AUD 3 Flashcards
What’s the difference between an audit and an examination?
In simple terms, an audit focuses on numbers, while an examination looks at processes and practices.
What is a recall of the TBS on communicating significant deficiencies?
It depends on if the audit is for a non-issuer/issuer, also if it is an integrated audit.
Some key things are the following about significant defciencies:
Always in writing
Always report to management and those charged with governanace
Always define sig def and material weakenesses in auditor’s report
Audit is never required to search for sig def in this case
Must communicate by 60 days of report release date
The report is restricted in use
What does footing and crossing mean in auditing very simply?
Footing: This involves adding up the columns of numbers at the bottom to ensure the totals are accurate. For example, if you have a list of expenses, footing would mean summing all the individual expenses to confirm the total matches what is recorded.
Cross-footing: This checks the accuracy of a report by adding the rows horizontally and comparing them to the totals. For instance, if you have totals for different categories, cross-footing would involve adding those row totals and comparing it to the overall total to ensure consistency.
This test the accuracy assertion
Which of the following best describes the nature of an audit performed in accordance with the Government Accountability Office (GAO) Government Auditing Standards?
Audit provides assurance for the following three things:
Entity’s compliance with laws and regulations
Effectiveness and efficiency of operations
Reliability of financial reporting
When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to who?
Specific legislative and regulatory bodies
The Accounting Principles Rule of the Code of Professional Conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as what?
New legislation
Evolution of a new form of business transaction
When assessing management’s plans for dealing with the adverse effects of future conditions and events, mitigating factors would include four things:
The postponement of expenditures (including R&D);
Plans to dispose of assets;
Plans to borrow money or restructure debt;
Plans to increase ownership equity (sell stock).
Accounting estimates are not used to measure ________ _________. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.)
future events
What is a bill of lading?
In short, a bill of lading is a critical document that shows proof of goods shipped, a binding contract for transportation, and proof of title and ownership. Understanding bills of lading is crucial for accurate accounting of inventory, expenses, and revenue, especially in businesses involved in international trade.
What management assertion would be tested by the following audit procedure: request positive confirmation directly from the customer of its balanced owed to the company?
Existence
What management assertion would be tested by the following audit procedure: test that the income statement agrees to the change of assets minus liabilities and owners’ equity?
Accuracy
What management assertion would be tested by the following audit procedure: test the aging in the A/R ledger?
valuation
What management assertion would be tested by the following audit procedure: trace shipping documents to the related sales invoices and orders, and to entries in the sales journal and A/R subsidiary ledger?
Cutoff/Completeness
How to calculate the sampling interval?
Tolerable Misstatement/Reliability Factor
How to calculate sample size?
Book Value of population/Sampling Interval
How to calculate tainting percentage?
(Book Value - Audited Value)/Book Value
Who could be related parties to a corporation?
Shareholders
Directors
Officers
Family members of directors and officers
Entities controlled by shareholders or officers
Business partners and joint ventures
Affiliated organizations
PCAOB rules state that auditors cannot what when it comes to financial relationships with their clients?
direct financial interest
indirect material financial interest
These services do not impair independence for an auditor under PCAOB but must be communicated to the audit committee in writing, but they are not prohibited. The potential effects of the services should be discussed with the audit committee.
non-audit services related to internal control
For two balance sheet accounts: cash and fixed assets, how would an auditor go about auditing them if cash had many transaction while fixed assets had few transactions?
Cash: more efficient to focus on the ending balance
Fixed asset: audit the transactions that occurred
What are some things that a registered firm must communicate to an audit committee?
Critical accounting policies and practices used
A schedule of unadjusted audit differences
alternative accounting treatments discussed with management
A change in accounting principle that is inseparable from a change in estimate should be accounted for how?
as change in estimate, not a change in principle. The client’s accounting constitutes a departure from GAAP.
allows users to perform diagnostic analytics to drill down into underlying data to answer questions or better understand the data.
data mining
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
$10,000
Because the statements are interrelated, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.
An engagement to provide an opinion or conclusion about a specific subject matter?
attestation engagement
The A/P department should receive what three things to assure that the goods received agree with what was ordered, and that the company is being billed only for what was received?
Purchase Order
Receiving Report
Vendor Invoice
Disclosure of fraud to parties other than a client’s senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor’s responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist?
SEC when the client reports a change in auditor
A successor auditor when the successor makes appropriate inquiries.
A government funding agency from which the client receives financial assistance.
subpoena
“We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage most likely is from a (an):
written representation obtained by the auditor from management
Internal auditors may assist the external auditor in what?
Understanding of internal control
performing test of controls
performing substantive tests
What is the formula to calculate whether attribute sample application is effective for a particular control?
Tolerable deviation rate = Sample deviation rate + allowance for sample risk
Could also be T-A = S
If Tolerable deviation rate is less than the S+A then the control cannot be relied upon
The principle of due care in the AICPA Code of Professional Conduct relates to which of the following professional requirements?
Providing services with competence and diligence
Providing services with an unbiased, open mind and without conflicts of interest pertains to what AICPA Code of professional conduct?
Objectivity
Independence
Auditing standards require that the auditor must be independent, except when?
When the auditor is required by law or regulation to accept the engagement
Auditing standards for nonissuers require that audit documentation be retained for at least ________ year from the ___________.
five years
report release date
How many financial experts must be on the audit committee?
At least one
___________ are unintentional and would not cause an auditor to withdraw from the engagement
errors
If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter (explanatory) paragraph of the audit report what four things?
1) the financial statements of the prior period were auditbed by a predecessor auditor
2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification
3) the nature of any emphasis of matter or other matter (explanatory) paragraph included in the predecessor auditor’s report
4) the date of the predecessor auditor’s report
a control that limits the severity of a control deficiency, and may prevent it from being identified as a significant deficiency or weakness
compensating control
Which of the following best describes the auditor’s responsibility with respect to Statements on Auditing Standards (SASs)?
Have sufficient knowledge of the SASs to identify relevant provisions
Should be prepared to justify any departures from such provisions
The audit report ______________ states whether the financial statements are presented in accordance with accounting principles generally accepted in the United States of America. On the other hand, consistency is __________(i.e., it is assumed that there is consistency when there is no mention of it in the report).
explicitly
implicit
