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AUDIT 1-1 > Audit-3 > Flashcards

Audit-3 Flashcards

0
Q

After accepting the engagement, what communication between predecessors and successor auditor can be made?

A

The successor auditor may:
- make specific inquiries regarding matters that may affect the conduct of the audit ( e.g. Audit problems)
- review the predecessor’s audit documentation related to matters of continuing accounting and auditing significance.
NOTE that the successor should not make reference to the work of the predecessor as the basis for the opinion.

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1
Q

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

A
  • Obtain clients permission to make inquiries of the predecessor auditor.
  • Specific inquiries include:
  • Information that might bear on management integrity.
  • Disagreement with management over accounting principles, auditing procedures, or other similarly significant matters.
  • The predecessor’s understanding as to the reasons for the change of auditor’s and.
  • Communication to audit committees/those charged with governance regarding fraud, illegal acts by clients, and matters relating to internal control.
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2
Q

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

A

The auditor should assess

  1. The firm’s ability to meet reporting deadlines.
  2. The firm’s ability to staff the engagement.
  3. Independence.
  4. Integrity of client management
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3
Q

What factors affect the “audit ability” of a client?

A

The following factors affect the “audit ability” of a client.

  • The availability and adequacy of accounting records.
  • Management’s attitude toward the internal control environment.
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4
Q

What topics should be included in an understanding between the auditor and the client? What is the purpose of establishing such an understanding?

A

An understanding should include:

  1. Objectives.
  2. Management’s responsibilities.
  3. Auditor’s responsibilities.
  4. Limitations of the engagement.
  5. Other matters, such as timing, client assistance, fees and billing, etc.
    - the purpose of establish an understanding is to reduce the risk of misunderstanding. Note that an engagement letter documenting the understanding is a presumptively mandatory requirement under GAAS.
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5
Q

What are presented by management in financial statement about which the auditor gathers evidence?

A

The financial statement are not statements of fact. They percent management’s assertions or claims, made implicitly or explicitly, about the recognition, measurement, presentation, and disclosure of information in the financial statements.

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6
Q

Name the six main financial statement assertions for nonissuer and issuers.
“COVER U and COVERD”

A

NONissuer: Cut-Off; Valuation, allocation, and accuracy; Existence and occurrence; Right and obligations; Understandability and Classification.(COVERU)
ISSUER: Completeness; Valuation or allocation; Existence and occurrence; Rights and obligations; and presentation and Disclosure(COVERD)

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7
Q

Name the relevant assertions for “transactions and events”

A
  • Completeness
  • (proper Period) Cutoff
  • Accuracy
  • Classification
  • Occurrence
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8
Q

Name the relevant assertions for “Account balances”

A
  • Completeness
  • Allocation and Valuation
  • Rights and Obligations
  • Existence
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9
Q

Name the relevant assertions for “presentation and disclosure”

A
  • Complereness
  • understandability and classification
  • Rights and Obligations, Occurrence
  • Valuation and Accuracy
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10
Q

What is the audit strategy?

A

The audit strategy outlines the scope of the audit engagement objective, Timing of the audit, and required communications, and the factors that determine the focus of the audit. The audit strategy also includes a preliminary assessment of materiality and tolerable misstatement.

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11
Q

What does materiality and tolerable misstatement mean with respect to the independent audit?

A

Materiality: is the amount of error or omission that would affect the judgment of a reasonable person. Materiality is reflected in the auditor’s report by the phrase “present fairly in all material respects.” The auditor uses judgment to set an initial level of materiality, and to revise it appropriately throughout the audit.

Tolerable Misstatement: is the maximum error in a population that the auditor is willing to accept.

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12
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 or accomplish the objectives of the audit.

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13
Q

What should be included in each step of the audit plan? we cast our NET over the audit

A

Each step of the audit plan should set out the procedure in detail, specifying the Nature, Extent, and Timing of the work to be performed and including a reference to the assertion under consideration. Nature, Extent, Timing.

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14
Q

List the three types of audit procedures and tell why each is used?

A
  • Risk assessment Procedures: to obtain an understanding of the entity and its environment, including control.
  • Tests of controls: to evaluate the operating effectiveness of internal control in preventing or detecting material misstatements.
  • Substantive Procedures: to detect material misstatements in the financial statements.
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15
Q

What are the responsibilities of assistants when there are disagreements?

A

Assistants have a responsibility to exercise due professional care and to observe the standards of fieldwork. they should bring any disagreement with the conduct of the audit to the attention of the auditor-in-charge.
The assistant also has the right to document the disagreement and to be disassociated from the opinion.

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16
Q

What factors determine the amount of reliance an independent auditor may place on the work of internal auditors?

A

The following factors affect the amount of reliance:

  • The objectivity of internal auditors (level of reporting within the organizational structure)
  • The competence of internal auditors
  • An evaluation of the work performed by internal auditors

Note that external auditor remains solely responsible for the audit report, and may not share judgment responsibility with the internal auditor.

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17
Q

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

A

Generally, in the case of a standard, unqualified opinion, no reference is made to the work of a specialist. If however the auditor chooses to add an explanatory paragraph or must depart from an unqualified opinion due to the work of the specialist, reference to the specialist may be made.
-Under the ISAs, the auditor should obtain permission form the specialist before making reference to the specialist in the report.

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18
Q

Under PCAOB standards, what factors affect nature and extent of necessary planning activities?

A
  • The Size and complexity of the company
  • The auditor’s previous experience with the company.
  • Changes in circumstances that occur during the audit.
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19
Q

According to PCAOB standards, What factors indicate less complex operations?

A
  • Fewer business lines
  • Less complex business processes and financial reporting systems.
  • More centralized accounting functions
  • Extensive involvement of senior management in day to day operations.
  • Fewer levels of management
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20
Q

According to PCAOB standards, the engagement partner is responsible for:

A
  • Planning the audit.
  • Supervising the work of engagement team members.
  • Complying with PCAOB standards.
21
Q

Under PCAOB standards, what factors should be taken into account when determining the extent of supervision?

A
  • The nature of the company
  • The nature of the work assigned to each engagement team member.
  • The risk of material misstatement.
  • The knowledge, skill, and ability of each engagement team member.
22
Q

Distinguish between known and likely misstatements.

A
  • Known misstatements: are specific misstatements identified during the audit.
  • Likely misstatements: are misstatements that the auditor considers likely to exist, even though a specific misstatement had not been identified.
23
Q

What is audit risk? List and define the two elements of audit risk.

A

Audit risk: is the risk that the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated. It is comprised of:

  • Risk of Material Misstatement: The risk that the financial statements are materially misstated.
  • Detection Risk: The risk that the auditor will not detect a material misstatement that exists in a relevant assertion.
24
Q

State the audit risk model including the relationship of detection risk to substantive test.

A

AR = RMM X DR
RMM= Risk of material misstatement.
DR= Detection risk
Note that as the acceptable level of detection risk increases, the assurance required from substantive test decreases. As the acceptable level of detection risk decreases, the assurance required from substantive testing must increase.

25
Q

What are the two components risk of materiel misstatement?

A

Inherent Risk: The susceptibility of a relevant assertion to a material misstatement assuming there are no related controls.
Control Risk; The risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected on a timely basis by the entity’s internal control.

26
Q

What is the difference between error and fraud?

State the auditor’s responsibility to detect errors and fraud?

A
  • an error is an unintentional misstatement or omission of amounts or disclosures in the financial statement.
  • Fraud is an intentional action that results in misstatements or omissions of financial information with the intent to deceive financial statement users.
  • The auditor must plan and perform the audit(using due care and professional skepticism) to provide reasonable assurance about whether the financial statement are free of material misstatement, whether due to errors or fraud.
27
Q

Name the two types of fraud?

A
  • Fraudulent financial reporting

- Misappropriation of assets, or defalcation

28
Q

What fraud risk factors are generally present when fraud occurs?

A

The three conditions that generally are present when fraud occurs are: incentives/ pressures, opportunity, and rationalization/attitude. The auditor identifies and evaluates these fraud risk factors as part of assessing the risk of material misstatement due to fraud.

29
Q

Define illegal acts

A

Violations of laws or governmental regulations committed by entity or by company personnel acting on behalf of the entity.

30
Q

State the auditor’s response to detected illegal acts.

A
  • Consider the effects of the illegal act on the financial statement.
  • Evaluate the materiality of the illegal act, considering both quantitative factors.
  • Evaluate the disclosure of loss contingencies, including possible fines, Penalties, and damages.
  • consider the implications for other areas of the audit; and
  • Communicate the illegal act to those charged with governance.
31
Q

When is the auditor required to obtain an understanding of the entity and its environment?

A

To assess the risk of material misstatement and to make informed judgments about other audit matters such as:
-Materiality and tolerable misstatement.
-The entity’s selection and application of accounting procedures.
-Areas that require special audit consideration.
Design and performance of further audit procedures.

32
Q

What steps should the auditor perform in assessing and responding to risk?

A
  1. Obtain an understanding of the entity and its environment, including its internal control.
  2. Assess the risk of material misstatement.
  3. Respond to the assessed level of risk by designing further audit procedures based on this assessment.
  4. Test internal controls to evaluate their operating effectiveness.
  5. Perform substantive test.
  6. Evaluate the sufficiency and appropriateness of audit evidence obtained
33
Q

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

A

Risk assessment procedures include:

  • Inquiry
  • Analytical procedures
  • Observation and inspection
  • Risk assessment discussion
34
Q

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

A

When obtaining an understanding of the entity and environment the auditor should understand:

  • Industry, regulatory, and other external factors.
  • The Nature of the entity
  • Objectives, strategies, and business risks.
  • The entity’s financial performance.
  • Internal control.
  • The company’s selection and application of accounting principles (issuer audits -PCAOB Standards)
35
Q

What are analytical procedures?

A

Evaluations of financial information made by study of plausible relationships among both financial and non-financial date( e.g. ratio analysis)
Note: Analytical procedures are required in the planning and final review phases of the audit. They also may be used (but are not required) in substantive testing.

36
Q

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

A

Analytical procedures are used in planning the audit to understand the client’s business and to identify unusual transactions and events, amounts, ratios, or trends the might represent specific risks relevant to the audit.

37
Q

What are the objectives of internal control?

A
  • To promote efficiency and effectiveness of operations.
  • To ensure reliable financial reporting.
  • To encourage compliance with applicable laws and regulations.
38
Q

What are some inherent limitations of internal control?

A
  • Errors: May be made in the performance of control procedures.
  • Collusion: Provides a way to bypass controls related to segregation of duties.
  • Top management can OVERRIDE internal controls.
  • Segregation of duties may be difficult to achieve in a SMALLER ENTITY.
39
Q

What are the components of internal control?

“CRIME”

A
  • Control environment
  • Risk assessment
  • Information and communication systems
  • Monitoring
  • Existing control activities
40
Q

Why is the control environment particularly important to internal control?

A

The control environment sets the tone of an organization, influencing the control consciousness of its people, and providing the foundation for the other components of internal control.

41
Q

What factors are included in the control environment?

A

-Communication and enforcement of integrity and ethical values.
-Management’s commitment to competence.
-Participation of those charged with governance.
-Management’s philosophy and operating style.
-organizational structure.
Assignment of authority, responsibility, and accountability.
- Human resource policies and practices

42
Q

Describe the “risk assessment” component of internal control.

A

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

43
Q

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

A
  • Identify and record all valid transactions.
  • Describe transaction in a timely manner and in sufficient detail to allow proper classification.
  • Measure and record the proper monetary value of transactions.
  • Determine and ensure proper recording of transactions and events in the appropriate time period.
  • Present transactions and related disclosures properly in the financial statements.
44
Q

What functions should an auditor understand about an entity’s communication system respect to financial reporting?

A
  • The Methods used to communicate roles, responsibilities and significant matters related to financial reporting.
  • Communications between management and those charged with governance, and between management and external parties.
45
Q

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

A

The monitoring process may include:

  • Management and supervisory activities.
  • Separate internal control evaluations.
  • The internal audit function.
  • Evaluation of communications from external parties.
46
Q

Name some control activities that are relevant to an audit. “ PAID TIPS”

A
  • Prenumbering of documents.
  • Authorization of transactions.
  • Independent checks to maintain asset accountability.
  • Documentation.
  • Timely and appropriate performance reviews.
  • Information processing general and application controls.
  • Physical controls for safeguarding assets.
  • Segregation of duties.
47
Q

What functions should be segregated?

Segregation of duties is your ARC to protect against a flood of troubles.

A
  • Authorizing transactions.
  • Recording transactions.
  • Maintaining CUSTODY of the related assets.
48
Q

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

A

An auditor obtains an understanding of internal control to evaluate the design of controls and determine whether they have been implemented, to assess the risk of material misstatement, and to design the Nature, Extent, and Timing of further audit procedures.

49
Q

When are service organization’s services considered to be part of an entity’s information system?

A

A service organization’s are considered to be part of an entity’s information system when those services affect the initiation, execution, processing, or reporting of the user company’s transactions.

50
Q

What two types

A

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AUDIT 1-1 (5 decks)

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