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Auditing > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

What are some of the important skills auditors develop?

A

The abilities to quickly understand and analyze various business models, strategies, and processes and to identify key risks relevant to a particular entity.

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2
Q

Independence

A

A state of objectivity in fact and in appearance, including the absence of any significant conflicts of interest.

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3
Q

External Auditors

A

Sometimes interchangeable with independent auditor. They are not employees of the entities they audit, and they commonly audit financial statements for publicly traded and private companies, partnerships, universities, government entities, and others. They may also conduct compliance, operational, and fraud audits.

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4
Q

Internal Auditors

A

Auditors who are employees of the organizations that they audit.

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5
Q

How does the IIA defined internal auditing?

A

An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

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6
Q

Government Auditors

A

These auditors are employed by federal, state, and local agencies. They are usually considered to be a type of internal auditor.

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7
Q

What are the two agencies that use auditors extensively at the federal level?

A

The Government Accountability Office (GAO) and the Internal Revenue Service (IRS)

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8
Q

Government Accountability Office (GAO)

A

They are under the direction of the comptroller general of the US and is responsible for Congress. They conduct audits of activities, financial transactions, and accounts of the federal government.
They also assist Congress by performing special audits, surveys, and investigations.
The majority of the audits conducted by these auditors are compliance and operational audits.

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9
Q

Internal Revenue Service (IRS)

A

Part of the US Treasury Department.
The main activity of these auditors is examining the books and records and organizations and individuals to determine whether their tax returns are accurate and in compliance with applicable tax laws and regulations.

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10
Q

What are three other federal agencies that conduct audits?

A

1) Army Audit Agency
2) Defense Contract Audit Agency (DCAA)
3) Federal Bureau of Investigation (FBI)

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11
Q

FBI Auditors

A

Frequently look into criminal money-laundering activities and investigate for fraud in government agencies and other organizations subject to federal laws.

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12
Q

Inspector General

A

All departments of the federal government, as well as many federal agencies, have this lead auditor.

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13
Q

Fraud Examiners

A

Employed by corporations, government agencies, public accounting firms, and specialized consulting and investigative services firms.
They are specially trained in detecting, investigating, and deterring fraud and white-collared crime.

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14
Q

Association of Certified Fraud Examiners (ACFE)

A

The primary professional organization supporting fraud auditors. They offer a certification program for individuals wanting to become CFEs.

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15
Q

What are the five major types of audits?

A

1) Financial Statement Audit
2) Internal Control Audits
3) Compliance Audits
4) Operational Audits
5) Fraud Audits

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16
Q

Integrated Audit

A

An audit of both financial statements and internal control over financial reporting, provided by the external auditor. Required for public companies.

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17
Q

Compliance Audits

A

Determines the extent to which rules, policies, laws, covenants, or government regulations are followed by the entity being audited.

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18
Q

Operational Audits

A

This type of audit involves a systematic review of part or all of an organization’s activities to evaluate whether resources are being used effectively and efficiently. The purpose of this audit is to provide assurance, assess performance, identify areas for improvement, and develop recommendations with respect to operational effectiveness and efficiency.
Sometimes this type of audit is referred to as a performance audit or management audit.

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19
Q

How does an operational audit differ from financial statement audits or compliance audits?

A

This type of audit presents different challenges than financial statement audits or compliance audits because operational audits often require the auditor to identify or create objective, measurable criteria against which to assess effectiveness and efficiency.
Some of these audits, such as information technology (IT) or cyber security audits, require specialized skills and expertise.

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20
Q

Fraud Audits

A

These types of audits serve to detect or deter fraudulent activities. They might be conducted in business settings in which managers or owners are concerned about fraud, criminal investigations where money or other assets are involved, or matrimonial disputes involving division of assets.

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21
Q

Occupational Fraud

A

This is a widespread problem that affects practically every organization. This type of fraud usually falls into one of three major categories: Asset Misappropriations (e..g, stealing inventory), Corruption (e.g., bribing government officials), Fraudulent Financial Statements (e.g., intentionally overstating assets in order to receive a bank loan).

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22
Q

What are three Non-Audit/Non-Assurance Services that public accounting firms may supply?

A

1) Tax Preparation and Planning Services
2) Management Advisory Services (MAS)
3) Compilation and Bookkeeping Services

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23
Q

Compilation

A

When a public accounting firm prepares financial statements for a company.

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24
Q

Public Accounting Firm

A

An organization created to provide professional accounting-related services, including auditing. Usually formed as a proprietorship or as a form of partnership.

25
Q

Why do so many public accounting firms generally end up organizing as an LLP or LLC?

A

Corporations are created and governed by individual states, and some states do not allow accounting firms to organize as corporations. Thus, because they span state boundaries, it is generally not possible for large firms to structure themselves as corporations, which is why large national and international public accounting firms generally are structured as LLPs.

26
Q

How are public accounting firms usually categorized?

A

By size.

27
Q

What are the “Big 4”?

A

Deloitte, EY, KPMG, and PwC.

28
Q

Who composes the typical auditing team?

A

Partners, Managers, Senior/In-Charge, Associate/Staff.

29
Q

Role of the Partner

A
  • Reach agreement with the auditee on the scope of the service to be provided.
  • Ensure that the audit is properly planned and that the audit is conducted in accordance with applicable auditing standards.
  • Assemble and audit team that has the required skills and experience.
  • Supervise the audit team and review the working papers.
  • Conclude on the adequacy of audit evidence and sign the audit report.
30
Q

Role of the Manager

A
  • Ensure that the audit is properly planned, including scheduling of team members.
  • Supervise the preparation of and approve the audit program.
  • Review the working papers, financial statements, and audit report.
  • Recommend key audit judgements to partner, oversee the work of seniors and staff.
  • Deal with invoicing and ensure collection of payment for services.
  • Inform partner about any auditing or accounting problems encountered.
31
Q

Role of Senior/In-Charge

A
  • Assist in the development of the audit plan.
  • Prepare budgets.
  • Assign tasks to associates and direct the day-to-day performance of the audit.
  • Perform procedures, gather and evaluate audit evidence.
  • Supervise and review the work of associates.
  • Inform the manager about any auditing or accounting problems encountered.
32
Q

Role of Associate/Staff

A
  • Perform audit procedures assigned to them by the senior.
  • Prepare adequate and appropriate documentation of completed work.
  • Inform the senior about any auditing or accounting problems encountered.
33
Q

Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act

A

Passed in July 2002. Similar to the impact of the Securities Acts of 1933 and 1934, this Act (commonly known as SOX) started a process of broad reform in corporate governance practices that would affect the duties and practices of public companies, financial analysts, external auditors, and securities exchange markets.
With respect to the accounting profession, the Act effectively transferred authority to set and enforce auditing standards for public company audits to the PCAOB. In addition, the act mandated that the SEC impose strict independence rules, prohibiting auditors from providing many types of nonaudit services to public company auditees.

The act imposed several other important mandates, including that audit firms rotate audit partners on audit engagements every five years, the public companies obtain an integrated audit, and that audit firms undergo inspection by the PCAOB.

34
Q

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

A

This Act amended [SOX] by granting authority to the PCAOB to inspect foreign audit firms that practice in the US or that have US auditees and by exempting public companies under $75 million market capitalization from the requirement to submit an audit of internal control over financial reporting.

35
Q

Due Professional Care

A

Requires that the auditor exercise professional skepticism. If the auditor fails to exercise due professional care, [they] can be held liable for civil damages or even criminal penalties.

36
Q

Professional Skepticism

A

An attitude that includes a questioning mind and a critical assessment of audit service.

37
Q

Corporate Governance

A

The oversight mechanisms in place to help ensure the proper stewardship over an entity’s assets. Management and the board of directors play primary roles, and the independent auditor plays a key facilitating role.

38
Q

Board of Directors

A

Persons elected by the stockholders of a corporation to oversee management and to direct the affairs of the corporation.

39
Q

Audit Committee

A

A committee consisting of members of the board of directors, charged with overseeing the entity’s system of internal control over financial reporting, internal and external auditors, and the financial reporting process. Members typically must be independent of management.

40
Q

What are the five categories that characterize the process of most business?

A

1) Financing process
2) Purchasing processes
3)0 Human resource management process
4) Inventory management process
5) Revenue process.

41
Q

Business Processes

A

Processes implemented by management to achieve entity objectives. Business processes are typically organized into the following categories: financing processes, purchasing, human resource management, inventory management, and revenue.

42
Q

Securities and Exchange Commission (SEC)

A

A federal government agency that administers the Securities Act of 1933, the Securities Act of 1934, and the Sarbanes-Oxley Act of 2002, among others. They have the overall responsibility to oversee the establishment of accounting and auditing standards in the US. They also recognize the Financial Accounting Standards Board (FASB) as the accounting standard setting in the US and issues Staff Accounting Bulletins (SABs) to augment the FASB’s standards. Lastly, they also oversee the PCAOB in its role.

43
Q

The Securities Act of 1933

A

This regulates disclosure of material information in a registration statement for an initial public offering of securities.

44
Q

S Forms

A

These are used by companies for issuing securities, and contain the audited financial statements of the registrant.

45
Q

The Securities Exchange Act of 1934

A

This Act regulates ongoing reporting by companies whose securities are listed and traded on a stock exchange or companies that possess assets greater than $10 million and whose equity securities are held by 500 or more persons.
The most common documents encountered by auditors under this Act are the 10K, 10Q, and 8K.

46
Q

The 10K and 10Q

A

These are, respectively, annual and quarterly reports, which include the financial statements that are filed with the SEC by a publicly traded company.

47
Q

When is an 8K filed?

A

This is filed whenever a “material corporate event” occurs, such as the sale of a division or a change of auditors.

48
Q

Public Company Accounting Oversight Board (PCAOB)

A

They describe themselves as “a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent financial reports.” While the board is a nonprofit corporation, it is in reality a quasi-governmental regulatory agency overseen by the SEC.

49
Q

American Institute of Certified Public Accountants (AICPA)

A

This is a private professional association of over 431,000 members in 130 different countries. It performs a number of functions that directly bear on the activities of member CPAs. The most important of these functions is the promulgation of rules and standards that guide audit and related services provided to nonpublic companies; governmental entities such as states, counties, municipalities, and school districts; and other entities such as universities and not-for-profits.

50
Q

International Auditing and Assurance Standards Board (IAASB)

A

They are sponsored and funded by the International Federation of Accountants (IFAC), which describes itself as “the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies.”

51
Q

Financial Accounting Standards Board (FASB)

A

A privately funded body whose mission is to establish standards for financial accounting and reporting.
Their Accounting Standards Codification (or ASC) is recognized by the SEC, the PCAOB, and the AICPA, as the source of US Generally Accepted Accounting Principles (GAAP).

52
Q

Generally Accepted Accounting Principals (GAAP)

A

Accounting principles that are generally accepted for the preparation of financial statements in the United States. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC. International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board.

53
Q

International Accounting Standards Board (IASB)

A

The international counterpart to the FASB. Their standards are the predominantly recognized accounting standards outside of the US. [They are] responsible for the development and publication of International Financial Reporting Standards (IFRS), and for approving interpretations of IFRS.

54
Q

Ethics

A

A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.

55
Q

Professionalism

A

Conduct, aims, or qualities that characterize a profession or professional person.

56
Q

AICPA’s Code of Professional Conduct

A

A set of principles, rules, and interpretations that establish guidance for acceptable behavior for accountants and auditors.

57
Q

Opinion Shopping

A

When an auditee seeks the views of other CPAs, hoping to find an auditor who will agree with the entity’s desired accounting treatment.

58
Q
A

Auditing (10 decks)

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