AUDIT Flashcards
1
Q
What kind of opinion should be issued when a CPA is associated with the FS of a publicly held entity, but has not audited or reviewed such FS?
A
Disclaimer of Opinion
2
Q
A qualified opinion due to a scope limitation and a qualified due to a GAAP departure both require what paragraph and where? (nonissuer)
A
A paragraph before the opinion paragraph titled “Basis for Qualified Opinion”
3
Q
What language should be used when an auditor qualifies his or her opinion due to a scope limitation?
A
The wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself
4
Q
What is the auditor’s responsibility for supplementary information which is outside the basic financial information, but is required by the FASB, GASB or GAAP?
A
For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information and add an other-matter paragraph to the audit report.
5
Q
Analytical Procedures (Definition)
A
Evaluations of financial information are made by a study of plausible relationships among data, and they include comparisons between the current year and prior year financial information. Used to enhance the auditor’s understanding of the client’s business
6
Q
Parallel Simulation
A
Reperformance Test; A technique by which the auditor reprocesses some or all of the client’s live data (using the auditor’s own software) and then compares the results with the client’s files
7
Q
Integrated Test Facility
A
A computer-assisted auditing technique that allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process
8
Q
Test Data Approach
A
A technique in which the client’s application program is used to process a set of test data (off-line), the results of which are already known by the auditor. If the client’s program is operating effectively, it should generate the same results determined by the auditor. The test data will often contain invalid information that is used to test EDP controls.
9
Q
Current Ratio
A
Current Assets / Current Liabilities
10
Q
Quick Ratio
A
Current Assets - Inventory - Prepaid Expenses / Current Liabilities
11
Q
Accounts Receivable Turnover
A
Sales (net)/Avg. Accounts Receivable (net)
12
Q
Days Sales in Accounts Receivable
A
Ending A/R/[Sales (net)/365]
13
Q
Inventory Turnover
A
COGS/Avg. Inventory
14
Q
Days in Inventory
A
Ending Inventory/[COGS/365]
15
Q
Accounts Payable Turnover
A
COGS/Avg A/P
16
Q
Days of Payables Outstanding
A
Ending A/P/[COGS/365]
17
Q
Cash Conversion Cycle
A
Days sales in accounts receivable + Days in inventory - Days of payables outstanding
18
Q
Asset Turnover
A
Sales (net)/Avg. Total Assets
19
Q
Profit Margin
A
Net Income/Sales (net)
20
Q
Return on Assets
A
Net Income/Average Total Assets
21
Q
Return on Sales
A
Income before interest income, interest expense, and taxes/Sales (net)
22
Q
Return on Equity
A
Net Income/Avg. Total Equity
23
Q
Gross (profit) Margin
A
[Sales(net) - COGS]/Sales(net)
24
Q
Operating Cash Flow Ratio
A
Cash flow from operations/Ending current liabilities
25
Basic Earnings per Share
Income available to common shareholders/Weighted Avg. Common Shares outstanding
26
Price Earnings Ratio
Price per share/Basic earnings per share
27
Dividend Payout
Cash dividends/Net income
28
Debt-to-Equity Ratio
Total Liabilities/Total Equity
29
Total Debt Ratio
Total Liabilities/Total Assets
30
Equity Multiplier
Total Assets/Total Equity
31
Times Interest Earned
Income before Interest Expense + Taxes/Interest Expense
32
Lapping
Today's cash receipts cover yesterday's theft;
A scheme whereby a current receipt of cash (or check) is stolen. To prevent detection, a subsequent receipt is applied to the previously unrecorded customer account
33
Kiting
Cash recorded in two places at once;
A scheme whereby a check drawn on one bank is deposited in another bank, but the disbursement is not recorded on a timely basis, resulting in an overstatement of cash.
34
Classical Variables Sampling
A statistical sampling method used to estimate the numerical measurement of a population, such as a dollar value (e.g. accounts receivable balance); Used to determine whether a given account balance is reasonable; Used in substantive testing
35
Ratio Estimation Sampling
A sampling plan that uses the ratio of the audited (correct) values of items to their book values to project the true population value
Formula: (Audited value of sample / book value of sample) × Total book value
36
Inherent Risk (Definition)
The susceptibility of an assertion to material misstatement assuming there are no related controls.
Exists independent of the engagement
37
Control Risk
The risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by an entity's internal control; Exists independent of the engagement
38
Examination
Provides a positive opinion, reasonable level of assurance, generally based on a variety of procedures, including search, verification, inquiry, and analysis. Representation letter from responsible party should be obtained
39
Agreed-Upon Procedures
No Assurance, Results in a list of procedures performed and findings, Conditions to perform Agreed-Upon Procedures: "I AM SURE"
40
I AM SURE
I AM SURE - Must be met to do an agreed-upon procedure
1) Independence of practitioner
2) Agreement of the parties
3) Measurability and consistency
4) Sufficiency of the procedures
5) Use of the report is restricted to specific parties
6) Responsibility for subject matter
7) Engagements to perform agreed-upon procedures
41
Compliance report in connection with audited financial statements
Auditing standards (SAS), Provides negative assurance
42
Agreed-Upon Procedures (Compliance)
Attestation standards (SSAE), Provides NO assurance
43
Examination (Compliance)
Attestation standards (SSAE), Provides reasonable assurance
44
SOC 1 Report
A report on the internal controls over financial reporting at a service organization
45
SOC 2 Report
A report on internal controls related to one or more of the Trust Services Criteria
46
Cognizant Agency for the Audit
Typically the federal awarding agency that provides the most amount of direct funding to a nonfederal entity
47
Mean-per-Unit Estimation
A sampling plan that uses the average value of the items in the sample to estimate the true population value
Formula: Estimate = Avg. Audited Value x Number of Items in Population
48
Difference Estimation
A sampling plan that uses the average difference between the audited (correct) values of items and their book values to project the actual population value
Step 1: Calculate projected error = [(Book value of sample – Audited value of sample) / Number of items audited] × Population of items
Step 2: Calculate point estimate = Total book value of population – Projected error
49
PPS Sampling (Definition)
A technique in which the sampling unit is defined as an individual dollar in a population. Once a dollar is selected, the entire account (containing that dollar) is audited. Designed to identify overstatement errors
50
PPS Sampling Interval
Tolerable misstatement/Reliability Factor
51
PPS Sample Size
Recorded amount of the population/Sampling Interval
52
Audit Risk Formula
Risk of Material Misstatement x Detection Risk
53
Risk of Material Misstatement Formula
Inherent Risk x Control Risk
54
Hierarchy of Audit Evidence
```
A 1) Auditor's direct personal knowledge/observation
E 2) External evidence
I 3) Internal evidence
O 4) Oral Evidence
U know this forever
```
55
Standard Auditing Procedures (mnemonic)
```
C the FIVE CARROT WARS identifies the procedures used in an audit to be victorious!
C - Confirmation
F - Footing, Cross-Footing, and Recalculation
I - Inquiry
V - Vouching
E - Examination/Inspection
C - Cutoff Review
A - Analytical Procedures
R - Reperformance
R - Reconciliation
O - Observation
T - Tracing
W - Walk-through
A - Auditing Related Accounts Simulatenously
R - Representation Letter
S- Subsequent Events
```
56
Financial Statement Assertions
```
COVER U
C - Completeness
O - CutOff
V - Valuation, Allocation, + Accuracy
E - Existence + Occurrence
R - Rights + Obligations
U - Understandability + Classification
```
57
A decrease in the risk of assessing control risk too low will have what effect on sample size?
Increase in sample size. A decrease in the risk of assessing control risk too low = A decrease in the amount of risk the auditor is willing to accept
58
Audit Risk (Definition)
The risk that the auditor may unknowingly fail to modify appropriately the opinion on the financial statements that are materially misstated
59
When are analytical procedures required during an audit?
During the planning stage and as a final review
60
Existence
Vouching; Going from Financial Statements back to the supporting documentation; Used to mitigate the risk of overstatement
61
Completeness
Tracing; Starts with source documents and traces forward; Used to mitigate the risk of understatement
62
PAID TIPS will help you remember the control activities in a strong system of internal control.
P - Prenumbering of documents
A - Authorization of transactions
I - Independent Checks to Maintain Asset Accountability
D - Documentation
T - Timely and Appropriate Financial Performance Reviews
I - Information Processing Controls
P - Physical controls for Safeguarding Assets
S - Segregation of Duties
63
Subsequent Event Procedures
- Review of post balance transactions
- Review management representation letter
- Make inquires of management regarding any unusual adjustments that may have been made
- Review of minutes of stockholders meeting that took place in January
- Examine the latest interim financial statements
64
An entity's comparative FS includes the FS of the prior year that was audited by a predecessor auditor whose report is not presented. The successor auditor should indicate:
1. That the statements were audited by a predecessor auditor. The predecessor auditor should not be named.
2. Type of opinion expressed by the predecessor and if it was modified, the reason for the modification
3. The nature of any emphasis-of-matter, other-matter or explanatory paragraph included in the predecessor auditor's report
4. The date of the predecessor auditor's report
65
Trend Analysis
- Compare financial statement item or account balance for the current period with prior periods
- Best used when amount/relationship is fairly predictable and operations are stable
- Low level of assurance
66
Ratio Analysis
- Ratios are calculated based on known relationships among accounts or nonfinancial information and compared with the same ratio for prior periods or with comparable entities
- Best used when analyzing data at a disaggregated level
- Low level of assurance
67
Nonstatistical Predictive Modeling
- Uses predictive model to estimate statement amount
- Best used when creating expectations based on simple variables
- High level of precision, may be used as the principal substantive procedure
68
Regression Analysis
- Advanced statistical technique that often uses data from prior period(s) to develop a model to predict future periods; provides direct and quantitative measures of the precision of expectation
- Best used when creating expectations based on several independent variables
- High level of precision, may be used as the principal substantive procedure
69
Single Audit
An audit of entities expending federal assistance that has two main components: an audit of the entity's financial statements and separate schedule of expenditures of federal awards, and a compliance audit of major federal awards; Includes a separate evaluation of materiality for each major program selected
70
Single Audit Act
Requires entities that expend total federal assistance equal to or in excess of $750,000 in a fiscal year to have an audit performed in accordance with the act.
71
Contractors (in relation to Single Audit Act)
Are not subject to the same audit requirements as recipients and subrecipients
72
Single Audit % of Coverage Requirements
For low-risk auditees, the auditor must test 20% of the total federal awards expended.
For other auditees, the auditor must test 40% of the total federal awards expended.
73
Attribute Sampling
A statistical sampling method used to estimate the rate of occurrence of a specific characteristic or attribute in the population; Used to test the attributes or characteristics of each item in a sample; Used in test of controls
74
Risk of Assessing Control Risk Too Low
The risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control
75
Risk of Assessing Control Risk Too High
The risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control
76
Nonsampling risk
All aspects of audit risk that are not due to sampling; Always present and cannot be measured; Auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit engagement and quality control of all firm practices
77
Discovery Sampling
A special type of attribute sampling appropriate when the auditor believes that the population deviation rate is zero or near zero. It is used when the auditor is looking for a very critical characteristic (e.g. fraud)
78
Stop-or-Go Sampling
Designed to avoid oversampling for attributes by allowing the auditor to stop an audit test before completing all steps. Used when few errors are expected in the population
79
Precision Interval
Used to describe auditor's evaluation of sampling results by calculating the possible error in either direction; An allowance for sampling risk is added to a point estimate to provide a range within which the true population value is expected to fall
80
Tainting Percentage
Misstatement/Recorded Amount on Client's Books
81
Projected Misstatement (PPS)
Tainting % x Sampling Interval
82
Predictive Analytics
Expected or predicted outcomes based on historical data
83
Prescriptive Analytics
Prescribe or recommend actions to be taken based on advanced analytics to reach a desired goal
84
Descriptive Analytics
Describe what happened within the data
85
Diagnostic Analytics
Explain why something happened
86
What is an exception to the general rule that auditors cannot accept contingent fees?
AICPA allows contingent fees in tax matters that are based on the results of judicial proceedings or the findings of governmental agencies.
87
Risks Related to Efficiency of the Audit
Risk of Incorrect Rejection and Likelihood of assessing control risk too high
88
Risks Related to Effectiveness of the Audit
Risk of Incorrect Acceptance and Likelihood of assessing control risk too low
89
How long does audit documentation have to be maintained for an auditor of issuers?
7 years
90
What can internal auditors assist the external auditors with?
Obtaining an understanding of internal control or in performing tests of controls or substantive tests
91
Five Components of Internal Control
1. Control Environment
2. Risk Assessment
3. Information and Communication Systems
4. Monitoring
5. Existing Control Activities
92
Audit Risk of Noncompliance
Audit Risk of Noncompliance = Risk of Material Noncompliance x Detection Risk
93
Accounting and Review Services Committee
The authoritative body designed to promulgate standards concerning an accountant's association with unaudited financial statements of a nonissuer
94
Preparations where SSARs does not apply
When the accountant prepares financial statements
1. solely for submission to taxing authorities
2. in conjunction with litigation services that involve pending or potential legal or regulatory proceedings
3. in conjunction with business valuations services
4. personal financial statements for inclusion in written personal financial plans
95
When is an accountant required to comply with SSARs?
When he/she prepares, compiles, or reviews financial statements of a nonissuer
96
Preparation Engagement
SSARS, No Assurance, Non-Attest, Nonissuers only
97
Compilation Engagement
SSARS, No Assurance, Attest, Nonissuers only
98
Review Engagement
```
Limited Assurance (Negative), Results in a conclusion, Representation letter from responsible party should be obtained
SSARS - Nonissuers
SAS - Nonissuers (interim financial statements)
PCAOB - Issuers (interim financial statements)
```
99
What entity oversees audit engagements (issuers and nonissuers)?
SAS - Nonissuers
| PCAOB - Issuers
100
Make-up of the PCABOB
2 CPAs and 3 Non-CPAS
101
Partner Rotation Rules
Under the SEC's rules, lead and concurring partner must rotate off the engagement after 5 years and other audit partners must rotate after 7 years
