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Audit > Audit Exam 1 > Flashcards

Audit Exam 1 Flashcards

1
Q

Auditing

A

Involves objectively obtaining and evaluating evidence regarding financial assertions of management to ascertain the degree of correspondence between the assertions and established criteria, and communicating results to interested uses.

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2
Q

Can audits be used by non-public companies?

A

Yes! It helps reduce the cost of capital and transaction costs.

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3
Q

Assurance

A

the most general category - which serves to improve the quality of information for decision makers

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4
Q

Attestation

A

the next sub category - provides an opinion as to the reliability of another’s assertions

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5
Q

Auditing

A

the most specific sub category - provides an opinion on assertions regarding economic events

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6
Q

Levels of Assurance

A

Positive - Limited/Negative - No Assurance

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7
Q

Example of Positive Assurance

A

an auditor’s report on a 10K

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8
Q

Example of Negative/Limited Assurance

A

review of financial statements

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9
Q

Example of No Assurance

A

compilation of financial statements

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10
Q

Who are providers of assurance?

A

public accounting firms - internal auditors - governmental audit profession - IRS agents

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11
Q

Who is part of regulating the accounting profession?

A

PCAOB - SEC - AICPA - COSO - IIA - GAO - State Board of accountancy - the courts

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12
Q

what does GAO stand for

A

government accountability office

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13
Q

corporate governance

A

the process by which the owners of an organization maintain the control and the accountability for the use of their resources for their business

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14
Q

Parties involved in the governance process

A

stockholders - BoD - Management - Audit Committee of the BoD - self regulatory agencies (AICPA FASB NYSE..etc) - Outside regulators (SEC) - external auditors - internal auditors

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15
Q

what does the sarbanes oxley act require?

A

that auditors of publicly traded companies are required to register with PCAOB

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16
Q

issuer of SOX

A

companies that file under the SEC Act of 1933 and 1934

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17
Q

Registrants of SOX

A

public accounting firms that prepare or issue any report with respect to any issuer

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18
Q

The PCAOB has the authority to 1 of 4

A

establish auditing, quality control, and independence standards

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19
Q

The PCAOB has the authority to 2 of 4

A

conduct inspections of registered firms

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20
Q

The PCAOB has the authority to 3 of 4

A

investigate any registered firm for acts in violation of standards or omissions of acts

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21
Q

The PCAOB has the authority to 4 of 4

A

enforce rules through various measures, including revoking registrations, filing civil lawsuits or changing fines

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22
Q

what else does SOX address?

A

corporate responsibility, financial disclosures, analysts, and fraud.

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23
Q

PCAOB standards are what in longer terms?

A

After SOX, the PCAOB adopted the original AICPA auditing standards as interim standards and has since then been issuing its own series of standards to supplement the original standards

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24
Q

What are the 3 categories of the PCAOB Standards

A
  1. General Standards
  2. Standards of Fieldwork
  3. Standards of Reporting
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25
Q

What are the PCAOB standards? (General Standards)

A

technical training and proficiency - independence - due professional care

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26
Q

what are the PCAOB standards? (Standards of Fieldwork)

A

planning of supervision - understanding internal control - sufficient competent evidential matter

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27
Q

what are the PCAOB standards? (standards of reporting)

A

financial statements prepared according to GAAP - Note inconsistencies with previous report - note inadequacies in disclosures - express opinion or provide reason why none provided

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28
Q

Specific standard of the AICPA

A

statements on auditing standards - identified two ways, through the original SAS numbering system and new codification, AU system, or AU-C for the recognized standards

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29
Q

PCAOB specific standard

A

PCAOB pronouncements - for audits of publicly traded companies

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30
Q

AICPA specific standard

A

attestation standards - for non audit attestation engagements

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31
Q

IAASB specific standard

A

international auditing and assurance standards board

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32
Q

quality control in auditing firms who is relevant?

A

AICPA –> peer review process - concurring partner review - licensing requirements / continuing education - limits on non audit services

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33
Q

GAAS

A

the general standards and are not really used for the basis of enforcement actions against CPAs, but often as the basis for determining negligence in legal liability cases

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34
Q

the code

A

provides more detailed guidance in the form of explicit rules, which are enforceable. They outline the minimum level of service a CPA is expected to perform and apply to all services performed by CPAs, not just as audit services as is the case with GAAS

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35
Q

what are two character rules of a CPA

A

independence rule & objective and integrity rule

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36
Q

General standards rule

A

an auditor must:
1. exercise due care
2. be competent
3. plan and supervise
4. obtain sufficient and relevant data

37
Q

compliance with professional standards rule

A

make the standards of GAAS binding to the CPA

38
Q

Compliance with GAAP rule

A

make the standards of GAAP binding to the CPA

39
Q

what are the two rules that pertain to an auditor’s relationship with a client

A

obligated to be:
- confidential rule
- contingent fee rule

40
Q

what are the rules pertaining to the CPA’s professional practice

A
  • discreditable acts rule
  • advertising rule
  • commissions and referral fees rule
  • form of practice and name rule
41
Q

SEC and PCAOB Rules governing independence Rule #1/3

A

Section 201 of SOX = non-audit services that are prohibited
a. bookkeeping
b. financial information systems designs and implementation
c. appraisal and valuation services
d. actuarial services
e. internal audit outsourcing
f. management services and human resources
g. broker-dealer or investment related services
h. legal services

42
Q

SEC and PCAAOB Rules governing independence Rule #2/3

A

Issues related to audit firm employees and compensation
- SOX section 203 = every 5 years the lead partner on the engagement needs to be rotated
- SOX section 206 = CEO,CFO, and CAO or any equivalent position cannot have worked at the audit firm 1 year preceding the audit
- The SEC prohibits any compensation for selling other services to audit clients other services being sold to

43
Q

SEC and PCAOB Rules governing Independence Rule #3/3

A

Required communication - relates to the CPA firm and the clients audit committee
a. CPA must communicate all critical accounting policy changes and how the issues were dealt with by management
b. audit committee must appoint, compensate, and oversee auditor
c. proxy statements and 10k statements must provide all audit fees and other service fees

44
Q

In order to practice, a CPA must…

A

know the rules established by the practice; they must also be aware of all of the legal liabilities they are subject to

45
Q

what are the three types of laws that auditors and CPAs are subject to

A

contract law, common law, and statutory law

46
Q

contract law

A

auditors can be liable to clients for breach of contract; or failing to carry out the explicit duties that were outlined in the contract

47
Q

common law

A

CPAs and auditors are also subject to rules established by court cases (ultrameres) these are developed mainly through cases that have to do with breach of contract, negligence, or fraud

48
Q

statutory law

A

the profession is subject to rules and regulations that RICO, SOX, and the SEC established

49
Q

what are the four levels of responsibility

A

breach of contract, ordinary negligence, gross negligence & constructed fraud, and fraud

50
Q

what is breach of contract in terms of responsibility

A

the most common in regards to the fact that most auditors do not perform the engagement in accordance with the engagement letter

51
Q

what is ordinary negligence in terms of responsibility

A

failure to perform a duty in accordance with the applicable standards

52
Q

what is gross negligence in terms of responsibility

A

reckless disregard for one’s professional responsibilities

53
Q

what is constructive fraud in terms of responsibility

A

misrepresentation that is known to be untrue or made with reckless indifference to the truth

54
Q

what is fraud in terms of responsibility

A

misrepresentation with the intent to deceive

55
Q

common law generally requires __________

A

privity of contract

56
Q

privity of contract

A

relationship between two parties that is recognized by law

57
Q

privity of contract can involve what parties (typically)

A

clients
foreseen users
other third parties such as
- foreseeable users (an unlimited group)
- “reasonably limited and identifiable users”

58
Q

when is the only case that privity is relevant

A

when the charge is ordinary negligence

59
Q

True or false: auditors are always liable to third parties to fraud or gross negligence

A

True

60
Q

to bring a charge of negligence, the plaintiff must demonstrate the following

A

duty
breach of duty
losses
causation

61
Q

what is the range for damages

A

from the auditors fee to punitive damages

62
Q

Private Securities Litigation Reform Act

A

changed damages in most cases from joint and several liability to proportionate liability

63
Q

joint and several liability

A

auditors liable for their share of damages and may be liable for damages of other defendants that cannot pay

64
Q

proportionate liability

A

auditors pay only their share of damages

65
Q

when auditors commit fraud they are….

A

liable to several and joint liability

66
Q

the 3 federal securities (statutory) laws are:

A

The securities Act of 1933, The Securities Act of 1934, and specifically rule 10b-5

67
Q

the Securities act of 1933

A

scope - new issuers. limited to registration statements or S-1 forms
Burden of proof: on auditor to prove they are not negligent

68
Q

the Securities Act of 1934

A

scope - existing issuers. Financial statements in annual reports and other findings like 10k
Burden of proof: is on the plaintiff to prove intentional or reckless misrepresentation

69
Q

rule 10b-5

A

addresses specifically fraud- the plaintiff must demonstrate:
a. the financial statements contained material misstatements
b. plaintiff relied on the misstatement
c. the plaintiff suffered injury from reliance
d. CPA had knowledge and intent to deceive

70
Q

the term for the CPA knowing that they had intent to deceive is ________

A

scienter

71
Q

other statutory law

A

RICO and Sarbanes Oxley

72
Q

factors that increase litigation (theres 4)

A
  1. risky clients
  2. lack of adequate training and or knowledge
  3. lack of independence
  4. lack of professional skepticism
73
Q

what makes for a risky client?

A

lack of internal controls and complex business processes

74
Q

what does it mean to have lack of adequate training and knowledge

A

to have:
inexperienced assistant auditors
reliance on outside specialists
failure to comply with GAAP

75
Q

actions that are helpful to mitigate risk

A

comply with GAAS
retain legal counsel
maintain adequate liability insurance coverage
investigate prospective clients
use engagement letters
properly assemble working letters

76
Q

what are the 6 assertions made by management during the preparation of financial statements that are tested by the auditor

A
  1. existence and occurrence
  2. completness
  3. valuation and accuracy
  4. cut-off
  5. rights and obligations
  6. presentation and disclosure
77
Q

audit risk model / formula

A

AR = IR * CR * DR

78
Q

AR stands for

A

audit risk

79
Q

IR stands for

A

inherent risk

80
Q

what is DR

A

detection risk

81
Q

audit risk definition =

A

thee possibility that auditors unknowingly fail to appropriately modify their opinion financial statements that are material misstatement

82
Q

inherent risk definition =

A

the possibility of a material misstatement of an assertion before considering the clients risk of internal control - business aspects and characteristics affect the level of inherent risk along with the business environment

83
Q

control risk definition =

A

the risk that material misstatement is not prevented or detected by the clients internal control system

84
Q

detection risk definition =

A

risk that the auditors fail to detect material misstatement (essentially a function of the effectiveness of the audit procedures)

85
Q

what makes for competent evidence

A

relevance and reliability

86
Q

what makes up audit evidence

A

sufficient and competent evidence

87
Q

relevancy addresses what

A

assertions

88
Q

analytical procedures

A

a variety of techniques used to study relationships between accounts within client financial presentations in order to identify possible material misstatements

89
Q

analytical procedures are used for what: (3 things)

A
  1. to assist the auditor in planning
  2. as a substantive test
  3. an overall review of the information and financials

Audit (2 decks)

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