AUD Deck 2

Question 1

Prior to accepting a new client, what must the auditor do?

Answer 1

the auditor must communicate with the predecessor auditor, but the client is required to grant permission before such communications take place. If the client will not grant such permission, the client should not accept the engagement

Question 2

What would the engagement letter most likely include?

Answer 2

management’s acknowledgment of its responsibility for maintaining effective internal control and management is responsible for making all financial records and related information available to the auditor

Question 3

How does a CPA firm decide whether to accept or continue a client relationship?

Answer 3

minimize the likelihood of associating w/ clients whose management lacks integrity

Question 4

What are the PCAOB standards for documentation completion for issuers?

Answer 4

45 days from the report release date

Question 5

What are the SAS rules for documentation completion for non-issuers?

Answer 5

60 days from the report release date

Question 6

How long do registered public accounting firms need to maintain audit work papers and supporting documentation for according to PCAOB standards?

Answer 6

7 years

Question 7

What are the Quality Control Elements?

Answer 7

HELP ME
Human Resources, Engagement/client acceptance and continuance, leadership responsibilities, performance of the engagement, monitoring, and ethical requirements

Question 8

What should the auditor’s documentation of risk assessment consider?

Answer 8

the nature, size, and complexity of the entity being audited along with cost-benefit considerations

Question 9

What is the documentation completion date defined as?

Answer 9

the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such

Question 10

What is physical control?

Answer 10

an uninterrupted power supply is considered a physical control. Physical controls monitor and control the environment of the workplace and computing facilities. they also monitor and control access to and from such facilities

Question 11

What are logical controls?

Answer 11

Logical controls use software and data to monitor and control access to information and computing systems. Think computers = logical

Question 12

What are general controls?

Answer 12

general controls are designed to ensure that an organization’s control environment is stable and well-managed

Question 13

What are information-processing controls?

Answer 13

Information-processing controls can be automated or manual, and apply to the processing of information and transactions to help ensure transactions occurred, are
authorized, and are completely and accurately processed and reported

Question 14

What approach is the integrated framework built on?

Answer 14

principles-based approach which allows management to use judgment and flexibility in applying internal controls

Question 15

What are the components of internal control?

Answer 15

components of internal control = CRIME
Control environment
Risk assessment
Information and communications systems
Monitoring
Existing control activities

Question 16

What are the objectives of an entity?

Answer 16

entity objectives are: ORC
Operations effectiveness and efficiency
Reliability of financial reporting
Compliance with laws and regulations

Question 17

What does the control environment component of the Internal Control framework represent?

Answer 17

the processes, structures, and standards that provide the foundation for the establishment of an entity’s internal control system
*it includes principles such as commitment to ethics and integrity, board independence and oversight, and accountability

Question 18

What does the existing control activities component of the Internal Control framework represent?

Answer 18

includes principles such as deployment of policies and procedures and the selection and development of controls around IT

Question 19

What does the information and communication component of the Internal Control framework represent?

Answer 19

internal and external communication as well as obtaining and using information

Question 20

What does the risk assessment component of the Internal Control framework represent?

Answer 20

identifying and analyzing risks and considering the potential for fraud

Question 21

What are Financial Statement assertions?

Answer 21

Completeness; cutoff; valuation, allocation, and accuracy; existence and occurrence; rights and obligations; understandability of presentation and classification

Question 22

Participation of the audit committee is a part of what internal control component?

Answer 22

control environment

Question 23

The internal audit function is a part of what internal control component?

Answer 23

monitoring

Question 24

selecting and developing activities contributing to the mitigation of risks is a principle related to what internal control component?

Answer 24

existing control activities

Question 25

an auditor’s engagement letter would most likely include what statement?

Answer 25

discussion of limitations of the engagement (limits the auditor’s responsibility to detect errors and fraud) - a material misstatement may remain undetected

Question 26

What is considered the concept of materiality?

Answer 26

information is material if there is a substantial likelihood that the information would be viewed by a reasonable investor as having significantly altered the total mix of available information

Question 27

If there is a high likelihood of misstatements, what should the auditor do to reduce the risk?

Answer 27

set the materiality at a lower amount - results in the auditor looking closer at audit evidence

Question 28

In assessing the objectivity of internal auditors, what would the independent CPA consider?

Answer 28

information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (ex: The Institute of Internal Auditors)

Question 29

What is audit risk?

Answer 29

Risk that the auditor may unknowingly fail to appropriately modify the opinion on the F/S that are materially misstated. The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor obtains “reasonable assurance” about whether the F/S are free of material misstatement

Question 30

What is inherent risk?

Answer 30

the susceptibility that an error or omission will occur in a F/S due to a factor other than a failure of control. the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls

Question 31

What is control risk?

Answer 31

Risk that a material misstatement could occur in a relevant assertion will not be prevented or detected and corrected on a timely basis by the entity’s system of internal control

Question 32

What type of relationship does risk of material misstatement and detection risk have?

Answer 32

Inverse Relationship - when risk of material misstatement is high, detection risk should be set at a low level and vice-versa

Question 33

What does the fraud triangle include?

Answer 33

Opportunity, Rationalization, Incentive (pressure/motivation)

Question 34

What is the integrated framework built on?

Answer 34

Principles-based, not rules based

Question 35

How can an auditor reduce detection risk?

Answer 35

increasing the extent of test of details