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MGT3160 > Audit > Flashcards

Audit Flashcards

1
Q

T or F: The purpose of audit is to identify fraud.

A

F

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2
Q

Information risk

A

The risk that users and shareholders do not have the same information as managers.

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3
Q

Three levels of assurance/nonassurance

A

Assurance: most expensive.
Review: less expensive, faster, lower level of confidence.
Notice to Reader (NTR): 0 assurance. Done for CRA/bookkeeping but not accepted by banks.

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4
Q

Examples of audit of information other than the financial statements.

A
  • mall stores may be audited if their rent is based on revenues.
  • condo corporations
  • more detailed level of materiality
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5
Q

Examples of audits for non financial information

A
  • effectiveness of internal controls
  • audit of controls of service organization
  • compliance
  • IT
  • greehouse gas emissions
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6
Q

Who is responsible for the preparation of financial statements: auditor or management?

A

Management.

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7
Q

Who is responsible for the design, implementation, and maintenance of internal controls: auditor or management?

A

Management.

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8
Q

Auditors’ personal responsibilities (3)

A
  • Professional competence and due care (education, experience)
  • Compliance with ethical and independence requirements
  • Professional skepticism and professional judgement
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9
Q

Auditors’ performance responsibilities

A
  1. Adequate planning and supervision
  2. Determining and applying materiality levels
  3. Identify and assess risks of material misstatement
  4. Obtain sufficient and appropriate evidence
  5. Reporting
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10
Q

Ethics vs. Professional Ethics

A

Ethics: moral principles/values (personal)

Professional ethics: morally permissible standards the profession has defined

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11
Q

CPA Code of Professional Conduct: Relevant section 200 rules

A

201: Maintenance of good reputation of the profession
202: Integrity, due care, objectivity
203: Professional competence
204: Indpendence
205: False and misleading documents and oral representations
206: Compliance with professional standards
208: Confidentiality of information
210: Conflicts of interest
211: Duty to report breaches of the CPA code
214: Fee quotations and billings
215: Contingent fees
217: Advertising, solicitation, endorsements
218: Retention of documentation and working papers

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12
Q

CPA Professional Conduct: Relevant section 300 rules

A

302: Communication with predecessor
303: Provision of client information

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13
Q

2 Types of Independence required

A

Independence in fact, independence in appearance

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14
Q

Threats to independence (5)

A
  • Self-interest
  • Advocacy
  • Intimidation
  • Self-review
  • Familiarity
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15
Q

True or false: when a threat to independence is identified, the auditor must immediately be removed from the client’s case.

A

False. First, try to reduce or resolve the threat before withdrawing. Eg. Can the auditor sell their shares before conducting the audit?

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16
Q

Safeguards to independence created by the profession, legislation, or securities regulation

A

Education and training

Periodic rotation of senior members on the engagement

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17
Q

Safeguards to independence provided by the audit client

A

Qualified, independent audit committee
Corporate governance policies
Corporate policies and ethical codes

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18
Q

Safeguards to independence available within the audit firm’s procedures

A

Tone at the top
Firm policies and procedures
Rotation of senior personnel
Required consultation

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19
Q

True or False: CPA Canada sets the rules for auditing

A

False. PROVINCIAL self-regulating CPA boards.

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20
Q

Business failure vs. audit failure

A

Business failure: business cannot repay debts, perhaps due to poor mgmt, shift in demand, economic factors.
Audit failure: auditor issues an incorrect audit opinion.

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21
Q

Expectation gap

A

The difference between what users expect from the audit and what the audit actually provides.

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22
Q

Examples of incorrect expectations by users of an audit, which create an expectation gap.

A
  • Auditors should accept primary responsibility for fin stmts.
  • Auditors certify the fin. stmts.
  • A clean opinion guarantees the accuracy of fin stmts.
  • Auditors perform 100% verification.
  • Auditors should give early warning about possible business failure
  • Auditors are supposed to detect fraud.
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23
Q

3 Audit evidence decisions

A

NATURE: Which audit procedures to use?
EXTENT: Which items to select for testing?
TIMING: When to perform the procedures?

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24
Q

3 Categories of audit procedures

A

RISK ASSESSMENT: risk of material misstatement
TEST OF CONTROLS: evaluate effectiveness
SUBSTANTIVE: tests of details & analytical procedures

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25
Q

3 Characteristics of persuasive evidence

A

APPROPRIATE: relevant & reliable
SUFFICIENT
TIMELY

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26
Q

6 factors of evidence reliability

A

Evidence obtained directly by the auditor
Independence of source
Qualifications of source
Consistency from multiple sources
Effectiveness of client’s internal controls
Degree of objectivity

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27
Q

7 Types of audit procedures

A 
INSPECTION
OBSERVATION
EXTERNAL CONFIRMATION
RECALCULATION
REPERFORMANCE
ANALYTICAL PROCEDURES
INQUIRY
28
Q

T or F: External documents are considered more reliable than internal documents.

A

True.

29
Q

Vouching vs tracing

A

Vouching: Use documentation to support recorded transactions/amounts.
Tracing: Use documentation to determine if transactions or amounts are included in the accounting records.

30
Q

Analytical procedures: 4 types of data that balances and ratios are compared with

A

Industry data
Similar prior-period data
Client-determined expected results
Auditor-determined expected results

31
Q

Possible adjustments to strategy if audit risk is determined to be pervasive

A

Assign more experienced staff
Heighten level of professional skepticism
Increase involvement of audit partners and managers
Closer supervision and review

32
Q

What must be considered in identifying significant risks?

A

Risk of fraud
Risk related to key economic, accounting, other developments
Complexity of transactions
Significant related party transactions
Degree of subjectivity in measurement of financial information
Significant transactions outside the normal course of business

33
Q

The fraud triangle: conditions for fraud

A
  1. Incentives/pressures
  2. Opportunities
  3. Attitudes/rationalization
34
Q

The risk of material misstatement is a function of (3 types of risk)

A

Detection risk
Inherent risk
Control risk

35
Q

Indicators of doubt of continuance as a going concern

A 
Liquidity position
Profits(losses) in previous years
Method of financing growth
Nature of the client's operations
Competence of management
36
Q

What is the objective of conducting an audit of the financial statements?

A

To express an OPINION of whether the financial statements are FREE FROM MATERIAL MISSTATEMENTS and presented fairly in conformity with the APPLICABLE REPORTING FRAMEWORK.

37
Q

Management (client) responsibilities in an audit

A
  • Adopt sound and appropriate accounting POLICIES
  • Implement and maintain adequate INTERNAL CONTROLS
  • Provide FAIR REPRESENTATIONS in the financials.
  • Provide auditor with access to ALL RELEVANT INFORMATION
  • Provide auditor with any additional information they may request
  • Provide unrestricted access to PERSONS within the entity from whom the auditor determines it necessary to obtain evidence
38
Q

Responsibilities of those charged with governance

A

(board of directors)

  • oversight of management
  • approve audited financial statements
39
Q

Key difference between error and fraud

A

intent

40
Q

Fraudulent financial reporting

A
  • harms users of financial statements by providing them with incorrect information for decision making
  • usually committed by management
41
Q

Misappropriation of assets

A
  • harms stockholders, creditors, and others because assets are no longer available to their owners
  • usually committed by employees
42
Q

Auditor’s responsibility to evaluate going concern

A
  • conclude opinion on the appropriateness of management’s use of the going-concern basis of accounting
  • conclude if there is material uncertainty about the entity’s ability to continue as a going concern.
43
Q

What are management assertions?

A

Implied or expressed representations about:

  • classes of transactions or events
  • related account balances in the fin. stmts.
  • classification, presentation, disclosure of information
44
Q

Management assertions about classes and transactions of events (statement of comprehensive income)

A 
OCCURRENCE
COMPLETENESS
ACCURACY
CUTOFF - correct reporting time period
CLASSIFICATION - correct accounts

it occurs to her to completely and accurately cut off the class

45
Q

Management assertions about account balances (statement of financial position)

A

EXISTENCE
COMPLETENESS
VALUATION AND ALLOCATION
RIGHTS AND OBLIGATIONS - the entity does control the rights to assets, and liabilities are the obligation of the entity

46
Q

Management assertions about presentation and disclosure (notes to the financial statements)

A

OCCURRENCE AND RIGHTS AND OBLIGATIONS - disclosed info did occur and does pertain to entity
COMPLETION
ACCURACY AND VALUATION
CLASSIFICATION AND UNDERSTANDABILITY

47
Q

Services, other than audit, offered by public accounting firms

A 
Tax
Accounting
Management advising
Valuation
Assistance with adoption of IFRS
Environmental & CSR reporting
48
Q

Greatest challenge in assessing operational efficiency during an audit

A

Developing criteria

49
Q

Stakeholders of an audit

A

management, users of financial statements, CRA, banks, employees, customers

50
Q

Implications of accepting an audit engagement

A

auditors must have:

  • independence
  • competence
51
Q

Additional issues when filing with the OSC

A
  • IFRS compliance
  • specific forms required by OSC that must be filed in a specific time frame
  • must be registered with CPAB
52
Q

Quality controls that audit firms must have in place

A
  • Culture/tone at top
  • Ethical requirements (independence, integrity)
  • Policies and procedures relating to:
    • acceptance of engagements
    • HR practices
    • engagement performance
  • Monitoring these quality controls
53
Q

True or False: audit evidence must be convincing and conclusive

A

False, it must be persuasive

54
Q

Examples of internal documentation

A

cheque request form
receiving report
payroll time card
adjusting journal entry

55
Q

Examples of external documentation

A

vendor’s invoice
cancelled note
cancelled cheque
validated deposit slip

56
Q

Analytical procedures are performed during what phase of the audit engagement?

A

The planning phase, to help determine the nature, extent, and timing of work to be done.

57
Q

What should be disclosed if there exists a related party transaction?

A
  • the nature of the relationship
  • description of transx
  • amounts due to or from related parties if not otherwise apparent
58
Q

acceptable audit risk

A

a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified
opinion has been issued

59
Q

True or false: The less audit risk the auditor is willing to accept, the higher the level of evidence that the auditor will collect.

A

True

60
Q

Inherent risk or control risk?

The management bonuses at CFHI are based on net income

A

Inherent risk

61
Q

Inherent risk or control risk?
Due to the size of the CFHI’s business, only one accounting
clerk does most of the accounting.

A

Control risk

62
Q

Which assertion is being upheld when sales invoices are matched with shipping documents by a computer system which creates an exception report?

A

Occurence

63
Q

Which assertion is being upheld when receiving reports are prenumbered and accounted for on a daily basis?

A

Completeness and Cut Off

64
Q

Which assertion is being upheld when sales invoices are independently verified before being sent to customers?

A

Accuracy

65
Q

Why does the auditor obtain an understanding of internal controls?

A

To assess risks of material misstatement to the financial statements.

66
Q

What should the auditor due of they find significant deficiencies in internal controls?

A

Report the weaknesses to the audit committee or an appropriate representative of management

67
Q

Test of controls vs substantive tests

A

Test of controls: verify whether a client’s controls are applied in the manner described in documentation eg. examination that JE’s received approval

Substantive tests: test for dollar errors in transx or financial statement balances eg. recalculation of amounts

MGT3160 (4 decks)

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