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Becker AUD > A3 > Flashcards

A3 Flashcards

1
Q

type of audit required for an issuer

A

integrated audit (F/S & I/C)

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2
Q

Client Acceptance Policies

A
  1. Firm’s Ability to Meet Reporting Deadlines
  2. Firm’s Ability to Staff the Engagement
  3. Independence
  4. Integrity of Client Management
  5. Group Audits
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3
Q

Management Responsibilities for Audit

A

financials and internal controls

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4
Q

Preconditions of an Audit

A
  1. applicable financial reporting framework

2. management responsibilities

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5
Q

What to do if there is a management imposed scope limitation

A
  1. audit required by law or regulation (permitted but not required)
  2. qualified opinion or circumstances beyond their control can result in acceptance
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6
Q

3 Types of Fraud in Audit

A
  1. financial statement
  2. asset misappropriation
  3. corruption
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7
Q

Engagement Letter Contents

A
  1. objective and scope of an audit
  2. responsibilities of auditor
  3. responsibilities of management
  4. statement that because of the inherent limitations of an audit
  5. identification of the applicable financial reporting framework
  6. reference to the expected form and content of any reports
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8
Q

Considerations for Initial Audit

A
  1. MANDATORY: communication with the predecessor auditor
    * *examine workpapers
    * *disagreements
    * *management integrity
    * *reason for change in auditors
    * *client PERMISSION is needed
  2. Auditor’s Responsibility
    * *opening balances could contain misstatements
    * *accounting policies have been consistently applied in the current period
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9
Q

Responsibilities of Engagement Partner

A
  1. planning the audit
  2. supervising the work of engagement team members
  3. compliance with relevant auditing standards
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10
Q

Knowledge of the Client’s Business and Industry

A
  • can accept engagement but then must obtain this knowledge
  • tour client facilities
  • review the financial history
  • obtain an understanding of client accounting
  • inquire of client personnel
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11
Q

Developing the Audit Strategy

A
  1. WRITTEN audit strategy
  2. Scope of the Audit (Extent)
  3. Reporting Objectives, Audit Timing, and Required Communications (Timing)
  4. Factors that Determine the Focus of the Audit (nature)
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12
Q

Factors that determine the focus of the audit

A
  1. materiality
  2. audit risk
  3. internal controls
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13
Q

PCAOB Standards for Audit Strategy

A
  • knowledge of internal control
  • matters affecting industry
  • extent of recent changes
  • preliminary judgments about materiality and risk
  • control deficiencies previously communicated
  • legal or regulatory matters
  • complexity of the company’s operations
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14
Q

Materiality for an Audit on the Financial Statements as a Whole

A

*should use the smallest level of misstatement that could be material to any one of the financial statements

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15
Q

Communication with Those Charged with Governance in initial planning stages of audit

A

*planned scope and timing

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16
Q

Developing the Audit Plan

A
  • MUST BE WRITTEN
    1. audit procedures
  • risk assessment procedures
  • further audit procedures
  • tests of controls
  • substantive procedures
    2. financial statement assertions
    3. drafting the audit plan
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17
Q

Financial Statement Assertions

A 
C ompleteness
O cutOff
V aluation, allocation, and accuracy 
E xistence and occurence 
R ights and obligations 
U nderstandability and classification
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18
Q

PCAOB Financial Statement Assertions

A 
C ompleteness
E xistence 
O ccurence 
A llocation
P resentation
R ights 
O bligations
V aluation 
E
D isclosure
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19
Q

Role of Client’s Internal Auditors

A
  • cannot help in matter involving judgment and/or assessment
  • the higher up they report, the more objective they are
  • NOT independent
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20
Q

Auditor’s Responsibility with Internal Auditors

A

*obtain understanding and assess competence and objectivity

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21
Q

Use of Specialists when Auditing

A
  • treat the specialist like one of your staff

* competence, capabilities, and objectivity

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22
Q

Types of Misstatements

A
  1. factual misstatements
  2. judgmental misstatements
  3. projected misstatements
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23
Q

Audit Risk Model

A

AR = IR x CR x DR

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24
Q

Can substantive procedures ever not be performed during an audit?

A

No

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25
Q

3 Categories to which assertions apply

A
  1. transactions
  2. account balances
  3. disclosures
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26
Q

Fraud Triangle

A
  1. pressure
  2. opportunity
  3. rationalization
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27
Q

Auditor’s Responsibility when it comes to Fraud

A
  • design audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
  • difficult to detect fraud due to the concealment aspects
  • should discuss risks with engagement personnel
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28
Q

PCAOB Standards for Fraud

A

*ask management and audit committee if they have received and responded to tips or complaints regarding the company’s financial reporting

29
Q

When are analytical procedures required during an audit?

A
  1. planning

2. final review

30
Q

Does the absence of fraud risk factors mean that there is no fraud risk?

A

No

31
Q

Presumption of Risk in All Engagements

A
  1. improper revenue recognition

2. management override of controls

32
Q

Items most susceptible to manipulation

A
  1. high degree of management judgment and subjectivity

2. highly complex accounting principles

33
Q

Levels to Respond to Assessed Fraud Risk

A
  1. general response
  2. response encompassing specific audit procedures
  3. response addressing risks related to management override
    significant risks? withdraw
34
Q

Communications of Fraud to Management/Those Charged with Governance

A

*report to management at least one level above those involved

35
Q

Instances where third party disclosure is necessary regarding fraud

A
  1. comply with certain legal and regulatory requirements
  2. to a successor auditor when the successor makes inquiries with permission of client
  3. response to a subpoena
  4. funding agency or other specified agency for clients that receive governmental financial assistance
  5. authorities in some circumstances
36
Q

Auditor’s Consideration of Noncompliance

A

obtain understanding of

  1. legal and regulatory framework
  2. how the entity is complying with that framework
37
Q

Reporting Noncompliance in the Auditor’s Report

A
  1. material effect = GAAP = except for or adverse
  2. insufficient evidence = GAAS = except for or disclaimer
  3. client response/refuse = GAAS = withdraw
38
Q

Assessing the Risks of Material Misstatement

A 
I nternal control understanding 
M aterial misstatement risks 
A assessed level of risk response 
C ontrol testing
P erform substantive testing 
A udit evidence - evaluate appropriateness and sufficiency
39
Q

Two Procedures Necessary in Every Audit

A
  1. analytical procedures
  2. risk assessment procedures

*test of operating effectiveness of controls is NOT required

40
Q

Risk Assessment Procedures

A
  • perform analytical procedures
  • conduct a discussion among engagement team members
  • inquire of the audit committee and management about the RMM
  • inquiries
  • observation and inspection
41
Q

Required Documentation for Assessing RMM

A
  • discussion among audit team
  • key elements of the understanding of the entity and its environment
  • the assessment of the risks of material misstatement
  • identified risks and related controls evaluated by the auditor
  • more complex = more extensive = more documentation

PCAOB = include assessment on particular locations (CPI)

42
Q

Five Components of Internal Control

A

*COSO framework

C ontrol environment 
R isk assessment 
I nformation and communication systems 
M onitoring 
E xisting control activities

*think of pyramid

43
Q

Key phrase for the five components of internal control

A

*auditor should obtain an understanding and knowledge of each component

44
Q

Circumstances that are red flags about management’s philosophy and operating style

A
  1. consumed with meeting budget
  2. dominated by one person
  3. compensation contingent upon the entity’s financial performance
45
Q

Control environment has a ________ effect on the auditor’s risk assessment and preliminary judgments

A

pervasive

46
Q

Strong vs. Weak control environment and timing of procedures

A

Strong: interim and roll forward
Weak: as of the balance sheet date

47
Q

Risk Assessment is whose responsibility when it relates to the five components of internal controls

A

management’s responsibility

48
Q

Information and Communication Systems - 5 Components of I/C

A
  • initiate
  • authorize
  • process
  • record
  • report
49
Q

Control Activities in a Strong Control Environment

A

P renumbering of documents
A uthorization of transactions
I ndependent checks to maintain asset accountability
D ocumentation
T imely and appropriate performance reviews
I nformation processing controls
P hysical controls for safeguarding assets
S egregation of duties

50
Q

Segregation of Duties (not IT)

A

C ustody
A uthorization
R ecording

51
Q

Two key elements of internal controls

A
  • preventative

* detective and corrective

52
Q

When assessing the RMM, the auditor should be

A

identifying types of potential misstatements

53
Q

Auditor should look at what when considering the internal controls

A
  • design
  • implementation
  • procedures
  • WALKTHROUGHS AND INQUIRIES
  • document all understandings
54
Q

Documentation Types

A

F lowchart
I nternal control questionnaire or checklists
N arrative
D ocumentation from the client, including copies

55
Q

Issue when IT systems are used and records are continually modified

A

*difficult for timing of testing since records continually update

56
Q

The “IT Exception”

A
  • cannot solve detection risk through substantive testing alone
  • must do SUBSTANTIVE AND CONTROL TESTING
57
Q

Segregation of Duties (IT)

A 
C ontrol group
O perators 
P rogrammers 
A nalyst 
L ibrarian

*weakness comes from doing or supervising another area

58
Q

IT Weaknesses

A

G I G O

59
Q

Service Organizations and Internal Controls

A

Service Auditor Reports

  1. reports only on design and implementation
    * *should not reduce the assessment of control risk
  2. reports on design, implementation, and effectiveness
    * *can be used to reduce the assessment of control risk
60
Q

Two Types of Audit Approaches

A
  1. substantive approach
  2. combined approach (reliance method)

*IT requires internal control assessment and substantive procedures

61
Q

If the auditor wants to rely on the operating effectiveness of internal controls, when must the test of controls be performed?

A

in the current period

62
Q

Nature of Tests of Internal Controls

A
  • using audit evidence hierarchy

* inquiry alone is not sufficient

63
Q

Audit Evidence Hierarchy

A 
A uditor evidence
E xternal evidence 
I nternal evidence 
O ral evidence 
U KNOW IT

*inquiry alone is not sufficient

64
Q

Can you use evidence obtained in prior audits about operating effectiveness of controls be used in the current audit?

A

Yes

65
Q

Timing of Substantive Procedures

A

RMM low = interim (roll forward)

RMM high = at balance sheet date

66
Q

Evaluating the Sufficiency and Appropriateness of Audit Evidence

A
  • revising the assessed RMM
  • modify planned audit procedures
  • document it
  • *overall response
  • *NET
  • linkage of those audit procedures
  • results of audit procedures
  • conclusions reached
67
Q

primary purpose of evaluating internal control

A

*material misstatements could exist in the financials

68
Q

Can you evaluate the risk for internal control while obtaining an understanding of it?

A

Yes

Becker AUD (6 decks)

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