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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
What are the PCAOB standards? (General Standards)
technical training and proficiency - independence - due professional care
26
what are the PCAOB standards? (Standards of Fieldwork)
planning of supervision - understanding internal control - sufficient competent evidential matter
27
what are the PCAOB standards? (standards of reporting)
financial statements prepared according to GAAP - Note inconsistencies with previous report - note inadequacies in disclosures - express opinion or provide reason why none provided
28
Specific standard of the AICPA
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
29
PCAOB specific standard
PCAOB pronouncements - for audits of publicly traded companies
30
AICPA specific standard
attestation standards - for non audit attestation engagements
31
IAASB specific standard
international auditing and assurance standards board
32
quality control in auditing firms who is relevant?
AICPA --> peer review process - concurring partner review - licensing requirements / continuing education - limits on non audit services
33
GAAS
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
34
the code
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
35
what are two character rules of a CPA
independence rule & objective and integrity rule
36
General standards rule
an auditor must: 1. exercise due care 2. be competent 3. plan and supervise 4. obtain sufficient and relevant data
37
compliance with professional standards rule
make the standards of GAAS binding to the CPA
38
Compliance with GAAP rule
make the standards of GAAP binding to the CPA
39
what are the two rules that pertain to an auditor's relationship with a client
obligated to be: - confidential rule - contingent fee rule
40
what are the rules pertaining to the CPA's professional practice
- discreditable acts rule - advertising rule - commissions and referral fees rule - form of practice and name rule
41
SEC and PCAOB Rules governing independence Rule #1/3
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
SEC and PCAAOB Rules governing independence Rule #2/3
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
SEC and PCAOB Rules governing Independence Rule #3/3
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
In order to practice, a CPA must...
know the rules established by the practice; they must also be aware of all of the legal liabilities they are subject to
45
what are the three types of laws that auditors and CPAs are subject to
contract law, common law, and statutory law
46
contract law
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
common law
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
statutory law
the profession is subject to rules and regulations that RICO, SOX, and the SEC established
49
what are the four levels of responsibility
breach of contract, ordinary negligence, gross negligence & constructed fraud, and fraud
50
what is breach of contract in terms of responsibility
the most common in regards to the fact that most auditors do not perform the engagement in accordance with the engagement letter
51
what is ordinary negligence in terms of responsibility
failure to perform a duty in accordance with the applicable standards
52
what is gross negligence in terms of responsibility
reckless disregard for one's professional responsibilities
53
what is constructive fraud in terms of responsibility
misrepresentation that is known to be untrue or made with reckless indifference to the truth
54
what is fraud in terms of responsibility
misrepresentation with the intent to deceive
55
common law generally requires __________
privity of contract
56
privity of contract
relationship between two parties that is recognized by law
57
privity of contract can involve what parties (typically)
clients foreseen users other third parties such as - foreseeable users (an unlimited group) - "reasonably limited and identifiable users"
58
when is the only case that privity is relevant
when the charge is ordinary negligence
59
True or false: auditors are always liable to third parties to fraud or gross negligence
True
60
to bring a charge of negligence, the plaintiff must demonstrate the following
duty breach of duty losses causation
61
what is the range for damages
from the auditors fee to punitive damages
62
Private Securities Litigation Reform Act
changed damages in most cases from joint and several liability to proportionate liability
63
joint and several liability
auditors liable for their share of damages and may be liable for damages of other defendants that cannot pay
64
proportionate liability
auditors pay only their share of damages
65
when auditors commit fraud they are....
liable to several and joint liability
66
the 3 federal securities (statutory) laws are:
The securities Act of 1933, The Securities Act of 1934, and specifically rule 10b-5
67
the Securities act of 1933
scope - new issuers. limited to registration statements or S-1 forms Burden of proof: on auditor to prove they are not negligent
68
the Securities Act of 1934
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
rule 10b-5
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
the term for the CPA knowing that they had intent to deceive is ________
scienter
71
other statutory law
RICO and Sarbanes Oxley
72
factors that increase litigation (theres 4)
1. risky clients 2. lack of adequate training and or knowledge 3. lack of independence 4. lack of professional skepticism
73
what makes for a risky client?
lack of internal controls and complex business processes
74
what does it mean to have lack of adequate training and knowledge
to have: inexperienced assistant auditors reliance on outside specialists failure to comply with GAAP
75
actions that are helpful to mitigate risk
comply with GAAS retain legal counsel maintain adequate liability insurance coverage investigate prospective clients use engagement letters properly assemble working letters
76
what are the 6 assertions made by management during the preparation of financial statements that are tested by the auditor
1. existence and occurrence 2. completness 3. valuation and accuracy 4. cut-off 5. rights and obligations 6. presentation and disclosure
77
audit risk model / formula
AR = IR * CR * DR
78
AR stands for
audit risk
79
IR stands for
inherent risk
80
what is DR
detection risk
81
audit risk definition =
thee possibility that auditors unknowingly fail to appropriately modify their opinion financial statements that are material misstatement
82
inherent risk definition =
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
control risk definition =
the risk that material misstatement is not prevented or detected by the clients internal control system
84
detection risk definition =
risk that the auditors fail to detect material misstatement (essentially a function of the effectiveness of the audit procedures)
85
what makes for competent evidence
relevance and reliability
86
what makes up audit evidence
sufficient and competent evidence
87
relevancy addresses what
assertions
88
analytical procedures
a variety of techniques used to study relationships between accounts within client financial presentations in order to identify possible material misstatements
89
analytical procedures are used for what: (3 things)
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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