Engagement Planning, Understanding Clients, and Assessing Risks - Wiley Flashcards

1
Q

What are the categories of assertions on financial statements?

A
  1. Account balances
  2. Classes of transactions
  3. Disclosures
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2
Q

What are the types of financial statement assertions?

A
  1. Completeness
  2. Existence
  3. Rights and Obligations
  4. Valuation and Allocation
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3
Q

When the acceptable level of detection risk decreases, what may an auditor do?

A

Postpone the planned timing of substantive tests from interim dates to the year-end (Timing)
Also, use of more effective substantive tests (Nature) and increasing the extent of the tests (Extent)

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4
Q

When the level of detection risk decreases, what is the result?

A

Assurance from substantive tests should increase.

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5
Q

Which audit risk components may be assessed in nonquantitative terms?

A

All 3, control, detection, and inherent risks (i.e. range of risk from minimum to maximum)
Also, all 3 can be stated quantitatively. (i.e. percentage)

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6
Q

How do inherent and control risk differ from detection risk?

A

They are a function of management, not under the auditor’s control, and exist independently of the financial statement audit.

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7
Q

What would most likely be used to make determinations about materiality?

A

Anything that is annualized, since materiality mostly references annual amounts (i.e. net income)
NOTE: anticipated sample size of a planned substantive test is determined by materiality, NOT vice versa.

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8
Q

What is the mathematical relationship between control risk and detection risk ?

A

Inverse

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9
Q

What is an audit risk and what is its function?

A

It’s the risk that the auditor will issue inappropriate opinions when FSs are misstated.
It is the function of the risks of material misstatement and detection risk.

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10
Q

What is performance materiality and how does it compare to financial statement materiality?

A

Performance materiality is assurance that several immaterial amounts don’t combine to a material, undetected misstatement. It is ordinarily less than FS materiality.

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11
Q

A decrease in the amount of tolerable misstatement in a class of transactions causes an auditor to do what?

A
  1. Perform planned auditing procedure closer to the balance sheet date,
  2. Select more effective auditing procedures or
  3. increase the extent of a particular procedure.
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12
Q

What are auditors EXPLICITLY required to asses in regards to material misstatement?

A

Existence of fraud.

Note: auditor must also look for errors and illegal acts, but those are implicit, NOT explicit)

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13
Q

What are factors that would indicate an increased risk of misstatement due to fraud?

A

Examples include: 1) Failure to timely correct known significant deficiency, 2) Nonfinancial management being preoccupied w/selection of accounting principles, 3) Significant portion of management’s compensation represented by bonuses based upon achieving unduly aggressive operating results, 4) Use of unusually aggressive accounting practices.

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