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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
What are the two levels that ROMM should be assessed at?
entity level and process level
26
27
what is entity level
impact of internal and external forces on the operations of a company as a whole
28
auditors should assess the impact of
external forces markets core products and services customers
29
what is the process level
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
after the process is understood at the process and entity level, the auditor needs to...
1. identify the process objectives 2. identify risks that threaten those objectives 3. Identify controls in place that prevent those risks
31
are there specific processes related to assessing ROMM due to fraud?
YES
32
what are the processes related to detecting ROMM due to fraud?
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
how do we respond to ROMM?
we test controls and we carry out substantive procedures
34
what does testing controls do?
they test the operating effectiveness of controls that are preventing material misstatements
35
what do substantive procedures do?
detect material misstatements at relevant assertion level.
36
what do substantive procedures include?
analytical procedures, tests of details of account balances, transactions and disclosures
37
what are procedures often related to or based on?
The clients: Revenue cycle acquisition cycle payroll cycle etc.
38
what generally does the revenue cycle entail?
sales and collections
39
what does the acquisition cycle entail?
purchases and disbursements
40
what might an auditor do to verify the existence of materials or inventory held by a client?
visit the site in order to physically see the equipment operating
41
how would an auditor confirm that a company has the right to their assets?
they would ask the client for the deeds to the buildings
42
how would the auditor verify the cutoff and completeness of recorded assetss?
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
Internal control system
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
what is the significance of reasonable assurance?
the fact that controls are affected by human error or collusion among employees
45
Three categories of internal controls
detective controls preventative controls corrective controls
46
detective controls
controls designed to detect errors or fraud after they occur
47
preventative controls
controls designed to prevent errors or fraud from occurring
48
corrective controls
controls designed to remedy errors identified by detective controls
49
Framework for internal controls
COSO 1992 "C.R.I.M.E"
50
What does "C.R.I.M.E" stand for
- it's COSO's 1992 internal control framework that stands for: Control Activities Risk Assessment Information & Communication Monitoring Environment
51
What is the underlying foundation for the internal control process
the control environment
52
What are important elements of the control environment
commitment to integrity and ethical values effective and independent BoD effective organizational structure attracting and retaining competent employees
53
Risk Assessment is what
its management's process for identifying, analyzing, and responding to risk
54
Important elements related to risk assessment
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
control activities
policies that help reduce or mitigate the likelihood that the organization's objectives are not being carried out
56
important types of control activities
performance reviews transaction controls general and application rules physical control segregation of duties
57
Information and Communication does what -
it reflects the company's ability to provide relevant information to decision makers across the entity
58
important elements of information and communication
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
Monitoring
refers to an entity's ability to check itself (not the same as the role of the independent auditor)
60
Important types of monitoring controls
management review and an internal audit function that is independent of management
61
Auditors consideration of internal control
review management documentation - narrative format - flowchart format - complete an internal control questionnaire
62
What is a walkthrough
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
What are the components of a preliminary control risk assessment
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
After doing the preliminary control risk assessment, what's next?
test the operating effectiveness of the internal controls
65
how do the operating effectiveness of controls get assessed?
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
where should significant control-related matters be reported?
to the organizations audit committee
67
what is a material weakness?
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
what is a significant deficiency
a less severe than a material weakness, but important enough to merit attention by the audit committee
69
Less than significant deficiency
not directly considered and reported to management if enough to merit attention
70
significant deficiency
less severe than material weakness and requires communication
71
material weakness
reasonable possibility of material misstatement and requires communication

Audit (2 decks)

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