Auditing 3 Flashcards
What happens if Management is dominated by one person who is also the majority shareholder?
Risk of fraud goes up but YOU DO NOT have to cancel the audit engagement (whereas you must if there is serious risk of intentional misapplication of policies)
When are substantive tests generally performed?
AFTER year end
When is a management rep letter obtained?
At the END of the audit
Before ACCEPTING an audit what inquiries should be made of the predecessor auditor?
- information about MGMT INTEGRITY
- Disagreement with MGMT over Accounting Principles
- Predecessors understanding for the change in auditors
- Communication to MGMT, BoD, Audit Committee regarding fraud, noncompliance, and certain I/C matters.
Who is ultimately responsible for making final adjustments to correct misstatements before an auditor’s report?
Management (so fucking stupid)
What is the REQUIRED contents of an engagement letter?
- Objective and scope of audit
- Responsibilities of MGMT and AUDITOR
- Statement that because of inherent limitations of an audit and internal control some material misstatements may not be detected due to fraud or error, even though the audit is properly planned and performed.
- ID the reporting framework
- Reference form and content of any future reports.
What are the six main financial statement assertions? (COVERU)
C- Completeness O- cutOff V- Valuation, Allocation, Accuracy E- Existence and Occurrence R- Rights and Obligations U- Understandability and Classification
PCAOB financial statement assertions? (CEO APROVED)
C- Completeness E- Existence O- Occurence A- Allocation P- Presentation R- Rights O- Obligations V- Valuation E- DON'T FORGET ABOUT THE EEE D- Disclosure
What does Completeness mean (Assertion)?
All account balances, transactions, and disclosures that should have been recorded have been recorded and included in the financial statements
What does cutOff mean (Assertion)?
Transactions have been recorded in the correct (proper) accounting period
What does Valuation, Allocation, and Accuracy mean (Assertion)?
Account balances, transactions, and disclosures are recorded fairly at appropriate amounts, and any resulting valuation or allocation adjustments are properly recorded.
What does Existence and Occurrence mean? (Assertions)
Account balances exist and transactions that have been recorded and disclosed have occurred and pertain to the entity
What does Rights and Obligations mean? (Assertions)
The entity holds or controls the rights to assets and liabilities are the obligations of the entity.
What doesUnderstandability and Classification mean? (Assertions)?
That transactions have been recorded in the proper accounts. Financial information is appropriately presented and described and disclosures are clearly expressed.
What are the two things that you need in an internal auditor?
Competency and Objectivity
How do you measure if an internal auditor is competent?
Competence is measured by education, certification, experience, quality of his work, and performance evaluations, and auditing standards
How do you measure if an internal auditor is objective
It is reflected in the organization level that the internal auditor reports too as well as the policies and procedures that are included at his company. Examples are previous experience and random policies are discussion with management, quality reviews.
How may internal auditors assist the auditors? (3 ways)
- Obtaining an understanding of internal control
- Performing tests of controls.
- Performing substantive tests.
When they are asking you a question about the planning process and they ask you about really any procedure, what should you look for?
“NET” of audit procedures.
Nature, Extent, and Timing
How do you obtain knowledge of the client’s INDUSTRY?
Through AICPA guidelines, industry journals, government publications, and “AICPA Trends and Techniques”
How do you obtain knowledge of the client’s BUSINESS?
Tour client facilities
Review the financial history of the client: previous audit reports, permanent files, SEC filings, tax returns
Inquire of Client Personnel
Obtain an Understanding of Client Accounting.
Does the independent auditor retain all the risk when he is working with an internal auditor or an external specialist?
Internal auditor. (Bears all risk)
The auditor should obtain knowledge about its client’s BUSINESS and INDUSTRY to..?
Understand the EVENTS and TRANSACTIONS that may have an effect on the entity’s financial statements
Why would an auditor test at an interim date instead of year end?
If the risk of material misstatements is lower and the test procedures from the interim testing can be carried through to the year end testing through other effective control testing or what have you. This is good when the incremental risk is low (above explanation kinda)
With respect to total misstatements, when are you allowed to issue an unmodified opinion?
When the estimate of the total misstatement is immaterial (less than a material amount)
What are the five components of COSO Internal Control Framework (CRIME)?
C- Control Environment- “tone at top”
R- Risk Assessment (obtain understanding of it)
I- Information and Communication Systems
M- Monitor- Continuous assessment
E- Existing Control Activities and procedures
What are the Existing Control Activities (E in “CRIME”) and procedures? (PAIDTIPS)
P- Prenumbering Documents
A- Authorization of Transactions
I- Independent checks to maintain asset accountability
D- Documentation
T- Timely and Appropriate performance reviews
I- Information Processing Controls
P- Physical controls for safeguarding assets
S- Segregation of Duties (Authorization, Record Keeping, Custodial)
PCAOB standards state the nature and extent of planning activities depends on what 3 things?
- The size and complexity of the company
- Auditor’s previous experience with the company
- Changes in Circumstances that occur DURING audit
