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Auditing > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is professional skepticism?

A

An attitude that includes a questioning my and critical assessment audit evidence.

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2
Q

What is the objective of external auditing?

A

The objective is to provide opinions on the reliability of the financial statements and as part of an integrated audit provide opinions on internal control effectiveness.

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3
Q

What is an unqualified audit report?

A

When the auditor has no reservations about managements financial statements or internal controls.

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4
Q

What is adverse opinion?

A

When the auditor has reservations about the effectiveness of the clients internal controls.

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5
Q

What does the public expect auditors to do?

A

(a) find fraud
(b) require accounting principles that bass pro tray the spirit of the concepts adopted by accounting standard setters
(c) be independent of management

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6
Q

Can you audit a company that a relative works at?

A

No

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7
Q

What use does management get out of audited financial statements?

A

The review performance, make operational decisions, report results to capital markets.

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8
Q

What use do the stockholders get out of audited financial statements?

A

Whether to buy or sell stock.

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9
Q

What used to the bondholders get out of audited financial statements?

A

Whether to buy or sell bonds.

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10
Q

What you stew financial institutions get out of a companies audited financial statements?

A

Evaluate loan decisions, consider interest rates, terms, and risk.

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11
Q

What you stew taxing authorities get out of audited financial statements?

A

It helps them determine taxable income and tax due.

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12
Q

What use do regulatory agencies get out of audited financial statements?

A

It helps them develop regulations and monitor compliance.

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13
Q

What used to labor unions get out of audited financial statements?

A

It helps them make collective bargaining decisions.

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14
Q

What use do the court systems get out of audited financial statements?

A

They can assess the financial position of a company in litigation.

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15
Q

What use do venders get out of audited financial statements?

A

It helps them assess credit risk.

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16
Q

What use do retired employees get from audited financial statements?

A

It protects employees from surprises concerning pensions and other post-retirement benefits.

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17
Q

Why is there a need for independent assurance?

A

To protect against potential bias, remoteness, complexity, and consequences.

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18
Q

What is the overall objective in conducting an audit?

A

To obtain reasonable assurance about whether the financial statements are free from material misstatement and to report on the financial statements based on the auditors findings.

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19
Q

What is phase 1 of the audit opinion formulation process?

A

Making client acceptance in continuance decisions.

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20
Q

Our auditors required to audit any company that asks?

A

No auditors choose whether or not to perform the audit.

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21
Q

What is phase 2 of the audit opinion formulation process?

A

Performing a risk assessment.

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22
Q

What is phase 3 of the audit opinion formulation process?

A

Obtaining evidence about internal control operating effectiveness.

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23
Q

What is phase 4 of the audit opinion formulation process?

A

Obtaining substantive evidence about accounts, disclosures, and assertions.

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24
Q

What is phase 5 of the audit opinion formulation process?

A

Completing the audit and making reporting decisions.

25
Q

What is managements responsibility?

A

(a) preparing and presenting financial statements in accordance with the applicable financial reporting framework, (b) designing, implementing, and maintaining internal control over financial reporting, (c) providing the auditors with information relevant to the financial statements and internal controls.

26
Q

What is the job of an external auditor?

A

They provide an independent audit of internal controls and financial statements.

27
Q

What kind of extern all auditors are there?

A

Sole practitioner firms, local and regional firms, and large multinational professional services.

28
Q

Do auditors specialize in specific industries?

A

Yes.

29
Q

What outside organizations affect the external auditing profession?

A

Congress, public Company accounting oversight Board (PCAOB), the SEC, the center for audit quality (CAQ), international auditing and assurance standards Board (IAASB), Committee of sponsoring organizations of the Treadway commission (COSO), generally accepted accounting principles (GAAP), international accounting standards Board (IASB), state boards of accountancy, the court system

30
Q

What is audit quality?

A

To provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.

31
Q

The FRC states there are how many drivers of audit quality?

A

Five

32
Q

According to the FRC what are the five primary drivers of audit quality?

A

(1) audit firm culture
(2) the skills and personal qualities of audit partners and staff.
(3) the effectiveness of the audit process.
(4) the reliability and usefulness of reporting
(5) factors outside the control of auditors that affect audit quality.

33
Q

What can happen if an audit is not conducted in a quality matter?

A

The auditor and audit firm may be sued.

34
Q

Which organizations have auditor independence requirements?

A

AICPA, PCAOB, SEC

35
Q

What does the AICPA see as a threat to an audit?

A

(1) self-review threat.
(2) advocacy threat.
(3) adverse interest threat
(4) familiarity threat
(5) undue influence threat
(6) financial self-interest threat
(7) management participation threat

36
Q

The PCAOB performs inspections of registered on firms every year for our firms have over ______ audits per year?

A
  1. And audits every three years for other registered audit firms
37
Q

What is an engagement quality review also referred to as concurring partner review?

A

This occurs when an audit partner not otherwise involved in the audit independently reviews each audit to make sure that documented evidence supports the audit opinion.

38
Q

What is an inter-office review?

A

A review of one office of the audit firm by professionals from another office to assure that the policies and procedures established by the firm are being followed.

39
Q

What is an engagement letter?

A

An engagement letter states the scope of the work to be done on the audit so that there should be no doubt in the mind of the client, external auditor, or the court system as to the expectations agreed to by the external auditor and the client.

40
Q

What is an audit from limitation?

A

And external audit firm should not undertake an engagement that it is not qualified to handle.

41
Q

How much of the audit should be documented?

A

The audit team should document everything done on the audit

42
Q

What is due professional care?

A

A standard of care expected to be demonstrated by a competent auditing professional.

43
Q

What is the client acceptance decision?

A

The process by which a new client is evaluated by the audit firm and individual engagement partner prior to being excepted into the audit firms portfolio of clients

44
Q

What is client continuance decisions?

A

The process by which existing clients for which the audit firm provided services in the proceeding. Are evaluated by the audit firm and individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period.

45
Q

True or false? When the auditor has no reservations about managements financial statements, or other internal controls,the audit opinion is said to be unqualified.

A

True

46
Q

T/f. Independence is referred to as the cornerstone of the auditing profession.

A

True

47
Q

T/f. The sole responsibility of management with regard to financial reporting involves preparing and presenting financial statements in accordance with the applicable financial reporting framework

A

False

48
Q

T/f. The internal audit function is designed primarily to assist the external auditor in providing assurance to third-party users of the financial statements.

A

False

49
Q

T/f. The big 4 firms are the only types of firms that conduct financial statement audits.

A

False, smaller firms do as well.

50
Q

T/f. With regard to working in a team environment, larger audit firms typically have teams with more continuity and overlap across engagements, where smaller audit firms typically have multiple teams that typically disband and after each engagement.

A

False

51
Q

T/f. Congress passed the Sarbanes-Oxley act of 2002 in response to a variety of major shocks during the early 2000’s.

A

True

52
Q

T/f. The AICPA sets auditing standards for auditors of non-public companies in United States

A

True

53
Q

T/f. Audit quality is achieved when the audit is performed in accordance with GAAS and when it provides reasonable assurance that the financial statements have been presented in accordance with GAAP and are not materially misstated due to errors or fraud.

A

True

54
Q

T/f. One of the key drivers of audit quality is the gross margin achieved by the audit firm and the ability of the engagement partner to maintain those margins over the duration of the audit engagement

A

False.

55
Q

T/f. The three primary types of review programs include: (1) external inspections/peer reviews, (2) engagement quality reviews, (3) inter office reviews.

A

True.

56
Q

T/f. The engagement letter states the scope of the work to be done on the audit so that there should be no doubt in the mind of the client, external auditor, or the court system as to the expectations agreed to by the external auditor and the client.

A

True.

57
Q

T/f. Existing clients for which the audit firm provided services in the proceeding period are evaluated by the audit firm and by the individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period; The process by which this evaluation occurs is called the client continuance decision

A

True.

58
Q

T/f. On shrooms may discontinue serving a client because the client does not fit the profile or growth strategy of the audit firm.

A

True.

Auditing (6 decks)

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