Audit Flashcards
Describe at least 3 business situations that would require an audit
- application for bank loan
- Publicly traded
- sale of business
Three most important responsibilities of a partner in a public accounting firm
- sign audit report
- maintain relationship with a client
- assume ultimate responsibility for audit
List the broad categories of threats of independence included in the AICPA conceptual framework
- Self-interest
- adverse interest
- familiarity
identify and describe the two components of the risk of material misstatement
- inherent risk - risk before considering internal control
- control risk - risk that internal control won’t prevent, detect, protect, against a mistake
Distinguish between Routine, nonroutine, and estimated transactions, with example
- Routine - recurring financial activities - Sales
- nonroutine - occurs only periodically (Depreciation)
- estimation - estimating the amount (allowance for uncollectible accounts)
When in the audit should the auditor apply analytical procedures?
during risk assessment & at final audit review
In a public company, what requirements must members of a board of directors satisfy to serve on the audit committee
- three must be independent
- all must be financially literate
- one must be an expert
State the purpose and nature of an engagement letter
Contract that contains the nature, scope, & fee of the audit
What is internal control?
Process designed to provide reasonable assurance in operations, reporting, & compliance
How does separation of record-keeping function from custody of assets contribute to internal control?
- Separation of powers
- Independently maintained records
Describe the difference between sampling risk and nonsampling risk
- Sampling Risk - risk of a problem in a sample when we didn’t detect one
- nonsampling risk - any other problem
In performing substantive test of book value of a population, auditors are concerned with two aspects of sampling risk. what are these two aspects, and which is more important?
- Incorrect Rejection & Incorrect Acceptance
- Incorrect Acceptance is more important because you are incorrectly saying that data is okay, throwing off your results.
work on cash is likely to be more extensive than one might expect because
- most liquid; lots of temptation
- it is involved with most other items
State one broad general objective of internal control over each of the following: Cash receipts, cash disbursements, and cash balances
Receipts - recorded promptly & accurately
Cash disbursements - authorized & disbursed promptly
cash balances - adequate & used for normal operations
Explain why the audit of revenue and recievables may present the auditors with significant audit risk
a major determinant of Net Income
what is an audit confirmation request
sent by auditors to external client to confirm existence & rights to value firms accts. recievables
What characteristics should an audit confirmation response possess if a CPA firm is to consider it to be valid evidence
received directly by CPA firm from outside party
Distinguish between a positive and negative Confirmation request
Positive - requires an answer in every case
negative - needs an answer if value is incorrect.
in confirming a clients accounts recievable, what characteristics should be present in the accounts if the CPA is to use negative confirmations?
- if there’s a large number of small balances
- low risk
- no reason to believe they’ll ignore us
Many auditors consider the substantion of the figure for inventory to be more difficult and challenging task than the verification of most other items on the balance sheet. list several specific factors that support this view.
- multiple methods
- variety of materials found in inventory
- excess or obsolete inventory
- usually large amount & affects net income
what part do independent auditors play in planning for a client’s physical inventory?
have understanding of client’s inventory
can be a key part in planning
auditors verification of plant and equipment is facilitated by several factors not applicable to audit work or current assets. What are these factors?
- high dollar amount, few transactions.
- not many changes.
- minor effect on net income
what are the objectives of establishing internal control over plant and equipment?
- Safeguarding the assets
- maintaining accurate records
- acquisitions/retirements properly authorized
compare the auditors approach to the verification of liabilities with their approach to the verification of assets.
Liabilities - concerned about understating
Assets - concerned about overstating
The auditors usually find in the clients possession documentary evidence, such as invoices, supporting both accounts receivable and accounts payable. Is there any difference inn the quality of such evidence for accounts receivable and for accounts payable?
- Accounts Recievable has all evidence created by the client (internal), which is accepted, but not ideal.
- A/P is a 3rd party evidence (external) which is ideal
Provide a list of the types of nonpublic company unmodified and modified opinions
- unmodified
- Modified
a. qualified
b. adverse
c. disclaimer of opinion
what info is provided in a public company audit report related to critical audit matters?
- determine/identify principal
- How we address it in audit
- relevant financial accounts
What are the two circumstances that result in modified opinions?
- info is materially misstated
- inability to give sufficient audit evidence
What factors determine whether a misstatement is considered pervasive?
-it is not contained to a specific item on F/S
- it is confined, but represents substantial portion of F/S
- it is fundamental to understand of disclosures
