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Becker > AUD > Flashcards

AUD Flashcards

1
Q

What type of audit opinion would an auditor issue if financial statements are materially misstated?

(Financial statement issues)

A
  1. If none or immaterial, Unmodified (unqualified) opinion issued
  2. If item is material, but NOT pervasive, Qualified opinion issued
  3. If item is material AND pervasive, Adverse opinion issued
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2
Q

What type of audit opinion would an auditor issue if they can’t obtain sufficient appropriate audit evidence?

(Audit issues)

A
  1. If none or immaterial, Unmodified (unqualified) opinion issued
  2. If item is material, but NOT pervasive, Qualified opinion issued
  3. If item is material AND pervasive, Disclaimer of opinion issued
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3
Q

What is control risk?

A

Control risk is the risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity’s internal control.

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4
Q

What is detection risk?

A

Detection risk is the risk that the auditor will not detect a material misstatement.

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5
Q

What is inherent risk?

A

Inherent risk is the susceptibility of material misstatement assuming there are no related internal control, policies, or procedures.

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6
Q

When should an auditor modify the basis of opinion paragraph of an audit report?

A
  • Qualified and adverse opinions both require modification to the opinion and basis for opinion sections of the auditor’s report.
  • Opinion section should be modified to reference the matter described in the basis for modified opinion section and depending on materiality of the issue, “except for” (qualified) or “do not present fairly” (adverse) language will be added to the opinion section.
  • Basis for modification section will describe the matter giving rise to the report modification.
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7
Q

In a situation where an auditor ASSUMES responsibility for the work of another CPA and that CPA issues an UNMODIFIED OPINION, how will this effect the following:

  • Opinion Type
  • Auditor’s Responsibility Section
  • Opinion Section
  • Basis for Opinion Section
A
  • Opinion Type - Baring that there are no issues with the work performed by the other CPA, the auditor will issue an UNMODIFIED OPINION, the same that the other CPA.
  • Auditor’s Responsibility Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
  • Opinion Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
  • Basis for Opinion Section - NO CHANGE. If the opinion is an UNMODIFIED OPINION, there would be no change to this section.
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8
Q

In a situation where an auditor DIVIDES responsibility with the work of another CPA and that CPA issues an UNMODIFIED OPINION, how will this effect the following:

  • Opinion Type
  • Auditor’s Responsibility Section
  • Opinion Section
  • Basis for Opinion Section
A
  • Opinion Type - Baring that there are no issues with the work performed by the other CPA, the auditor will issue an UNMODIFIED OPINION, the same opinion that the other CPA issued.
  • Auditor’s Responsibility Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
  • Opinion Section - MODIFY. This section would be modified to reflect the division of responsibility between both auditors.
  • Basis for Opinion Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
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9
Q

In a situation where an auditor ASSUMES responsibility for the work of another CPA and that CPA issues an QUALIFIED OPINION, how will this effect the following:

  • Opinion Type
  • Auditor’s Responsibility Section
  • Opinion Section
  • Basis for Opinion Section
A
  • Opinion Type - The auditor would need to determine whether the item is material to it’s financial statements. If the item (the matter for which the other CPA qualified their opinion) is immaterial, the auditor would issue an UNMODIFIED OPINION. If the item is material, the auditor would issue a qualified opinion.
  • Auditor’s Responsibility Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
  • Opinion Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
  • Basis for Opinion Section - NO CHANGE. If the opinion is an UNMODIFIED OPINION, there would be no change to this section.
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10
Q

In a situation where an auditor DIVIDES responsibility with the work of another CPA and that CPA issues an QUALIFIED OPINION, how will this effect the following:

  • Opinion Type
  • Auditor’s Responsibility Section
  • Opinion Section
  • Basis for Opinion Section
A
  • Opinion Type - The auditor would need to determine whether the item is material to it’s financial statements. If the item (the matter for which the other CPA qualified their opinion) is immaterial, the auditor would issue an UNMODIFIED OPINION. If the item is material, the auditor would issue a qualified opinion.
  • Auditor’s Responsibility Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
  • Opinion Section - MODIFY. This section would be modified to reflect the division of responsibility between both auditors.
  • Basis for Opinion Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
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11
Q

When are negative confirmations most likely used?

A

Negative confirmations are used when:

  • Combined assessed level of IR and CR is LOW
  • Large # of small balances
  • No reason to believe that confirmation recipients will ignore them
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12
Q

What are example internal control components for Control environment?

A
  1. Participation of those charged with governance
  2. Assignment of authority, responsibility, and accountability
  3. Human resource policies and practices
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13
Q

What are example internal control components for Risk assessment?

A
  1. Adoption of new accounting principles
  2. Incorporation of new technology
  3. New personnel
  4. Corporate restructuring
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14
Q

What are example internal control components for Information and communication systems?

A
  1. Proper presentation of transactions and related disclosures
  2. Measurement and recording of proper monetary values
  3. The way in which significant events are captured by the accounting system
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15
Q

What is an example of internal control components for Monitoring?

A

Internal audit function

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16
Q

What are example internal control components for Existing control activities?

A
  1. Authorization of transactions
  2. Segregation of duties
  3. Pre-numbering of documents
  4. Operating performance reviews
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17
Q

What opinion should an auditor issue if a material weakness is noted in an audit of ICFR?

[Integrated audit]

A

Auditor should issue an Adverse opinion.

In the Basis of Opinion paragraph, there is an additional paragraph where we explain what the material weakness is.

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18
Q

What are fraud risk factors for attitudes/rationalizations pertaining to misstatements from fraudulent financial reporting?

A
  1. Excessive interest by management in maintaining or increasing the entity’s stock price - management is obsessed with maintaining their stock price as this relates to their attitude. Since they want to keep stock price high, could result in management overstating revenue or profit.
  2. Management failing to correct known significant deficiencies on a timely basis - this reflects management attitude regarding significant deficiencies. If the significant deficiencies aren’t addressed, it could lead to fraudulent financial reporting.
19
Q

What are fraud risk factors for incentives/pressures pertaining to misstatements arising from misappropriation of assets?

A
  • Promotions, compensation, or other rewards inconsistent with expectations - rewards can relate to incentives or pressures.
  • Note: This is included in the authoritative guidance AU-C 240.A75
20
Q

What are fraud risk factors for incentives/pressures pertaining to misstatements from fraudulent financial reporting?

A
  1. New accounting, statutory, or regulatory requirements - new laws can put pressure on management which could result in misstatements from fraudulent financial reporting.
  2. Management has significant financial interest in the entity - management may own or have loans with entity, so they can feel pressure for ensuring that entity performs well. This could lead to fraudulent financial reporting.
21
Q

What are fraud risk factors for opportunities pertaining to misstatements arising from misappropriation of assets?

A
  1. Large amounts of cash on hand or processed - if employees have access to cash it can be easily stolen.
  2. Inadequate physical safeguards over cash, investments, or inventory - if assets aren’t properly safeguarded, they can be stolen.
22
Q

What are fraud risk factors for opportunities pertaining to misstatements from fraudulent financial reporting?

A
  1. Significant related-party transactions NOT in the ordinary course of business - these typically have a higher inherent risk b/c these may occur at terms totally different than had they occurred with an independent third party. Auditors will look at these with more scrutiny as there is an opportunity for management to potentially manipulate the numbers with the transaction.
  2. Significant bank accounts in tax-haven jurisdictions for which there appears to be no clear business justification.
  3. Ineffective board of directors or audit committee oversight over internal control - Board and Audit Committee are charged with overseeing the financial reporting process. If they aren’t properly performing their oversight responsibilities, then fraudulent financial reporting could occur.
  4. Inadequate monitoring of controls, including automated controls and controls over interim financial reporting - typically, when there is inadequate monitoring of controls, this leads to opportunity for fraud.
23
Q

What type of procedure is sending a letter to the company’s outside attorney for information concerning pending or threatened litigation, claims, and assessments?

A

Sending a letter to the client’s attorney is inquiry of an external party.

24
Q

What type of procedure is scanning the repairs and maintenance account for unusually large amounts?

A

Scanning the repairs and maintenance account for unusually large amounts is an analytical procedure.

25
Q

What type of procedure is agreeing sales invoices to credit files to determine whether customer had a credit file and approved for credit?

A

Procedure involves the auditor reperforming the task that the client staff would have normally completed during the processing of the order. Goal is to determine whether the credit approval control is working properly.

Procedure is reperformance and is being used as a test of controls.

26
Q

What type of procedure is reviewing the Board minutes for authorization of new debt financing?

A

Reviewing board minutes involves inspection.

Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media or a physical examination of an asset.

Procedure is used as a test of control because the auditor is looking for evidence of authorization.

27
Q

What type of procedure is computing depreciation expense based on book value, company’s depreciation policy, and estimated economic life and agreeing the amount to the F/S?

A

Recalculation consists of checking the mathematical accuracy of documents or records either manually or electronically.

Procedure is a substantive procedure because it provides evidence that the depreciation amount reported on the F/S is reasonable and conforms with GAAP.

28
Q

What is an integrated test facility?

A
  • Integrated test facility uses test data commingled with actual data to test transactions.
  • Using this type of computer-assisted auditing technique allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process.
29
Q

What is parallel simulation?

A

Parallel simulation involves writing a computer program that duplicates the logic of a client’s program, using identical data as input, and comparing output.

30
Q

How do you calculate the allowance for sampling risk?

A

Upper deviation rate - [obtained from using chart sample size, # of deviations]

Less: Sample deviation rate - [# of deviations noted / sample population size]

= Allowance for sampling risk

  • If Upper deviation rate < Tolerable deviation rate = MAY rely on control
  • If Upper deviation rate > Tolerable deviation rate = DO NOT rely on control
31
Q

What are the key assertions when auditing Inventory during the observation?

A

Existence assertion:
* Vouching from Inventory report to auditor test counts
* Vouching from Inventory report to pre-numbered inventory tags

Completeness assertion:
* Tracing from auditor test counts to Inventory report
* Tracing from pre-numbered inventory tags to Inventory report

Accuracy assertion:
* Comparing auditor test counts to the pre-numbered inventory tags - to verify that client counts matched auditor test counts

32
Q

What is the relationship between risk of assessing control risk too low and sample size for attribute sampling?

A

Inverse relationship.

If risk of assessing control risk too low is decreased, sample size must increase.

Note: Decrease in risk of assessing control risk too low = Decease in the amount of risk auditor is willing to accept, which means the sample size will need to be increased.

33
Q

What is the relationship between tolerable misstatement and sample size for variables sampling?

A

Inverse relationship.

If tolerable misstatement is increased, sample size must decrease.

Note: If more mistakes are allowed, the sample size can be smaller.

34
Q

How do you calculate sampling interval in PPS sampling?

A

PPS Sampling interval = Tolerable misstatement / Reliability Factor

35
Q

How do you determine sample size for PPS sampling?

A

PPS Sample Size = BV of Population / Sampling Interval

Note: Answer is always rounded up.

36
Q

How do you calculate tainting percentage for a particular sample selection in PPS sampling?

A

Tainting percentage =

BV [recorded amount] - Audited amount / BV [recorded amount]

37
Q

How do you calculate projected error for a particular sample selection in PPS sampling?

A

Projected error = Tainting % x Sampling interval

38
Q

How do you calculate Mean-per-Unit estimation for variables sampling?

A

Mean-per-unit estimation = Average audited value x Number of items in population

39
Q

How do you calculate Ratio Estimation for variables sampling?

A

Ratio estimation = [Audited BV / BV of sample] x Total BV

40
Q

How do you calculate Difference Estimation for variables sampling?

A

Difference Estimation includes two (2) steps:

  1. Calculate projected error = [(BV - Audited value of sample) / # of items audited] x Population items
  2. Calculate point estimate = Total BV of population - Projected error
41
Q

How do you calculate a sample size WITHOUT stratification?

A

Sample size without stratification = Total BV of population / Sampling interval

Note: Need to know the sampling interval and total population BV for which sample will be derived from.

42
Q

How do you calculate a sample size WITH stratification?

A

If you don’t have enough information to use PPS sampling, you can manually select samples that are GREATER than the sampling interval.

Next, take the total of the remaining population and divide by the sampling interval.

Add the number of samples together to arrive at your total stratified sample selection.

43
Q

An increase in what items will cause sample size to increase?

[Direct relationship]

A

Sample size will INCREASE as the following INCREASE:

  • Expected misstatement
  • Standard deviation (population variability)
  • Assessed level of risk

Becker (4 decks)

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