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ACC-420 > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued

A

Acceptable Audit Risk

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2
Q

Overall approach to the audit that considers the nature of the client, risk of significant misstatements. And other factors such as the number of client locations and past effectiveness of client controls

A

Audit Strategy

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3
Q

Written records of the clients expectations for the period; a comparison of budgets with actual results may indicate whether or not misstatements are likely

A

Budgets

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4
Q

The risk that the client will fail to achieve its objectives related to (1) reliability of financial reporting (2) effectiveness and efficiency of operation and (3) compliance with laws and regulations

A

Client Business Risk

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5
Q

The official record of the meetings of a corporation’s board of directors and stockholders, in which corporate issues such as the declaration of dividends and the approval of contracts are documented

A

Corporate Minutes

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6
Q

An agreement between the CPA firm and the client as to the terms of the engagement for the conduct of the audit and related services

A

Engagement Letter

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7
Q

A measure of the auditor’s likelihood that there are material misstatements in a segment before considering the effectiveness of internal control

A

Inherent Risk

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8
Q

Involves deciding whether to accept or continue doing the audit for the client, identifying the client’s reasons for the audit, obtaining an engagement letter, and developing an audit strategy

A

Initial Audit Planning

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9
Q

Affiliated company, principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other

A

Related Party

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10
Q

Any transaction between the client and a related party

A

Related Party Transaction

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11
Q

BLANK is required by auditing standards to communicate with BLANK

A

New and old auditor

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12
Q

The predecessor auditor must receive what from the client before communicating with the new auditor

A

permission

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13
Q

Financial reporting frameworks are

A

GAAP and IFRS

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14
Q

Investigating new clients and reevaluating existing ones is an essential part of deciding BLANK

A

Acceptable audit risk

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15
Q

BLANK signs the engagement letter for public companies and BLANK for private

A

Audit Committee and management

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16
Q

The risk that a client will fail to meet its objectives

A

Client Business Risk

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17
Q

Three primary reasons for obtaining a good understanding of the client’s industry

A

Risks associated with specific industries, aids auditor in knowing inherent risks of the industry, and helps auditor learn unique accounting requirements of that business

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18
Q

Transactions with BLANK are important to auditors because accounting standards require that they be disclosed in financial statements if they are material

A

Related Parties

19
Q

Related parties must be included in the BLANK files

A

Permanent

20
Q

Auditors should understand a client’s objectives related to

A

Reliability of financial reporting, effectiveness and efficiency of operations, and compliance with laws and regulations

21
Q

Remaining risk after considering the effectiveness of top management controls is called

A

Residual Risk

22
Q

The primary source for identifying client business risk

A

Management

23
Q

Auditors compare client data with

A

Industry data, similar prior- period data, client-determined expected results, auditor determined expected results, and expected results using nonfinancial data

24
Q

Two shortcomings of comparing with previous years

A

Does not include growth or decline in business activity and relationships of data to other data are ignored

25
Q

What overcomes both shortcomings of comparing with previous years

A

Ratio and percentage relationships

26
Q

Two concerns with budgets

A

Evaluating if the budget plans were realistic and that current financial information was changed by client personnel to conform to the budget

27
Q

Short-Term Debt-Paying Ability Ratios

A

Cash Ratio, Quick Ratio, and Current Ratio

28
Q

Cash Ratio

A

Cash+Marketable Securities / Current Liabilities

29
Q

Quick Ratio

A

Cash+Marketable Securities+Net Acc Rec / Current Liabilities

30
Q

Current Ratio

A

Current Assets / Current Liabilities

31
Q

Liquidity Activity Ratios

A

Acc Rec Turnover, Days to Collect Rec, Inventory Turnover, and Days to Sell Inventory

32
Q

Accounts Receivable Turnover

A

Net Sales / Average Gross Receivables

33
Q

Days to Collect Receivables

A

365 Days / Accounts Receivable Turnover

34
Q

Inventory Turnover

A

Cost of Goods Sold / Average Inventory

35
Q

Days to Sell Inventory

A

365 Days / Inventory Turnover

36
Q

Ability to Meet Long-Term Debt Obligations Ratios

A

Debt to Equity and Times Interest Earned

37
Q

Debt to Equity

A

Total Liabilities / Total Equity

38
Q

Times Interest Earned

A

Operating Income / Interest Expense

39
Q

Profitability Ratios

A

Earnings Per Share, Gross Profit Percent, Profit Margin, Return on Assets, and Return on Common Equity

40
Q

Earnings Per Share

A

Net Income / average common shares outstanding

41
Q

Gross Profit Percentage

A

Net Sales-Cost of Goods Sold / Net Sales

42
Q

Profit Margin

A

Operating Income / Net Sales

43
Q

Return on Assets

A

Income before taxes / Average total assets

44
Q

Return on Common Equity

A

Income before taxes-preferred dividends / average stockholders’ equity

ACC-420 (16 decks)

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