Audit Section 3 Flashcards
An example of an entity being expected to accrue a loss contingency for the period under audit is
Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible. (Example of a recognized subsequent event)
When there is a material loss affects the audit report and there are creditors relying on the financial statements, the client properly should adjust the financial statements. Since they are refusing to do so, the auditor would most likely
notify the board of directors of the situation in an attempt to encourage the adjustment.
When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor’s report, but before issuance of the related financial statements, the auditor’s responsibility for events occurring subsequent to the original report date is
limited to the specific event referenced.
When facts are discovered after issuing an auditor’s report that would have caused the auditor to revise the report, the auditor should discuss the matter with
management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.
When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor’s report, the auditor should
determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Long-term debt that matures within one year is reported as a
current liability on the balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether such debt is appropriately classified on the balance sheet.
What would an auditor most likely perform in obtaining evidence about subsequent events
Investigate changes in long-term debt occurring after year-end
Since the auditor’s report was newly dated as of April 11, Year 4, the auditor is responsible for subsequent events until that date. The period between the date of the financial statements and the date of the auditor’s report is the subsequent period, during which the auditor is responsible for
investigating certain subsequent events
DUAL DATE is
when a major event comes to the auditor’s attention between the report date and issuance of the report; the financial statements may include the event as an adjustment or disclosure.
An auditor tests accounting records by using
analytical procedures and substantive procedures.
Accounting records consist of records of initial
journal entries and any supporting records.
Internal consistency among a client’s accounting records provides
limited evidence that the financial statements are fairly presented.
A client’s accounting records are
not sufficient support for an audit opinion. The auditor must test the accuracy of the accounting records by performing analytical procedures and substantive procedures.
When confirmations are sent out by the auditor and received back directly, this represents a form of
external evidence. While external evidence is considered the second most reliable evidence, an auditor’s direct personal knowledge (obtained through examination, re-computation, inspection, and observation) is the most reliable form of evidence.
PCAOB standards state that the relevance of audit evidences depends on
A. Whether the audit procedure is designed to directly test an assertion.
B. Whether the audit procedure is designed to test for an understatement or overstatement.
C. The timing of the audit procedure.
The auditor’s risk assessment affects
the nature, extent, and timing of audit procedures, but does not determine the relevance of audit evidence.
In order to obtain a reasonable basis for an audit opinion regarding the fairness of the client’s financial statements, the auditor should usually obtain and rely on evidence that is:
Persuasive because it is usually not possible or practical to obtain assurance beyond all doubt (100% of accounting data tested), the auditor should usually rely on audit evidence that is persuasive. Persuasiveness is a subjective concept, and is unique to each audit.
An auditor is in the process of gathering evidence during the current audit. Which of the following would not be considered corroborating evidence?
Sales invoices if an auditor reviews a client’s invoices, he or she would be examining the underlying accounting records of the client. Other underlying accounting records the auditor may review include contracts, ledgers, worksheets, checks, and journal entries.
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
Provide an objective basis for quantitatively evaluating sample risk. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.
The auditor decided to increase the level of the preliminary assessment of control risk because
the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate.
The risk of incorrect acceptance is an aspect of sampling risk that the auditor considers when
designing an audit procedure where sampling is used. This is considered before any potential misstatement is identified.
Qualitative factor that an auditor of a nonissuer may consider relevant when evaluating whether misstatements are material
A. The potential effect of the misstatement on the entity’s compliance with a contractual agreement.
B. The significance of the financial statement element affected by the misstatement.
C. The masking effect of the misstatement on a change in earnings in the context of industry conditions.
If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be
understated, because the control will be less effective than sample results would indicate.
The missing invoice should be counted as a deviation, resulting in a 2% sample deviation rate.
However, this information alone is not sufficient to determine whether the control can be relied upon. The auditor would also need to know the
upper deviation rate or the allowance for sampling risk, which would allow the auditor to calculate the upper deviation rate). It is the upper deviation rate that needs to be compared to the tolerable rate in making decisions.