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Audit > AUDIT #1 > Flashcards

AUDIT #1 Flashcards

TIPICANOE

1
Q

1.02 - What are the three categories that the overall responsibilities and objectives of an audit can be broken down into?

A
  1. Responsibilities
  2. Performance
  3. Reporting
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2
Q

1.02 What Responsibilities are applicable through out the audit?

A
  1. Training & Professional judgement
    - AU-C 200
  2. Independence & Other Ethical Requirements, including Due Care
    - AU-C 200
  3. Professional Skepticism
    - AU-C 200
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3
Q

1.02 What Performance objectives are required during an audit?

A
  1. Internal Controls
    - AU-C 315
  2. Corroborative Evidence (Substantive Testing)
    - AU-C 200
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4
Q

1.02 What Reporting objectives are required during an audit?

A
  1. Accounting principles are in conformity with Applicable Financial Reporting Framework (AFRF)
    - AU-C 700
  2. No new accounting principles applied. (Comparability/ Consistency) implied
    - AU-C 708
  3. Omitted financial disclosures - NONE
  4. Expression of an opinion
    - AU-C 700
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5
Q

1.02 The overall objectives & responsibilities in an audit can be summarized using the acronym TIPICANOE. What does it stand for?

A
  1. Training and Professional Judgement
  2. Independence & Other Ethical Requirements
  3. Professional Skepticism
  4. Internal Controls
  5. Corroborative Audit Evidence (substantive)
  6. Accounting Principles (conformity AFRF)
  7. No new Accounting Principles (Consistency / Comparability)
  8. Omissions & Disclosures None
  9. Express an Opinion
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6
Q

1.03 What are the two KEY considerations to accepting an Audit?

A
  1. Determining the acceptability of the AFRF
  2. Obtaining managements agreement that it understand and accepts certain responsibilities:
    - Financial Statements
    - Internal Controls
    - No client-imposed scope limitation
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7
Q

1.03 In a first year audit inquiries with the predecessor auditor should include (RID-C-U)

A
  1. Reason for the Change
  2. Integrity of management
  3. Disagreements during audit
  4. Communication with management or those charged with governance
  5. Understanding of related party relationships/transactions and significant unusual transactions
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8
Q

1.03 In recurring audits what reasons might cause revision to the terms of the preceding engagement?

A
  1. Indications that management does not understand the objectives and scope of the engagement
  2. Revision or special terms
  3. Significant changes to the entity size or nature of business
  4. Changes to senior management or significant changes in ownership
  5. Regulatory requirements changes
  6. Change in AFRF
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9
Q

1.04 Under AU-C 260 the auditor is required to communicate with those charged with governance, who does that include?

A

Management includes those with executive responsibility for the conduct of the entity’s organization?

  1. Board of Directors (YES)
    1a. Audit Committee (NO)
  2. Management (YES)
  3. Stockholders (NO)
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10
Q

1.04 What is the Audit Committee and what is it for?

A

The Audit Committee is a sub-committee made up of board members who are not officers or employees of the company (ie. they must be independent). The committee members will have no special interest in supporting the financial representation of management, which provides objectivity. They do the following:

  • serve as members of the BOD and are disinterested in the day-to-day operations
  • hire/fire external auditor
  • receive external auditor reports and communications
  • oversee the internal audit function
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11
Q

***1.04 What matters need to be communicated to management or those charged with governance?

A
  • Planned scope and timing of the engagement (significant risk - that many require special consideration)
  • Deficiencies and material weaknesses in internal control
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12
Q

1.05 When is the client representation letter required?

A

The client representation letter cannot be obtained until the end of the audit field work. It must however, be obtained prior to issuing the report.

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13
Q

1.05 Once the auditor has made the decision to accept the audit engagement it is required to send out an Engagement Letter. What is included in the Engagement Letter?

A
  • Objective and scope
  • Auditor Responsibilities
  • Client (Management) Responsibilities
  • A statement of inherent limitation of an audit and I/C
  • Identification of AFRF
  • Reference to the expected form and content of the report with an indication that the actual report may differ
  • Other…
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14
Q

1.05 What are the elements of the Engagement Letter (FACSIMILE)

A
  1. Fees
  2. Auditors responsibility
  3. Confirmation of Engagement
  4. Scope & Objective of Engagement
  5. Internal Control
  6. Management Responsibility
    1. Irregularities - Fraud
    2. Illegal Acts
    3. Errors
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15
Q

1.06 What are some items that may impact the Nature, Timing and Extent of an audit?

A
  • The size and complexity of an entity
  • The auditors experience with the entity
  • knowledge of the entity’s business and industry
  • knowledge of the entity and its environment (including I/C)
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16
Q

1.06 What are the three preliminary engagement activities?

A
  1. Performing quality control procedures regarding Acceptance & Continuance
  2. Evaluating Ethical Requirements
  3. Engagement Letter
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17
Q

1.06 What is the formula for Risk of Material Misstatement (RMM)

A

RMM = Inherent Risk (IR) x Control Risk (CR)

IR - the risk of a material misstatement due to the nature of an element of the F/S

CR - the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to lack of effective I/C.

18
Q

1.06 What is Detection Risk in terms of RMM?

A

Detection Risk (DR) is the risk that a material misstatement will not be detected by the auditor. The higher the RMM, the lower the auditor will wish to reduce DR. DR equates to the level of substantive test that are to be performed.

19
Q

1.06 What are the steps to the Audit Plan?

A
  1. Client Acceptance and continuance
  2. Plan the audit
  3. Obtain an understanding of the client, its environment, and internal control
  4. Assess Risk of Material Misstatement and Design Further Procedures
  5. Perform Test of Controls
  6. Perform Substantive Procedures
  7. Form an Opinion
  8. Issue a Report
20
Q

1.06 The steps in planning an audit include: mnemonic BRAINSTOPS

A
  1. Basic discussions with the client (NTE)
  2. Review of audit documentation (prior work papers)
  3. Ask about recent developments (ex. mergers)
  4. Interim F/S (Flux Analysis)
  5. Non-audit personnel (tax preparers for client)
  6. Staffing
  7. Timing (I/C, interim testing)
  8. Outside assistance (specialist IT)
  9. Pronouncements (updates required)
  10. Scheduling with the client (PBC dates)
21
Q

1.06 What is Audit Risk (AR)?

A

AR = RMM x DR

AR = IR x CR x DR

22
Q

1.06 AU-C 240 States that the auditor has what responsibility in relation to detection risk?

A

The auditors responsibility is to plan and perform and audit to obtain reasonable assurance that no errors or acts of fraud have caused the F/S to be materially misstated.

23
Q

1.08 What is considered a misstatement?

A
  1. A difference in the amount, classification or presentation of an element/account/item
  2. Omission of an element
  3. Disclosure not in accordance with GAAP
  4. Omission of a disclosure
24
Q

1.08 What are the two types of fraud?

A
  1. Fraudulent financial reporting (management fraud, or cooking the books)
  2. Misappropriation of assets (embezzlement, theft, misuse of assets)
25
Q

1.08 True or False

The auditor must communicate all known and likely misstatements (even immaterial), identified during the audit, other than those the auditor believes are trivial, to the appropriate level of management on a timely basis?

A

True

26
Q

1.08 True or False

The auditor is required to communicate all knowledge or suspicion of fraud to management and/or governance.

A

True

If the fraud involves senior management those charged with governance need to be told. The auditor may want to consult with legal counsel.

27
Q

1.08 What are the three conditions of the Fraud Triangle?

A
  1. Reason or motivation (incentive/pressure)
  2. Opportunity
  3. Rationalization
28
Q

1.08 AU-C 250 states that the auditor must do what?

A

AU-C 250 states that the auditor must communicate knowledge or suspicion of noncompliance with applicable laws and regulations.

29
Q

1.08 Should misstatements be evaluated quantitatively?

A

No, they should be evaluated both quantitatively and qualitatively.

-qualitatively changing trends of profitability

changes a loss to income

30
Q

1.09 What is the difference between the following opinions that could be issued by an auditor: Qualified, Adverse, Disclaimer, Unmodified.

A

If a client has not appropriately accounted for a material illegal act (non-compliance) the auditor’s report must reflect this departure from GAAP by issuing a QUALIFIED OR ADVERSE opinion.

A Disclaimer of Opinion Reflects the inability to obtain sufficient appropriate audit evidence.

31
Q

1.08 True or False

The auditor must communicate all known and likely misstatements (even immaterial) identified during the audit?

A

True - except for those the auditor believes are trivial

32
Q

1.09 True or False

Any evidence of the existence of fraud should be communicated to management?

A

TRUE

Fraud involving senior management must be communicated to those charged with governance.

Discussion should be with the appropriate level of management, one level above.

33
Q

1.09 What items should be documented by an auditor when it comes tor consideration of FRAUD.

A
  1. The brainstorm session
  2. Procedures performed to obtain info used to identify RMM due to Fraud
  3. Identified RMM
  4. Reasons for Revenue not being considered a fraud risk
  5. Procedures performed to ensure appropriate response to risk of management override
  6. The nature of communication about fraud
34
Q

1.09 What type of opinion should an auditor give in their report is a material misstatement identified is not corrected by management?

A

The auditor should provide a Qualified Opinion or an Adverse Opinion.

35
Q

1.09 What kind of opinion should an auditor give if he/she was unable to obtain sufficient audit evidence to provide an opition?

A

The auditor should provide a Qualified Opinion or Disclaimer Due

36
Q

1.10 What does AU-C 220 Require of CPA Firms?

A

To implement a system of quality control procedures that provide the CPA firm with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements.

37
Q

1.10 Quality Control Standards depend on what factors?

A
  • the size of the firm
  • the nature of the practice
  • the organizational structure
  • cost benefit considerations
38
Q

1.10 What are the 6 elements of quality control? (HEAL - ME)

A
  1. Human Resources (Personnel management)
  2. Ethical requirements (independence)
  3. Acceptance and continuance of client relationships and specific engagements
  4. LEadership responsibilities for quality within the firm (tone at the top)
  5. Monitoring
  6. Engagement Performance
39
Q

1.10 What does quality control 10 require?

A

QC1- Requires CPA firms to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partner issue reports that are appropriate in the circumstances. Note these are explicit to their accounting and audit practice.

40
Q

1.10 If a firm does not develop quality control procedures for the “acceptance and continuance of client relationships and specific engagement what could happen as a result?

A

QC - Procedures regarding acceptance and continuance when it comes to an audit client should be outlined in detail and should help avoid association with clients whose management lacks integrity.

41
Q

QC - Engagement Performance means?

A

The CPA firm should establish policies and procedures to ensure that it meets applicable professional standards in the performance of its engagements.

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