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ACCT 4303 Auditing > Chapter 1 Class > Flashcards

Chapter 1 Class Flashcards

1
Q

what is the purpose of an audit?

A

provide financial statement users with an opinion on whether financial statements are presented fairly in all material aspects

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2
Q

GAAS acronym

A

Generally Accepted Auditing Standards

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3
Q

An auditor’s __________ is formed in accordance with GAAS and relevant ethical requirements

A

opinion (or report)

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4
Q

management is inherently _______

A

biased

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5
Q

auditing is critical to help ensure the liquidity of the world’s ____________

A

capital markets (the money flows where it’s supposed to)

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6
Q

what is management incentivized to do?

A

present the financial statements and projections in a way that will entice potential investors and creditors

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7
Q

investors and creditors need assurance that information presented is ___________

A

reliable

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8
Q

why was Sarbanes-Oxley created?

A

to help ensure audit quality is not compromised

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9
Q

SOX created the ___________ board

A

PCAOB

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10
Q

PCAOB acronym

A

Public Company Accounting Oversight Board

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11
Q

PCAOB regulates the profession by:

A
  • setting audit standards
  • performing inspections of audit work completed and the quality control at audit firms
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12
Q

business risk

A

the risk that an entity will fail to meet its objectives

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13
Q

what 3 aspects of information do managers need to minimize business risk?

A
  • timely
  • relevant
  • reliable
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14
Q

what are the environmental conditions that increase user demand for relevant and reliable info?

A
  • complexity
  • remoteness
  • time sensitivity
  • consequences
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15
Q

complexity

A

events and transactions are numerous and often complicated

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16
Q

remoteness

A

decision makers are often separated from current and potential business partners

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17
Q

time sensitivity

A

decisions need to be made rapidly

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18
Q

consequences

A

devisions can involve a significant investment of resources

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19
Q

information risk

A

the probability that the information circulated by a company will be false or misleading

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20
Q

who is there a potential conflict of interest between?

A

information providers (managers, employees) and financial statement users (investors, creditors)

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21
Q

auditors must be ______ and ______ to lend credibility to information presented

A

independent and objective

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22
Q

assurance

A

the lending of credibility to information

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23
Q

attestation

A

assurance provided for specific assertions made by management

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24
Q

auditing

A

attestation when the assertions are embodied in a company’s financial statements

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25
Q

who prepares the financial statements?

A

management

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26
Q

auditors supply an opinion as to whether info is presented ______ in all ________ aspects

A

fairly; material

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27
Q

auditing is a ____________ of objectively obtaining and evaluating ___________ regarding assertions about economic actions and events

A

systematic process; evidence

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28
Q

systematic process

A

purposeful and logical process that has a logical starting point, proceeds among established guidelines, and has a logical conclusion

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29
Q

evidence

A

consists of all types of information that ultimately guide auditor’s decisions

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30
Q

examples of assertions made by management

A
  • inventory exists and is owned by the company
  • liabilities are complete
  • revenue transactions really happened
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31
Q

auditing is a specific type of ______________

A

attestation engagement

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32
Q

what is an attestation engagement?

A
  • an engagement in which a practitioner issues a report
  • an assertion about a subject matter that is the responsibility of another party
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33
Q

Assurance services improve the quality of:

A

information

34
Q

true/false
assurance services can include non-financial information

A

true

35
Q

whose job is it to prepare financial reports?

A

management

36
Q

financial reporting’s function is to:

A

provide info to outside decision makers

37
Q

financial statements contain management assertions about:

A
  • transactions and events that occurred during the period being audited
  • account balances at the end of the period
  • financial statement presentation and disclosure
38
Q

assertion

A

a declaration that something is the case

39
Q

each assertion gives rise to a:

A

question that can be answered with audit evidence

40
Q

5 steps of the audit process

A
  1. plan the audit using management’s assertions to test risks
  2. determine the different types of misstatements that could occur for each relevant assertion
  3. develop auditing procedures according to the risks and potential misstatements identified
  4. gather the evidence necessary to persuade the auditor that there is no material misstatement related to each relevant assertion
  5. issue a report to provide assurance to financial statement users
41
Q

5 types of assertions

A
  1. existence or occurrence
  2. completeness
  3. valuation and allocation
  4. rights and obligations
  5. presentation and disclosure
42
Q

Existence or Occurrence key audit questions

A
  1. do the assets listed really exist?
  2. did the recorded transactions really occur?
  3. are the transactions recorded in the proper period?
43
Q

existence:

A

each of the balance sheet and income statement balances actually exist

44
Q

tests for existence

A
  1. verify cash with banks
  2. count inventory
  3. verify A/R with customers
45
Q

occurrence

A

each of the income statement events and transactions really did occur in the proper period

46
Q

tests for occurrence

A

view sales documentation to verify sales really occurred

47
Q

key audit questions for completeness

A
  1. are the financial statements complete?
  2. were all transactions recorded?
  3. are the transactions in the proper period?
48
Q

completeness

A

all transactions, events, assets, liabilities, equities that should have been recorded are actually recorded

49
Q

example of tests performed for completeness

A

“search for unrecorded liabilities”

50
Q

cutoff

A

refers to accounting for revenue, expense, and other transactions in the proper period

51
Q

what is the cut-off date?

A

the year-end balance sheet date

52
Q

key audit questions for valuation and allocation

A
  1. are the balance sheet accounts valued correctly?
  2. are the transactions accurately recorded?
  3. are the expenses allocated to the periods that were benefitted?
53
Q

allocation

A

refers to the appropriate percentages of an asset or liability being recorded on the income statement in accordance with GAAP

54
Q

example of test performed for allocation

A

recalculate dep. expense based on purchase/disposal dates of asset and client policy

55
Q

accuracy

A

refers to the appropriate recording of the transactions at the correct amount

56
Q

examples of test performed for accuracy

A
  1. compare vendor invoices to inventory prices
  2. obtain lower-of-cost-or-market data
  3. evaluate collectability of receivables
57
Q

key audit questions of rights and obligations

A
  1. does the company really own the assets?
  2. are all legal responsibilities to pay the liabilities identified?
58
Q

rights and obligations

A

assets are really owned and the liabilities are really owed by the company being audited

59
Q

key audit questions of presentation and disclosure

A
  1. were all transactions recorded in the correct accounts?
  2. are the disclosures understandable to users?
60
Q

presentation and disclosure

A

all transactions and events have been presented correctly in accordance with GAAP and all relevance info disclosed to financial statement users

61
Q

classification

A

transactions must be classified in the correct accounts

62
Q

understandability

A

must be useful and understandable to decision makers

63
Q

when is an account or disclosure “significant”?

A

there is a reasonable possibility that the account or disclosure could contain a material misstatement

64
Q

when is an assertion relevant?

A

there is a reasonable possibility that a material misstatement exists related to the assertion for the significant account being audited.

65
Q

professional skepticism

A

having an attitude that includes a questioning mind and a critical assessment of evidence
- do not accept assertions without corroboration

66
Q

auditors must remain __________ and __________

A

objective and unbiased

67
Q

assurance services

A

lend credibility to information, whether financial or nonfinancial

68
Q

compilation

A

preparing financial statements without performing any evidence-gathering work

69
Q

review

A

limited evidence-gathering work is performed, but the scope is narrower than audit

70
Q

when can a CPA firm both provide tax services and audit a company?

A

when the client’s audit committee preapproves the relationship in writing. the CPA firm must maintain its independence and objectivity

71
Q

which advisory services can’t a public accounting firm provide to a public audit client?

A
  1. bookkeeping and related services
  2. design or implement financial info systems
  3. appraisal or valuation services
  4. actuarial services
  5. internal audit outsourcing
  6. management or HR services
  7. investment or broker/dealer services
  8. legal and expert services
72
Q

auditors cannot provide services in which:

A

they make managerial decisions for the client or that would result in them auditing their own work

73
Q

internal auditing

A

assurance designed to add value and improve an organization’s operations
- help org. accomplish objectives

74
Q

operational auditing

A

the study of business operations for the purpose of making recommendations about the use of resources, business objectives, and compliance with policies

75
Q

who audits the federal government?

A

Government Accountability Office (GAO)

76
Q

what types of audits does GAO perform?

A
  1. financial audits
  2. attestation engagements
  3. performance audits
77
Q

regulatory audits

A

the “economic assertions” or taxable income made by taxpayers and determine their correspondence with the IRC

78
Q

who creates and administers the CPA exam?

A

the American Institute of Certified Public Accountants (AICPA)

79
Q

three sections of the CPA exam

A
  1. financial accounting and reporting
  2. regulation
  3. auditing and attestation
80
Q

three disciplines you can choose for the fourth CPA sections

A
  1. tax compliance and planning
  2. business analysis and reporting
  3. information systems and controls
81
Q

who administers CPA licenses?

A

the state

ACCT 4303 Auditing (21 decks)

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