ch 4 review

Question 1

entity- level risk

Answer 1

affects multiple accounts/ assertions

Question 1

why would you want to gain an understanding of the entity?

Answer 1

identify inherent risk to plan the audit

Question 2

transaction- level risk

Answer 2

affects only 1 transaction class or account

Question 3

examples of industry, regulatory and other external factors

Answer 3

general economic conditions; government regulation; reputation

Question 4

nature of the entity, strategies, internal control

Answer 4

customer and supplier relationships; sources of financing; import/ export

Question 5

4 procedures to get an idea of the industry

Answer 5

1. inquiries
2. analytical procedures
3. observation and inspection
4. discussion among audit team members

Question 6

who to inquire?

Answer 6

management, client personnel, internal auditors, “auditors”

Question 7

what are the analytical procedures?

Answer 7

trend analysis and ratio analysis

Question 8

makes sure there is compliance with laws and regulations - “illegal acts”

Answer 8

EPA/ OSHA

Question 9

auditors have ________ responsibility for detecting direct and material illegal acts as for detecting material misstatement

Answer 9

the same

Question 10

what are the auditing standards of a private company issued by ASB called

Answer 10

GAAS

Question 11

if there is a material but indirect effect on financial statements the auditors have __________ responsibility

Answer 11

limited

Question 12

what are client performance measures

Answer 12

how does your client specifically measure its performance- different for all clients

Question 13

what are two key measures of client performance

Answer 13

profitability and liquidity/ cash flows

Question 14

what are ways to measure profitability

Answer 14

EPS; profit margin ratio; gross profit margin ratio

Question 15

what are way to measure liquidity

Answer 15

can they pay their debts when they come due; current ratio debt to assets ratio

Question 16

analytical procedures involve the study of __________ relationships among both ____________ and __________ data

Answer 16

plausible; financial; nonfinancial

Question 17

the planning/ risk assessment phase is how long?

Answer 17

2 quarters

Question 18

is the planning and risk assessment phase required?

Answer 18

yes

Question 19

what is the purpose of the planning/ risk assessment phase

Answer 19

assist the auditor in planning the N-E-T of the audit; used for risk measurement to alert the auditor to problem areas requiring attention

Question 20

what does risk response substantive procedures phase happen

Answer 20

3rd quarter

Question 21

is the risk response phase required?

Answer 21

no

Question 22

what is the risk response phase purpose?

Answer 22

serves as planning function; obtain evidential matter about specific management assertions related to account balances or transactions; evidence is circumstantial

Question 23

when is the risk response phase done

Answer 23

after full set of financial statements

Question 24

is the risk response phase required?

Answer 24

yes

Question 25

what is the risk response phase purpose

Answer 25

assist the auditor in the final review of the overall reasonableness of account balances

Question 26

who is a related party

Answer 26

parent/ subsidiary; equity method investments (20%-50% ownership); family members of upper management of client

Question 27

why is there a concern with related parties

Answer 27

may not have arm’s length transaction

Question 28

GAAP rules regarding related parties

Answer 28

1. must be disclosed
2. ensure proper disclosure

Question 29

procedures to find related parties

Answer 29

• inspect SEC filings (if pub)
• inspect BOD min
• inquire of mgt
• inspect docs

Question 30

audit committee

Answer 30

generally 3-5 members of the board of directors

Question 31

audit committee members must be ___________ directors

Answer 31

independent

Question 32

what is an independent director

Answer 32

not management, not employees, no financial interest, have financial expertise

Question 33

what is the purpose of the audit committe

Answer 33

enhance the internal controls by having direct communication with the auditors

Question 34

what auditors talk with audit committee

Answer 34

internal and external

Question 35

functions of audit committee

Answer 35

• hires and fires external auditors
• approves services provided by external auditors
• resolves any disagreements between mgt and auditors
• establishes procedures for receiving complaints

Question 36

a group that represents shareholders/ owners and is responsible for ensuring the entity is being run to benefit the shareholders/ owners

Answer 36

board of directors

Question 37

processes used by a client at the end of a period to finalize accounts

Answer 37

closing procedures

Question 38

an entity that is not independent of the client

Answer 38

related party

Question 39

a comparison of account balances to a single line item

Answer 39

common-size analysis

Question 40

the ability of a company to pay its current debts when they fall due

Answer 40

liquidity

Question 41

a situation in which noncompliance with laws and regulation impacts amounts already included in financial statements

Question 42

client risk that affects only cash disbursements

Answer 42

transaction-level risk

Question 43

the analysis of financial information by considering the plausible relationship among sales revenue and allotted shelf space in a grocery store

Answer 43

analytical procedures

Question 44

a committee of the board of directors responsible for hiring the external auditors

Answer 44

audit committee

Question 45

a comparison of a client’s inventory turnover in days with the industry average