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
What type of sampling is use for testing controls?
Attribute sampling
example would be is the invoice properly approved(yes or no questions)
What type of sampling is used in substantive testing?
Variable or PPS sampling
It is when an auditor wants to find the exact $ amount that they are off
When does an auditor lower control risk?
When Upper Deviation Rate<Tolerable rate
What is deviation rate?
The auditor’s best estimate of the deviation rate in the population from which it was selected
What are three things that affect the sample size for attribute sampling?
Risk of assessing control risk too low(sampling risk)
Tolerable deviation rate
Expected deviation rate
If an auditor of a non-issuer is unable to apply a designed audit procedure to an item selected as part of a sample for a test of controls and no alternative procedures are possible, then the auditor should:
treat the item as a deviation from the prescribed control
helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level.
statistical sampling
If providing an opinion on supplementary information, the auditor should perform audit procedures using what materiality level?
The same materiality level used in the financial statement audit
When are substantive analytical procedures used?
To test a large volume of predictable transactions
What are two conditions that must happen for an auditor to issue an opinion on supplementary information?
Neither an adverse nor a disclaimer of opinion was issued on the financial statements
Reasonable assurance is a _______, but not ___________, level of assurance to allow an auditor to detect a material misstatement.
high
absolute
Obtaining evidence that is sufficient and appropriate is _________ in the basis for opinion section of the auditor’s report.
explicit
Order the following from least to most broad: Assurance, Attestation, Auditing? Come up with examples of each to know the difference between the three?
Auditing: F/S
Attestionation: Pro-forma f/s, financial projections, MD&A section of 10-K
Assurance: Most broad, any information even non-financial
Involves separating items into relatively homogeneous groups and treating each group as a separate population
Stratification
What are the three types of variable sampling plans?
Mean per unit estimation
ratio estimation
difference estimation
Formula for mean per unit estimation.
(Audited Sample Value/# of items in sample) * number of items in population
Formula for ratio estimation
(Audited book value of sample/book value of sample) * Total book value
Formula for difference estimation
1) ((Book Value of Sample - Audited Value of sample)/# of items audited) * Population items
2) Total book value of population - projected error
Formula for Probability proportional to size for substantive testing?
1) SAMPLING INTERVAL = (Tolerable Misstatement/Reliability Factor)
2) SAMPLE SIZE = Recorded Book Value/Sampling Interval
Reliability factor table will be given for the questions
used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population.
variables sampling
sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try to estimate a numerical measurement of the population.
attribute sampling
What are three factors that affect the sample size for variable sampling for substantive tests and how do each affect the sample size?
Variability of poulation: higher variable, greater sample size
Specified tolerable misstatement: higher tolerable misstatement, lower sample size
specified risk of incorrect acceptance: lower risk of incorrect acceptance results in an increase in sample size
What are the main things in an engagement letter?
Engagement Objectives
Management’s responsibilities
Auditor’s responsibilities
Limitations (no absolute assurance)
Other services to be provided
In which sections of the auditor’s report should an auditor refer refer to U.S. generally accepted accounting principles (GAAP)?
Opinion section and Management’s responsibility section
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
Disclaimer of opinion
For an auditor of an issuer, critical audit matters should be communicated in the Critical Audit Matters section, which:
Immediately follows the Basis for Opinion Section
What is an emphasis of matter paragraph?
Emphasizes a matter that is already disclosed in the f/s
Used for a non-issuer
When is an emphasis of matter paragraph required?
CAP Acronym
CONSITENTCY
Justified change in accounting principle that has a material effect on the entity’s f/s
AUDIT OPINION CHANGE
Subsequently discovered facts that lead to a change in audit opinion
PURPOSE-SPECIAL PURPOSE FRAMEWORK
Usually the only time that a emphasis of matter paragraph is added because of a lawsuit is when what words are used?
“Unusually important”
When is an other matter paragraph used?
When an auditor refers to matters other than those that are presented or disclosed in the financial statements
When are other matter paragraphs required?
Restrict Use of report
Subsequent discovered facts lead ot a change in audit opinion
Comparative financial statements:
Unless the auditor adds in an emphasis of matter or explanatory paragraph, the use can assume what about the financial statements?
They are materially consistent from one period to the next
Subsequently discovered facts that lead to a change in an audit opinion may be presented in what paragraph?
Either
Emphasis of matter
Other matter
What is the difference between management’s responsibility for evaluating subsequent events for issuers/non-issuers?
Issuers: reposnsible for evaulating subsequent events until the date the finanaicla statements are issues
Non-issuers: responsible for evaluating subsequent events until the date that the financial statements are available to be issued
W/hat are two common examples of recognized subsequent events?
Litigation: when there is a lawsuit that happens before year end but is not settled until between the balance sheet date and when the financial statements are issued
Bankruptcy of customer: the customer owes money to a business but will not pay because of bankruptcy
What does the auditor do to check for subsequent events?
PRIME acronym
Post balance sheet transaction: increases in stock or long term debt
Management REPRESENTATION letter
Inquiries with management
Meeting minutes from BOD or audit committee
Examination of interim financial statements and compare with f/s under audit
Auditor is responsible for subsequent events until when?
Until the auditor report date which is usually before when the financial statements are actually released
Section 404 of the Sarbanes-Oxley Act of 2002 requires the company’s external auditors to attest to, and report on what?
The internal control assessment made by management of the issuer
What does a combined approach refer to?
An auditor performing both a test of controls and a substantive procedure
In an integrated audit of a non-issuer, an auditor should issue an adverse opinion on the effectiveness of an entity’s internal control in which of the following situations?
a material weakness exists
What are the three objectives of the COSO cube?
Operations
Reporting
Compliance
PCAOB has established risk assessment standards for issuer audits. Which of the following is not a financial statement assertion as recognized by PCAOB standards?
Cutoff
Cutoff is not a financial statement assertion recognized by PCAOB standards. PCAOB standards include the assertions of Existence or Occurrence, Completeness, Valuation or Allocation, Rights and Obligations, and Presentation and Disclosure. Cuttoff testing would be covered by the Existence or Occurrence and the Completeness assertions.
When an auditor of a non-issuer 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
What is the auditor’s objective of an audit?
To obtain reasonable assurance whether the financial statements are free from material misstatement whether due to error or fraud
Key things from Bank reconciliation TBS
Bank Balance
Deposits in transit: make sure these are recent
Outstanding checks: make sure there are not any check >6 months outstanding
Book Balance: BINS
Add bank collections and interest
Subtract non-sufficient funds and service charges
Agreed to bank balance and General Ledger balance of the period for the bank reconciliation
Document between the seller and the shipper
Bill of Lading
What management assertions does confirming a client’s customer A/R provide?
Existence of A/R
Rights to the A/R
This is prepared by the customer and is mailed along with the check
remittance advice
When does an auditor use negative A/R confirmations?
When the assessed level of risk of material misstatement is low or when there are a large number of small accounts receivable accounts.
What does a voucher package do?
The Accounts payable or accounting department matches the following records
Purchase requisition
Purchase Order
Receiving Report
Vendor Invoice
A/P then sends this to the treasury department to pay the bill
How does the treasurer cancel supporting documents after payment?
By stamping PAID on the voucher package
How does an auditor search for unrecorded liabilities?
The auditor should select cash disbursements subsequent to year-end and examine the supporting documentation
If this relates to a payable before year end then it should be recorded as a liability
What are things that happen on the report release date?
the begging of the retention period
the auditor grants the client permission to use the report
the date on which the report is delivered to the client
defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
documentation completion date
The _________ support the audit opinion, not the client’s financial statements
auditor’s workpapers
The _________ support the client’s financial statements
client’s records
What is important about what can be done after the documentation completion date?
Existing documentation must not be deleted and additions to the audit documentations must be documented as such
includes audit documentation that has a continuing interest from year to year
permanent (continuous) file
When the auditor has obtained evidence that fraud exists, what should the auditor do?
It is important that the matter be brought to the attention of the appropriate level of management as soon as practicable. This is true even if the matter is considered inconsequential.
Fraud involving an officer should be reported to who?
Those charged with governance
This type of misstatement involves an unreasonable estimate by the client
judgmental misstatement
When are inherent risk, control risk, and detection risk assessed?
Although an auditor does assess inherent risk and control risk, they do not assess detection risk. Instead, they control it through the level of testing they perform.
