Auditing

Question 1

What are the 4 information risks?

Answer 1

1. competing Incentives
   - management may be inclined to present financial statement information to further their own objectives
2. remoteness
   - financial statement users cannot access the information of the entity being reviewed
3. reliability
   - financial statement users are concerned about the accuracy of the information presented
4. complexity
   - management may be inclined to present financial statement information to further their own objectives

Question 2

What is an audit?

Answer 2

an independent examination of a company’s financial statements to assess the reliability of the information presented

auditors will look for mistakes and tell you to fix them before giving their final opinion

Question 3

What are the 3 levels of assurance?

Answer 3

Reasonable assurance (audit engagement)
positive expression of opinion
(“in our opinion the statement presents fairly”)

limited Assurance (review engagement)
negative expression of opinion
(“nothing has come to our attention” )

no assurance (compilation engagement / notice to reader)
no expression of opinion

Question 4

What are the 4 different audit report opinions?

Answer 4

1. fairly stated… - - unmodified (“clean”) opinion
2. fairly stated, expect for - - - qualified opinion
3. unable to conclude… disclaimer of opinion
4. does not fairly state… adverse opinion

Question 5

What are the quantitative materiality factors?

Answer 5

• amount that impact decision of a user
• selected as a percentage of a base, examples include:
  revenue, net income before tax,
  total assets, expenses
• typically normalized

Question 6

What are the qualitative materiality factors?

Answer 6

• compliance with regulations
• compliance with covenants
• impact on ratio analysis
• masks changes in earnings/trends
• impact on management compensation

Question 7

What is the formula for audit risk model?

Answer 7

audit risk (AR) * inherit risk (IR) * control risk (CR) * detection risk (DR)

Question 8

What is audit risk?

Answer 8

the risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated

Question 9

What is inherit risk?

Answer 9

the susceptibility of the financial statements to a material misstatement without considering internal controls

Question 10

What is control risk?

Answer 10

the risk that a client’s system of internal controls will not prevent or detect a material misstatement

Question 11

What is detection risk?

Answer 11

the risk that the auditors will not be effective detecting a material misstatement should there be one

Question 12

What are the 3 phases of an audit?

Answer 12

1. risk assessment phase
   - gaining an understanding of the client, identifying risk factors, developing and audit strategy, and assessing materially
2. risk response phase
   - detailed testing of controls & substantive testing of transactions and balances
3. reporting phase
   - providing an opinion on the fair presentation of the financial statements based on the evidence gathered