ch 4 review Flashcards
entity- level risk
affects multiple accounts/ assertions
why would you want to gain an understanding of the entity?
identify inherent risk to plan the audit
transaction- level risk
affects only 1 transaction class or account
examples of industry, regulatory and other external factors
general economic conditions; government regulation; reputation
nature of the entity, strategies, internal control
customer and supplier relationships; sources of financing; import/ export
4 procedures to get an idea of the industry
- inquiries
- analytical procedures
- observation and inspection
- discussion among audit team members
who to inquire?
management, client personnel, internal auditors, “auditors”
what are the analytical procedures?
trend analysis and ratio analysis
makes sure there is compliance with laws and regulations - “illegal acts”
EPA/ OSHA
auditors have ________ responsibility for detecting direct and material illegal acts as for detecting material misstatement
the same
what are the auditing standards of a private company issued by ASB called
GAAS
if there is a material but indirect effect on financial statements the auditors have __________ responsibility
limited
what are client performance measures
how does your client specifically measure its performance- different for all clients
what are two key measures of client performance
profitability and liquidity/ cash flows
what are ways to measure profitability
EPS; profit margin ratio; gross profit margin ratio
what are way to measure liquidity
can they pay their debts when they come due; current ratio debt to assets ratio
analytical procedures involve the study of __________ relationships among both ____________ and __________ data
plausible; financial; nonfinancial
the planning/ risk assessment phase is how long?
2 quarters
is the planning and risk assessment phase required?
yes
what is the purpose of the planning/ risk assessment phase
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
what does risk response substantive procedures phase happen
3rd quarter
is the risk response phase required?
no
what is the risk response phase purpose?
serves as planning function; obtain evidential matter about specific management assertions related to account balances or transactions; evidence is circumstantial
when is the risk response phase done
after full set of financial statements
is the risk response phase required?
yes
what is the risk response phase purpose
assist the auditor in the final review of the overall reasonableness of account balances
who is a related party
parent/ subsidiary; equity method investments (20%-50% ownership); family members of upper management of client
why is there a concern with related parties
may not have arm’s length transaction
GAAP rules regarding related parties
- must be disclosed
- ensure proper disclosure
procedures to find related parties
- inspect SEC filings (if pub)
- inspect BOD min
- inquire of mgt
- inspect docs
audit committee
generally 3-5 members of the board of directors
audit committee members must be ___________ directors
independent
what is an independent director
not management, not employees, no financial interest, have financial expertise
what is the purpose of the audit committe
enhance the internal controls by having direct communication with the auditors
what auditors talk with audit committee
internal and external
functions of audit committee
- hires and fires external auditors
- approves services provided by external auditors
- resolves any disagreements between mgt and auditors
- establishes procedures for receiving complaints
a group that represents shareholders/ owners and is responsible for ensuring the entity is being run to benefit the shareholders/ owners
board of directors
processes used by a client at the end of a period to finalize accounts
closing procedures
an entity that is not independent of the client
related party
a comparison of account balances to a single line item
common-size analysis
the ability of a company to pay its current debts when they fall due
liquidity
a situation in which noncompliance with laws and regulation impacts amounts already included in financial statements
client risk that affects only cash disbursements
transaction-level risk
the analysis of financial information by considering the plausible relationship among sales revenue and allotted shelf space in a grocery store
analytical procedures
a committee of the board of directors responsible for hiring the external auditors
audit committee
a comparison of a client’s inventory turnover in days with the industry average
