Auditing Fall 2022 Flashcards
Two important sections of the Sarbanes-Oxley Act (2002)?
302: The CEO/President must take personal responsibility on signing off on the financial statements
404: There has to be a separate affirmation/assertion that the internal controls over financial reporting are adequate
Why was the Sarbanes-Oxley Act established?
To protect investors from accounting fraud by improving financial reporting and auditing standards
How to calculate performance materiality
Materiality - sampling error
Why is nonsampling risk typically set at 0?
The big 4 accounting firms assume that they hire people with a good education who are given additional training and taught to be alert as possible and have situational awareness. There is also a lengthy review process before work is finalized
What reasons do we need performance materiality?
- due to sampling risk - risk that the sample is not representative of the population
- due to nonsampling risk - risk that the auditor does not correctly asses the sample
What happened in 1982 to change the CPA handbook?
Two Canadian banks went bankrupt and accountants were blamed. At the time, banks were exempt from the handbook so there weren’t any standards
When were accounting standards initially developed and what was the priority?
In the 1930s the handbook was developed with the needs of large manufacturing companies as a priority. It even said at the front that it didn’t apply to banks, insurance companies, service companies, etc.
It took two decades to develop a broader set of accounting standards
Why does the auditing profession avoid the use of the term completeness?
Because it is difficult to perfect - how do you know you have a complete set of information?
Audit Risk Model?
AR = IR * CR * DR
(inherent risk and control risk are separate from one another)
What is a common weakness of internal controls
Since they are costly they are typically designed to prevent one person working by themselves from making an error or perpetrating fraud (not to prevent collusion).
We need to avoid the following auditor tendencies:
- confirmation bias (overlooking unusual circumstances)
- over-generalizing
- using inappropriate assumptions (not getting to know the business)
Two purposes for CPA Canada Handbook
- list requirements
- provide guidance in interpreting those requirements (paragraph A.5 specifies what to do when you need more guidance)
- legal and ethical requirements
- court decisions
- accounting interpretations
- emerging accounting issues
- industry practices
Law vs. regulation?
Law - established by parliament or some authoritative body
Regulation - established by the profession
Why is an engagement letter important?
Every audit, you need to specify the agreement with the client for examples requirements such as:
- needing access to all information
- needing the right and ability to speak to anyone in the organization
What is audit risk?
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It is a function of the risks of material misstatement and detection risk.
