Auditing Flashcards
What is the Auditor’s primary role?
To provide an impartial (independent) assesment of the reliability of managements financial statements.
In the U.S.A who issues Auditing standards applicable to audits of government entities?
US Government accountability office (GOA).
List some benefits of an audit to a private company (also known as a nonissuer).
1) More favorable cost of capital.
2) Insights into adequacy of internal controls.
3) Benchmark an entities performance with other similar entities.
In the U.S.A., who issues auditing standards applicable to audits of public companies (also known as issuers)?
Public Company Accounting Oversight Board (PCAOB).
In the U.S.A., who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?
AICPA’s auditing standards board.
Define “Generally Accepted Accounting Principles” (GAAP)
The standards by which the quality of the financial statements is judged.
Who is primarily responsible for the fairness of an entitie’s financial statements?
Management. The financial statements are the representation of management.
What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards?
The Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board.
Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.
1) Purpose
2) Premise
3) Responsibilities
4) Reasonable assurance
5) Performance requirements to achieve reasonable assurance
6) Inherent limitations
7) Reporting
Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.
1) Purpose/premise
2) Responsibilities
3) Performance
4) Reporting
Identify the topics associated with the three general standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
1) Training
2) Independence
3) Due professional care.
Identify the topics associated with the four reporting standards for Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
1) GAAP
2) Consistency
3) Disclosure
4) Opinion
Identify the topics associated with the three field work standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
1) Planning and supervision
2) Internal control
3) Evidence
What type of professional requirement is indicated by the word should in AICPA professional standards?
Presumptively mandatory requirement.
What type of professional requirement is indicated by the word must in AICPA professional standards?
Unconditional requirement
What is meant by the term interpretive publications?
These consist of the appendices to the SASs, auditing interpretations of the SASs, the AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.
List the six elements of a quality control system.
1) Leadership responsibilities for quality within the firm
2) Relevant ethical requirements (especially independence)
3) Acceptance and continuance of client relationships
4) Human resources
5) Engagement performance
6) Monitoring
What is meant by the term engagement quality control review?
A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)
Services for which a CPA firm is required to have a sytem of quality control.
Audits, attestation, compilation and review services. (Not applicable to tax or consulting services.)
Who is responsible for the administration of a quality control system?
May be vested in one person but everyone shares responsibility
List the two types of substantive audit procedures.
Analytical Procedures
Tests of details.
What are some considerations that must be given by the auditor during the planning phase of the audit?
1) Determine whether to accept or continue the audit engagement
2) Assess the risk of material misstatement
3) Evaluate requirements for staffing and supervision
4) Prepare the required written audit program (also called the “audit plan”).
List the two types of test of details
Tests of ending balances
Tests of transactions.
What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?
1) Obtain the required understanding of the design of internal control for planning purposes.
2) Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls.
List the four basic steps in the audit process.
1) Planning
2) Internal Control Consideration
3) Substantive Audit Procedures
4) Reporting.
List the four types of opinions that an auditor may give on financial statements.
1) Unmodified
2) Qualified
3) Adverse
4) Disclaimer
List the reason(s) for which an entity may receive a qualified opinion
1) Misstatement, such as a GAAP departure (material, not pervasive effect)
2) Scope limitation (material, not pervasive effect)
List the reason(s) for which an entity may receive a disclaimer of opinion.
Scope limitation (material and pervasive effect).
List the reason(s) for which an entity may receive an adverse opinion.
Misstatement, such as a GAAP departure (material and pervasive effect).
Prior to the clarified auditing standards, how was an Unqualified Audit Report structured?
An unqualified audit report was presented in three paragraphs:
1) Introduction (three sentences),
2) Scope (five sentences), and
3) Opinion (one sentence).
How is an auditor’s unmodified audit report structured under the clarified auditing standards?
An unmodified auditor’s report is presented in 4 sections:
1) An introduction (1 sentence).
2) Management’s responsibility section (1 sentence).
3) Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
4) Opinion (1 sentence).
What type of assurance is associated with a “review” of an entity’s financial statements?
Negative assurance, which is considered a moderate level of assurance.
To what services are Statements on Standards for Accounting and Review Services (SSARs) applicable?
Statements on Standards for Accounting and Review Services are applicable to reviews and compilations of the financial statements of private companies, that is, non-issuers.
What is a Compilation?
A compilation is an assembly of the financial records of a private company into a financial statement format without expressing any degree of assurance on the reliability of those financial statements.
What type of assurance is associated with an “audit” of an entity’s financial statements?
Positive assurance. Positive assurance is considered a high level of assurance.
What is meant by the term initial audit?
The prior year’s financial statements have been audited by a predecessor auditor.
What matters should be covered in the (successor) auditor’s inquiry of the predecessor auditor?
1) Facts related to management’s integrity;
2) Significant accounting or auditing disagreements;
3) Any communications with the audit committee (or others charged with governance) about fraud, illegal acts, and significant deficiencies in internal control matters; and
4) Predecessor’s understanding of the reason(s) for the client’s change in auditors
What is meant by the term preconditions for an audit?
The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted.
Who initiates the communications between the predecessor auditor and successor auditor?
The successor auditor initiates the communication with the predecessor by requesting that the client authorize the predecessor auditor to allow the successor auditor to review the predecessor auditor’s working papers
What matters are typically addressed in an engagement letter?
1) The objective and scope of the audit;
2) The auditor’s responsibilities;
3) Management’s responsibilities;
4) A statement about the inherent limitations of an audit;
5) A statement identifying the applicable financial reporting framework;
6) Reference to the expected content of any reports to be issued; and
7) Other matters, as warranted (e.g., fees, etc.).
Identify factors relevant to establishing an overall audit strategy.
1) Identify characteristics of the engagement affecting its scope;
2) Identify the reporting objective of the engagement and required communications;
3) Consider the factors relevant to utilizing the audit team;
4) Consider the results of preliminary engagement planning activities; and
5) Determine the nature, timing, and extent of necessary resources for the engagement
What is the auditor’s basic audit planning responsibility?
The auditor should plan the audit (and design the required written audit program or plan) to be responsive to the auditor’s assessment of the risk of material misstatement
Identify some activities associated with pre-engagement activities.
1) Perform appropriate procedures to address the quality control issues associated with the acceptance/continuance of the audit engagement;
2) Evaluate the audit team’s compliance with relevant ethical requirements (especially independence issues); and
3) Establish an understanding in writing of the terms of the engagement.
Identify 3 planning-related issues that should be included in the auditor’s documentation.
1) The overall audit strategy;
2) The audit plan; and
3) Any significant changes made to the audit strategy or the audit plan during the engagement, along with the reasons for any such changes.
List the audit procedures that should occur during the planning phase of an audit.
1) Review client records
2) Inquire of client personnel
3) Coordinate client assistance
4) Determine if specialists are needed
5) Coordinate staffing requirements.
What is the difference between an overall audit strategy and an audit plan?
An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.
List several circumstances that impact the extent of planning activities.
1) Size and complexity of the entity
2) Auditor’s experience with that entity
3) Auditor’s understanding of the entity and its environment, including its internal control.
Prior auditing standards referred to planning stage materiality. What did the term planning stage materiality mean?
The size of the misstatements that the audit program was designed to detect.
What is the basic meaning of the concept of materiality?
An understanding of what is important.
What is meant by the term tolerable misstatement?
The application of performance materiality to a particular sampling procedure or application.
What 4 matters should be documented with respect to materiality considerations?
1) Materiality for the financial statements as a whole;
2) Materiality level(s) for applicable transactions, account balances, or disclosures;
3) Performance materiality; and
4) Any revision of those considerations during the audit engagement
The clarified auditing standards introduced the term performance materiality. What does that term mean?
The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole
The terms planning stage materiality and evaluation stage materiality in prior auditing standards has been replaced by what single concept in the clarified auditing standards?
Performance materiality.
