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Audit > Audit Exam 2 > Flashcards

Audit Exam 2 Flashcards

1
Q

The steps of the audit process

A
  1. Client acceptance & staffing
  2. Plan the audit
  3. Perform the audit procedures
  4. Complete the audit
  5. Form an opinion and issue an audit report
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2
Q

What are 2 components crucial to planning an audit

A
  1. Obtain an understanding of the client and its environment
  2. Assess the risk of material misstatement and fraud risks and design the audit procedures
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3
Q

What does the audit procedures begin with?

A

Begins with a request for proposal prepared by aj organization’s management

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4
Q

The request proposal must come from who exactly if the organization is a public company?

A

the audit committee

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5
Q

What is an audit committee?

A

a committee that oversees the organizations accounting an financial reporting policies and practices

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6
Q

What must an audit committee have?

A

At least 3 independent directors

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7
Q

What does a request proposal discuss?

A

The nature of the services offered
Qualifications of their personnel
An estimate of the audit fee

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8
Q

Part of the client acceptance

A

The audit committee must approve the appointment and the budget

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9
Q

What must the predecessor auditor do?

A

Nothing

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10
Q

What must the successor auditor do?

A

Attempt to communicate with the predecessor auditor BEFORE accepting the engagement

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11
Q

What will the predecessor and the successor auditor discuss?

A

Details related to:
Integrity of management
Disagreements with management related to accounting or auditing matters
Information about fraud and internal controls
Why there was a switch of auditors

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12
Q

What is an engagement letter?

A

Where the terms of the audit engagement are established and outlined

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13
Q

What is included in an engagement letter?

A
  1. The objective and scope of the audit
  2. The auditor’s and management’s responsibilities
  3. Inherent limitations of an audit
  4. The applicable financial reporting framework
  5. The form and content of reports to be issued
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14
Q

Who is typically staffed on an audit engagement?

A

An:
Engagement Partner
Engagement Manager
Senior Auditor
Staff auditors
Tax or IT or valuation specialist
Concurring partner

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15
Q

What determine if something is material?

A

If it would affect the decisions of the users of the financial statements

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16
Q

Why is assessing materiality in the planning stage significant?

A

because it aids in setting or gaging the scope of the audit procedures

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17
Q

what are the materiality rules based on?

A

Can either be pre-existing rules or they can be new

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18
Q

SAB 99

A

An immateriality explanation - the amounts are immaterial simply because they fall beneath the minimum threshold

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19
Q

what are the materiality factors to consider

A
  1. amounts that may affect loan covenants
  2. amounts that may cause an entity to miss forecasted revenue or earnings
  3. material misstatements from prior years
  4. potential for fraud or legal acts
  5. cumulative misstatements
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20
Q

Performance materiality

A

the misstatement amount that auditors would be willing to tolerate within a particular class of accounts

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21
Q

Tolerable misstatement

A

the application of performance materiality to a specific audit procedure

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22
Q
A
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23
Q

to obtain an understanding of the client sufficiently under AU-C 315 the auditors must understand specifically the “_____ & _______”

A

entity and environment

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24
Q

to understand an entity and its environment including its internal control procedures, auditors may need to …

A

inquire with management an employees
carry out analytical procedures
observe and inspect business processes, activities

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25
Q

What are the two levels that ROMM should be assessed at?

A

entity level and process level

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26
Q
A
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27
Q

what is entity level

A

impact of internal and external forces on the operations of a company as a whole

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28
Q

auditors should assess the impact of

A

external forces
markets
core products and services
customers

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29
Q

what is the process level

A

for your each core business process, the auditor needs to document the understanding of the process. This includes discussions with management and operating employees

30
Q

after the process is understood at the process and entity level, the auditor needs to…

A
  1. identify the process objectives
  2. identify risks that threaten those objectives
  3. Identify controls in place that prevent those risks
31
Q

are there specific processes related to assessing ROMM due to fraud?

A

YES

32
Q

what are the processes related to detecting ROMM due to fraud?

A

step 1: brainstorm session with engagement team
step 2: inquiries with management and other relevant personnel
step 3: risk assessment analytical procedures (especially with revenue)

33
Q

how do we respond to ROMM?

A

we test controls and we carry out substantive procedures

34
Q

what does testing controls do?

A

they test the operating effectiveness of controls that are preventing material misstatements

35
Q

what do substantive procedures do?

A

detect material misstatements at relevant assertion level.

36
Q

what do substantive procedures include?

A

analytical procedures, tests of details of account balances, transactions and disclosures

37
Q

what are procedures often related to or based on?

A

The clients:
Revenue cycle
acquisition cycle
payroll cycle
etc.

38
Q

what generally does the revenue cycle entail?

A

sales and collections

39
Q

what does the acquisition cycle entail?

A

purchases and disbursements

40
Q

what might an auditor do to verify the existence of materials or inventory held by a client?

A

visit the site in order to physically see the equipment operating

41
Q

how would an auditor confirm that a company has the right to their assets?

A

they would ask the client for the deeds to the buildings

42
Q

how would the auditor verify the cutoff and completeness of recorded assetss?

A
  1. agree the items from the inventory floor to the accounting record
  2. verify the cutoff transactions
  3. obtian the final shipping doccuments for the year to see when the last items were shipped
43
Q

Internal control system

A

a process designed to provide reasonable assurance regarding the achievement of objectives related to
- reliability of financial reporting
- compliance with applicable laws
- effectiveness and efficiency of operations
- safeguarding of assets

44
Q

what is the significance of reasonable assurance?

A

the fact that controls are affected by human error or collusion among employees

45
Q

Three categories of internal controls

A

detective controls
preventative controls
corrective controls

46
Q

detective controls

A

controls designed to detect errors or fraud after they occur

47
Q

preventative controls

A

controls designed to prevent errors or fraud from occurring

48
Q

corrective controls

A

controls designed to remedy errors identified by detective controls

49
Q

Framework for internal controls

A

COSO 1992 “C.R.I.M.E”

50
Q

What does “C.R.I.M.E” stand for

A
  • it’s COSO’s 1992 internal control framework that stands for:
    Control Activities
    Risk Assessment
    Information & Communication
    Monitoring
    Environment
51
Q

What is the underlying foundation for the internal control process

A

the control environment

52
Q

What are important elements of the control environment

A

commitment to integrity and ethical values
effective and independent BoD
effective organizational structure
attracting and retaining competent employees

53
Q

Risk Assessment is what

A

its management’s process for identifying, analyzing, and responding to risk

54
Q

Important elements related to risk assessment

A

determining the risk tolerance related to the achievement of objectives
formal procedure that evaluate the likelihood of negative factors and the magnitude of them
risk response procedures that include avoidance, reduction, sharing, and or acceptance

55
Q

control activities

A

policies that help reduce or mitigate the likelihood that the organization’s objectives are not being carried out

56
Q

important types of control activities

A

performance reviews
transaction controls
general and application rules
physical control
segregation of duties

57
Q

Information and Communication does what -

A

it reflects the company’s ability to provide relevant information to decision makers across the entity

58
Q

important elements of information and communication

A

a distributed manual of all procedures and codes for all employees and relevant personnel
an effective and accessible AIS
clear lines and methods of communication between management and employees

59
Q

Monitoring

A

refers to an entity’s ability to check itself (not the same as the role of the independent auditor)

60
Q

Important types of monitoring controls

A

management review and an internal audit function that is independent of management

61
Q

Auditors consideration of internal control

A

review management documentation
- narrative format
- flowchart format
- complete an internal control questionnaire

62
Q

What is a walkthrough

A

a tracing cycle of a single transaction in an organization - used to understand the business processes as well as identify risks learn the language of the entity

63
Q

What are the components of a preliminary control risk assessment

A

to evaluate the design effectiveness of the orgs internal control
identify compensating controls (if applicable)
auditors can assess control risk at 100% if necessary

64
Q

After doing the preliminary control risk assessment, what’s next?

A

test the operating effectiveness of the internal controls

65
Q

how do the operating effectiveness of controls get assessed?

A

use procedures similar to testing the IC, but use larger samples of transactions and target specific cycles
update the assessment of control risk and the need for substantive testing

66
Q

where should significant control-related matters be reported?

A

to the organizations audit committee

67
Q

what is a material weakness?

A

a deficiency in an internal control over financial reporting (or a combination of deficiencies) where there is reasonable probability that a material misstatement of a company’s financial statements will not be prevented or detected on a timely basis

68
Q

what is a significant deficiency

A

a less severe than a material weakness, but important enough to merit attention by the audit committee

69
Q

Less than significant deficiency

A

not directly considered and reported to management if enough to merit attention

70
Q

significant deficiency

A

less severe than material weakness and requires communication

71
Q

material weakness

A

reasonable possibility of material misstatement and requires communication

Audit (2 decks)

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