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ACCO 360 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

what is the key to conducting a quality audit

A

assessing and managing risk

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2
Q

overall goal of a quality audit is

A

determine the risk of material misstatement for overall statements and specific assertions related to classes of transactions, balances and disclosures

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3
Q

the risk of material misstatement exists at two levels

A
  1. overall financial statement level

2. assertion level

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4
Q

def: risk of material misstatement at overall financial statement level

A

risk that relate pervasively to the financial statements as a whole and potentially affect many assertions

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5
Q

which factors can increase the likelihood of material misstatements (5)

A
  1. lack of integrity or competence
  2. weak entity level controls
  3. inadequate accounting systems and records
  4. declining economic conditions
  5. changes in industry
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6
Q

risk of material misstatement at assertion level has two components

A

inherent risk and control risk

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7
Q

inherent risk is higher for valuation assertion related to accounts that require

A

complex calculations or accounting estimates that involve significant estimates or judgement

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8
Q

control risk may be higher for valuation assertion if internal controls fail to have

A

independent review and verification of complex calculations or estimates

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9
Q

from the assessment of risk of material misstatement the auditor will develop

A
  1. an overall risk response

2. risk response at assertion level with tests of controls and substantive audit procedures for specific assertions

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10
Q

if the risk is pervasive the risk response strategy could be (4)

A
  1. assign more experienced staff
  2. heighten professional skepticism
  3. increase involvement of audit partners and managers
  4. closer supervision and review
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11
Q

during risk assessment process these procedures are done

A
  1. inquiries of management and others
  2. analytical procedures
  3. observation and inspection
  4. discussion among engagement team
  5. others
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12
Q

with inquiries of management and personnel it is important to

A

get perspectives of different levels of authority

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13
Q

inquiries of those in charge of governance is good for

A

oversight provided by BofD and others, important aspect of internal control

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14
Q

inquiries to internal audit personnel can provide

A

information about key risks to business (financial reporting, operations and compliance) + design and operating effectiveness of internal controls

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15
Q

analytical two purposes

A
  1. understand the business

2. assess client business risk

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16
Q

how does analytical purpose happen?

A

identify unusual amounts, ratios or trends that might reveal unusual transactions

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17
Q

analytical procedures include financial or non-financial information?

A

both

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18
Q

the information used in analytical procedures is aggregated so

A

provide only a broad indication about if a material misstatement exists

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19
Q

what kind of documents to inspect

A

purchase orders, invoices, receiving reports with disbursements

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20
Q

what kind of other risk assessment procedures

A

information from client acceptance evaluation like discussing with predecessor or background checks

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21
Q

risk assessment procedures provide sufficient appropriate audit evidence to form an audit opinion

A

false

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22
Q

in all risk assessment procedures the auditor must find

A

the significant risks that require special audit consideration

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23
Q

the auditor must consider as significant risks (6)

A
  1. risk of fraud
  2. risk related to recent key economic, accounting or other
  3. complexity of transaction
  4. significant related party transactions
  5. subjectivity in measurement of financial info
  6. non-routine transactions
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24
Q

estimation uncertainty is often related to

A

assumptions about future events, which are difficult to preduct

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25
Q

examples of estimates that can be significant risks

A

fair value accounting unique or material hedging

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26
Q

how can transactions be unusual or non-routine

A

either due to size or nature and infrequent

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27
Q

why are non-routine transaction a significant risk?

A

involve greater extent of management intervention, manual data collection and processing, complex calculations or unusual accounting principles not subject to effective internal controls

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28
Q

risk of not detecting a material misstatement due to fraud is ___ than error

A

higher

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29
Q

the consideration of risk of material misstatement due to fraud is made at

A

financial statement level and assertion level

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30
Q

elements of fraud risk assessment

A
  1. discuss with audit team members risk fraud
  2. inquiries to management
  3. evaluate unusual or unexpected relationships
  4. evaluate the risk for revenue fraud and management override and understand period-end
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31
Q

what items should the audit team discuss?

A
  1. how and where financial statements might be susceptible
  2. how mgmt could perpetuate or conceal fraud
  3. how anyone might misappropriate entity assets
  4. how auditor might respond
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32
Q

CAS 240 requires that auditor make specific inquiries about

A

fraud in every audit (management and employees)

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33
Q

two kinds of analytical procedures

A

horizontal analysis and vertical analysis

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34
Q

def: horizontal analysis

A

account balance compared to previous period and the % change in the account balances for period is calculated

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35
Q

def: vertical analysis

A

numbers are converted into % of sales for income statement and of total assets for balance sheet

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36
Q

3 conditions for fraud

A
  1. incentives or pressure
  2. opportunity
  3. attitude and rationalization
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37
Q

def: attitude or rationalization

A

an attitude, character or set of ethical values that allow employees to intentionally commit a crime or dishonest act

38
Q

examples of incentives/pressures (4)

A
  1. decline in company’s financials
  2. meet forecasts
  3. reputation
  4. wealth tied in options
39
Q

examples of opportunities for fraud

A
  1. industries with significant judgement and estimates

2. turnover in accounting personnel or other processes

40
Q

incentives/pressures for misappropriation of assets

A
  1. employees with financial pressures

2. dissatisfied ones

41
Q

how to prevent pressure on employees with financial problems?

A

credit check on employees with access to assets

42
Q

how to prevent pressure on employees who are dissatisfied?

A

dealing fairly and monitor employee morale

43
Q

the opportunity for asset misappropriation is bigger in

A

companies with accessible cash or inventory or other valuable assets
OR weak internal controls
OR small business or not for profit (less segregation)

44
Q

when risks are identified due to fraud the auditor must develop response on three levels

A
  1. overall response
  2. assertion level
  3. related to management override
45
Q

def: overall response

A

relate to adjustments to overall audit strategy

46
Q

examples of overall responses

A

more experienced personnel, increase professional skepticism, increase sensitivity

47
Q

because fraud perpetrators are often knowledgeable about audit procedures auditors should

A

incorporate unpredictability in the audit strategy

48
Q

examples of unpredictable strategy

A

visit locations or test accounts not tested before

49
Q

response at assertion level may lead to changing

A

the nature, timing and extent of audit procedure

50
Q

how would the nature be modified?

A

to obtain audit evidence that is more reliable and relevant

51
Q

how would timing be modified?

A

end of period instead of during

52
Q

how would extent be changed?

A

obtain more evidence in response to fraud risk at assertion level (increase sample size)

53
Q

examples of responses to management override

A
  1. journal entries and adjustments for evidence of misstatements
  2. review accounting estimates for biases
  3. business rationale for significant unusual transactions
54
Q

def: audit risk

A

risk that auditor will express an inappropriate audit opinion when financial statements are misstated

55
Q

def: audit risk model

A

tool to develop audit strategy at assertion level (planning purpose)

56
Q

detection risk formula

A

DR = AAR/IR * CR

57
Q

the auditor must assess audit risk at three levels

A
  1. financial statement
  2. account balance
  3. disclosure
58
Q

if things are good AAR can be

A

high

59
Q

if things are bad AAR should be

A

low

60
Q

the risk of material misstatement is a function of

A

detection risk

61
Q

def: detection risk

A

the risk that the audit evidence for an audit assertion will fail to detect misstatements exceeding performance materiality

62
Q

2 key points about DR

A
  1. determines the amount of substantive evidence needed

2. if DR reduced, auditor must accumulate more substantive evidence to get to reduced planned risk

63
Q

if a high likelihood of misstatement, inherent risk is

A

high

64
Q

when considering inherent risk we do not look at

A

internal controls

65
Q

inherent risk is inversely related to

A

planned detection risk

66
Q

inherent risk is directly related to

A

evidence

67
Q

auditor performs control risk assessment at two levels

A

financial statement level and assertion level

68
Q

the audit risk model shows there is a close relationships between

A

inherent risk and control risk

69
Q

combination of IR and CR is referred to as

A

risk of material misstatement

70
Q

relationship between control risk and detection risk is

A

inverse

71
Q

relationship between control risk and substantive evidence is

A

direct

72
Q

the auditor can increase planned DR if controls are

A

effective (low CR)

73
Q

if CR is low then the auditor will

A

rely on internal controls therefore tests of controls > substantive testing

74
Q

acceptable audit risk can also be referred to as

A

audit assurance

75
Q

def: audit assurance

A

opposite of AAR so 1-AAR = audit assurance

76
Q

factors that affect AAR

A
  1. degree reliance on statements by Users
  2. likelihood of Financial difficulties after report
  3. evaluation management Integrity
  4. new client
77
Q

if users place heavy reliance you can ___ AAR

A

decrease AAR

78
Q

3 factors that affect reliance of users on report

A
  1. client’s size
  2. distribution of ownership
  3. nature and amount of liabilities
79
Q

if change of financial failure or loss is high you can ____ AAR

A

decrease AAR

80
Q

factors to indicate of doubt about ability to continue as going concern

A
  1. liquidity position
  2. profit and losses in previous years
  3. method of financing growth
  4. nature of client’s ops
  5. competence of management
81
Q

factors about management integrity that can lead to lower AAR

A
  1. prior criminal conviction
  2. frequent disagreements with prior auditors
  3. frequent turnover of key financial and internal audit personnel
82
Q

to assess AAR the auditor will first consider factors related to

A

engagement risk

83
Q

def: engagement risk

A

risk that the auditor or audit firm will suffer harm after the audit is finished even if it is correct

84
Q

engagement risk is closely tied to

A

client business risk

85
Q

most important concepts in auditing is about

A

the inclusion of inherent risk in the audit risk model

86
Q

what does having IR in the model indicate?

A

auditors should attempt to predict where misstatements are most and least likely

87
Q

the assessment of inherent risk begins at

A

planning stage

88
Q

factors affecting inherent risk (14)

A
  1. nature of business
  2. results of previous audits
  3. related parties
  4. complex or non-routine transaction
  5. judgement required
  6. make up of population
  7. fraud risk
  8. management motivation and bias
  9. initial vs. repeat engagement
  10. accounting staff competency
  11. asset susceptible to theft
  12. change in tech and org
  13. economic conditions
  14. doubts about integrity
89
Q

how do auditors respond to risk?

A

changing the nature and extent of testing and type of audit procedures + more experienced staff + reviewed more carefully

90
Q

two factors to assess control risk

A
  1. quality of corporate governance processes

2. effectiveness of internal control procedures

91
Q

risk is a measure of _____ where materiality is a measure of _____

A

uncertainty and magnitude/size

ACCO 360 (11 decks)

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