AUD 1 Flashcards
What is an adjusting subsequent event?
An event that provides additional evidence about conditions existing at the balance sheet date.
Requires adjustments to the financial statements.
What is a non-adjusting subsequent event?
An event that reflects conditions arising after the balance sheet date. Requires disclosure but no adjustments to the financial statements.
What are the four types of opinions on the outcome of an audit?
unqualified (unmodified)
qualified
adverse
disclaimer
What is an unqualified (clean) opinion?
The financial statements are fairly presented with no material misstatements.
What is a qualified opinion?
The financial statements are fairly presented, except for a specific material issue.
What is an adverse opinion?
The financial statements do not present fairly due to significant issues.
What is a disclaimer of opinion?
“The auditor cannot express an opinion due to a lack of evidence or scope limitation.
“
What is random sampling?
Each item has an equal chance of being selected to reduce bias.
What is systematic sampling?
Selects items at fixed intervals (e.g., every nth item).
What is haphazard sampling?
The auditor picks items without structure or a statistical method.
What is judgmental (non-statistical) sampling?
The auditor uses their judgment to choose specific items.
What is monetary unit sampling (MUS)?
Larger dollar amounts have a higher chance of being selected.
What is stratified sampling?
The population is divided into subgroups (strata), and a sample is selected from each.
What organization issues Statements on Auditing Standards (SASs) for nonissuers?
The AICPA’s Auditing Standards Board (ASB).
What standards are used in audits of issuers (public companies)?
PCAOB standards, which include SASs adopted by the PCAOB and auditing standards (AS) issued by the PCAOB.
What standards are used for audits of government entities?
Generally Accepted Government Auditing Standards (GAGAS), also known as the “Yellow Book.”
What are the three types of modified opinions of an audit?
Qualified
Adverse
Disclaimer of opinion
What are the opinions of an audit that is issued due to a scope limitation?
Qualified
Disclaimer of opinion
What are the opinions for an adverse, qualified, and disclaimer of opinion.
“In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not present fairly the financial position…”
“In our opinion, except for the omission of information described in the Basis for Qualified Opinion section of our report…”
“Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.”
When an auditor of a nonissuer qualifies his or her opinion because of a scope limitation, such as the inability to confirm accounts receivable, the wording in the opinion paragraph should indicate that the qualification pertains to what?
The possible effects on the financial statements and not to the scope limitation itself
To obtain reasonable assurance:
An auditor must plan the work and properly supervise assistants
When should litigation be disclosed?
Outcome is reasonably possible (but not probable).
Outcome is probable, but the loss cannot be reasonably estimated.
When should litigation be accrued?
Outcome is probable.
Loss can be reasonably estimated.
What situations are disclosed in an Emphasis of Matter paragraph?
Going concern uncertainty.
Change in accounting principles or policies.
Significant subsequent events.
Major litigation or regulatory uncertainties.
When are Other Matter paragraphs used in an audit report?
To provide context for the audit, such as a special purpose framework.
When reporting on prior period financial statements that were not audited.
To address subsequent events that may affect the audit report.
To highlight significant related party transactions.
To explain restrictions on the use of the audit report.
What happens when the audited financials statements include a material misstatement?
The auditor’s opinion would be either qualified or adverse depending on the pervasiveness of the misstatement.
What happens when the entity engaged in significant transactions with a related party during the year under audit and subsequent to year-end?
If the entity engaged in significant transactions with a related party, the auditor may be required to use an emphasis-of-matter paragraph
What happens when a material weakness in internal controls exists?
This would be reported to those charged with governance.
When is an other-matter paragraph used?
refers to matters other than those presented or disclosed in the financial statements that are relevant to the users’ understanding
What are the key things about the term “consistency” when it comes to auditing?
deals with the comparability of financial statements from year to year
If the auditor is able to obtain sufficient evidence about consistency, no mention of consistency need be made. Consistency is implied in the auditor’s report.
When does an auditor add an emphasis of matter paragraph for a lawsuit?
If the terminology “unusually important” is added
What is important thing to remember when it comes to the relationship between the audit opinion and whether an emphasis of matter, other matter, or explanatory paragraph is used?
It unmodified (unqualified) opinion can still be the issued regardless of one of these paragraphs being present in the audit report
What is a key thing to remember when it comes to paragraph types in an audit report?
Non-issuers will use emphasis of matter/other matter paragraphs
Issuers will use explanatory pargraph
Explanatory paragraph generally comes after the opinion paragraph for an issuer
The auditors refers to what for guidelines on how to perform an audit?
Generally Accepted Auditing Standards (GAAS)
If a company issues f/s that have financial position (balance sheet) and results of operations (income statement) but omits the related SCF, the auditor will normally conclude that the omission requires what type of opinion?
Qualified opinion
What is the pass key when it comes to an auditor not being able to perform a specific procedure?
It is not a scope limitation if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures.
If they cannot perform alternate procedures then a qualified or disclaimer of opinion should be expressed
What happens when prior period financial statements are restated to conform with GAAP?
The auditor’s updated report on the prior-period financial statements should express an unmodified opinion concerning the restated financial statements.
In addition, the auditor would state the substantive reasons for the change in opinion in an emphasis-of-matter (or other-matter) paragraph.
Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the auditor should
1) read f/s of current period
2) horizontal analysis
3) obtain a letter of representation from the successor auditor and former client’s management
When does a group engagement partner not mention the component auditor in the audit report (opinion)
Under U.S. GAAS, when the group engagement partner assumes responsibility for the component auditor’s work
When a group engagement partner decides to make reference to a component auditor’s audit under U.S. GAAS, the group engagement partner’s report should state “We did not audit the financial statements of X Company…” in which section of the audit report?
Opinion paragraph
How do you know what subsequent events the auditor took responsibility for?
The period between the date of the financial statements and the date of the auditor’s report is the subsequent period, during which the auditor is responsible for investigating certain subsequent events.
When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor’s report, but before issuance of the related financial statements what happens to the auditor’s responsibility?
the auditor’s responsibility for events occurring subsequent to the original report date is limited to the specific event referenced.
When auditing a nonissuer, what is an auditor’s responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements but required by GAAP?
The auditor should apply certain limited procedures to the supplementary information and add a separate section with the heading “Required Supplemental Information” to the financial statement audit report.
What are the two general purpose frameworks?
IFRS
GAAP
What are types of special purpose frameworks?
Cash basis
Tax basis
Regulatory basis
Contractual basis
An auditor’s special report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that refers to what?
The note to the f/s that describes the basis of accounting
A description of how the income tax basis differs from GAAP should be included where?
The notes to the f/s
What are the key items included in an engagement letter for an audit?
Scope of the audit
Responsibilities of management (e.g., financial statements)
Auditor’s responsibilities (e.g., follow GAAS)
Audit limitations (e.g., reasonable assurance)
Audit terms (e.g., fees, timing, use of specialists)
Auditing standards required that the auditor must be independent. What is the exception?
Except when required by law or regulation to accept the engagement
A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant’s review report be modified?
If the accountant agrees with the change, the accountant should issue the review report without mentioning the change in engagement.
What are the key points when communicating with a predecessor auditor?
Obtain client’s permission before contacting.
Inquire about reasons for change in auditors.
Discuss any disagreements with management.
Ask about fraud, noncompliance, or internal control issues.
Review the integrity of management and any significant matters from the prior audit.
Does a predecessor auditor have to communicate with the successor auditor?
No, a predecessor auditor is not required to communicate with the successor auditor
What are the six elements of quality control for audit and assurance engagements?
HELP ME acronym
Human resources – Hiring competency, staffing, development, and advancement.
Engagement/client acceptance & continuance – Evaluate client integrity, firm’s capability, and conflicts of interest.
Leadership responsibilities – “Tone at the top” influences firm attitudes.
Performance of the engagement – Ensure high performance, supervision, and engagement reviews.
Monitoring – Second partner review, peer review.
Ethical requirements – Independence, integrity, objectivity; Sarbanes-Oxley Act responsibilities.
Audit documentation should be prepared in enough detail so that an _________ ___________ who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
experienced auditor
Audit documentation should show that the what should reconcile with what?
accounting records
financial statements
What is the date on which the auditor grants the client permission to use the report?
report release date
What is the date by which final documentation must be assembled?
Documentation completion date
How to calculate the documentation completion date for nonissuers versus issuers?
Nonissuers - Documentation completion date = Report release date + 60 days
Issuers - Documentation completion date = Report release date + 45 days
What is the documentation retention requirements for nonissuers and issuers?
Non issuers = five years for audits from the report release date
Issuers = seven years for audits from the report release date
What are things that would be included in a permanent (continuous file)
Contracts
pension plans
leases
stock options
bylaws
articles of incorporation
minutes of meetings
bond indentures
What are the five components of internal control based on the COSO Internal Control Framework
CRCIM
Control Environment
Risk Assesment (Management’s responsibility)
Control Activities
Information and Communication
Monitoring Activities
What are the three categories of entity objectives?
Reliability of financial reporting
Effectiveness and efficiency of operations
Compliance with laws and regulations
According to COSO, management oversight of the effectiveness of internal control provides evidence for which of the following control components?
Monitoring Activities
Which of the following components of internal control would be considered the foundation for the other components?
Control Environment
Within the COSO Internal Control—Integrated Framework, which of the following components is designed to ensure that internal controls continue to operate effectively?
Monitoring
those systems that identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives
Information and communication
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:
Record and conceal fraudulent transactions in the normal course of assigned tasks.
Which of the following is true about the timing of predecessor/successor communications?
They can occur both before and after the auditor accepts the engagement.
What are four things that the auditor does within the planning phase of an audit?
the auditors would obtain knowledge of the client’s business and industry
perform risk assessment procedures
develop an audit strategy
develop an audit plan
What is the difference between an audit strategy and an audit plan?
audit stretegy provides, scope of audit, outlines reporting objectivies, provides preliminary assessment of materiality and tolerable misstatement
the audit plan (not the audit strategy) outlines the nature, extent, and timing of the audit procedures that will be performed by the auditors on an engagement.
Which of the following accounts would an auditor most likely test prior to the balance sheet date?
a component of the statement of income and the amount reported includes the transactions that took place during the full period of the financial statements.
Balance sheet items would not be included because they are a snapshot at the date being tested
A _________ audit plan is required for every audit.
written
In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?
For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.
GAAS defines a _____________ as a person or firm with special skills in a field other than accounting or auditing (e.g., actuaries, appraisers, attorneys, or engineers).
specialist
What are two tasks that an internal auditor that is competent and objective perform for an independent auditor?
Test of controls and of details (substantive tests)
Even if the auditor references the ___________ in the report, the auditor is still responsible for expressing an opinion on the financial statements as a whole. Therefore, the auditor is responsible for evaluating the work performed by the ___________.
specialist
specialist
What happens when an auditor uses an audit specialist for a client audit and the auditor provides an unmodified opinion in the audit report?
No reference to the work of the specialist should be made in the report
When establishing the audit strategy, the auditor should determine materiality for the following:
f/s as a whole
performance materiality
materiality levels for particular classes of transactions, account balances, or disclosures
As the acceptable level of detection risk changes the auditor can change the following?
Nature: how effective the procedure is
Timing: Either to interim or year end date
Extent: how much testing is being done
__________ _____________ are necessary for all relevant assertions pertaining to a client’s significant transactions and account balances.
substantive procedures
What is the formula for audit risk?
Audit Risk = Risk of Material Misstatement * Detection Risk
Risk of Material Misstatement = Inherent Risk * Control Risk
The risk of not detecting a material misstatement resulting from ____________ fraud is greater than that for employee fraud because they are in a position to manipulate accounting records, present fraudulent financial information, or override controls.
management
The Sarbanes-Oxley Act of 2002 requires registered firms to maintain audit documentation for __________ years
seven
What is a key lagging economic indicator that showed up on a few MCQs?
Average duration of unemployment
are policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system
general controls
relate to safeguarding assets, such as using security devices to limit access to programs and restricted areas.
physical controls
apply to the processing of individual transactions and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and reported.
information processing controls
Which of the following is the most complete and accurate list of the walkthrough procedures usually performed in an issuer’s integrated audit?
Inquiry
Observation
Inspection of relevant documentation
Reperformance of controls
What is a key indicator that an auditor can use when evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern?
Negative Cash flows
What improves the reliability of data?
Strong, effective controls
What is the hierarchy of audit evidence from most to least reliable?
Auditor’s direct personal knowledge
External Evidence: Confirmations
Internal Evidence
Oral Evidence: Inquiries
The auditor uses their ____________ ____________ to evaluate the sufficiency and appropriateness of audit evidence.
professional judgement
What type of accounts would be most predictable and used for analytical procedures?
Relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time
occurs when an auditor looks at a process or procedure performed by others.
observation
involves examining records or documents
inspection
What assertions do tracing and vouching test?
Tracing: forward to backward, completeness, understatement
Vouching: backward to forward, existence, overstatement
What are some ways that an auditor would obtain evidence regarding subsequent events?
Obtaining lists of litigation for review with the client’s attorneys
Reading minutes of board meetings and reading interim f/s
Making inquiry of management about unusual adjustments after year-end
__________ __________ is outside the basic financial statements, so problems with this information do not prevent the issuance of an unmodified opinion on the basic financial statements.
supplementary information
Because the financial statements are interrelated, the auditor should consider materiality in terms of the ____________ aggregate level of misstatement that could be material to any _______ of the financial statements.
smallest
one
An auditor’s working trial balance generally contains columns for _____________ and ___________
reclassifications
adjustments
auditor believes that an account balance is materially misstated but it was not materially misstated
incorrect rejection
auditor believes that an account balance is not materially misstated but it was materially misstated
incorrect acceptance
sample results indicate a lower deviation rate than actually exists in the population
risk of assessing control risk too low
sample results indicate a greater deviation rate than actually exists in the population
risk of assessing control risk too high
Attribute sampling is used to test ___________.
controls
Know that the auditor draws conclusions by comparing the tolerable deviation rate to the upper deviation rate. What are the two outcomes?
Upper deviation rate <= Tolerable deviation rate = Rely on Control
Upper deviation rate > Tolerable deviation rate = Do not rely on control
What is the formula to calculate the upper deviation rate?
upper deviation rate = Sample Deviation rate + Allowance for sampling risk
During the process of transforming raw data into information that can be used in a relational database, which of the following must be used to create a relationship between two tables?
foreign key
Which of the following terms is used to describe the unique attribute that identifies a specific record in a table?
Primary key
What is a remittance slip?
A document sent with a payment to specify what the payment covers.
What is a cashier’s job description?
Cashier receives remittances from the mailroom and also prepares the daily deposit slip
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of:
Valuation and allocation
Two assertions for which confirmation of accounts receivable balances provides primary evidence are:
Rights and obligations and existence
Which of the following statements is true regarding the communication with a predecessor auditor?
“Contact with the predecessor auditor before client acceptance is mandatory, but client permission is required.
”
documents that serve as formal requests for payments
vouchers
In order to have an appropriate segregation of duties, the __________ ____________ should prepare the purchase order, the __________ ___________ department should match the purchase order, receiving report, and vendor invoice, and the _____________ should actually make the payment.
purchasing department
accounts payable
treasurer
Under an effective system of internal control, the accounts payable clerk should ensure that what supporting documents are in agreement before the voucher is submitted for payment?
invoice
receiving report
purchase order
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
A __________ __________ is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts.
lockbox system
When __________ occurs, an employee uses current remittances to conceal remittances that have been stolen previously. Thus, a lag will exist from the time that this current payment is deposited until the current customer’s account is actually credited. (The current payment is applied to the previous customer’s account).
lapping
What is kiting?
a trick where someone moves money between two bank accounts to make it look like they have more cash than they really do.
Write a check from Bank A (even though there isn’t enough money).
Deposit that check into Bank B.
Since it takes a few days for the check to clear, it temporarily looks like the money is in both accounts.
What is lapping?
An employee takes Customer A’s payment and keeps it for themselves.
When Customer B’s payment comes in, the employee uses that money to cover Customer A’s account.
This cycle continues, using new payments to hide the missing money from earlier.
Good internal control for cash includes the separation of what three things?
cash handling
record keeping
reconciliation of bank statements
when someone secretly takes money or property they were trusted to manage or protect for personal use.
embezzlement
An insignificant portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
confirmation
What’s the difference between a remittance and credit memo?
Remittance is from the customer of the client
Credit memo is an approved document by the client to credit a customer’s account
An auditor’s principal objective in analyzing repairs and maintenance expense accounts is to:
Discover expenditures that were expensed but should have been capitalized.
Restrictions on retained earnings should be shown as appropriations in the financial statements. An auditor attempts to determine whether any such restrictions exist to verify what management assertion?
Classification and presentation
In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would trace the authorization for the options granted to what?
The BOD’s approval
When a company’s stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:
of share issues and outstanding
According to the Uniform Guidance, non-profit entities, states, and local governments that expend ________________ or more in federal awards during the entity’s fiscal year are required to have a _________ _________
750,000
single audit
As long as the __________ is large enough, __________ size has virtually no impact on sample size.
population
Given the auditor’s preliminary assessment of potential control weaknesses, the auditor would be most concerned with the _________________ for employees to commit fraud within the organization.
opportunity
Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?
Make inquiries to understand the potential consequence of the deviation.
What is the proposed adjustment for AFDA when the client records 800 and the audit estimation for AFDA is 1500 to 1800.
DR: Bad debt expense 700
CR: AFDA 700
Whose signatures should be included in the management representation letter to the auditor?
CEO/President
CFO
In the management representation, management should indicate that they believe that the effects of ________________ misstatements are immaterial, individually or in the aggregate, to the financial statements as a whole.
uncorrected
