Audit

Question 1

Financial Statement Audit

Answer 1

An examination of financial information to determine if financial statements are presented fairly in accordance with an applicable financial reporting framework.

Question 2

Applicable Financial Reporting Framework

Answer 2

A comprehensive set of principles and standards that prescribe how financial statement elements that result from an entity’s transactions, events, and circumstances are to be recognized, measured, and disclosed, including a general purpose framework and a special purpose framework.

Question 3

General Purpose Financial Reporting Framework

Answer 3

A financial reporting framework designed to meet the general needs of financial statement users, involving a comprehensive set of measurement, recognition, and disclosure principles achieving wide acceptance, such as GAAP, International Reporting Standards (IFRS), or the pronouncements of the GASB.

Question 4

Special Purpose Framework

Answer 4

A financial reporting framework (FRF) that is not a general purpose framework and is designed to meet the specific needs of those familiar with the framework and how it is used to evaluate an entity’s financial position or performance, such as a cash basis, tax basis, regulatory agency basis, contractual basis, or other basis of accounting. Also known as an other comprehensive basis of accounting (OCBOA).

Question 5

Auditing Standards

Answer 5

A framework of guidelines established by an appropriate authoritative body, such as the PCAOB for issuers or the Auditing Standards Board (ASB) for nonissuers, to be followed by an auditor to make certain that the objectives of the engagement are met.

Question 6

Auditing Procedures

Answer 6

The actions taken by the auditor to obtain sufficient appropriate audit evidence in support of the conclusions on which the auditor’s opinion is based.

Question 7

Generally Accepted Auditing Standards (GAAS)

Answer 7

The body of authoritative audit literature established by the Auditing Standards Board of the AICPA to be applied in the audits of financial statements of nonissuer (nonpublic) companies and against which the quality of audits are measured and judged.

Question 8

Predecessor Auditor

Answer 8

The independent CPA who performed or was engaged to perform an audit of a new audit client’s financial statements from its most recent prior period.

Question 9

Professional Skepticism

Answer 9

An attitude that includes a questioning mind and a critical assessment of audit evidence, with an alertness for conditions that may indicate a material misstatement—being alert to contradictory information from different sources, to the possibility that documentary evidence may not be reliable, to the possibility that the client is being dishonest when providing information, and to indications of fraud.

Question 10

Integrity

Answer 10

honesty and fairness with an incorruptible commitment to ethical values.

Question 11

Objectivity

Answer 11

Refraining from compromising professional judgment due to bias, conflict of interest, or undue influence of others.

Question 12

Independence

Answer 12

An auditor’s ability to perform without compromising professional judgment and act with integrity, objectivity, and professional skepticism, consisting of independence of mind (fact) and independence in appearance, required for the performance of attest engagements. Independence is considered to be impaired, for instance, if a direct or a material indirect financial interest is held by the auditor or family member.

Question 13

Due Professional Care

Answer 13

Applying a level of care to the performance of work that would be expected of a professional with comparable qualifications, enabling an auditor to act without negligence, with skill and due diligence.

Question 14

Reasonable Assurance

Answer 14

The degree of assurance provided by an audit opinion representing a high degree of assurance, but not absolute assurance. Reasonable assurance indicates a high degree of reliability without indicating perfection, and is supported by sufficient, appropriate audit evidence gathered.

Question 15

Those Charged with Governance

Answer 15

The individuals or parties responsible for overseeing the strategic direction of an entity and obligations related to accountability—generally the board of directors, although often limited to the audit committee.

Question 16

Engagement Letter

Answer 16

Documentation of the understanding between the accountant and the client required to be in the form of an engagement letter or other suitable form of written agreement, signed by both the accountant and the client, for review, compilation, and preparation engagements, and in an audit engagement, although for audit engagements, it is not required to be signed.

Question 17

Materiality

Answer 17

Measurement of the degree of misstatements and omissions that are expected to, individually or in the aggregate, influence the judgement of a reasonable financial statement user.

Question 18

Audit Risk
(AR = IR x CR x DR)

Answer 18

The risk that the auditor may unknowingly fail to appropriately modify the audit opinion on financial statements that are materially misstated. Consists of inherent risk (IR), control risk (CR) and detection risk (DR), such that audit risk
(AR) = IR x CR x DR.

Question 19

Inherent Risk (IR)

Answer 19

Before considering any related internal controls, the susceptibility of an assertion to misstatement that could be material, individually or in the aggregate.

Question 20

Control Risk (CR)

Answer 20

The risk a misstatement in an assertion, that could be material individually or in the aggregate, will not be prevented or detected and corrected on a timely basis due to a lack of effective internal controls.

Question 21

Risk of Material Misstatement
(RMM)

Answer 21

The risk that, prior to the audit, relevant assertions contain misstatements that are material to the financial statements. Consists of inherent risk (IR) and control risk (CR), such that RMM = IR x CR.

Question 22

Detection Risk (DR)

Answer 22

The risk that the auditors will not detect misstatements in the financial statements that could be material, individually or in the aggregate.

Question 23

Fraud

Answer 23

An intentional act on the part of one or more individuals, which may result in a material misstatement to the financial statements, and consists of either misappropriation of assets or fraudulent financial reporting.

Question 24

Error

Answer 24

An unintentional misstatement in the financial statements or omission of required information from the financial statements.

Question 25

Known Misstatements

Answer 25

Misstatements specifically identified during the audit.

Question 26

Likely Misstatements

Answer 26

Misstatements not specifically identified, but are likely to exist based on indications derived from audit evidence obtained or due to a difference between management and auditor judgments.

Question 27

Fraud Risk Triangle

Answer 27

The three characteristics of fraud that are generally assumed to be present whenever fraud has occurred:
Motivation (incentive/pressure),
Opportunity, and
Rationalization (ie, the perpetrator’s ability to rationalize the fraudulent act).

Question 28

Quality Control

Answer 28

firm’s system to provide it with reasonable assurance that the CPA firm and its personnel comply with applicable professional standards and only issue reports that are appropriate under the circumstances.

Question 29

Compliance Audit

Answer 29

An examination performed to determine if an entity is in compliance with the terms of an agreement, such as a loan agreement or bond indenture agreement; or with laws and regulations to which it is subject.

Question 30

Operational Audit

Answer 30

An examination of an entity’s operating procedures to evaluate their efficiency and effectiveness in meeting the entity’s objectives. Often performed by internal auditors.