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AUDIT > AUDIT 2 > Flashcards

AUDIT 2 Flashcards

1
Q

Name the elements of a CPA firm’s system of quality control for its auditing, attest, and accounting and review services. (HELPME)

A
  1. Human Resources
  2. Engagement/client acceptance and continuance
  3. Leadership responsibilities
  4. Performance of the engagement
  5. Monitoring
  6. Ethical Requirements
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2
Q

Explain the relationship between quality control standards and GAAS standards.

A

Quality control standards pertain to the conduct of all professional activities of an entity’s practice as a whole.

GAAS standards relate to the conduct of the individual audit engagement.

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3
Q

What are the objectives of an auditor when implementing quality control procedures at the engagement level?

A

The auditor is able to provide reasonable assurance that:

  1. The audit complies with professional standards and any legal or regulatory requirements.
  2. The report issued by the auditor is appropriate for the engagement.
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4
Q

Describe the required characteristics of the engagement quality reviewer.

A

The engagement quality reviewer must be a partner who is not otherwise associated with the engagement and who is competent, independent, objective, and acts with integrity.

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5
Q

When does a significant engagement deficiency exist?

A
  1. The engagement team failed to obtain sufficient appropriate evidence.
  2. The engagement team reached an inappropriate ovrall conclusion.
  3. The engagement report is not appropriate for the curcumstances.
  4. The firm is not independent.
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6
Q

How long must audit documentation be retained for issuers and nonissuers??

A

Issuers: 7 years from report release date
Non-issuers: 5 years from report release date

Report release date is the date on which the auditor gives the client permission to use the report (often the day that the report is delivered to the client).

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7
Q

Define permanent (continuous) file and provide examples of audit documentation that may be included within.

A

The permanent files includes audit docs. that has a continuing interest from year to year.

  1. Contracts, pension plans, leases, stock options, bylaws, articles of incorporation, bond indentures
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8
Q

Before the auditor accepts an engagement, what communication between the predecessor and the auditor should be made?

A
  1. Obtain the client’s permission to make inquiries to predecessor auditor.
  2. Specific inquires such as….information that might bare on management integrity. Disagreements, why the change in auditors, communication
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9
Q

What should the auditor assess when considering the firm’s client acceptance and continuance policies?

A
  1. Firm’s ability to meet reporting deadlines
  2. Ability to staff the engagement
  3. Independence
  4. Integrity of client management
  5. The group engagement team’s ability to obtain sufficient and appropriate audit evidence
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10
Q

Purpose of an engagement letter.

A

To reduce the risk of misunderstanding (required under PCAOB standards)

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11
Q

What topics should be included in the agreement to audit engagement terms?

A
  1. Objectives and scope
  2. Management’s responsibilites
  3. Auditor’s resp.
  4. Inherent limitations
  5. Identification of the applicable framewrok
  6. Reference to the expected form

Can also refer to timing, client assistance, fees and billing, and so on.

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12
Q

What factors affect the nature and extent of necessary planning activities?

A
  1. The size and complexity of the company
  2. The auditor’s previous experience with the company
  3. Changes in circumstances that occur during the audit
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13
Q

What factors indicate less complex operations?

A
  1. Fewer business lines
  2. Less complex business processes and financial reporting systems
  3. More centralized accounting functions
  4. Extensive involvement of senior managemnt in day to day ops.
  5. Fewer levels of management
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14
Q

The engagement partner is responsible for what 3 functions?

A
  1. Planning the audit
  2. Supervising the work of engagement team members
  3. Complying with relevant audit standards
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15
Q

What factors determine the nature, extent, and timing of supervision?

A
  1. The size and complexity of the entity
  2. The nature of the work assigned to each engagement team member
  3. The assessed risk of material misstatement
  4. The qualifications of the assistants
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16
Q

What are the responsibilities of auditors when there are disagreements among members of the audit team?

A

They should exercise due professional care and to observe the standards of their fieldwork. They should bring up any disagreements to the attention of the partner.

The auditor also have the right to document the disagreement and disassociate from the opinion if they feel is needed.

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17
Q

What is audit strategy?

A

Outlines the scope of the audit, the reporting objectives, timing, required communications, and other factors. Includes a preliminary assessment of materiality and tolerable misstatement.

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18
Q

Is an auditor required to have prior experience with a client’s business or industry before accepting an engagement?

A

No. Once it is accepted, they should obtain an understanding.

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19
Q

What is an audit plan?

A

A written audit plan (required for every audit) is a listing of audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. The audit plan typically follows development of the audit strategy.

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20
Q

Name the six main financial statement assertions.

A
  1. Completeness
  2. Cutoff
  3. Valuation, allocation, and accuracy
  4. Rights and obligations
  5. Understandability and classification
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21
Q

Name the relevant assertions for “transactions and events”

A
  1. Completeness
  2. Proper Period Cutoff
  3. Accuracy
  4. Classification
  5. Occurrence
22
Q

Name the relevant assertions for “account balances”

A
  1. Completeness
  2. Allocation and valuation
  3. Rights and obligations
  4. Existence
23
Q

Name the relevant assertions for “presentation and disclosure”.

A
  1. Completeness
  2. Understandability and classification
  3. Rights and obligations
  4. Valuation and accuracy
24
Q

What factors does the external auditor have to assess if he or she plans to use the internal auditors to provide direct assistance?

A
  1. The external auditor has to assess the internal auditor’s objectivity and competence.
  2. Note, the external auditor remains solely responsible for the audit report, and may not share judgement responsibility with the internal auditor.
25
Q

What factors does the external auditor have to assess when they would like to use an internal auditor function to reduce the extent of substantive procedures?

A

They need to assess the competence and objectivity of the internal audit function. In addition, the external auditor should assess whether the internal audit function uses a systematic or disciplined approach.

26
Q

Provide some examples of factors that the external auditor may consider when assessing the competence of the internal auditors

A
  1. Education of internal
  2. Professional certs.
  3. Experience
  4. Performance evals.
  5. The audit plan, procedures, and quality of internal audit documentation
27
Q

What do we consider when looking at the OBJECTIVITY of internal auditors?

A
  1. Organizational level to which they report
  2. Policies prohibiting audits of areas in which the internal auditor lacks independence
  3. Whether any constraints or restrictions are placed on the internal audit functions by management or those charged with governance
28
Q

For which decisions must the external auditor not share responsibility with the internal auditor?

A

The external auditor is required to make all significant judgements and may not share responsibilty with the internal auditors. These judgements include:

  1. Assessing the risks of MM
  2. Evaluating the sufficiency of tests performed
  3. Evaluating significant accounting estimates
  4. Determining materiality
  5. Determining the type of audit opinion
29
Q

Should an auditor refer to the work of a specialist in the auditor’s report?

A

Generally, in the case of an unmodified opinion, no. However, if its a modified opinion due to the work found by a specialist, reference to that specialist will be made. The audit may need permission from the specialist before making reference to them in the audit report.

30
Q

Define materiality and tolerable misstatement.

A

Materiality: Amount of error or omission that would affect the judgement of a reasonable person.

Tolerable misstatement Maximum error in a population that the auditor is willing to accept. it is the application of performance materiality to a particular sampling procedure

31
Q

Why is the auditor required to perform risk assessment procedures, starting with obtaining and understanding of the entity and its environment?

A

To assess the risk of material misstatement and to make informed judgements about other audit matters such as:

  1. Materiality and tolerable misstatement
  2. The entity’s selection and application of accounting procedures
  3. Areas that require special audit consideration
  4. Design and performance of further audit procedures
32
Q

What risk assessment procedures should the auditor use to obtain an understanding of the entity and its environment?

A
  1. Inquiry
  2. Analytical Procedures
  3. Risk assessment discussion
  4. Audit data analytics
  5. Other procedures such as reviewing external information
33
Q

What factors should be examined when obtaining an understanding of the entity and its environment?

A
  1. Industry, regulatory, and other external factors
  2. The nature of the entity
  3. Objectives, strategy, and business risks
  4. The entity’s financial performance
  5. The company’s selection and application of accounting principles
34
Q

For what purpose are analytical procedures used in the audit planning phase?

A

To understand the client’s business and to identify unusual transactions and events, amounts, ratios, or trends that might represent specific risks relevant to the audit.

35
Q

Audit data analytics (ADAs) include performing what functions with respect to data underlying or related to the subject matter of an audit?

A

ADAs involve analyzing paterns, identifying anomalies, and extracting other useful information in/from the data through analysis, modeling, and visualization.

36
Q

What are the 5 steps generally used in performing audit data analytics to help with the assessment of the risk of material misstatement?

A
  1. Plan the ADA
  2. Access and prepare the data for purposes of the ADA
  3. Consider the relevance and the reliability of the data used
  4. Perform the ADA
  5. Evaluate the results and conclude whether the purpose and specific objectives of performing the ADA have been achieved.
37
Q

Describe the Plan the ADA step

A

Plan the ADA: Includes determining the objective of the ADA procedure, the data population to be analyzed, selecting the ADA procedure that best meets these objectives, and selecting the tools, graphics, and tables that will be used.

38
Q

Define “notable items” as related to ADAs

A

Notable items include items that may identify a previously unidentified risk, modify or support the assessment of risks of MM, or provide the auditor with information to better plan the audit procedures.

39
Q

What are the objectives of internal control?

A
  1. To promote efficiency and effectiveness of operations
  2. To ensure reliable financial reporting
  3. To encourage compliance with applicable laws and regulations
40
Q

What are some inherent limitations of internal control?

A
  1. Management override of internal controls
  2. Human error, which may include errors in the design or use of automated controls.
  3. Deliberate circumvention of controls by collusion of two or more poeple.
41
Q

What are the 5 components of internal control?

A
  1. Control Environment
  2. Risk assessment
  3. Information and communication systems
  4. Monitoring
  5. Existing control activities
42
Q

Why is the control environment particularly important to internal control?

A

It sets the tone of an organization, influencing the control consciousness of its employees, and providing the foundation for he other components of internal control.

43
Q

What factors are included in IC?

A
  1. Communication and enforcement of integrity and ethical values
  2. Management’s commitment to competence
  3. Participation of those charged with governance
  4. Management’s philosophy and operating style
  5. Organization structure
  6. Assignment of authority
  7. Human resource policies and practices
44
Q

Describe the “risk assessment” component of IC.

A

It is an entity’s identification and analysis of risks to the achievement of its objectives with respect to financial reporting. Risk assessment involves identification, analysis, and management of business risks relevant to the preparation of financial statements.

45
Q

What functions are served by an entity’s information system with respect to financial reporting?

A
  1. Identify and record all valid transactions
  2. Process and account for system overrides
  3. Describe transactions in a timely manner and in sufficientdetail
  4. Measure and record the proper monetary value of transactions
46
Q

What functions should an auditor understand about an entity’s communication system with respect to FR?

A
  1. The methods used to communicate roles, responsibilites, and significant matters related to financial reporting.
  2. Communication between management and those charged with governance, and between management and external parties.
47
Q

What activities may be considered part of the monitoring component of internal control?

A

May include:

  1. Management and supervisory activities
  2. Separate internal control evaluations
  3. The internal audit functions
  4. Evaluation of communcations from external parties
48
Q

Name some control activities that are relevant to an audit. PAIDTIPS

A
  1. Prenumbered Documents
  2. Authorization of transactions
  3. Independent checks to maintain asset accountability
  4. Documenation
  5. Timely and appropriate performance reviews
  6. Information processing general and application controls
  7. Phyiscal controls for safeguarding assets
  8. Segregation of duties
49
Q

What functions should be segregated? (ARC to protect against flood of troubles)

A
  1. Authorization transactions
  2. Recording transactions
  3. Maintaining custody of the related assets
50
Q

Why does an auditor obtain an understanding of the client’s internal control?

A

They evaluate the designs of the controls and determine whether they have been implemented, to assess the risk of MM, and to design the nature, extent and timing of further audit procedures.

51
Q

Describe “auditing around the computer” and identify when it is appropriate and not appropriate.

A

When they audit around, they do not directly test the application program, but instead test the input data, process the data independently, and then compares the independent results to the program results.

This method is appropriate for simple batch systems that have a good audit trail. Auditing around the computer is not appropriate when there is insufficient paper-based evidence.

52
Q

List and briefly define the types of computer assisted audit techniques that may be used.

A
  1. Transaction tagging: Electronically marks specific transactions
  2. Embedded audit modules: Sections of program code to collect data for the auditor
  3. Test data: Use of the client’s system to process the auditor’s data, offline.
  4. Integrated test facility: Use of the client’s system to process the auditor’s data, ONLINE.
  5. Parallel simulation: Use of the auditor’s systems to re-process client data.

AUDIT (6 decks)

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