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AUD Test > Audit 3 > Flashcards

Audit 3 Flashcards

1
Q

What should an auditor consider before accepting a new client or continuance with an old client?

A
  1. firm’s ability to meet reporting deadlines
  2. firm’s ability to staff the engagement
  3. independence
  4. integrity of client management
  5. group audits
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2
Q

Required contents of an audit engagement letter

A
  1. objective and scope of the audit
  2. responsibilities of the auditor
  3. responsibilities of management
  4. statement on inherent limitations of the audit
  5. identification of applicable reporting framework
  6. reference to expected form and content of reports
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3
Q

Inquiries that an auditor should make of a predecessor auditor BEFORE accepting an engagement

A
  1. info on management’s integrity
  2. disagreements with management
  3. reasons for change in auditor
  4. communication regarding fraud, noncompliance, or IC matters
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4
Q

Performance materiality

A

It’s less than the financial statement materiality and it reduces the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the FS as a whole.

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5
Q

Tolerable Misstatement

A
  • The application of performance materiality to a particular sampling procedures
  • Maximum amount that an account balance or class of transactions can be misstated without causing the FS to be misstated.
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6
Q

A written audit plan is…

A

REQUIRED

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7
Q

Tests of controls

A

-they are used to evaluate the OPERATING EFFECTIVENESS of internal controls in PREVENTING or DETECTING material misstatements

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8
Q

Substantive procedures

A

Used to detect material misstatements, they include:

  • Tests of Details
  • Substantive procedures
  • Analytical procedures
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9
Q

What are the main financial statement assertions?

A 
"These assertions COVER U"
Completeness
cutOff
Valuation, allocation and accuracy
Existence and occurrence
Rights and obligations
Understandability and classification
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10
Q

Completeness

A

“Land of reality to the land of accounting records”

All account balances, transactions, and disclosures that SHOULD HAVE been recorded HAVE BEEN

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11
Q

Cutoff

A

Transactions have been recorded in the CORRECT PERIOD

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12
Q

Valuation, allocation, and accuracy

A

Account balances, transactions, and disclosures are recorded FAIRLY at the APPROPRIATE AMOUNTS (and any adjustments are recorded

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13
Q

Existence and Occurrence

A

“Land of accounting records to land of reality”

Account balances EXIST and transactions that have been recorded and disclosed OCCURRED

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14
Q

Rights and Obligations

A

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

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15
Q

Understandability and Classification

A
  • Transactions have been recorded in the PROPER ACCOUNTS

- Financial info is APPROPRIATELY PRESENTED and DESCRIBED and disclosures are CLEARLY EXPRESSED

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16
Q

Assertions that relate to transactions/events

A

CCC-AO

completeness, cutoff, accuracy, classification, and occurrence

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17
Q

Assertions that relate to Account balances

A

CAVE-RO

completeness, allocation and valuation, rights and obligations, and existence

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18
Q

Assertions that relate to Presentation and Disclosure

A

CUC-ROVA

completeness, understandability and classification, rights and obligations, and valuation and accurancy

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19
Q

PCAOB standards say that financial statement assertions are…

A 
"CEO APPROVED"
Completeness
Existence
Occurrence
Allocation
Presentation
Rights
Obligations
Valuation
E (buy a vowel!)
Disclosure
20
Q

The internal auditor cannot share responsibility for…

A
  1. decisions
  2. judgments
  3. assessments
  4. issuing the report
21
Q

What is audit risk?

A

the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.

22
Q

Factual misstatements

A

misstatements about which there is no doubt

23
Q

Judgmental misstatements

A

differences arising from judgments of management that the auditor considers unreasonable or inappropriate

24
Q

Projected misstatements

A

the auditor’s best estimate of misstatements in populations

25
Q

Audit risk equation

A

AR = RMM x DR

audit risk = risk of material misstatement * detection risk

26
Q

Risk of material misstatement

A

= Inherent risk * Control risk

27
Q

Inherent risk

A

the susceptibility of a relevant assertion to a material misstatement assuming that there are no related controls

28
Q

Control risk

A

the risk that a material misstatement will occur without being prevented or detected in a timely basis by the internal controls

29
Q

Detection risk

A

the risk that the auditor will not detect a material misstatement that exists in a relevant assertion

30
Q

Types of fraud

A
  1. Fraudulent financial reporting (lying)
  2. Misappropriation of assets (stealing)
  3. Corruption (cheating)
31
Q

The characteristics of fraud (the fraud triangle)

A
  1. Incentive/pressure
  2. Opportunity
  3. Rationalization/attitude
32
Q

What two risks are presumed to exist in every audit?

A
  1. improper revenue recognition (Analytical procedures are REQUIRED by PCAOB standards)
  2. management override of controls
33
Q

When are analytical procedures required?

A
  1. Planning stage

2. Final review stage

34
Q

When must a CPA communicate fraud with external parties?

A
  1. to comply with legal and regulatory requirements
  2. to the successor auditor (with permission)
  3. subpoena
  4. funding or other specified agency when entity receives governmental financial assistance
  5. to authorities in some cases
35
Q

Assessing the risks of material misstatement

A

“IM A CPA”
Internal control, entity and environment (obtain understanding)
Material misstatement (assess risk)
Assessed level of risk response
Control testing
Perform substantive testing
Audit evidence (evaluate appropriateness and sufficiency)

36
Q

The components of internal controls

A 
"CRIME"
Control environment
Risk assessment
Information and communication
Monitoring
Existing control activites
37
Q

Control activities

A

“PAID TIPS”
Pre-numbering of documents
Authorization of transactions
Independent checks to maintain asset accountability
Documentation
Timely and appropriate performance reviews
Information processing controls
Physical controls for safeguarding assets
Segregation of duties

38
Q

Segregation of duties

A

“segregation of duties is your ARC to protect against a flood of troubles”
Authorization
Record keeping
Custody of assets

39
Q

Procedures to obtain evidence about design and implementation of internal controls

A
  1. Inquiry
  2. Observation of application of the controls
  3. Inspection of documents/records
  4. Observation of premises and plant facilities
  5. Walkthroughs
40
Q

Documentation of the understanding of internal control

A

-The auditor must document this
-Documentation can include “FIND”
Flowchart
Internal control questionnaire or checklists
Narrative
Documentation from client

41
Q

Common flowchart symbol is a diamond…

A

“A diamond is a big decision” = Decision symbol

42
Q

Segregation of duties for IT

A 
"COPAL"
Control group
Operators
Programmers
Analyst (system)
Librarian

Note: if someone is a supervisor and they have control over more than one area of COPAL, it may look like an advantage, but really it’s a segregation problem

43
Q

What are the main limitations of internal control?

A
  1. Management override
  2. Human error
  3. Collusion
44
Q

Difference between Type 1 and Type 2 reports (Service auditor reports when the entity uses a service organization)

A
  1. Type 1 CANNOT be used to reduce the assessment of control risk while Type 2 can (sometimes)
  2. Type 2 actually reports on the operating EFFECTIVENESS of internal controls
45
Q

Elements of audit procedures

A

“we cast our NET over the audit”
Nature
Extent
Timing

AUD Test (7 decks)

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