Deck 2 Flashcards
Why does confirmation of customers’ A/R rarely provide reliable evidence about the completeness assertion?
The completeness assertion states that all transactions that should be recorded have been recorded. A/R confirmations rarely provide evidence about completeness since recipients of the confirmations have a vested interest in not reporting understatements (transactions that have not been recorded)
When developing an audit strategy for an existing client, the auditor may determine a materiality level for all the following:
The level of materiality for:
- the client’s financial statements
- performance materiality
- certain account balances, transactions, and disclosures
What is the interrelationship between a financial statement audit and an audit of internal control for nonissuers?
If, during the audit of internal control, a deficiency is noted the auditor should consider any deficiency in determining the nature, timing, and extent of substantive tests in the financial statemen audit
What are the elements of a CPA firm’s quality control policies and procedures applicable to the firm’s auditing practice?
The elements of a CPA firm’s quality control are (HELP ME):
- Human Resources
- Engagement/Client acceptance and continuance
- Leadership Responsibilities
- Performance of the engagement
- Monitoring
- Ethical Requirements
What is the concept of materiality?
Information is material if there is a substantial likelihood that the information would be viewed by a reasonable investor as having significantly altered the total mix of available information
If auditor reads the annual report from client, which includes the audited financial statements, and discovers both a material inconsistency and a material misstatement of fact. How should the auditor respond?
The auditor should request that the annual report be revised to eliminate both the material inconsistency and the material misstatement of fact.
Can a firm that does not have adequate system of quality control still comply with professional standards on a specific engagement?
Yes, even a firm that has inadequate quality control procedures may still have compiled with professional standards on any given engagement.
What are some of the auditor’s procedures with respect to fair value?
- auditor should obtain management representations relating to intent and ability to carry out planned courses of action.
- Auditor should evaluate the appropriateness of the valuation model used by management
- Auditor may develop an independent fair value estimates to help corroborate management’s estimate
What is the first course of action if the auditor becomes aware of a material departure from GAAP?
The auditor should recommend revising the financial statements to conform to GAAP. If the client does not want to revise the F/S, then the auditor might consider modifying the report, or, if modification is inadequate, withdrawing from the engagement.
What requires modification of the accountant’s report on a review of interim financial information of a publicly held entity on the basis of GAAP?
Departures from GAAP (including inadequate disclosure) require modification of the review report.
Once a client does further testing of the client’s internal controls led the auditor to reduce the assessment of control risk. What will likely occur?
Lower control risk reduces the total risk of material misstatement. When the risk of material misstatement (RMM) decreases, the auditor may choose to reduce the amount of substantive procedures performed, although substantive procedures cannot be eliminated entirely.
What type of relationship does sample size have with population variability and desired risk of incorrect acceptance?
- There is a direct relationship between population variability and sample size so an increase in variability results in an increase in sample size.
- There is a inverse relationship between desired risk of incorrect acceptance and sample size so a decrease in the desired risk of incorrect acceptance will result in an increase sample size.
What sequence of events an auditor might follow in considering internal control?
An auditor may choose to perform tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.
What happens if control risk has increased in the current period as compared to the previous period?
An increase in control risk increases the risk of material misstatement and requires corresponding decrease in detection risk to maintain the same low level of overall audit risk. Detection risk is reduced by using more (or more effective) substantive testing.
Why would the auditor choose to apply substantive tests to balance sheet accounts at an interim period?
Applying substantive tests at the interim increases the detection risk, but this may be acceptable when the risk of material misstatement (comprised of inherent risk and control is risk ) is low.
List the hierarchy of audit evidence
- Auditor’s direct personal knowledge (auditor’s physical inspection of documents)
- External evidence received by auditor (ie. A/R confirmation
- External evidence received and held by a client. (bank statement)
- Oral evidence ( oral statement from client)
Before accepting an engagement for a new client, an auditor is required to:
An auditor must attempt to communicate with the predecessor auditor. Inquiry is important because the predecessor auditor may provide information critical to the acceptance decision. Under the Rules of the Code of Professional Conduct, the auditor must first request the client’s permission.
To note although the auditor is required to obtain an understanding of the entity and its environment, including internal controls, this typically happens after the engagement is accepted, not before
What is a scatter plot?
Scatter plot allows for the auditor to graphically show the relationship among variables.
