AUD II Blake CPA Flashcards

1
Q

5 components of Internal control:

Existing control activities

A

-Authorization of transactions
-Segregation of duties
-Pre-numbering documents
-Operating performance reviews

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2
Q

Control environment examples:

A

Participation of those charged w/ governance “Tone at the Top”

Assignment of authority, responsibility & Accountability “How Co operates”

Human Resource Policies & Practices “Way we operate”

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3
Q

Monitoring:

A

Internal Audit function “Checking up to making sure everything is okay”

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4
Q

Information & Communication systems

A

Proper PRESENTATION of transactions & Related disclosures

MEASUREMENT & RECORDING of proper monetary values

The way in which SIGNIFICANT events are captured by accounting SYSTEM

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5
Q

Risk Assessment

A

Adoption of a new Accounting principle “Risk is taken” need appropriate risk assessment on new principle

New Personnel

Incorporation of new technology

Corporate restructuring

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6
Q

Incentives/Pressure - Committing fraudulent reporting (Fraud triangle)

A

Exists when management is UNDER PRESSURE from sources OUTSIDE OR INSIDE THE ENTITY to obtain an expected or unrealistic earnings target or financial outcome

Consequences to mgt not meeting financial goals can be severe

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7
Q

Incentives/Pressure - Misappropriate Assets (Fraud triangle)

A

MGT is living beyond their means - stealing assets to keep up with lavish lifestyle

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8
Q

Opportunities - Fraud (Fraud triangle)

A

Makes/allows for a misrepresentation to Occur

ex: a perceived opportunity to commit fraud may exist when an individual believes internal control can be overridden (MGT or employee is aware of specific DEFICIENCIES IN INTERNAL CONTROL)

Nature of business such as easy to steal assets (Cash) may provide an employee opportunity to commit fraud

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9
Q

Attitudes/Rationalization of fraud (Fraud triangle)

A

Mindset created by employee to justify misrepresentation

ex: MGT’s disregard for controls or MGT overly aggressive attitude in meeting financial goals

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10
Q

What is an element that is agreed between management and the auditor during the planning phase?

A

Timing of inventory observation procedures that will be performed, agreed before implementation of strategy occurrs

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11
Q

Where in the audit report would supplementary information be disclosed of a non-issuer when presented with the basic F/S?

A

Included in a separate section that references the required supplementary information Headed “Required supplementary information”

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12
Q

When an auditor is asked to express an opinion on stockholders’ equity, what other basic F/S must be audited in order for External auditor to accept engagement?

A

Must also audit Balance sheet account due to the interrelationship btw stock holders’ equity & B/S account

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13
Q

What assertion is being tested when tracing accounting records to source documents (supporting evidence)?

A

Existence or occurrence Assertion

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14
Q

What assertion is being tested when tracing source documents to the accounting records (GL, TB, Sales journal.?)

A

Completeness Assertion

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15
Q

What basic F/S tends to be the most predictable for analytical procedures during a F/S audit?

A

Income Statement account since the statement covers a period of time

B/S accounts are less predictable b/c they are a snapshot in time

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16
Q

When are analytical procedures required?

A

During audit’s planning & Final Review

17
Q

Valuation assertion

A

ensures that assets, liabilities, and equity interests are recorded fairly and at appropriate amounts, & any valuation adjustments are appropriately recorded.

ex: Testing collectibility of A/R would ensure that receivable and any necessary allowance adjustment is appropriately reflect in F/S

18
Q

Rights & Obligations assertion

A

Ex: A/R would be tested by performing procedures such as contract review

19
Q

How is the statement of $ Flows Audited?

A

Auditor reconciles amount on the cash flow statement to other basic F/S’s

20
Q

What is the point of reperformance?

A

Auditor independently performs procedures or controls to ensure that they were performed appropriately.

ex: Testing the operating effectiveness of controls over bank reconciliation to make sure that auditor reaches same results and conclusions when re-performing the process

21
Q

Exception

A

a response that indicates a difference between the information in the entity’s records and the information provided by the confirming party

ex: Payment mailed to client that has NOT been recorded

22
Q

What is the calculation for Upper Deviation Rate?

A

Sample Deviation rate + Allowance for Sampling Risk

23
Q

What happens when Upper Deviation rate > Tolerable Rate?

A

Auditor would reduce planned reliance on a prescribed control when using statistical sampling of attributes when testing internal controls

24
Q

Expected deviation Rate

A

Auditor’s best estimate of the deviation rate in the population before the sampling plan is executed

25
Q

What is used to determine the sample size for test of controls?

A

Tolerable deviation rate, allowable risk of assessing risk to low and Expected deviation rate

26
Q

What measurement does sample size have a direct relationship with?

A

Expected Error Rate/Expected population deviation rate

27
Q

What measurement does sample size have a inverse relationship with?

A

Tolerable rate

28
Q

What relates to the effectiveness of an audit?

A

Incorrect acceptance & risk of assessing control risk too low in detecting an existing material misstatement

29
Q

What relates to the efficiency of an audit?

A

Risk of incorrect rejection & risk of assessing control risk too high

30
Q

Attribute sampling

A

statistical sampling method used to test if controls are put in place by client and operating effectively