Auditing Chapters 1-7 Midterm Short Answer

Question 1

Preliminary audit planning

Answer 1

the first stage of an audit process where the auditor gathers information, assesses risks, and develops a strategy to conduct the audit effectively

Question 2

What are the types of Pre-engagement activities:

Answer 2

a. Client Acceptance and Continuance Procedures
b. Understanding the Engagement Terms
c. Compliance with Ethical and Legal Standards
d. Communication with Predecessor Auditor (If Applicable)

Question 3

Explain the Audit risk model and the relationship between each one

Answer 3

Inherent Risk - The likelihood of material misstatements occurring without considering internal controls.

Control Risk - The risk that a material misstatement will not be prevented or detected by the company’s internal controls.

Detection Risk - The risk that the auditor’s procedures fail to detect a material misstatement.

Engagement Risk - auditor exposure to financial loss and damage to professional reputation

AUDIT RISK = IR X CR X DR or RM X DR

Question 4

MGMT Assertions about classes of transactions and events

Answer 4

Occurrence
Completeness
Authorization
Accuracy
Cutoff
Classification
Presentation

Question 5

MGMT Assertions about account balances

Answer 5

Existence
Rights and Obligations
Completeness
Accuracy, valuation, and allocation
Classification
Presentation

Question 6

Audit procedures for obtaining audit evidence

Answer 6

inspection
observation
confirmation
recalculation
reperformance
analytical procedures
inquiry

Question 7

Components of Internal Control

Answer 7

Control Environment
Risk Assessment Process
Control Activities
Information and Communication
Monitoring Activities

Question 8

general controls vs application controls

Answer 8

General Controls - broad policies and procedures that apply across an entire information system, ensuring its overall security and proper functioning.
1. Data center and network operations
2. System software acquisition, change, and maintenance
3. Access security
4. Application system acquisition, development, and maintenance

Application Controls - specific controls designed to validate data accuracy within individual applications, focusing on input, processing, and output stages of data flow.
1. Data capture controls
2. Data validation controls
3. Processing controls
4. Output controls
5. Error controls

Question 9

What is an Internal Control Deficiency?

Answer 9

An internal control deficiency occurs when a control is either missing or not operating effectively, increasing the risk of financial misstatements, fraud, or operational inefficiencies. It means that a control fails to prevent, detect, or correct errors and irregularities in a timely manner.

Question 10

What are the primary types of control deficiencies?

Answer 10

Significant Deficiency - less severe control issue that still warrants attention from management

Material Weakness - represents a more significant control deficiency that could materially affect financial reporting reliability