AUD Deck 2

Question 1

What should the Engagement Letter include?

Answer 1

1. a statement regarding the INHERENT LIMITATIONS of the audit. the inherent limitation statement would describe the unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with GAAS
2. assistance desired from client staff
3. communication between successor and predecessor auditor

Question 2

Prior to acceptance of a new engagement, an auditor must do what?

Answer 2

communicate with the predecessor auditor

Question 3

What should the successor auditor inquire with the predecessor auditor about?

Answer 3

1. the predecessor’s knowledge of changing auditors
2. disagreements the predecessor had with the client concerning auditing procedures and accounting principles

Question 4

if the auditor believes the client’s request is reasonable regarding a change in engagement review, how should the auditor handle the audit work that was done previously?

Answer 4

the auditor must comply with the standards for a review and issue an appropriate report. the report should not refer to the original engagement, to any auditing procedures performed, or the scope limitation

Question 5

auditing standards required that the auditor must be independent, except when ____ BY LAW or REGULATION to accept the engagement

Answer 5

REQUIRED

Question 6

____ fees are prohibited when performing F/S audit

Answer 6

CONTINGENCY

Question 7

The predecessor auditor will typically allow a review of audit documentation related to?

Answer 7

planning, risk assessment, audit procedures, audit results, and matters of continuing audit significance.

Question 8

When the audit engagement includes reporting on selected financial data, the report prepared by the auditor should be _____ to the data that was obtained from the financial statements

Answer 8

LIMITED

Question 9

What are the elements of Quality Control?

Answer 9

HELP ME!
HR
Engagement/client acceptance and continuance
Leadership Responsibilities
Performance of the Engagement
Monitoring
Ethical Requirements

Question 10

What is a system of Quality Control?

Answer 10

it establishes POLICIES AND PROCEDURES that provide REASONABLE ASSURANCE of conforming with PROFESSIONAL STANDARDS

Question 11

______ standards relate to the conduct of a firm’s entire practice, whereas professional standards such as GAAS relate to the conduct of an individual engagement.

Answer 11

QUALITY CONTROL

Question 12

What does audit documentation (working papers) provide?

Answer 12

1. principal support for the auditor’s report
2. assist in the planning, conduct, and supervision of the audit
3. accountability
4. useful information
5. provide evidence that the audit was conducted in accordance with GAAS

Question 13

must maintain audit workpapers and support documentation for ____ years for REGISTERED PUBLIC ACCOUNTING/PCAOB Standards and ___ years for nonissuers/SAS

Answer 13

7 years = ISSUERS/PCAOB Standards/Sarbanes-Oxley Act of 2002;
5 years = NONISSUERS/SAS

Question 14

final audit documentation file must be assembled by the auditor within ____ days following the report RELEASE date (auditing standards/nonissuer) but according to PCAOB Standards, the documentation completion date is ____ days following the report release date

Answer 14

60 days = nonissuer/auditing standards/SAS
45 days = PCAOB/issuer

Question 15

What is the management representation letter?

Answer 15

the client asserts that all material matters have been adequately disclosed to the auditor

Question 16

The Audit Strategy Comes before Audit Planning. What is the difference between audit strategy and audit planning?

Answer 16

*Audit STRATEGY is an OUTLINE that SETS THE SCOPE, TIMING, AND DIRECTION of the AUDIT. also helps GUIDE the DEVELOPMENT of the audit plan

*Audit PLAN is based on the audit strategy that OUTLINES the NATURE, EXTENT, and TIMING of the procedures to be performed during the audit

Question 17

Audit uses a ____ based approach

Answer 17

RISK

Question 18

when audit procedures are performed before year-end (interim), the auditor must assess the ______ RISK involved

Answer 18

INCREMENTAL

Question 19

What is the difference between Test of Controls and Substantive Procedures?

Answer 19

*Test of Controls = if applicable. Used to EVALUATE THE OPERATING effectiveness of controls in PREVENTING or DETECTING material misstatements

*$ubstantive Procedures = REQUIRED. used to DETECT MATERIAL MISSTATEMENTS to transaction classes, account balances, and disclosures. It includes other audit procedures required by GAAS - test of details and Substantive analytical procedures

Question 20

What is the difference between footed and cross-footed?

Answer 20

*FOOTED = summation of COLUMN
*CROSS-FOOTED = summation of ROW

Question 21

What are F/S Assertions?

Answer 21

COVERUP

COMPLETENESS
cutOFF
VALUATION, ALLOCATION, and ACCURACY
EXISTENCE and OCCURRENCE
RIGHTS and OBLIGATIONS
UNDERSTANDABILITY of Presentation and classification

Question 22

according to PCAOB standards, a centralized accounting function is indicative of ____ (more/less) complex transactions

Answer 22

LESS

Question 23

a ______ (increase/decrease) in the amount of misstatements that the auditor could tolerate will cause the auditor to perform the planned auditing procedures closer to the B/S date

Answer 23

DECREASE

Question 24

the auditor would perform substantive procedures before year-end if the amount of misstatements the auditor could tolerate were _______ (increase/decrease

Answer 24

INCREASED

Question 25

(TRUE/FALSE) the earlier in the year that the auditor performs substantive testing, the greater the incremental risk the auditor accepts regarding the year-end F/S

Answer 25

TRUE

Question 26

if there is a high likelihood of misstatements then the auditor sets materiality at a _____ (higher/lower) amount resulting in the auditor looking closer at audit evidence

Answer 26

LOWER

Question 27

What are analytical procedures?

Answer 27

performed during an audit’s REVIEW stage to evaluate the overall F/S presentation and to assess the conclusions reached

Question 28

an ______ (increase/decrease) in materiality levels would result in a decrease in audit risk resulting in less substantive testing

Answer 28

INCREASE

Question 29

What is Audit Risk?

Answer 29

the risk that the auditor may UNKNOWINGLY FAIL to appropriately MODIFY THE OPINION on financial statements that are MATERIALLY MISSTATED. audit risk should be low

Question 30

What is Audit Risk Formula?

Answer 30

Audit Risk = RMM x Detection Risk
Audit Risk = (inherent risk x control risk) x Detection Risk
s/b low = assessed by auditor x controlled by auditor

DR = AR / RMM (IR X CR)

Question 31

What is inherent risk?

Answer 31

the risk that an account is MORE LIKELY to have the AMOUNTS WRONG OR DISCLOSURES INCORRECT ON FINANCIALS.

inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls

factors: COMPLEXITY, SUBJECTIVITY, CHANGE, UNCERTAINTY, MANAGEMENT BIAS

Question 32

What are examples of high inherent risk?

Answer 32

HIGH-VOLUME, UNIQUE, OR INDIVIDUALLY SIGNIFICANT TRANSACTIONS / COMPLEX OR SUBJECTIVE CALCULATIONS / AMOUNTS DERIVED FROM ESTIMATES / CASH.

TECHNOLOGY THAT RENDERS A PRODUCT OBSOLETE, LACK OF WORKING CAPITAL, DECLINE IN THE OVERALL INDUSTRY OR ECONOMY

Question 33

What is Control Risk?

Answer 33

the risk that a material misstatement that could occur will NOT BE PREVENTED, DETECTED, AND CORRECTED ON A TIMELY BASIS BY THE ENTITY’S SYTEM OF INTERNAL CONTROL.

RISK THAT CLIENT’S INTERNAL CONTROLS DON’T CATCH IT

Question 34

an auditor assesses control riskBELOW the maximum (low or medium) if:

Answer 34

AUDITOR PLANS TO RELY ON CONTROLS. THE DESIGN AND IMPLEMENTATION OF CONTROLS APPEAR TO BE OPERATING EFFECTIVELY. –> AUDITOR WILL NEED TO TEST CONTROLS TO SUPPORT CONTROL RISK BELOW THE MAX.

RMM will be equal to IR x CR

Question 35

an auditor assesses control risk AT the maximum (HIGH) if:

Answer 35

1. THERE ARE NO EFFECTIVE CONTROLS TO THE SPECIFIC ASSERTION
2. THE IMPLEMENTED CONTROLS ARE NOT OPERATING EFFECTIVELY
3. SUFFICIENT APPROPRIATE AUDIT EVIDENCE MAY BE OBTAINED BY SUBSTANTIVE TESTING ONLY. –> AUDITOR WILL NOT TEST CONTROLS WHEN CONTROL RISK IS ASSESSED AS HIGH AND WILL PROCEED WITH SUBSTATNIVE TESTING.

RMM will = IR

Question 36

What is Detection Risk?

Answer 36

the risk that the auditor WILL NOT DETECT A MATERIAL MISSTATEMENT THAT EXISTS IN A RELEVANT ASSERTION. CONTROLLED BY AUDITOR

Question 37

What type of relationship does RMM have with DR?

Answer 37

IMVERSE RELATIONSHIP. RMM AFFECTS DR

↑ RMM, then ↓ DR = ↑ more assurance required from Substantive Testing. If there is a riskier area (RMM ↑), an area that is more likely to contain a material misstatement, then lets get more persuasive evidence
↓ RMM, then ↑ DR = ↓ less assurance required from Substantive Testing

Question 38

What is the relationship between Audit Risk and Materiality?

Answer 38

IMVERSE

Question 39

______ risk arises when a test of controls or substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions that would have been reached had the test been applied to ALL items in the account balance or class of transactions

Answer 39

SAMPLING

Question 40

_____ risk increases when an auditor performs substantive analytical procedures for F/S accounts at an interim date

Answer 40

DETECTION

Question 41

What are examples of Control Risk?

Answer 41

posting of unauthorized journal entries, inaccurate physical inventory count, incorrect formula in a worksheet

Question 42

a misstatement that involves an estimate is considered a ______ misstatement

Answer 42

JUDGMENTAL