Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Audit Test 2 > Chapter 8 Slides > Flashcards

Chapter 8 Slides Flashcards

1
Q

Four phases of an audit

A

Phase 1: Plan and design audit approach
Phase 2: Perform tests of controls and substantive tests of transactions
Phase 3: Perform substantive analytical procedures and tests of details of balances
Phase 4: Complete the audit and issue an audit report

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

8 steps of planning an audit and designing an audit approach

A
  1. accept client and perform initial audit planning
  2. understand client’s business and industry
  3. perform preliminary analytical procedures
  4. set preliminary judgment of materiality and performance materiality
  5. identify significant risks due to fraud or error
  6. assess inherent risk
  7. understand internal control and assess control risk
  8. finalize overall audit strategy and audit plan
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

3 main reasons the auditor should properly plan the audit engagement

A
  1. enable auditor to obtain sufficient appropriate evidence for the circumstances
  2. help keep audit costs reasonable
  3. avoid misunderstandings with the client
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

3 risk terms relevant to audit planning

A
  1. AAR
  2. CBR
  3. RoMM
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

acceptable audit risk is

A

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 unmodified opinion has been issued

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Lower AAR requires

A

more certainty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Zero AAR means

A

absolute certainty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

100% AAR means

A

complete uncertainty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Lower AAR may require 3 things

A
  1. more testing (lower materiality)
  2. different procedures
  3. more experienced auditors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Higher risk leads to

A

more testing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

inadequate internal controls lead to 2 things

A
  1. more testing
  2. higher risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

testing work (size of samples selected and extensive inquiries and analysis) is always in correlation to two things

A

ability to rely on IC
risk assessed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

client business risk

A

the risk that the entity fails to achieve its objectives or execute its strategies due to changes in industry, regulations, economic conditions, or aggressive firm goals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

higher client risk leads to

A
  1. more testing
  2. lower materiality
  3. different procedures
  4. more experienced auditors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

risk of material misstatement is

A

the risk that the FS contain a material misstatement due to fraud or error PRIOR to the audit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

risk of material misstatement depends on

A

effectiveness of IC, client business risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

higher risk of material misstatement leads to

A
  1. more testing
  2. lower materiality
  3. different procedures
  4. experienced auditors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

5 reasons to refuse new clients

A
  1. startup firm
  2. lack of industry expertise
  3. publicly traded
  4. high-risk industry (changing rapidly = software)
  5. shortage of personnel
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

this is required when an auditor takes on a new client

A

communication with predecessor auditor (predecessor must obtain permission to break confidentiality)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

6 reasons an auditor may refuse continuing clients

A
  1. conflicts with management
  2. unpaid fees
  3. integrity of client
  4. excessive risk
  5. regulatory issue
  6. going concern issue
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

purpose of communicating with predecessor auditor

A

to determine if client lacks integrity or if there were disputes about accounting principles

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

6 aspects in planning an audit

A
  1. identify client’s reasons for audit
  2. obtain an understanding with the client
  3. related party transactions
  4. management and governance
  5. code of ethics
  6. minutes of meetings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

risk factors associated with the client’s reasons for an audit include

A
  1. likely statement users
  2. intended uses of statements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

The auditor needs to establish a firm understanding of the terms of the engagement with the client. Thus, auditing standards require…

A

an engagement letter which includes the engagement’s objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
related party transactions between related people/company are intertwined and thus
increase audit work
26
the auditor needs to assess management's __ and __ __ and its ability to __ and __ __ __.
management's philosophy and operating style and its ability to identify and respond to risk
27
governance includes...
the organizational structure as well as operations of the board of directors and the audit committee
28
Public companies must disclose whether they have adopted a __ _ __ that applies to senior management. If they do, auditors should have an understanding of it, and should investigate any changes.
code of ethics
29
the official record of the meetings of the board of directors, which include key authorizations and summaries of important topics discussed; the auditor should read them to identify matters relevant to the audit
minutes of meetings
30
8 parts of understanding the client's business and industry
1. industry and external environment 2. business operations and processes 3. management and governance 4. objectives and strategies 5. measurement and performance 6. tour facilities 7. related parties 8. minutes of meetings
31
2 purposes of preliminary analytical procedures
1. gain an understanding 2. identify risks
32
2 types of preliminary analytical procedures
1. common-size financials (using YoY comparisons or to competitors or industry) 2. key financial ratios (compare to prior years, to industry, benchmarks)
33
four types of ratios used in preliminary analytical procedures
1. liquidity 2. leverage 3. activity 4. profitability
34
2 types of materiality
1. preliminary judgment about materiality (FS as a whole) 2. performance materiality (Trx, BS, Disclosures)
35
performance materiality is set at what % of overall materiality
50-75%
36
which accounts do we allocate performance materiality to? why?
balance sheet accounts income statement misstatements will affect the balance sheet as well due to double entry accounting
37
benchmark for evaluating materiality in for-profit entities
net income
38
benchmark for evaluating materiality in nonprofit entities
net assets or total donations (sales)
39
auditor's responsibilities
identify and assess the risk of material misstatement due to fraud or error based on the understanding of organization/entity's environment and internal controls
40
auditor needs to understand the entity's __ and __ to identify and assess the risk of material misstatement
1. environment 2. internal controls
41
why auditor needs to understand industry and external environment
1. risks for specific industries may affect auditor's assessment of client business risk 2. many risks are common to all clients in certain industries 3. many industries have unique accounting req. that need to be understood to evaluate FS
42
materiality is
the magnitude of misstatements that individually or when aggregated could reasonably be expected to influence the economic decisions of users made on the basis of the FS (relative, not absolute concept)
43
5 steps to applying materiality (only first two are part of planning extent of tests; last 3 evaluating results)
1. set materiality for FS as a whole 2. determine performance materiality 3. estimate total misstatement in segment 4. estimate combined misstatement 5. compare combined estimate with preliminary or revised judgment about materiality
44
steps of materiality for audit planning
1. FS as a whole 2. performance (segments of audit)
45
3 segments of audit to which performance materiality must be applied
transactions, account balances, disclosures
46
when is preliminary judgment of materiality established?
when planning--before final field work
47
3 factors affecting preliminary materiality judgment
1. materiality is a relative rather than absolute concept 2. benchmarks are needed for evaluating materiality 3. qualitative factors also affect materiality
48
preliminary judgment about materiality may change because...
preliminary financials are now final, new circumstances arise
49
the maximum amount financials could be misstated by
preliminary judgment about materiality
50
the lower the dollar amount of prelim. materiality,
the more evidence is required
51
materiality is typically what percent of NIBT for for-profit companies
3-6% (depends on auditor judgment and firm's guidelines
52
sum of all performance materiality cannot exceed __ overall materiality
2x (ultimately depends on auditor judgment and firm guidelines)
53
performance materiality, aka (2)
1. allocation of preliminary judgment 2. tolerable misstatement (PCAOB)
54
3 major difficulties when allocating materiality to balance sheet accounts
1. auditors expect certain accounts to have more misstatements than others 2. both overstatements and understatements must be considered 3. relative audit costs affect the allocation
55
auditor's overall/top concern with the FS
net income
56
Why is net income so important?
affects EPS, stock price, dividends, recover acquisition price
57
directionally, what are auditor's focused on in FS (for different accounts)? Why?
1. overstatement of assets and revenue 2. understatement of liabilities and expenses (net income is affected)
58
why do we allow the sum of performance materiality to exceed preliminary materiality?
1. don't expect all accounts to be misstated by fully allocated materiality 2. over and understatements should net to less than the preliminary
59
Why do we allocate materiality when planning the audit? (3)
1. determine amount of evidence to accumulate for each account 2. minimize audit costs without sacrificing audit quality 3. regardless of allocation accuracy, at the end of the audit, auditor must be confident that combined misstatements in all accounts are less than or equal to the preliminary judgment about materiality
60
two types of misstatements to compare to the materiality amount at the end of the audit
1. known misstatements 2. likely misstatements
61
known misstatements are __ and __
quantifiable and verifiable
62
likely misstatements are __, but __ or __ __
quantifiable, but judgmental or not verifiable
63
2 types of likely misstatements
1. differences between management and auditor's interpretations 2. sampling results extrapolated total population

Audit Test 2 (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions