Audit 2

Question 1

SAS 84

Answer 1

successive auditor must attempt to communicate with prior auditor before accepting the engagement.

• must ask client first before communicating
• must primarily focus on assessing the integrity of the client’s management

Question 2

Preliminary engagement activities

Answer 2

1) Determine the audit engagement team requirements
2) Ensuring compliance with all relevant ethical and independence requirements
3) Establishing an understanding with the client

Question 3

establishing an understanding with the client means to draw up an….

Answer 3

engagement letter

Question 4

facts about the engagement letter

Answer 4

it is a contract

Signed/dated by auditor and client* (audit committee*)

Question 5

internal audit communications

Answer 5

sox encourages communication with IA
-Emphasis is decision making
-Improving the quality (relevance and reliability) of information or its context (usefulness)
-A level of independence is necessary (e.g. objectivity)
reliance on IA should be outlined in the audit plan

Question 6

audit committee definition

Answer 6

A subcommittee of the board of directors that is responsible for the
-financial reporting and
-disclosure process
(communicating with the financial reporting/accounting group, internal auditors, external auditors and management)

Question 7

sec 301 sox audit committee requirements

Answer 7

• Members must be on the board of directors and must be independent
• Directly responsible for overseeing work of any registered public accounting firm employed by the company
• Must preapprove all audit and nonaudit services
• Must establish procedures to follow for complaints
• Must have the authority to engage independent counsel

Question 8

audit planning steps

Answer 8

1- Assess business risks (more in Chapter 4)

2- Establish materiality

3- Identify multilocation needs

4- Assess the need for specialists

5- Assess the possibility of illegal acts

6- Identify related parties

7- Consider additional value-added services

Question 9

documenting the audit plan includes…

Answer 9

assessing the risk at all levels focusing on:
nature
timing
extent

Question 10

supervision means to …

Answer 10

inform
direct
review

Question 11

types of audit tests

Answer 11

risk assessment procedures
test of controls
substantive procedures

Question 12

tests of controls

Answer 12

inquiry
inspection
observation
reperformance
walkthrough

Question 13

substantive procedures

Answer 13

tests of details

analytical procedures

Question 14

dual purpose test

Answer 14

test of controls

substantive tests of transactions

Question 15

materiality determination requires

Answer 15

professional judgement

Question 16

steps of applying materiality

Answer 16

1-determine level for the overall financial statements (planning)
2-determine tolerable misstatement (individual account allocation)
3- evaluate audit findings near the end of the audit

Question 17

Planning materiality requires/uses

Answer 17

quantitative data that may be influenced by qualitative information

Question 18

why is tolerable misstatement generally greater than planning materiality ?

Answer 18

• Not all accounts will be misstated by their full tolerable misstatement allocation.
• Audits of individual accounts are conducted simultaneously.
• When errors are identified, additional testing is typically performed in that account and related accounts.
• Overall materiality serves as a “safety net.”

Question 19

if the aggregate misstatement is less than planning materiality, then the auditor may conclude that…

Answer 19

the FS are fairly represented.

Question 20

audit risk=

Answer 20

risk of material mistatement*detection risk

RofMM=inherant risk*control risk

Question 21

inherent risk definition

Answer 21

Risk of a material misstatement occurring in an assertion assuming no related internal controls (auditors assess by performing risk assessment procedures).

Question 22

control risk definition

Answer 22

Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control (auditors assess by performing control tests).

Question 23

detection risk definition

Answer 23

Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist (auditors restrict by performing substantive tests).

Question 24

factors that effect inherent risk

Answer 24

Nature of the client and its environment

Nature of the particular financial statement element

Question 25

characteristics indicative of high control risk

Answer 25

No internal audit function
Inconsistent profitability or operating cash flows
Top management is cynical towards controls (“tone at the top”)
Previous control failures detected
Substantial turnover, questionable reputation, inadequate staffing, or management team lacks requisite accounting skills

Question 26

limitations of the audit risk model

Answer 26

-The desired level of audit risk may not actually be achieved.
-It does not consider potential auditor error.
-There is no way of knowing what the preliminary level of risk actually was.
Note: Qualitative measures may be used instead

Question 27

areas of risk

Answer 27

nature of the entity
external factors
objectives and strategies
entity performance measures
internal control

Question 28

likely mistatement categories

Answer 28

• difference in judgment of estimates

- “likely to exist” mistatement based on projections from sample size

Question 29

fraud risk triangle

Answer 29

pressure
opportunity
rationalization

Question 30

management assertions about the FS

Answer 30

Completeness

Existence / Occurrence

Accuracy (Numerical / Classification / Cutoff or Timing)

Valuation / Allocation

Obligations / Rights / Authorization

Presentation

Question 31

completeness

Answer 31

All transactions that should have been recorded, have been recorded

Question 32

Existance/occurance

Answer 32

Transactions and events that have been recorded, have occurred and pertain to the entity

Question 33

accuracy

Answer 33

Amounts and other data relating to recorded transactions and events have been recorded appropriately

Question 34

valuation

Answer 34

Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded

Question 35

obligations

Answer 35

The entity holds or controls the rights to assets, and liabilities are the obligations of the entity

Question 36

presentation

Answer 36

Financial information is appropriately presented and described, and all disclosures are clearly expressed.