AUD 3 Flashcards
Insufficient control consciousness
Is an example of a deficiency in the design of controls.
It is not evidence of failure in the operation of internal control.
An auditor would be most likely concerned with internal controls that provide reasonable assurance about
The entity’s ability to process and summarize financial data
Adverse opinion is least likely to be rendered when
An auditor is unable to complete a procedure. Since an adverse opinion is given when there is a departure from GAAP
Limitation on scope of audit sufficient to preclude an unmodified opinion includes when
Management is unable to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary
Purpose of management rep letter
To confirm management’s oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledging that all compensated balances or other restrictions on cash have been disclosed.
What assertion is in reviewing the renewal of a note payable shortly after the balance sheet date?
Understandability of presentation and classification. Classification meaning the note is either current or non current.
Occurrence assertion relates to
Whether recorded transactions have actually occurred during the given period.
Completeness assertion relates to
Whether all transactions occurring in the period have been recorded.
Valuation and accuracy assertion relates to
Fair disclosure of financial and other information at appropriate amounts
What is not an audit procedure that the auditor would perform concerning legal matters ?
Confirm directly with the lawyers if all claims etc have been disclosed in the financial statements
Inventory turnover increased
Sales and inventory amount unchanged
What happened?
Gross profit percentage decreased
Inventory turnover ratio =
Cost of goods sold / average inventory
COGS must increase or average inventory must decrease. Here, COGS increased. Sales didn’t change so gross profit decreased.
Reasonableness test is when
Data in two or more fields are checked for consistency
In regards to audits of employee benefit plans, Independence is impaired when
The auditor is also the investment advisor to the employee benefit plan
The auditor should not inquire prior year engagement personnel regarding their assessment of management’s honesty and integrity because this impairs
Professional skepticism
Most authoritative guidance for audit of issuer?
General guidelines by PCAOB Auditing Standards
What is the effect of increase in risk of material misstatement on detection risk and the extent of substantive procedures?
The acceptable level of detection risk decreases and the extent of substantive procedures increases.
PCAOB standards state that the relevance of audit evidence depends on
Timing do audit procedure
Whether the audit is designed to directly test and assertion
Whether the audit procedure is designed to test an understatement or understatement
Not the auditor’s risk assessment
When reporting on the same basis used for income tax purposes the auditor should include
A report paragraph that states
The income tax basis of accounting is a basis other than GAAP
Significant deficiency compared to a material weakness is
Less severe than material weakness
Auditor would ask the attorney about their client who was threatened with litigation, about what:
How likely it is that there will be unfavorable outcome to the litigation
An estimate of the potential loss
Management’s intended response
*Not the appropriateness of management’s financial statement disclosure
When compiling a financial statements
(This means when doing a complication)…
An accountant would be least likely to perform analytical procedures
Internal auditor may provide direct assistance for what?
Test of controls and substantive testing
What should a practitioner include in an agreed upon procedures report?
All findings from application of the agreed-upon procedures
Stratified sampling is used when
There is a lot of variation among the population. Stratification separates the population into relatively homogeneous groups and results in a lower sample size and therefore increases efficiency
In reviewing subsequent events the auditor would look at
Inquiring the client’s legal counsel concerning litigation
Preparation of financial statements is a non attest service. This includes
Not required to make a determination on whether the cpa is independent or not
Preparation doesn’t require a report but rather a statement that states “no assurance was provided”
Testing inventory and account balance is what assertion?
Completeness
When material weakness exists in internal control what type of opinion is issued?
Adverse
When testing subsequent events, compare the FS being audited with what?
Interm financial statements
Overall audit strategy includes what things to consider?
Prelim materiality
Audit risk
Internal control
Most reliable type of data?
Independent outside data
How to assess objectivity of internal auditor?
Determine the org level to which they report
Management is not required to do what?
Provide written assessment about the effectiveness of the entity’s internal controls that is dated as of the date of the issuance of the assessment
True or false; Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.
True
What’s an example of using computer data? When would it be used?
Ex: to test all data in AP file
Disclaimer of opinion is inappropriate for what?
Ex: management does not provide reasonable justification for a change in accounting principles
Management needs to include a written statement saying whether they believe effects of uncorrected misstatements are…
Immaterial, individually and in the aggregate to the FS as a whole
Auditor would least likely examine AJE booked to what account ?
AJE to record recurring periodic accounting estimates when addressing the risk of mgmt overuse of controls
Embezzlement could happen when?
When blank checks and signature plates are restricted to the cash disbursement bookkeeper who personally reconciled the account.
Auditor should design the audit to provide…
Reasonable assurance of detecting errors and fraud that are material to the FS
In order to consider the service auditors report is satisfactory the auditor should inquire ..
Of the service auditors competence
To gain assurance all inventory items in the inventory listing are valid…
Trace/vouch items listed in the inventory listing to inventory tags and auditors recorded count sheets
Analytical procedures enhance auditor’s understanding of
The clients business
Count the inventory on the ..
Last day of the year
Material risk of noncompliance is inversely related to what?
Detection risk
Material weakness is a control deficiency that the likelihood of misstatements is …
Likelihood is reasonable
Magnitude is material
If it’s impractical to observe the client’s physical count of inventory…
Alternative procedures may be used
When an accountant is preparing financial statements…
The accountant should verify the completeness of information provided by management for the FS
When the group auditor decided not to refer to a component auditors who audited a subsidiary of the group auditors client, the group auditor most likely would ..
Determine the type of work to be performed by the group auditor on the financial information of the component.
Determine repairs and maintenance and assertion for ..
PPE not charged to expense
Compilation is limited to presenting
Info in the form of FS that is the representation of management
Long term investments in stock need to have the shares owned confirmed by
Independent custodian
Need to assess performance materiality for group audit and
Assess materiality for group as a whole.
If taking responsibility for another firm’s audit work …
Review the other firm’s audit work papers and repertory a subset of audit testing to validate the firm’s conclusions
Presence of material weakness means what type of report to be issued?
Adverse
Include in management rep letter that
Management has the responsibility for the design of controls to detect fraud
Inventory turnover assertion tested is
Valuation and allocation since some might be old and obsolete
To reduce risk of errors in billing dept the auditor would not
Reconcile control total for sales invoices with AR sub ledger
Remittance advices are considered what?
Customer payments
SOC 1 report includes
Managements description of the service organizations system
Someone who approves purchase orders would also do what?
Negotiations with vendors
Who is responsible for contacting the old auditor
The successor auditor
Audit test for attribute sampling
Inspecting purchase orders for proper approval by supervisors
Management should address written representations about a firms annual audit to the
Auditor
Identify contingent liability through
Standard bank confirm
In a compilation or review an auditor should
Be able to justify departure from SSARS
Proper authorization of write offs would be in what dept?
Treasurer
An accountant’s standard on a compilation of a projection should not include a …
Statement that the accountant expresses only limited assurance that the results may be achieved
PPE assertion so that lives are disclosed properly is what assertion
Completeness
Comparing transactions to vouchers recorded is what assertion
Cut off
When confirming AR balances rather than individual invoices it is most beneficial to include with the confirmations …
Client prepared statements of account that show the details of the account balances
In determining whether all sales have been authorized an auditor should consider the tolerable rate of deviations from the control activity and the ..
Likely rate of deviations
In guiding auditors what is not an ethical principal
Materiality
*integrity, public interest and proper use of government info is
Weakness in control with investments includes
Holding securities on site instead of a third party custodian
