CH 6

Question 1

Explain the objective of conducting an audit of financial statements and an audit of internal controls?

Answer 1

1) The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with applicable financial accounting framework.

Question 2

What are steps to develop audit objectives?

Answer 2

1) Understand objectives and responsibilities for the audit
2) Divide Financial Statements into cycles
3) Know management assertions about financial statements
4) Know general audit objectives for classes of transactions, accounts, and disclosures
5) Know specific audit objectives for classes of transactions, accounts, and disclosures

Question 3

What are management’s responsibilities?

Answer 3

1) Financial statements and internal controls
2) SOX increases managements responsibility for the financial statements
3) CEO and CFO must certify quarterly and annual financial statements submitted to the SEC.

Question 4

What are auditors’ objectives to review financial statements?

Answer 4

1) Obtain reasonable assurance in order to be free from material misstatements
2) Opinion of applicability of reporting framework
3) Auditor’s findings have to be reported and communicated.

Question 5

What are auditor’s responsibilities that are considered by laws and regulations?

Answer 5

If auditor SUSPECTS materiality, they should inquire management, consult client’s counsel or specialist, and consider accumulating evidence

If auditor KNOWS materiality,
consider effects on financial statements, effect on relationship with management, and communicate with audit committee or equivalent.

Question 6

What are auditors’ responsibilities?

Answer 6

1) Examine for material misstatements
2) use Professional skepticism
3) look for Fraudulent reporting or theft of assets
4) perform in Reasonable Assurance
5) Errors vs Fraud

Question 7

Define Misappropriation of assets and Fraudulent financial reporting

Answer 7

1) Misappropriation of assets=employee fraud

2) Fraudulent financial reporting= management fraud

Question 8

What are six characteristics of skepticism?

Answer 8

1) Question mindset
2) Suspension of judgement
3) Search for knowledge
4) Interpersonal understanding
5) Autonomy
6) Self esteem

Question 9

Define Financial Statement cycles

Answer 9

Audit are performed by dividing the financial statements into smaller segments or components

Question 10

Define Cycle approach

Answer 10

to divide an audit is to keep closely related types of transactions and account balances

Question 11

What are five cycles?

Answer 11

1) sales and collection cycle
2) Acquisition and payment cycle
3) Payroll and personnel cycle
4) Inventory and warehousing cycle
5) Capital Acquisition and repayment cycle

Question 12

What are the audit objectives for transactions?

Answer 12

1) transaction related audit objectives (transactions are properly recorded)
2) Balance related audit objectives ( account balances that are properly recorded)
3) Presentation and disclosure related audit objectives

Question 13

Define Management Assertions

Answer 13

implied or expressed management’s representation in

1) classes of transactions
2) related accounts
3) disclosures of FS.

Question 14

What are three Management Assertions?

Answer 14

1) Assertions about classes of transactions and events for the period under audit
2) Assertions about account balances at period end
3) Assertions about presentation and disclosure

Question 15

What are PCAOB’s assertions?

Answer 15

1) Existence or occurrence
2) completeness
3) Valuation or allocation
4) Rights and Obligations
5) Presentation and disclosure

Question 16

What are AICPA’s assertions?

Answer 16

1) Existence or occurrence
2) Completeness
3) Valuation or allocation
4) Presentation and disclosure.

Question 17

What are six transaction related audit objectives?

Answer 17

1) occurrence
2) Completeness
3) Accuracy
4) Posting and Summarization
5) Classification
6) Timing

Question 18

What are the eight balance related audit objectives?

Answer 18

1) Existence
2) Completeness
3) Accuracy
4) Classification
5) Cutoff
6) Detail tie in
7) Realizable Value
8) Rights and obligations

Question 19

What are four phases of auditing financial statements

Answer 19

1) Plan and design an audit approach based on risk assessment procedures
2) Perform tests of controls and substantive tests of transactions
3) Perform analytical procedures and tests of details of balances
4) Complete the audit and issue an audit report