Auditing 3

Question 1

What happens if Management is dominated by one person who is also the majority shareholder?

Answer 1

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)

Question 2

When are substantive tests generally performed?

Answer 2

AFTER year end

Question 3

When is a management rep letter obtained?

Answer 3

At the END of the audit

Question 4

Before ACCEPTING an audit what inquiries should be made of the predecessor auditor?

Answer 4

1. information about MGMT INTEGRITY
2. Disagreement with MGMT over Accounting Principles
3. Predecessors understanding for the change in auditors
4. Communication to MGMT, BoD, Audit Committee regarding fraud, noncompliance, and certain I/C matters.

Question 5

Who is ultimately responsible for making final adjustments to correct misstatements before an auditor’s report?

Answer 5

Management (so fucking stupid)

Question 6

What is the REQUIRED contents of an engagement letter?

Answer 6

1. Objective and scope of audit
2. Responsibilities of MGMT and AUDITOR
3. 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.
4. ID the reporting framework
5. Reference form and content of any future reports.

Question 7

What are the six main financial statement assertions? (COVERU)

Answer 7

C- Completeness
O- cutOff
V- Valuation, Allocation, Accuracy
E- Existence and Occurrence
R- Rights and Obligations
U- Understandability and Classification

Question 8

PCAOB financial statement assertions? (CEO APROVED)

Answer 8

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

Question 9

What does Completeness mean (Assertion)?

Answer 9

All account balances, transactions, and disclosures that should have been recorded have been recorded and included in the financial statements

Question 10

What does cutOff mean (Assertion)?

Answer 10

Transactions have been recorded in the correct (proper) accounting period

Question 11

What does Valuation, Allocation, and Accuracy mean (Assertion)?

Answer 11

Account balances, transactions, and disclosures are recorded fairly at appropriate amounts, and any resulting valuation or allocation adjustments are properly recorded.

Question 12

What does Existence and Occurrence mean? (Assertions)

Answer 12

Account balances exist and transactions that have been recorded and disclosed have occurred and pertain to the entity

Question 13

What does Rights and Obligations mean? (Assertions)

Answer 13

The entity holds or controls the rights to assets and liabilities are the obligations of the entity.

Question 14

What doesUnderstandability and Classification mean? (Assertions)?

Answer 14

That transactions have been recorded in the proper accounts. Financial information is appropriately presented and described and disclosures are clearly expressed.

Question 15

What are the two things that you need in an internal auditor?

Answer 15

Competency and Objectivity

Question 16

How do you measure if an internal auditor is competent?

Answer 16

Competence is measured by education, certification, experience, quality of his work, and performance evaluations, and auditing standards

Question 17

How do you measure if an internal auditor is objective

Answer 17

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.

Question 18

How may internal auditors assist the auditors? (3 ways)

Answer 18

1. Obtaining an understanding of internal control
2. Performing tests of controls.
3. Performing substantive tests.

Question 19

When they are asking you a question about the planning process and they ask you about really any procedure, what should you look for?

Answer 19

“NET” of audit procedures.

Nature, Extent, and Timing

Question 20

How do you obtain knowledge of the client’s INDUSTRY?

Answer 20

Through AICPA guidelines, industry journals, government publications, and “AICPA Trends and Techniques”

Question 21

How do you obtain knowledge of the client’s BUSINESS?

Answer 21

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.

Question 22

Does the independent auditor retain all the risk when he is working with an internal auditor or an external specialist?

Answer 22

Internal auditor. (Bears all risk)

Question 23

The auditor should obtain knowledge about its client’s BUSINESS and INDUSTRY to..?

Answer 23

Understand the EVENTS and TRANSACTIONS that may have an effect on the entity’s financial statements

Question 24

Why would an auditor test at an interim date instead of year end?

Answer 24

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)

Question 25

With respect to total misstatements, when are you allowed to issue an unmodified opinion?

Answer 25

When the estimate of the total misstatement is immaterial (less than a material amount)

Question 26

What are the five components of COSO Internal Control Framework (CRIME)?

Answer 26

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

Question 27

What are the Existing Control Activities (E in “CRIME”) and procedures? (PAIDTIPS)

Answer 27

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)

Question 28

PCAOB standards state the nature and extent of planning activities depends on what 3 things?

Answer 28

1. The size and complexity of the company
2. Auditor’s previous experience with the company
3. Changes in Circumstances that occur DURING audit