Audit 4

Question 1

Audit evidence is gathered throughout the audit (objective of substantive testing: detect material misstatements in F/S)

Answer 1

S-ubstantive procedures
O-ther audit procedures
R-isk assessment procedures
T-est of controls

Question 2

Types of audit evidence

Answer 2

A-ccounting records
C-orroborating evidence(obtained through Observation, Inquiry, and Inspection)
E-lectronic: Evidence in Electronic Form

Question 3

Types of Analytical Procedures

Answer 3

Comparisons of Financial data

Ratio Analysis

Question 4

Steps in designing analytical procedures

Answer 4

1. Determine procedures suitable for testing assertions
2. Determine reliability of data
3. Perform analytical procedures and compare the results
4. Investigate the significant differences

Question 5

Analytical procedures are More & Less reliable

Answer 5

More-I/S accounts are more predictable

Less-Accounts with management discretion are less predictable

Question 6

Documentation required for Substantive Analytical Procedures

Answer 6

F-actors considered
E-xpectation of the auditor
A-dditional audit procedures performed
R-esults of such analytical procedures

Question 7

Audit Terminology

Answer 7

F-oot (add down), crossfooting (add across), and recalculation-verify mathematical accuracy
I-nquiry-requesting info both internally and externally
V¬-ouching
E-xamination/Inspection

C-onfirmation-specific type of inquiry from external 3rd parties
A-nalytical Procedures=look for unusual items
R-eperformance
R-econciliation
O-bservation
T-racing

C-utoff Review
A-uditing related Accounts Simultaneously
R-epresentation Letter=conclusion of fieldwork
S-ubsequent Events review

Question 8

Account Balances Assertions

Answer 8

C-ompleteness (all assets, liabilities and equity interests that should have been recorded have been)
V-aluation, Allocation, and Accuracy (amounts fairly and appropriately made, as well as adjustments)
E-xistence and Occurrence
R-ights and Obligations

Question 9

Transactions and Events Assertions

Answer 9

C-ompleteness 
cutOff
V-aluation, Allocation, and Accuracy
E-xistence(B/S) and Occurrence(I/S)
U-nderstandability and Classification (recorded in the proper accounts)

Question 10

Presentation and Disclosure Assertion

Answer 10

C-ompleteness
V-aluation, Allocation, and Accuracy
R-ights and Obligations, and Occurrence (Disclose events and transactions that have occurred and pertain to the entity)
U-nderstandability (of the footnotes only) and Classification=clearly expressed)

Question 11

Positive confirmations is best for

Answer 11

L-arge $ amounts
E-xpected errors/disputes
W-eak IC

Question 12

Negative confirmations are used when

Answer 12

L-ow risk
E-xpect customer attention
S-mall balances

Question 13

The accounting department (accounts payable) has 3 functions

Answer 13

R-ecord the payable
A-pprove the invoice for payment
P-ayment: Record the payment after it is approved by the Treasurer

Question 14

Risk reduced by segregation of duties

Answer 14

A-uthority
R-ecordkeeping
C-ustody

Question 15

7 cycles of auditing

Answer 15

P-P&E: acquisitions and disposals, and related depreciation expense
I-nventory: Perpetual, physical, and manufacturing
P-ayroll and personnel: payroll and personnel functions
E-xpenditure: purchases, payables, and cash disbursements
R-evenue: sales revenues, receivables, and cash receipts

I-nvestments: investments in debt and equity and the income received from investments
&
F-inancing: debt and equity financing, repayments, interest expense, and dividends

Question 16

The following functions of the Inventory cycle should be segregated

Answer 16

W-arehouse
R-eceiving
        A
P-urchasing
S-hipping

Question 17

Dual testing of inventory observation

Answer 17

O-bserving the performance of management’s count procedures
T-est counts get performed
I-nspecting the inventory to ascertain its Existence and Condition
E-valuating management’s Instructions and Procedures for the inventory count

Question 18

3 things to look for in PP&E retirements

Answer 18

T-axes: Company does not pay taxes on unknown property
I-nsure: Company does not/cannot insure an asset they don’t have
T-our plant/inquire

Question 19

Related Parties may include

Answer 19

A-ffiliates: Reporting entity’s affiliates
M-embers of their immediate families
O-wners(Principle)

Question 20

May indicate a related party transaction

Answer 20

C-ompensating balance arrangement
L-oan Guarantees
U-nusual, nonrecurring transactions near year-end
N-onmonetary exchanges
T-ransactions based on terms that differ significantly from market terms

Question 21

Significant related party transactions outside of the normal course of the entity’s business, auditor should?

Answer 21

T-erms of the transactions
R-ational(Business) of the transaction
A-ccounted for(Transactions)
D-isclosed(Transactions)
E

Question 22

Identifications of previously unidentified or undisclosed related party or significant related party transactions

Answer 22

1. Communicate the information to the other members of the engagement team
2. Request management to identify all transactions with the newly identified related parties
3. Inquire why IC failed, and disclosure of the related party relationships or transactions.
4. Perform appropriate substantive procedures
5. Reconsider the risk of other related party transactions
6. Evaluate the audit implications if management purposefully did not disclose related party transactions.

Question 23

Auditor’s responsibility with estimates

Answer 23

P-olicies and Practices assessment: Assess management’s written policies and practices regarding the development and use of estimates

G-AAP: Ensure estimates conform to GAAP
R-easonable: Determine that the accounting estimates are reasonable
U-ncertainty: Evaluate the degree of estimation uncertainty
V-erify that all material misstatements have been developed
E

Question 24

Fair value must comply with

Answer 24

P-ast track record of estimates is accurate
I-ndustry: Appropriate in relation to industry
C-hanges: Justify any changes in approach
C-onsistent method with prior period

Question 25

Auditor’s responsibility for FV

Answer 25

C-ontrols (Understand) that are relevant
A-ssess the risk of material misstatement of FV measurements
P-rocess(Understand)
E-valuate the sufficiency, competency, and consistency of evidence obtained

Question 26

PCAOB standards state that auditor’s evaluation of audit results should include evaluation of the following

Answer 26

1. Result of the AP performed during the overall review of the F/S
2. Misstatements/uncorrected misstatements found during the audit
3. Qualitative aspects of the companies practices
4. Conditions related to fraud risk
5. Presentation/disclosures of the F/S
6. Sufficiency and appropriateness of the audit evidence obtained

Question 27

The auditor must evaluate the materiality of all misstatements found during the audit

Answer 27

QUALITATIVE conditions

A-pproaches materiality in the aggregate
P-rior period misstatements
E-ffects both individually and in the aggregate of misstatements
S-ize of misstatement

Question 28

Documentation Requirements for misstatements

Answer 28

T-rivial Amount below which misstatements are clearly trivial
A-ll misstatements accumulated during the audit and whether they have been corrected
U-ncorrected: Summary/conclusion/basis of uncorrected misstatements

Question 29

Audit documentation for 2nd review partner (sign-offs)

Answer 29

C-ompleted: date work was completed
R-eviewed(Who)
               O
P-erformed(Who)
D-ate of review

Question 30

A significant engagement deficiency exists when?

Answer 30

F-ailed to obtain sufficient appropriate evidence
I-nappropriate conclusion
N-ot appropriate report for the circumstances
I-ndependent NOT