests

208
Q

What should an auditor understand with respect to Information and Communication on an audit?

A

Understand Client’s Major transaction classes Transaction initiation Support records/documents Transaction processing Financial Statement internal reporting process Financial Statement external communication process

209
Q

How must an auditor document understanding of Internal Control?

A

Auditor must document understanding of Internal Control via Memos - Flowcharts - Questionnaires

210
Q

What is the purpose of testing Internal Controls?

A

Auditor needs reasonable assurance that controls are functioning as designed and effective Internal Control Testing should be strong as (IRON) so that nothing gets past them Inquiry - Interview company personnel Re-performance - Can it be replicated? Observation - Watch the control be applied INspection - Dig into the details/documents If results are as expected - substantive procedures do not need to be adjusted

2014 CPA Study Flashcards (1 decks)

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