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ACCT 3222 > ch 3 review > Flashcards

ch 3 review Flashcards

1
Q

who issues the audit standards for private company audits?

A

ASB

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2
Q

when considering client acceptance/ continuance some factors you should consider are

A

management integrity, competance, independence

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3
Q

when speaking with predecessor auditors what re some factors to consider

A

-management integrity
-disagreements with management over accounting policies or audit procedures
- why the change in auditors
-communication with those charged with governance regarding fraud/ IC

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4
Q

is an engagement letter required?

A

yes

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5
Q

what is an engagement letter

A

establishes an understanding with the client regarding services to be performed

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6
Q

objective of engagement

A

express opinion on the financial statementa

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7
Q

auditor’s responsibilities

A

conduct the audit according to audit standards (PCAOB/ ASB)

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8
Q

management’s responsibilities

A

give us access to all documentation and client personnel; prepare and present financial statements; implement and maintain internal controls

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9
Q

what are the three phases of an audit

A
  1. risk assessment phase
  2. risk response phase
  3. reporting phase
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10
Q

what happens in the risk assessment phase of the audit

A

planning - what are the greatest risks for error or fraud in the financial statements; auditors spend more time on high risk areas of the financial statements

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11
Q

what happens in the risk response phase of the audit

A

detailed testing of internal controls and account balances/ transactions (execute out plan)
- may have to revisit audit strategy and make changes

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12
Q

what happens in the reporting phase of the audit

A

conclusion and forming an opinion

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13
Q

materiality

A

an error or omission is material if there is a substantial likelihood that it would influence the judgment made by a reasonable user based on the financial statements

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14
Q

qualitative versus quantitive

A

qualitative is the nature and quantitative is maginitude

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15
Q

the three steps involving materiality

A
  1. determine planning (overall) materiality
  2. determine performance materiality
  3. reevalute materiality throughout entire audit and at conclusion of audit
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16
Q

how do you calculate planning materiality

A

pick a benchmark and take %

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17
Q

what is the most common benchmark and percentage for planning materiality

A

net income before taxes and take 5%

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18
Q

how to calculate performance materiality

A

breakdown planning materiality to apply to each account (account specific!!!)

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19
Q

what is the typical performance materiality?

A

approximately half planning materiality

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20
Q

what happens if you raise materiality

A

would conduct less extensive testing (less audit evidence)

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21
Q

what happens if you lower materiality

A

have to do more extensive testing (more audit evidence)

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22
Q

what do you do in the reevaluate materiality?

A

use professional judgment as to whether or non materiality needs to be altered

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23
Q

professional skepticism

A

maintain a questioning mind and thoroughly investigate all evidence presented by the client

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24
Q

availability bias

A

tendency to be influenced by information or events that are memorable or readily availible

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25
Q

confirmation bias

A

the tendency to place more weight on information that corroborates an existing belief than on information that contradicts that belief

26
Q

overconfidence bias

A

the tendency to overestimate one’s ability to make accurate assessments of risk or other judgments or decisions

27
Q

anchoring bias

A

the tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed

28
Q

automation bias

A

a tendency to favor output generated from automated systems even when human reasoning or contradictory information raises questions about whether such output is reliable or fit for purpose

29
Q

what are three ways to overcome audit bias

A
  1. proper training of audit staff
  2. supervision of audit staff
  3. review of audit work performed
30
Q

financial statements are _________ & __________ made by management

A

claims; assertions

31
Q

audit risk:

A

risk that the auditors will give the wrong opinion

32
Q

what is the audit risk model?

A

a formula that calculates audit risk

33
Q

do you want audit risk to be high or low?

A

low

34
Q

audit risk (AR) =

A

Risk of Material Misstatement (RMM) * Detection Risk (DR)

35
Q

what are the two risks calculated into risk of material misstatement in the audit risk model

A

inherent risk * control risk

36
Q

what is inherent risk?

A

the susceptibility of an account to be misstated; some accounts are more likely to be based off of complexity, number of transactions, etc.

37
Q

what does the number assigned to inherent risk mean

A

the percentage of confidence that the auditors will give the right opinion

38
Q

what is control risk

A

risk that the client’s internal controls will not prevent or detect a material misstatement

39
Q

what is detection risk

A

the risk that our audit procedures so not detect a material misstatement

40
Q

what does the number assigned to control risk mean

A

90% chance internal controls won’t catch misstatement (bad)

41
Q

what does the number assigned to detection risk mean

A

the % chance that auditors dont detect misstatement

42
Q

the _________ the detection risk the more work/ evidence for the auditor

A

lower

43
Q

there is an inverse relationship between __________ and ____________

A

risk of material misstatement and detection risk

43
Q

the __________ the detection risk the less work/ evidence for the auditor

A

higher

44
Q

what is the “N - E - T “ of the audit stand for

A

Nature; extent; timing

45
Q

what is the nature of the audit

A

what types of audit procedures to perform

45
Q

what is the extent of the audit

A

how much audit work to perform

46
Q

what is the timing of the audit

A

when to perform the audit procedures

47
Q

in what quarter(s) is risk assessment phase

A

2nd Q

48
Q

in what quarter(s) is reporting phase

A

end of 3rd Q and YE

49
Q

in what quarter(s) is reporting phase

A

after year end when field work is does and report is issued

50
Q

have to determine inherent risl for ________

A

EVERY account level

51
Q

fraud versus error

A

fraud is an intentional misstatement or omission while an error is unintentional misstatement or omission

52
Q

2 categories for fraud risk

A

fraudulent financial reporting and misappropriation of assets

53
Q

what is fraudulent financial reporting

A

“lying” ; not applying GAAP properly; “cooking the books”

54
Q

what’s worse for the economy: fraudulent financial reporting or misappropriation of asses

A

fraudulent financial reporting (think ENRON)

55
Q

what is misappropriation of assets

A

“stealing” ; “embezzlement”; causes companies to pay for something it didn’t receive

56
Q

responsibility of management

A

to design and implement programs and controls to prevent, deter and detect fraud

57
Q

responsibiltiy of auditor

A

to plan and perform (design) the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud

58
Q

three fraud risk factors

A
  1. incentives/ pressures
  2. opportunities
  3. attitude/ rationalization
59
Q

fraud risk assessment

A

auditors assess and do fraud risk
- brainstorm among audit team
- document extensively our fraud risk assessment

60
Q
A

ACCT 3222 (5 decks)

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