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AUDITING THEORY > AT - AUDIT OVERVIEW > Flashcards

AT - AUDIT OVERVIEW Flashcards

1
Q

What is the primary function of an independent audit?

A

The primary function of an audit is to LEND CREDIBILITY TO THE FS PREPARED BY THE ENTITY.

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2
Q

What is audit as mentioned by PSA?

A

An audit enables the auditor to express an opinion whether the FS are prepared in all material respects in accordance with an identified financial reporting framework.

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3
Q

What is audit as defined by American Accounting Association?

A

An audit is a SYSTEMATIC PROCESS of OBJECTIVELY OBTAINING AND EVALUATING EVIDENCE regarding assertions about ECONOMIC ACTIONS AND EVENTS to ASCERTAIN THE DEGREE OF CORRESPONDENCE between these assertions and ESTABLISHED CRITERIA and COMMUNICATING THE RESULTS TO INTERESTED USERS.

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4
Q

What are the types of audit? Define each.

A
  1. Financial Statement Audit - determines whether FS are fairly presented in accordance with an identified financial reporting framework
  2. Compliance Audit - review of an organization’s procedures to determine whether the organization has adhered to specific procedures/rules/regulations
  3. Operational Audit - AKA performance/management audit, it is the study of a specific unit of an organization for the purpose of measuring it’s performance. Its main objective is to assess the performance of the entity, identify areas for improvements and make recommendations to improve performance
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5
Q

What are the types of auditors?

A
  1. Government auditors
  2. Internal auditors
  3. External auditors
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6
Q

What is the objective of an audit of financial statements?

A

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared in all material respects, in accordance with an identified financial reporting framework, or acceptable financial reporting standards.

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7
Q

What is the auditor’s responsibility on financial statements?

A

The auditor’s responsibility is to FORM AND EXPRESS AN OPINION ON THE FINANCIAL STATEMENT BASED ON HIS AUDIT.

An audit DOES NOT RELIEVE MANAGEMENT OF ITS RESPONSIBILITIES ON THE FS.

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8
Q

What assurance is provided by an auditor on the audit of FS?

A

Reasonable assurance only.

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9
Q

What are the limitations as to why the auditor can only give reasonable assurance and not absolute assurance on his audit of the FS?

A
  1. Error in application of judgment/ Non-sampling risk
  2. Reliance on management’s representation - management lacking integrity may provide the auditor with false representations causing auditor to rely on unreliable evidence.
  3. Inherent limitations of client’s accounting and internal control systems
  4. Nature of evidence - evidence obtained by auditor DOES NOT CONSIST OF HARD FACTS. “AUDIT EVIDENCE IS GENERALLY PERSUASIVE RATHER THAN CONCLUSIVE IN NATURE”..
  5. Sampling risk/ Use of testing
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10
Q

What are the general principles governing the audit of financial statements?

A
  1. Auditor should comply with the CODE OF PROFESSIONAL ETHICS FOR CPAs PROMULGATED BY BOA
  2. Auditor should CONDUCT AN AUDIT IN ACCORDANCE WITH THE PHILIPPINE STANDARDS ON ACCOUNTING
  3. The auditor should PLAN AND PERFORM THE AUDIT WITH AN ATTITUDE OF PROFESSIONAL SKEPTICISM.
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11
Q

What is professional skepticism?

A

An attitude of professional skepticism means the auditor MAKES A CRITICAL ASSESSMENT WITH A QUESTIONING MIND.

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12
Q

What are the four reasons why there is a need for an independent financial statement audit.

A
  1. CONFLICT OF INTEREST between management and users of FS
  2. Expertise - complexity of accounting and auditing requires expertise.
  3. Remoteness - users of financial information are usually prevented from directly assessing the reliability of information
  4. Financial Consequences - misleading financial information could have substantial economic consequences.
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13
Q

What are the principles under the Theoretical framework of auditing?

A
  1. Audit function operates on the assumption that all financial data are VERIFIABLE.
  2. The auditor should always MAINTAIN INDEPENDENCE with respect to the FS under audit.
  3. There should be NO LONG-TERM CONFLICT BETWEEN THE AUDITOR AND THE CLIENT MANAGEMENT.
  4. An EFFECTIVE INTERNAL CONTROL SYSTEM REDUCES THE POSSIBILITY OF ERRORS AND FRAUD AFFECTING THE FS.
  5. Consistent application of GAAP OR PFRS RESULTS IN FAIR PRESENTATION OF FS.
  6. What was held true in the past will continue to hold true in the future in the absence of known conditions to the contrary.
  7. AN AUDIT BENEFITS THE PUBLIC.
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14
Q

The subject matter of any audit consists of ?

A

Assertions.

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15
Q

Which one of the following is NOT a major difference between OPERATIONAL AND FINANCIAL AUDITING?

a. purpose of the audit
b. distribution of the report
c. testing the effectiveness of internal control
d. audit of non-financial areas

A

C.

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16
Q

What is the overall objective of internal auditing?

A

It is to assist members of the organization in the effective discharge of their responsibilities.

17
Q

Internal auditing is an independent appraisal function established within an organization to examine and evaluate its activities. To that end, internal auditing provides assistance to

a. External auditors
b. Stockholders
c. Management and BoD
d. Government

A

C.

18
Q

T or F
The auditor’s opinion enhances the value and usefulness of the FS. By attaching a report to the FS, the auditor provides decreased assurance to users that the FS are reliable.

A

False, INCREASED assurance

19
Q

What are assertions?

A

Assertions are representations made by an auditee about economic actions and events.

20
Q

What are established criteria?

A

Established criteria are the basis against which assertions have been evaluated or measured. These are important to judge the validity of the assertions. In an audit, the auditor determines the degree by which assertions conform to these criteria by comparing the assertions to the criteria

21
Q

T or F
An audit of FS relieves management of its responsibilities.

A

False

22
Q

An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the case of FS audit, which is not a valid criterion?

a. PSA
b. International Accounting Standards
c. Authoritative financial reporting framework
d. GAAP

A

A. PSA
Remember, assertions vs established criteria (Accounting related)

PSA and other auditing standards are related to the manner of conducting the audit, and are not compared with contents of the FS.

23
Q

The criteria for evaluating quantitative information vary. In the case of independent audit of FS, the criteria usually are

a. PSA
b. PFRS
c. NIRC
d. SEC regulations

A

b. PFRS

24
Q

In auditing financial accounting data, the primary concern is with

a. determining whether recorded info properly reflects the economic events that occurred during the accounting period
b. determining if fraud has occurred
c. determining if taxable income has been calculated correctly
d. analyzing the financial information to be sure that it complies with government requirements

A

a. determining whether recorded info properly reflects the economic events that occurred during the accounting period

25
Q

In determining the primary responsibility of the external auditor for an audit of a company’s FS, the auditor owes primary allegiance to:

a. stockholders/creditors and investing public
b. management of the audit client because the auditor is paid by them
c. The AASC
d. Audit committee of the audit client

A

a. stockholders/creditors and investing public

26
Q

An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the case of an audit of FS, which of the following would not be a valid criterion?

a. International Accounting Standards
b. PFRS
c. Generally accepted auditing standards
d. PFRS for SMEs

A

c. Generally accepted auditing standards

27
Q

In FS audits, the audit process should be conducted in accordance with

a. The audit program
b. PSA
c. Philippine Accounting Standards
d. PFRS

A

b. PSA

28
Q

Which of the following is more difficult to evaluate objectively?

a. Efficiency and effectiveness of operations
b. Compliance with applicable government regulations
c. Presentation of FS in accordance with applicable financial reporting criteria
d. All the above

A

a. Efficiency and effectiveness of operations

29
Q

Internal auditors are expected to add value to the organization through improved operational effectiveness. In addition, their responsibilities include all the following except:

a. reviewing the reliability and integrity of information
b. ensuring compliance with the company’s accounting policies
c. verifying accounting information for external users
d. ensuring compliance with applicable governmental regulations

A

c. verifying accounting information for external users

30
Q

What is the overall objective of internal auditing?

a. Attest to the efficiency with which resources are employed
b. Ascertain that controls are cost-justified
c. Provide assurance that financial data have been accurately recorded
d. Assist members of the organization in the effective discharge of their responsibilities

A

d. Assist members of the organization in the effective discharge of their responsibilities

31
Q

To whom does the internal auditors report to?

A

The audit committee of the BoD

AUDITING THEORY (17 decks)

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