aud Flashcards
What should be included for the Auditor’s address?
The City and State where located
What is Management Responsible for in regards to the Financial Statements?
Preparation and Fair Presentation of Financial Statements in accordance with the Applicable Financial Reporting Framework
What is Management Responsible for in regards to Internal Control?
Internal Control Design, Implementation, Maintenance
What are the headings in the Audit Report for an Unmodified Opinion?
(TIM-AA) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion
What are the headings in the Audit Report for an Modified Opinion?
(TIMA-BA) Title; Introduction; Management Responsibility; Auditor Responsibility; Basis for (Modified) Opinion; Audit Opinion
In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the headings?
(TIM-AA EMO) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion; Emphasis-of-Matter; Other-Matter
What are the requirements for referencing a Component Auditor in the Audit Report?
Component Financial Statements must be prepared using same Financial Reporting Framework as the Group Financial Statements; Component Auditor must have performed audit in accordance with GAAS or PCAOB Standards.
What must the Group Engagement Partner do if they assume responsibility for the Component Auditor’s work?
Perform additional audit procedures; Be involved in Component Auditors work; Perform Risk Assessment procedures; Assess Risk of Material Misstatement
What standards govern SSARS engagements?
Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)
Which clients can have compilation engagements?
Non-SEC (non-public) registrants only.
What is a Compilation?
Accountant puts together financial statements with information PROVIDED BY MANAGEMENT. No opinion is expressed and no assurances are given. Independence is not required.
What disclosures are required for Compilation engagements?
Disclosures not necessary must state that they are not included
What standards govern Review engagements?
SSARS (Statements on Standards for Accounting and Review Services)
What type of assurance is given in a Review engagement?
Reviews give limited assurance.
What procedures are required for Review engagements?
Analytical procedures are required for reviews. Compare results to documented predictions.
What is a Review engagement?
Financial statements are presented with no opinion expressed- and limited assurances are given. Independence is required for a review engagement.
What is a Forecast?
A prospective financial statement that uses normal circumstances. General and limited use allowed.
What is a Projection?
A prospective financial statement using hypothetical situations. Only limited use by the client is allowed.
What are the requirements for Agreed Upon Procedures?
Independence is required; Only limited use by the client is allowed.
What disclosures are required for remote likelihood of losses?
No disclosure required.
What disclosure is required for a probable loss contingency?
Accrue if estimable. Emphasis-of-Matter paragraph if not estimable.
What disclosure is made if a loss contingency is reasonably possible?
Auditor assesses need for Emphasis-of-Matter paragraph based on loss likelihood.
How is a gain contingency reported?
Gain contingencies are not reported.
How does an immaterial GAAP issue affect the audit opinion?
It doesn’t. Opinion is Unmodified.
How does a very material GAAP issue affect the Audit Report?
Modified-Adverse Opinion is issued. Emphasis-of-Matter paragraph is added after Opinion paragraph.
How do GAS standards compare to GAAS?
GAS is more strict than GAAS.
What is required under the Single Audit Act?
An audit performed under governmental auditing standards (GAS). A report on internal control is required. GAAS and GAS don’t require the I/C report.
What is Audit Sampling?
Taking part of a population- subjecting it to audit procedures- projecting results to a population
What are the characteristics of Statistical Sampling?
Based on formulas Helps find an appropriate audit sample Helps evaluate evidence obtained Helps evaluate results and quantify Sampling Risk
What are the characteristics of Non-Statistical Sampling?
Based on human decision Equally acceptable as Statistical Sampling
What are the characteristics of Substantive Tests?
Variables sampling Probability proportionate to size sampling
What type of sampling are Control Tests?
Attribute Sampling
What is Sampling Risk?
Risk that your sample isn’t representative of population Can happen even if audit is done properly
What is the risk of assessing Control Risk too high?
A risk of Control Testing - Auditor works to make Control Risk lower More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency Audit ends up being effective (correct result)- but you do more work
What is the risk of assessing Control Risk too low?
A risk of Control Testing - Complement to Confidence Level Inverse relationship to Sample Size Higher accepted risk of assessing Control Risk too low = Smaller Sample Lower accepted risk of assessing Control Risk too low = Larger Sample
What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?
Leads to higher Detection Risk - Fewer substantive tests Sample understates Control Risk This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness. Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it
What is the risk of Incorrect Acceptance?
A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated Hurts audit effectiveness Wrong conclusion reached Efficient- but not effective
What is the risk of Incorrect Rejection?
A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated Hurts audit efficiency Wrong recommendations given Effective- but not efficient
What is Non-Sampling Risk?
Risk of human (auditor) missing an error Also called exception- error or deviation.
How does Sampling Risk compare to Non-Sampling Risk?
Sampling Risk deals with the chance that your audit sample is flawed Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed
What is Attribute Sampling?
Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amounts For example- 5 invoices out of 100 were not properly paid. Error rate is 5% Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.
How do you determine if Control Procedures are operating properly or not operating properly?
Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors
What is the Tolerable Rate?
Error rate in population that you are willing to accept/tolerate Inverse relationship to Sample Size Higher Tolerable Rate = Smaller Sample Lower Tolerable Rate = Larger Sample If you’re willing to accept a higher probability that errors exist- there is less pressure on the sample
What is the Expected Population Error Rate?
What Error Rate are you expecting? - Judgment call- based on experience Direct relationship to Sample Size More errors = Larger Sample Less errors = Smaller Sample
What is the basic premise of Attribute Sampling?
Attribute in the sample gives information about the entire audit population Used to estimate Internal Control error rate
For what is the Expected Population Deviation (error) Rate used?
Used to determine initial level of Control Risk
What is the Allowable Risk of Over-reliance?
Risk of Assessing Control Risk too low Gives you the Sampling Risk
When is Attribute sampling used?
Attribute sampling is only useful when there is documented evidence (an audit trail) to test Use when the existence of an error needs to be verified or debunked
What is Classic Variable Sampling?
Testing for a dollar amount Value in sample gives information about value in entire population.
What functions are used in conjunction with Classic Variable Sampling?
Mean Per Unit = Sample Average x Number in Population Stratification - Decreases effect of variance in population and reduces sample size
What are the characteristics of Probability Proportionate to Size (PPS) sampling?
A form of Variable Sampling Does NOT use Standard Deviation Auditor focuses on a dollar amount Larger or more valuable items get picked more often as part of the sample
What is Projected Misstatement?
Misstatement found in sample - have to project it to remainder of population
How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?
PPS: Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design Classic Variables Sampling: Easy to expand sample size- Selecting zero and negative balances easy
What factors affect sample size?
Tolerable rate for error - Inverse relationship with sample size Risk of assessing Control Risk too low - Inverse relationship with sample size Expected population error rate - Direct relationship with sample size Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.
What is the formula for Audit Sampling?
SER + ASR < TER SER = Sample Error Rate ASR = Allowance for Sampling Risk TER = Tolerable Error Rate
What is Allowance for Sampling Risk?
The amount that you add to the Sampling Error Rate to get some cushion for your sample. As high as you think the population error rate could go based on experience.
What is the Tolerable Error Rate?
The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective If population error rate is more than TER- do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing
What are the steps to develop a sampling plan?
Determine Test Objective - for example- have sales shipments been billed? Define Population and Deviation - take a sample of shipping document- trace forward to see if billed Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate. Select Sampling Technique
After a Sampling Plan is developed- what are the steps in sampling?
Perform the Sampling Plan Evaluate Results Document Results
What is Systematic Sampling?
Every certain # of a population is selected Population needs to be randomly ordered Primary advantage is that population doesn’t require pre-numbering
What is Sequential Sampling?
Also called Stop or Go sampling Each audit step determines the next step
What is Discovery Sampling?
Audit is testing an area that is so crucial that zero population errors can be tolerated Any phony employees on payroll?
How does Block Sampling compare to other sampling methods?
Easy to implement- but is the worst method of sampling.
What is the primary duty of an auditor?
To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.
What is the auditor’s responsibility for detecting theft or fraud?
Auditors are *not* responsible for detecting theft or fraud. Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.
When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?
The earlier the auditor is hired- the better for audit planning and efficiency.
When can audit procedures be performed at interim dates?
If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates. The auditor then reviews changes in the balances at year-end.
When can an auditor accept an engagement offered after the year is already closed?
The auditor can take the engagement if they are able to overcome the limitations of the engagement.
For what does an auditor use professional skepticism?
To plan the scope of the audit To plan the objectives of the audit
How can analytical procedures be performed in audit planning?
The auditor can compare actual versus forecasted numbers.
What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?
If issues relating to predecessor auditor’s work on previous Financial Statements come up during the current audit- Auditor must have client’s permission to discuss the issue.
What questions must an auditor ask with respect to procedures carried out by assistants?
Were they adequately performed? (Review the working papers) Are the results consistent with the audit report?
How is audit strategy mapped out?
Auditor determines what the reporting objectives are. Auditor determines the scope of the audit.
Describe the key components of maintaining auditor independence.
Auditor must be independent in fact and appearance Honesty No direct financial interest No indirect material financial interest
Describe Due Professional Care
Technical abilities mirror those held by peers in the profession Follow GAAS Standards Obtain a Reasonable Level of Assurance Maintain Reasonable Level of Skepticism Supervise Audit Staff Review judgment at every level
What should an auditor do prior to accepting an audit engagement?
Review the previous financial statements Speak to third parties Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)
What questions should be asked by an auditor prior to taking an engagement?
Note: must have permission of client to contact predecessor auditor (no permission = no engagement) Why the Auditor Change? Any Serious Discussions with Audit Committee? How is Management Integrity? Disagreements? How was Internal Control? Understand Industry or Be Willing to Learn Consider Scope Limitation - Limited evidence available = no engagement
What should be included in an audit engagement agreement?
Note: must be written Objectives of Engagement Limitations of Engagement Responsibilities of Management - Provide written assertions Responsibilities of Auditor - Limited error/fraud responsibility Expectations of Access to Records Financial Statements (and Disclosures) are Management’s Responsibility Compliance with Laws Internal Control
What is management’s responsibility with respect to the financial statements?
Management is responsible for financial statements and adequacy of disclosures. Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation
What is the purpose of the Audit Committee?
Responsible for Hiring Auditor Oversees Internal Control Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan Acts as Liaison Between Auditor and the Board Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities
How is Audit Risk calculated?
Inherent Risk x Control Risk x Detection Risk Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report Based on Auditor Judgment Measured in both Qualitative and Quantitative
Describe Control Risk
Risk that internal control will not detect error or fraud Auditor cannot control this.
Describe Inherent Risk.
Which transactions have a higher level of risk? Auditor cannot control
Describe Detection Risk.
Will the auditor fail to detect a material misstatement? Auditor CAN control Do testing at year-end Increase substantive testing Run more effective tests
What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?
Less Acceptable DR = Run More Substantive Tests More Acceptable DR = Run Less Substantive Tests More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR) Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)
What are quantitative measurements versus non-quantitative measurements with respect to risk?
Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges
Whose responsibility is it to FIND and PREVENT fraud?
It is Management’s responsibility.
What is the auditor’s responsibility with respect to fraud and illegal acts?
Assess the RISK that such things will lead to material misstatements Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee) Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)
What are the three factors that affect/influence fraud?
Fraud is born out of: Rationalization Incentive Opportunity (RIO)
What is the difference between fraud and errors?
Errors are unintentional- fraud is intentional.
What red flags may indicate higher risk in an audit?
Management compensation tied to stock Aggressive financial forecasting Former auditor disagreed with Management Records not available for audit Current audit procedures may need to be reconsidered if red flags exist.
Describe the characteristics of a Fraud Risk Factor.
Has been observed in similar situations Does NOT necessarily mean that there is a material weakness in internal control Leads to an auditor taking action
What does an examination of internal control accomplish with respect to illegal acts?
Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts
What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?
Strives to make audit engagement procedures less patterned and predictable Re-evaluates management’s application of accounting procedures Finds and assigns audit personnel with relevant skills in this area
What should be documented with respect to fraud risk factors in an audit?
Any fraud risks identified that could lead to material misstatement Audit procedures performed to assess risks Nature of communication made to audit committee and company management Disclosure to third parties regarding fraud not normally the auditor’s responsibility Fraud by management should normally be reported to the audit committee- NOT the SEC.
What was the effect of the SOX Act of 2002?
Created PCAOB Designates Officer responsibility for internal control Must disclose significant internal control weaknesses to auditor and audit committee Must disclose any level of fraud discovered by employees with internal control responsibilities
What is the Hierarchy of Authoritative Literature?
- Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)
What quality control activities are undertaken by CPA firms with audit practices?
Firm Leadership exhibits quality and leads by example and sets the tone for the organization Firm should Monitor and document that its policies and procedures are being followed Firm should have Relevant Ethical Requirements Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality Firm should have competent and ethical personnel Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.
Which literature governs Compilation services?
SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only
What is the independence requirement for Compilations?
Independence NOT required for Compilations No Internal Control work allowed No assurance given
What type of assurance is provided by a Compilation?
Compilations are not an assurance service. No assurance is provided.
What type of assurance is provided by Review services?
Reviews provide NEGATIVE assurance.
What is the independence requirement for a Review?
Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed
For compilations and reviews- what knowledge must a service provider have?
Must have an understanding of the client industry.
What are attestation services?
CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required
What is the independence requirement for consulting services?
Independence is not required for consulting services.
Describe the limitations on Prospective Financial Statements?
Report is restricted to specified users. Agreed-upon procedures are implemented.
What is the role of the Group Engagement Team?
Develop Audit Strategy; Communicate with Component Auditors; Perform work on the Consolidation Process; Evaluate Audit Conclusions; Understand work of Component Auditors;
