Audit General

Question 1

Information risk

Answer 1

Risk that financial information presented to stakeholders is not reliable . Audit must reduce this risk to an acceptable level

Question 2

Threats to independence

Answer 2

• Self interest : financial interest
• Self review
• Advocacy
• Familiarity
• Intimidation

Question 3

Rules of professional conduct

Answer 3

Objectivity
integrity and due care
Professional competence
Confidentially
Professional behaviour

Question 4

Materiality is used when

Answer 4

1. planning - where to focus procedures
2. Execution - used to evaluate errors and determine extent of additional procedures
3. Reporting - Evaluate aggregate errors. If client wont fix opinion will be affected

Question 5

Unqualified opinion

Answer 5

Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided by the small business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive

Question 6

Qualified opinion

Answer 6

In situations when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion.

Question 7

Adverse opinion

Answer 7

he worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented. Although this may occur by error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it.

Question 8

Disclaimer of opinion

Answer 8

On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.

Question 9

Base for materiality

Answer 9

Usually Normalized income before taxes

others:
total assets
total revenues
total expenses
total equity

Question 10

Threshold for materiality

Answer 10

Usually 3-7% of normalized net income

1-3% of revenues/ expenses/ assets
3-5% of equity

If sensitive users use lower range

Question 11

Materiality is based on

Answer 11

Objectives of users
NOT risk

Change in materiality from p/y if new users or new objectives

Question 12

Normalized net income

Answer 12

Adjust for unusual items that wont happen again in future years.
ex special mgmt bonus
above normal wage for managers
unusual gains or losses on sale of ppe or shares

NI BEFORE TAX

• Accounting adjustments (profit not sales)*
• normalizing amounts

*think must adjust COGS with any sales adjustments

Question 13

Performance materiality

Answer 13

60 to 80% of overall

For individual account balances

Question 14

Specific materiality

Answer 14

For specific accounts that would affect users.

Question 15

RMM

Answer 15

IR X CR

Question 16

Audit risk

Answer 16

RMM X DR

Risk that auditors opinion is incorrect

Question 17

Detection risk

Answer 17

Risk that auditor will not detect material misst.

Objective is to bring detection risk to a low level

Question 18

If RMM is high do what?

Answer 18

Don’t lower materiality

Do increase quality and quantity of audit evidence to reduce RMM to acceptable level

Increase professional skepticism

Assign more qualified staff

Increase supervision

Change timing of audit

Question 19

IR at OFSL

Answer 19

Poor financial health
Signif competition
1st audit
Upcoming sale / purchase
New rules from industry
Public offering of shares
Employee bonuses based on NI - risk of manipulation
Accounting issues subject to judgement or estimates - risk of error
New bank users w/ covenant - risk of manipulation to meet covenants
Long time client - decreases risk

Question 20

CR at OFSL

Answer 20

Old systems
Lack of segregation of duties
lack of internal audit functions
lack of computer controls
poor attitude by mgmt for controls
lack of policiies
lack of system documentation 
lack of staff knowledge - risk of error
Lack of oversight from mgmt. or owners - risk of fraud or error

Question 21

When discussing risk

Answer 21

Talk about facts that increase and decrease

Talk about what risk is
& how it impacts entity

Question 22

IR & CR at assertion level

Answer 22

Industry facts
Nature of business ie food become obsolete inventory
Characteristics of account balances ie jewelry likely to be stolen
Physical controls
Segregation of duties

Question 23

Fraudulent reporting

Answer 23

By management. Intentional omissions or manipulations

Question 24

Misappropriation

Answer 24

Stealing, personal use of assets etc

Question 25

Indicators of going concern

Answer 25

current ratio going down
bad financial ratios
LT debt cannot be paid
Reliance on ST financing
negative cash flow
neg r/e
plans to liquidate
top mgmt leaves
loss to key customer
non compliance with laws
material lawsuit

Question 26

Approaches

Answer 26

1. Substantive
2. Combined

For OFSL and assertion level. May be diff

Question 27

Overall Risk Question

Answer 27

Discuss factors than increase and decrease risk
Why risks are important (impact)
How will users be affected

Question 28

Materiality Question

Answer 28

Identify USERS
Does materiality need to be revised from p/y
What OBJECTIVES of USERS (not risk) have changed the materiality need
Consider your base & link to user
If using NI adjust for accounting issues & normalize
apply a threshold %
discuss your approach

Question 29

Independence

Answer 29

Ability to act w/ objectivity, integrity and professional skepticism

Question 30

Safeguards to independence

Answer 30

Reduce threat:
education - profession
audit committee - client
firm policies - practioner

Question 31

Audit evidence must be

Answer 31

Sufficient &
Appropriate

Must get reasonable not absolute assurance that F/S are free from material misstatement

Question 32

Review engagement approach

Answer 32

Use inquiry and analytical

Obtain limited assurance

Question 33

Normalize income for materiality

Answer 33

Only adjust for items that are recurring
include - adjustments to sales etc
don’t include - impairment, obsolete inventory, special wages etc