A5 Progress Test Flashcards
What is the relationship between audit risk and materiality?
Inverse - the risk of a very large m/s may be low while the risk of a very small m/s may be high. Also the more material a misstatement is, the less likely it is that an auditor will not find it.
A discussion among engagement personnel of the potential for material misstatement due to fraud is required as part of _________?
PLANNING
During planning the auditor is specifically required to perform analytical procedures relating to ___________, in order to identify unusual relationships that might be indicative of fraud.
Analytical Procedures
If an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern and that the entity’s disclosures are adequate, then the audit report may be either:
a. Unmodified with emphasis-of-matter paragraph, or
b. Disclaimer of opinion
According to SSARS, a compilation report must state that:
A compilation has been performed, describe what a compilation is, and emphasize that since no audit or review was performed, no assurance is provided. Although a signature is required, it need not be manual.
SSARS does not require that the compilation report be:
Printed on the accountant’s letterhead, nor does it require a manual signature.
The title of the OCBOA report should be:
“Independent Auditor’s Report.”
Audit documentation, regarding the risk of material misstatement due to fraud, is required to include:
A description of the discussion among engagement personnel (fraud brain storming session).
When are tests of details performed to detect material misstatements in the financial statements?
The auditor performs tests of details after the auditor has assessed risk, not as part of making this assessment.
An internal control questionnaire for notes payable would likely ask if direct borrowings on notes payable are:
Authorized by the board of directors.
The requirement for two authorized signatures is part of the _______________ internal control system.
The requirement for two authorized signatures is part of the disbursements internal control system.
An auditor’s risk assessment is based on the assumption that controls are operating effectively. What are the steps in making this assessment?
a. Consider whether control activities can have a pervasive effect on financial statement assertions.
b. Evaluate the effectiveness of the internal controls with tests of controls.
c. Obtain an understanding of the entity’s accounting system and control environment.
When an auditor cannot rely on management’s representations, he or she should:
Withdraw from the engagement.
The auditor should evaluate the adequacy of disclosure in the financial statements with respect to the potential effects of an act of noncompliance with laws and regulations . If the auditor concludes that disclosure is inadequate, he or she should:
Express a qualified or adverse opinion, but would not necessarily need to withdraw from the engagement (unless the client refused to accept the modified report).
Communication among audit team members about the risks of material misstatement due to fraud should:
Continue throughout the audit.
Is an act of omission or commission by an entity, whether intentional or unintentional, which is contrary to prevailing laws and regulations.
Non-Compliance
What is the auditor’s responsibility regarding noncompliance with laws and regulations?
The auditor is responsible for obtaining reasonable assurance that the financial statements are free of material misstatements due to noncompliance with laws and regulations, however they are not responsible for preventing noncompliance and cannot be expected to detect noncompliance with all laws and regulations.
Ordinarily, the disclosure of noncompliance to parties other than management and those charged with governance:
Is not part of the auditors responsibility because of the auditors professional duty of confidentiality.
Under what circumstances would an auditor have a duty to disclose noncompliance outside the entity?
- In responses to inquiries from an auditor to a predecessor.
- In response to a court order.
- In compliance with requirements for the audits of entities that receive federal financial assistance from a government agency.
If a client refuses to accept an auditor’s report as modified, when reporting on noncompliance, the auditor should:
Withdraw from the engagement and notify those charged with governance in writing
If an act of noncompliance has a material effect on the financial statements and has not been adequately reflected in the financial statements:
A qualified or adverse opinion should be issued
If the auditor suspects that noncompliance may exist, the auditor should discuss the matter with:
With management at least one level above those suspected of noncompliance and when appropriate those charged with governance.
If management or those charged with governance are involved with noncompliance, the auditor should communicate the matter to:
The next higher level of authority (if none - auditor may need to obtain legal advice).
The financial accounting standards established by an authorized recognized standards setting body.
Definition of a financial reporting framework.
True or false: An accountant may be engaged to compile or review a complete set of f/s or an individual financial statement. Financial statements may be for an annual period or for a shorter or longer period.
TRUE
When the auditor’s report on compliance with aspects of contractual agreements or regulatory requirements is included in the auditor’s report on the financial statements:
The restriction on the use of the report applies to the entire audit report.
If an auditor issues a separate report on compliance with aspects of contractual agreements or regulatory requirements from the auditors report on financial statements them:
Only the report on compliance needs to be restricted as to use.
If an auditor is asked to issue a report on a clients compliance with contractual agreements and regulatory requirements in connection with a f/s audit. The auditor must have:
a. Audited the clients financial statements
b. May only issue negative assurance on compliance
When f/s are prepared in accordance with a regulatory, contractual, or other basis of accounting, the auditors report should:
Describe the purpose for which the f/s were prepared or refer to a note that contains that information.
Except when the special purpose financial statements are prepared in accordance with a regulatory basis and are intended for general use, the auditors report should include an other matters paragraph that restricts the use when the special purpose f/s’s are prepared in accordance with either:
A contractual basis of accounting or a regulatory basis of accounting AND an other basis if accounting
Except when the special purpose financial statements are prepared in accordance with a regulatory basis and are intended for general use, the auditors report should include an emphasis of matter paragraph that:
- Indicates the f/s are prepared I accordance with applicable special purpose framework
- Referees to the note to the f/s that describes the framework
- States special purpose framework is not GAPP
How is the management responsibility paragraph different when prepared in accordance with a special purpose framework?
It should also make reference to managements responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances. (When mgt. has a choice if financial reporting frameworks.)
When auditing a single financial stmt. the auditor should determine materiality for:
The single financial stmt. rather than for the complete set of financial statements.
When auditing a specific element the auditor should determine materiality:
Separately for each element (makes audit more extensive than if same info were being considered in audit of complete f/s).
True or false: An audit of a single financial statement, or of a specific element, account, or item may be performed as a separate engagement or in conjunction with a complete set of financial statements.
TRUE
There is a presumption in every audit that what (2) risks exist?
- Improper revenue recognition
2. Management override of controls
What is the name of the standard setting body that established U.S. GAAP?
Financial Accounting Standards Board (FASB)
If the auditor believes that the financial statements need to be revised to reflect a subsequent event and management does not make the revision. The auditor should express a:
Qualified or Adverse Opinion
Conditions existing on or before the balance sheet date.
Recognized (Type 1) Events > Requires Financial Statement adjustment.
Conditions Existing After the Balance Sheet Date.
Non-recognized (Type 2) Event > May Require Footnote Disclosure
The PRIME test to perform on subsequent events include:
Post balance sheet transactions
Representation letter should be obtained from management
Inquiry - of mgt. & those charged with governance
Minutes of board meetings
Examine latest available interim financial statements to compare
If adjustments are made after the original date of the auditors report, the auditor may dual date the report to extended responsibility:
ONLY FOR THE PARTICULAR SUBSEQUENT EVENT
