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AUD > Audit Standards & Engagement Planning > Flashcards

Audit Standards & Engagement Planning Flashcards

1
Q

compliance audits

A

performed to determine if entity is complying w applicable law and regulations

performed by regulatory bodies

IRS audit, OSHA audit

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2
Q

operational audits

A

performed by internal auditors to determine if mgmt’s policies are being follow appropriately and evaluate entity’s performance as well as its compliance w internal controls

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3
Q

financial statement audits

A
  • determine if f/s are being fairly presented
  • performed by CPAs

f/s audit, interim reviews

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4
Q

reasonable assurance

A

high lvl of assurance

NOT absolute assurance

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5
Q

unconditional requirement

A

auditor must comply to be in accordance w GAAS

“must”
“is required to”

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6
Q

presumptively mandatory requirement

A

auditor expected to comply but rarely may depart from standards if deem ineffective. alt procedures must be performed and documented

must document why they’re not gonna do it.

“should”

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7
Q

clarity standard format

A

applies to non public, non issuers

  1. introduction
  2. objectives
  3. definitions
  4. requirements
  5. application and other explanatory material
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8
Q

GAAS

A

generally accepted auditing standards

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9
Q

PCAOB

A

Public Company Accounting Oversight Board

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10
Q

3 categories of standards of GAAS

A
  1. general standards
  2. fieldwork standards
  3. reporting standards
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11
Q

general standards

A

these apply to aspects of engagement from acceptance to completion

qualification of auditor and quality of work

  1. T-training and proficiency
  2. I-independence
  3. P-due Professional care
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12
Q

fieldwork standards

A

apply to portion of engagement devoted to gathering evidence

how audit is planned and how audit evidence is accumulated and evaluated

3 standard of fieldwork:

  1. P-planning and supervision
  2. I-internal controls
  3. C-corroborative audit evidence
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13
Q

reporting standards

A

apply only to manner in which audit report is to be written

prep and content of audit report

4 standards of reporting:

  1. A-accounting principles in conformity w GAAP
  2. N-no new accounting principles applied - consistency
  3. O-omitted information disclosure-none
  4. E-expression of an opinion
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14
Q

10 GAAS

A

measurement of quality of auditor’s performance VS. audit procedures which are Acts to be performed by auditors

TIPPICANOE

3 general standard:

  1. T-training & proficiency
  2. I-independence
  3. P-due Professional care

3 standard of fieldwork:

  1. P-planning and supervision
  2. I-internal controls
  3. C-corroborative audit evidence

4 standards of reporting:

  1. A-accounting principles in conformity w GAAP
  2. N-no new accounting principles applied - consistency
  3. O-omitted information disclosure-none
  4. E-expression of an opinion
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15
Q

independence required for

A
  1. audit
  2. review

“CARES”

C-compilation (must mention if not independent)
A-agreed upon procedures
R-reviews
examination
S-special report
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16
Q

independence not required for

A
  1. compilation
  2. taxes
  3. consultation
  4. f/s preparation engagement
  5. other non attest (bookkeeping, payroll)
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17
Q

what can impair independence

A

any direct financial interest

material indirect financial interest

cpa auditor&raquo_space; client
cpa auditor&raquo_space; mutual fund&raquo_space; client

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18
Q

ethical requirement

A
  1. responsibilities
  2. the public interest
  3. integrity
  4. objectivity and independence
  5. due care
  6. scope and nature of services
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19
Q

what can currently auditor inquiry of old auditor (predecessor auditor)?

A

RID -C

R-reason for change
I-integrity of mgmt
D-disagreements during adit
C-communication w mgmt or those charged w governance

ALSO:

internal control
substantive procedures
contingencies
subsequent events

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20
Q

governance

A
  • member of mgmt may serve as executive members of the board of directors
  • in owner-mangaged entities, mgmt and governance are the same
  • member of entity’s legal structure (company directors)
  • parties external to entity such as govt agencies
  • group of ppl (board of directors)
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21
Q

those charged w governance

A

responsible for overseeing strategic direction of the entity and obligations related to accountability

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22
Q

what should auditor communicate w audit committee?

A

DISAPPROVE

D- disagreement w mgmt
I- illegal acts, noncompliance w law & regulations
S- significant accounting policies adopted or changed by mgmt
A- adjustment proposed by auditor
P- prior discussion w mgmt b4 accept engagement
P-problem or significant difficulties arising from audit
O-other information
V-views of accountant regarding accounting policies, estimates, and disclosure
E-estimates and processed used to obtain them

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23
Q

audit committee

A

made up of independent directors

one must be financial expert

if no expert, reason must be disclosed.

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24
Q

financial expert

A
  • has understanding of GAAP
  • exp w prepare f/s and applying knowledge to estimates, accruals, and reserves
  • exp w internal accounting controls
  • knows function of audit committee

-doesnt need to be CPA

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25
Q

engagement letter components

A

not required, but recommended in writing

FACSIMILE

F-fees
A- auditor's responsibilities (GAAS)
C- confirmation of engagement 
S- scope and objective of engagement
I- internal control
M- management responsibilities 
I- irregularities (fraud)
L- iLlegal acts
E- errors
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26
Q

audit program

A

step by step list of audit procedures

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27
Q

RMM

A

risk of material misstatement

likelihood that f/s are materially misstated which consists of control risk and inherit risk

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28
Q

key consideration of audit program

A

materiality
RMM
business and industry considerations

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29
Q

control risk

A

risk that material misstatement will not be prevented or detected and corrected on a timely basis due to lack of effective internal control

30
Q

inherit risk

A

risk of material misstatement due to nature of element of f/s

risk that an item will be materially misstated if there are no controls in place

risk of misstatement due to factors other than a failure of relevant controls and it exists independently of the audit

31
Q

steps in planning an audit

A

BRAINSTOPS

B- basic discussion w client
R- review of audit documentation
A- ask about recent development
I- interim f/s
N- non-audit personnel
S- staffing
T- timing
O- outside assistant
P- pronouncement 
S- scheduling w the client
32
Q

AR=

audit risk=

A

inherit risk x control risk x detection risk

risk that the auditor will fail to issue an appropriate report when the financial statements are materially misstated

33
Q

RRM=

risk of material misstatement

A

inherit risk x control risk

34
Q

AR =

audit risk =

A

RRM x DR

risk that the auditor will fail to issue an appropriate report when the financial statements are materially misstated

35
Q

detection risk (DR) =

A

TD x AP

test of detail risk x substantive analytical procedures risk

36
Q

detection risk

A

risk that audit procedures will incorrectly lead to conclusion that a material misstatement does not exist when it DOES

function put forth by auditor.

only risk component that an auditor can affect.

broken down into 2 components:

  • test of details risk (TD)
  • substantive analytical procedures risk (AP)
37
Q

fraudulent financial reporting

A
  • misrepresentation of facts
  • manipulation, falsification, alteration of accounting records
  • intentional misapplication of accounting principles
  • non recording of transasctions
38
Q

missappropriation of assets

A
  • defalcation schemes
  • embezzlement of funds
  • theft of other assets
  • misuse of entity assets
39
Q

fraud triangle

A
  1. reason or motive (incentive/pressure)
  2. opportunity
  3. rationalization
40
Q

reason or motie

A
  • personal gain

- pressure to meet analysts’ expectation

41
Q

opportunity

A

lack of internal control or not enforced create opportunity

-have opportunity to override controls

42
Q

rationalization

A

rationalize their fraudulent acts bc they do not believe its wrong

accompanied w their action is a common practice

commission is sometimes viewed as a means of eliminating an unfair advantage

rationalize their acts as having NO CHOICE. repercussion of not doing fraud would be too severe

43
Q

direct effect of noncompliance

A

EX: nonpayment of payroll taxes or business license fee

44
Q

indirect effect of noncompliance

A

EX: price fixing, purchase securities based on insider information

45
Q

2 types of fraud

A

fraudulent financial reporting

misappropriation of assets

46
Q

specific procedures of CPA firm depends on:

A
  1. size of firm
  2. nature of practice
  3. organizational structure and cost benefit considerations
47
Q

6 element of Quality Control element within a CPA firm

A

HEAL-ME

H-human resources (personal mgmt)
E-ethical requirements (independence)
A-acceptance and continuance of client relationship and specific engagements
L-leadership responsibilities for quality within the firm

M-monitoring
E-engagement performance

Audit firms must establish quality control procedures to provide themselves with reasonable assurance that their personnel comply with professional standards and applicable regulatory/legal requirements

48
Q

if RRM is high

A

planned audit procedure increase:

  • more thorough test
  • rely more on year end testing
  • assign experienced staff with specialized skills
  • close supervision required

goal is to decrease detection risk. do this by:

  • increase substantive procedures
  • focusing resources on high risk areas
  • change nature, timing, scope of audit procedures
49
Q

what is an accounting framework

A

is the set of criteria (either rules or standards) that are required for financial items to be recognized, classified, and recorded within an entity’s financial statements

50
Q

general purpose framework is designed to

A

meet the common financial information objectives of a wide range of users

  • generally accepted accounting principles (GAAP)
  • international financial reporting standards (IFRS)
  • statement of federal financial accounting standards (SFFAS
  • statements of govt standards
51
Q

special purpose framework

A

non-GAAP framework designed meet a specific purpose (ie, financial information requirements) of a specific group of users (eg, tax regulators)

  • cash accounting basis
  • tax accounting basis
  • regulatory agency accounting basis
  • contractual accounting basis
52
Q

performance audit

A

performed on governmental or nonprofit entities

The audit can be related to any given process or project and may focus on specific procedures or processes.

These audits are performed using Generally Accepted Governmental Auditing Standards (GAGAS)

53
Q

Professional standards are

A

measures of the quality of the auditor’s performance

54
Q

A misstatement on the financial statements occurs when

A

one or more of management’s assertions is contradicted by audit evidence

55
Q

responsibility of management

A
  1. prepare fs
  2. comply w laws and reg.
  3. est. and monitor internal control
  4. provide auditor w relevant info
56
Q

responsibility of auditor

A
  1. provide reasonable assurance
  2. adhere to auditing standards
  3. understand regulatory environment
  4. assess internal control
57
Q

The engagement quality review documentation should include

A
  1. identification of the engagement quality reviewer and his or her assistants
  2. the documents reviewed
  3. the date on which the engagement quality reviewer provided concurring approval of issuance.
58
Q

inherit risk

A

The risk that an assertion will lead to a material misstatement

59
Q

who to report immaterial fraud too

A

management and/or those charged with governance

60
Q

first step in planning audit

A

Make a preliminary judgment about materiality

as it will affect many of the decisions the auditor will make in selecting and executing audit procedures and in interpreting results

61
Q

Attestation engagements include

A

reporting on financial projections and forecasts

62
Q

The phrase “generally accepted accounting principles” is an accounting term that

A

Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

GAAP is promulgated by the FASB

63
Q

When an auditor sets control risk at maximum

A
  1. internal controls will not be relied upon
  2. the opinion will be based entirely upon evidence gathered from substantive testing

The two primary reasons the auditor would not rely on controls are if the controls are weak or if performing substantive tests is more efficient in conducting the audit

64
Q

step in assessing control risk

A
  1. Considering whether control procedures can have a pervasive effect on financial statement assertions
  2. Evaluating the effectiveness of internal control procedures with tests of controls
  3. Obtaining an understanding of the entity’s accounting system and control environment
65
Q

test of detail are

A

Tests of details are substantive tests that are performed after evaluating internal control

66
Q

control risk is assessed below the maximum

A
  1. rely on internal controls
  2. reduce the amount of substantive testing

The auditor assesses control risk below the maximum when there are specific, reliable internal controls that relate to specific management assertions

allows for an increase in interim testing and a more efficient audit, rather than reliance on testing exclusively at year end

67
Q

The internal auditor should report directly to the

A

board of directors or the audit committee.

68
Q

A misstatement on the financial statements occurs when

A

one or more of management’s assertions is contradicted by audit evidence

69
Q

attest services

A

audits
review
agreed upon procedures

stmt on auditing standards (SAS)
SSARS
SSAES

70
Q

Misstatements are considered material if they

A

individually or in the aggregate, are expected to influence the decisions of a user of the financial statements.

When different materiality levels are determined for various financial statements, the LOWEST aggregate dollar amount will be used.

71
Q

successor can ask predecessor about working papers regarding:

A
  1. internal control
  2. substantive procedures
  3. contingencies (litigations)
  4. subsequent events

AUD (10 decks)

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