Chapter 3 Flashcards
What factor would most likely cause a CPA not to accept a new audit engagement?
Management’s disregard of its responsibility to maintain an adequate internal control environment.
What do auditors prepare engement letters to be signed by the auditees?
TO communicate and clarify the expectations and responsibilities of both the auditee and the auditor.
What are 3 key factors to consider when using the work of internal auditors?
1) Competence and objectivity
2) Materiality or significance of the accounts examined by the internal audit function
3) Audit risk associated with the accounts examined by the internal auditors
The audit committee of a company should consist of who?
Individuals of the board of directors that are not officers or employees, including a financial expert.
Borrowing money at an interest rate substantially below the prevailing market rate could indicate what?
Related party transacations
Test of controls includes what?
1) Inspection of documents
2) Walkthroughs
3) Observations
4) Inquires of personnel
5) Reperformance of the control by the auditor
Audit Supervisor Activities should include the following
1) Inform team of responsibilities including:
a. Objectives
b. Nature, timing, & extent of procedures
c. Matters the could affect procedures
2) Direct team memebers to present significant issues
3) Review work of team to evaluate
a. the work was performed and documented
b. objectives of the procedures were achieved
c. the results of the work support the conclusion
What is affected by how the financial statement users may be influenced in decision making
Materiality
What is the first step in apply Materiality?
Determine Materiality level for the overall financial statements
Which laws & regulations does the auditor have the same responsibility as that for errors and fraud?
Laws and regulations that have a direct and material effect on the financial statements.
What is a dual-purpose test?
- Test of control
2. Substantive test of transactions.
When likely misstatments are greater than overall materiality, what should the auditor do?
1) Request that the auditee adjust the financial statements
or
2) Modify the opinion if the auditee will not adjust the financial statements
What is more detailed, the audit plan or the audit strategy
The audit plan is more detailed.
The use of what type of specialist is significant in most engagements?
IT Specialist
When are related parties initially identified?
Audit Planning
What are the two types of Test of Details?
1) Substantive test of transactions
2) Test of Details of account balances and disclosure
Test to detect errors or fraud in individual transactions.
Substantive test of transactions
Substantive test that concentrate on the details of items contained in the account balance and disclosure
Test of Details
Audit procedures performed to test material misstatements in an account balance, transaction class, or disclosure component of the financial statements.
Substantive procedures
Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
Analytical procedures
Materiality allocated to a specific account.
Tolerable Misstatement
An auditor has withdrawn from an audit engagement of a public company after finding fraud that may materially affect the financial statements. The auditor set forth the reasons and findings in correspondence with who?
Audit committee of the board of directors
The auditor discuss the timing of the audit procedures with the client’s management during the initial planning phase of the audit (T/F)
True
Purchases from another corporation that is controlled by the corporations chief stockholder, Loan from the corporation to a major stockholder, and Sales of land to the corporation by the spouse of a director are referred to as what?
Related Party Transactions
The party in the entity to which the internal auditor reports is a matter of the internal auditor’s competence (T/F)
False
An small misstatement of an illegal payment to a foreign official that was not recorded with have a materiel effect on an entity’s financial statements (T/F)
True
A written understanding between the auditor and the client concerning the auditor’s responsibility for the discovery of illegal acts is usually set forth in what?
Engagement Letter
Types of Audit Test
- Risk Assessment
- Test of Controls
- Substantive Test
Two types of substantive Test
- Test of Details
2. Substantive Analytical Procedures
