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CPA Exam > Auditing 3- Day 2 > Flashcards

Auditing 3- Day 2 Flashcards

1
Q

When is auditor’s risk identified in the auditor’s report?

A

“Arises because the auditor obtains REASONABLE assurance about whether the F/S are free of material misstatement”

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2
Q

Why do you perform the test of controls (related to control risk)?

A

To ASSESS the level of control risk (this does not play a factor in increasing the work with the inverse relationship to detection risk, the ASSESSED level plays into that)

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3
Q

What are the types of misstatements that can occur from unintentional or intentional error (fraud)?

A
  1. Inaccuracies in the collection/processing of data
  2. Departures/misapplication of GAAP
  3. Omissions
  4. Incorrect estimates/judgement + disagreements
  5. Inappropriate selection/application of accounting policies.
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4
Q

What is audit risk?

A

The risk that the auditor may unknowingly fail to appropriately modify the opinion on the financial statements that are materially misstated. It arises no matter what because you can only obtain REASONABLE assurance, and should be mitigated to a low enough level to be satisfied in expressing an opinion.

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5
Q

What is the Audit Risk Model? (AR =)

A

AR = (RMM= IR x CR) x DR

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6
Q

What is inherent Risk?

A

The susceptibility of a relevant assertion to a material misstatement assuming their are no related controls. Includes complex transactions/estimates like derivatives.

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7
Q

What is Control Risk?

A

The risk that a material misstatement will occur in a relevant assertion will not be prevented or detected in a TIMELY BASIS OR MANNER

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8
Q

What is Detection Risk?

A

The risk that the auditor will not detect a material misstatement in a related assertion.

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9
Q

RMM has an INVERSE relationship with what?

A

Detection Risk

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10
Q

Detection Risk has an INVERSE relationship with what?

A

Amount of SUBSTANTIVE PROCEDURES (test of details) to be performed (NOT test of controls)

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11
Q

RMM has a DIRECT relationship with what?

A

The Amount of SUBSTANTIVE PROCEDURES to be performed. (Less RMM = Less Work)

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12
Q

How can the auditor DECREASE Detection Risk?

A

Decrease DR = MORE WORK:

  1. Nature of substantive test is MORE EFFECTIVE
  2. Change in extent of substantive tests (LARGE SAMPLE SIZE)
  3. Change in timing of tests (more tests at year end)
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13
Q

Which of the risks (IR CR DR) can be assessed in NON-QUANTITATIVE TERMS?

A

ALL THREE

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14
Q

When talking about Fraud Risk (not controls because that would be the intelligent thing for this question) what STRENGTHENS CONTROL ENVIRONMENT?

A
  1. Internal audit communicates with those charged with governance
  2. Influence of external parties that oversee certain controls
  3. Those charged with governance ACTIVELY oversee CONTROL SHIT
    * ** MGMT BEING DOMINATED BY 1 INDIVIDUAL HURTS THE CONTROL ENVIRONMENT (MGMT OVERRIDE)
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15
Q

When should fraud be reported to THOSE CHARGED WITH GOVERNANCE (AUDIT COMMITTEE/two reasons)?

A
  1. MATERIAL MISSTATEMENT on F/S

2. Fraud involving SENIOR MGMT

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16
Q

Is there an increase in possible fraudulent reporting when MGMT/BoD SELLS or BUYS the company’s stock?

A

NEITHER. They both don’t mean a goddamn thing haha

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17
Q

What is a transaction that could be for an immaterial amount, but have a material effect on fraud risk of the F/S?

A

ILLEGAL PAYMENTS

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18
Q

What is the attitude any auditor on the team must maintain while considering fraud risk?

A

A QUESTIONING mind and a CRITICAL assessment of audit evidence.

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19
Q

What is the auditor’s responsibility in relation to fraud?

A

To plan and perform the audit with reasonable assurance about whether they are free from material misstatement AND THIS INCLUDES A SPECIFIC ASSESSMENT OF FRAUD RISK.

20
Q

What kind of assurance does an auditor provide for noncompliance with a DIRECT effect on the F/S?

A

Reasonable Assurance

21
Q

What kind of assurance does an auditor provide for noncompliance with an INDIRECT effect on the F/S?

A

NO ASSURANCE

22
Q

What are the steps for Assessing and Responding to the Risk of Material Misstatement (IMACPA)

A

I- Internal Control, Entity, Environment- Obtain Understanding by PERFORMING RISK ASSESSMENT
M- Material Misstatement- Assess the risk
A- Assessed level of risk response
C- Control Testing TO EVALUATE THEIR OPERATING EFFECTIVENESS (NOT DONE IN OBTAINING UNDERSTANDING)
P- Perform Substantive Testing
A- Audit Evidence- Evaluate that it is sufficient and appropriate.

23
Q

What is REQUIRED when obtaining an understanding of the entity and environment? (2 things, bonus if you can name what is NOT REQUIRED)

A
  1. Risk Assessment Procedures
  2. Analytical Procedures
    NOT REQ- Test of Oper. Effectiveness of Controls
24
Q

What are the Risk Assessment Procedures?

A
  1. Inquiries of MGMT (possible BoD and External Party)
  2. Analytical Procedures (REQ at BEG AND END)
  3. Observation and Inspection
  4. Risk Assessment Discussion with Audit Team
  5. Other Procedures (External Info- like the trade journals described before about industry, Prior Period Evidence)
25
Q

What are the Analytical Procedures performed during PLANNING?

A
  1. Compare F/S to budgeted/forecasted results
  2. Non-Financial Data can be used
  3. Identify any Unusual Transactions, events, ratios, trends that may represent significant risk to the audit.
26
Q

What do TESTS OF DETAILS support?

A

The planned level of assurance to a related assertion level

27
Q

What do TESTS OF CONTROLS support?

A

The planned level of control risk and whether it is operating effectively and if it can be used in determining the test of details and detection risk.

28
Q

What are the three fraud risk factors (ROI)?

A

R- Rationalization/Attitude- attempt to justify fraud behavior
O- Opportunity- lack of effective controls to monitor
I- Incentive/Pressures- a reason to commit fraud.

29
Q

What are the three entity objectives that Internal Control is designed to provide reasonable assurance for?

A
  1. Reliability of Financial Reporting
  2. Effectiveness and Efficiency of Operations
  3. Compliance with Applicable Laws and Regulations
30
Q

The auditor should obtain an understanding of I/C to do what three things?

A
  1. Design and Implementation of the I/Cs.
  2. Assess the risk of material misstatements
  3. Design the NET of audit procedures (substantive and TOC)
31
Q

When are service by another organization not considered to be part of the client’s information system?

A

When it is specifically authorized by the client.

32
Q

What are test of controls used for?

A

To evaluate the operating effectiveness of I/C in preventing or detecting material misstatements.

33
Q

What are the inherent limitations to internal control?

A

Mgmt override
Collusion between two parties
Inappropriate manual intervention
Unauthorized changes to the data

34
Q

What is the relationship between the complexity of the IT system and documentation?

A

DIRECT relationship. The more complex the IT system the more documentation that is required.

35
Q

What are the three things that internal control is relevant to in relation to the audit?

A
  1. Entire Entity
  2. Entity Operating Unit
  3. Business Functions
36
Q

What types of controls are considered to be an entity level control?

A

The Control Environment, the risk assessment procedures, and risk management processes

37
Q

What does allowing for greater management oversight do for segregation of duties in a small organization?

A

THIS IS ABSOLUTELY GOING TO BE A QUESTION BECAUSE IT IS SO CONTRADICTING:
This HELPS COMPENSATE for the lack of segregation of duties in a small organization.

38
Q

What are test of controls? Again

A

After obtaining an understanding knowledge of client and internal control the auditor must make a risk assessment that the controls are operating effectively. To support this assessment (of control risk, they ask you this in so many fucking ways its nauseating) the auditor performs test of controls to obtain sufficient and appropriate evidence.

39
Q

What does the NATURE element of Auditing Procedures mean?

A

The nature includes both its purpose (test of control or substantive) and its type (inspection, observation, inquiry, confirmation, recalc, reperformance, analytical procedure)

40
Q

What does the EXTENT element of Auditing Procedures mean?

A

The extent refers to the quantity to be performed, such as the number of observations to be made or the sample size to be used.

41
Q

What does the TIMING element of Auditing Procedures mean?

A

The timing refers to when audit tests may be performed at either interim dates or at period end (year end).

42
Q

What are the tests of controls in the order of how much evidence they provide (most evidence to least evidence)?

A

Reperformance, Inspection, Observation, Inquiries

43
Q

What does the auditor NOT have to do when OBTAINING AN UNDERSTANDING ABOUT INTERNAL CONTROL?

A

NOT REQUIRED to evaluate operating effectiveness, that is more dealt with in the risk assessment procedures.

44
Q

During the planning phase of the audit what does the auditor consider when UNDERSTANDING internal control?

A

The risk and types of misstatements that could occur
Factors that influence the design of TOC and Substantive tests
Assessment of Inherent Risk
Complexity of Entity’s Operations
Manual v. Computer Operating Systems

45
Q

WHAT IS NOT CONSIDERED DURING PLANNING/UNDERSTANDING OF INTERNAL CONTROL?

A

THE OPERATING EFFECTIVENESS

CPA Exam (10 decks)

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