Audit Deck 3 Flashcards
In assessing the tolerable deviation rate using statistical sampling, do deviations at a given rate usually mean misstatements are actually at a higher or a lower rate?
Lower Rate
What should an accountant do if they believe the financial statements are materially misstated in a compilation engagement?
Obtain the additional or revised information need to correct the financial statements
Is a change in estimate accounted for retrospectively or prospectively?
Prospectively
Is a change in accounting principle account for retrospectively or prospectively?
Retrospectively
What is the formula for Inventory Turnover?
COGS / ((Beginning Inventory + Ending Inventory) / 2)
How do you calculate COGS?
Beginning Inventory + Purchases - Ending Inventory
How is the existence assertion verified?
By vouching from the records and statements back to the supporting documents
What type of investment can a CPA have in a client that would NOT be considered a direct financial interest?
An investment held through a nonclient regulated mutual fund
What does an auditor need to assess when examining an entity’s compliance with specified requirements?
Attestation Risk (CONTROL RISK, Inherent Risk, Detection Risk)
Why does an auditor obtain an understanding of an entity’s information and communication system?
- To Understand how transactions are initiated, processed and reported
- Understand the financial reporting process
- Means used to communicate financial reporting roles and responsibilities
What is a review engagement mainly based on?
Inquiry and analytical procedures perform by the auditor
The vouchers payable department typically doesn’t perform:
Accounting for unused prenumbered purchase orders and receiving reports
When an auditor increases the planned level of control risk because certain control activities were determined ineffective, the auditor would need to reduce detection risk. How would they reduce detection risk?
By increasing the extent of tests of details
Does the expected deviation rate vary directly or inversely with sample size?
Directly
Does the tolerable rate vary directly or inversely with sample size?
Inversely
What does an auditor need an understanding of during a financial statement audit?
An understanding of internal control relevant to an entity’s financial reporting objective
When an accountant is performing agreed-upon procedures, do they have to be independent even though they are providing NO assurance?
Yes, they must be independent
When an auditor reports on internal control during a FINANCIAL STATEMENT audit, does the auditor need to include a statement that restricts the use of the report?
Yes, they need to restrict the use of the report
Ration estimation sampling is most effective when there is a correlation between the audit amounts and the _____?
Book Values
When receiving reports are prenumbered and then periodically reconciled to inventory records, this helps determine that all goods received have been recorded in inventory. Which assertion does this cover?
Completeness Assertion
How many years do Lead Audit Partners have to take off as a “time-out” before they can serve on an engagement again? (after they had been the lead partner for 5 years.)
5 years of “time-out”
If the auditor agrees with a change in accounting principle and wants to issue an unmodified opinion, do they need to include an emphasis-of-matter paragraph concerning the change?
Yes. (Even though they are issuing an unmodified opinion, they need to include an emphasis-of-matter paragraph documenting the change in accounting principle.)
If management does not want to include “management discussion and analysis” in their annual report (this is required to be included per the SEC, but NOT per GAAP), what kind of report does an auditor issue?
Unqualified with Explanatory Paragraph (just remember, if it’s required by SEC but not GAAP, you can still have an unmodified/unqualified opinion, but you need to explain that it was not included)
Without stratification, if you using a sampling interval to select a sample from a population, the equation would be Population / _______? (make sure to round UP the answer)
The sampling interval
WITH stratification when using a sampling interval, you take out the biggest numbers of the population and count them each individually, then take the rest of the population and divide the Remaining population by _______?
The sampling interval
If cash was received, but there was no corresponding invoice, it’s likely that there was no sale and instead, it could have something to do with disposals of _____ and _____ assets.
Property
Fixed
Financial projections are only available for ______ use.
Limited
The following factors are a part of?
1. Communication and enforcement of integrity and ethical values
2. Commitment to competence
3 Participation of those charged with governance
4. Management’s philosophy and operating style
5. Organizational structure
6. Assignment of authority, responsibility, and accountability
7. Human resource policies and practices
CONTROL ENVIRONMENT
Would an auditor issue a qualified opinion if there was a scope limitation?
NO (they would either issue a DISCLAIMER of OPINION or withdraw)
Would an auditor issue a qualified opinion if there was a material weakness in internal control?
NO (they would issue an ADVERSE opinion)
