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ACCT 4303 Auditing > Chapter 3 Class > Flashcards

Chapter 3 Class Flashcards

1
Q

what are 3 risk management activities public firms do before beginning an audit engagement?

A
  1. perform procedures regarding the acceptance or continuance of the audit client relationship
  2. determine compliance with independence and ethics requirements
  3. reach a contractual understanding
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2
Q

from the auditing firm’s perspective, the acceptance/continuance of client relationships is focused on:

A

managing risks

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3
Q

how do auditing standards require a new firm obtain basic information about their cilent?

A

a prospective auditor must reach out to the previous auditor to attempt to gain information and potential issues about their client

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4
Q

what is required of all senior managers and members of the audit committee while obtaining engagement?

A

criminal background checks

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5
Q

client must _______ _________ before a new auditing firm can reach out to their old auditing firm

A

grant approval

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6
Q

what will a new firm ask the client’s old auditing firm about?

A
  • management’s integrity
  • disagreement with management about accounting principles, audit procedures, etc.
  • reason for a change in auditors
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7
Q

what form must a company file when it changes auditors?

A

Form 8-K with the SEC

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8
Q

when must an auditing firm review their continuing relationship with a client?

A

annually or when a significant event occurs with the client (change in management directors, mergers, litigation, etc.)

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9
Q

auditors must be independent in ______________ and __________

A

appearance and fact

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10
Q

engagement letter

A

a written letter documenting the auditor’s understanding with each client
- acts as a contract, prepared for each individual audit

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11
Q

5 elements of the engagement letter

A
  1. the objective of the engagement (to express an opinion)
  2. management’s responsibilities
  3. auditor’s responsibilities
  4. any limitations of the engagement
  5. any other matters the auditor wishes to include (detailed is better)
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12
Q

4 elements a termination letter addresses:

A
  1. access to audit documentation by successor auditors
  2. re-issuance of the report when required for comparative financial reporting
  3. fee arrangements for future services
  4. understanding the circumstances of termination
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13
Q

5 steps of the audit plan

A
  1. obtain engagement
  2. engagement planning
  3. risk assessment
  4. audit evidence
  5. reporting
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14
Q

audit plan

A

a comprehensive list of procedures the audit team needs to gather sufficient and appropriate evidence on which to base their opinion of the financial statements

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15
Q

2 steps the auditor is required to do in engagement planning:

A
  1. develop and document a plan that describes the nature, timing, and extent of audit procedures
  2. plan the nature, timing, and extent of control tests and substantive tests performed
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16
Q

3 factors influencing the work completed during planning:

A
  1. client’s size, industry, complexity
  2. auditor’s prior experience with the client
  3. client’s IT system
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17
Q

3 main goals of audit planning:

A
  1. make sure the audit will be properly staffed
  2. determine materiality
  3. outline the specific audit procedures
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18
Q

the audit plan will identify:

A
  • each of the relevant financial statement assertions for each significant account/disclosure
  • the combination of control and substantive testing for each assertion
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19
Q

what serves as audit documentation?

A

the auditor’s sign-off when each step in the audit plan is completed

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20
Q

3 elements of a sign off

A
  • date
  • initials
  • work paper reference
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21
Q

which staff personnel is specifically required in public audits?

A

quality assurance (“concurring” partner

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22
Q

who has final responsibility for the audit?

A

the audit partner

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23
Q

who does the audit team typically consist of?

A
  • partner
  • manager
  • IT auditor
  • tax specialist
  • concurring partner
  • other audit staff
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24
Q

internal auditors should be _______ but cannot be ________

A

objective; independent

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25
Q

IT auditor

A

a member of the audit team with special training to evaluate computerized controls and processes

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26
Q

planning meetings should include:
and focus on:

A

all team members
financial statement accounts with the highest risk of material misstatement

27
Q

external auditors assess internal auditors’ _________ and ___________

A

objectivity and competence

28
Q

how is internal auditors’ competence determined?

A

education, experience, certifications

29
Q

what can internal auditors help with?

A

SOME substantive testing. they cannot make any decisions or judgements

30
Q

interim audit work

A

procedures performed several weeks or months before the financial statement date

31
Q

year-end audit work

A

procedures performed shortly before and after the financial statement date

32
Q

time budgets include:

A
  • areas of the engagement
  • expected number of hours to be spent on each area
33
Q

materiality must be expressed as a:

A

specified amount

34
Q

materiality is a matter of:

A

professional judgement

35
Q

performance materiality

A
  • an amount less than materiality for the financial statements as a whole
  • used to make sure the aggregate of uncorrected misstatements does not exceed materiality as a whole
36
Q

performance materiality is often referred to as

A

tolerable misstatement

37
Q

typical materiality percentages are:

A
  • 3-5% of profit before tax
  • 1-2% of revenue or total assets
38
Q

Materiality Qualitative Factor: Nature of item or issue

A

consider illegal acts; errors in the more liquid assets are considered more important

39
Q

Materiality Qualitative Factor: Engagement circumstances

A

consider legal liability; items that turn a net loss into a net income; items surrounded by uncertainty

40
Q

Materiality Qualitative Factor: Possible cumulative effects

A

auditors must evaluate the aggregate sum of known or potential misstatements

41
Q

3 purposes of audit procedures

A
  1. to gain an understanding of the client and its risks
  2. to test the operating effectiveness of internal controls
  3. to produce evidence about management’s assertions
42
Q

2 ways to conduct substantive tests

A
  1. analytical procedures
  2. test of details
43
Q

analytical procedures are more __________, while tests of details are more __________

A

efficient, effective

44
Q

8 general audit procedures to gather evidence:

A
  1. inspection of records and documents
  2. inspection of tangible assets
  3. observation
  4. inquiry
  5. confirmation
  6. recalculation
  7. re-performance
  8. analytical procedures
45
Q

internal evidence

A

documents prepared by the client

46
Q

inspection of records and documents

A

examine authoritative documents prepared by independent parties and by the client

47
Q

reliability of documents depends on their ______ and _______

A

nature and source

48
Q

vouching

A

an auditor selects an item from the financial records and follows it back through the processing steps to its origin

49
Q

tracing

A

an auditor selects a source document and follows its processing patch forward to the financial statements

50
Q

assertion related to vouching

A

existence/occurrence

51
Q

assertion related to tracing

A

completeness

52
Q

scanning

A

scanning financial records to find unusual items or events

53
Q

inspection of tangible assets

A

examining PPE, inventory, securities certificates

54
Q

assertions related to inspection of tangible assets

A

existence, valuation

55
Q

observation

A

observing client personnel performing their procedures and control activities

56
Q

inquiry

A

collection of verbal evidence from independent parties and management

57
Q

confirmation

A

letters printed on the client’s letterhead and signed by the client. seeks out info the client can supply

58
Q

2 main types of confirmations

A
  1. banks (cash and loan balance)
  2. customers (receivables)
59
Q

assertions related to recalculations

A

existence, valuation

60
Q

analytical procedures are required during _____ and __________

A

planning and final review

61
Q

audit documentation

A

the written record for the basis for the auditors’ conclusions that provides the support for the auditors’ representations

62
Q

Lead Schedule

A

a summary of the accounts or components in an account group

63
Q

audit standards require that documentation show:

A
  1. the client’s accounting records agree or reconcile with the financial statements
  2. the work was adequately planned and supervised
  3. a sufficient understanding of the client’s internal control was obtained
  4. sufficient appropriate audit evidence was obtained as a reasonable basis for an audit opinion

ACCT 4303 Auditing (21 decks)

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