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Auditing 1 > Exam 1 (1-4) > Flashcards

Exam 1 (1-4) Flashcards

1
Q

Most defining case of corporate fraud in US history

A

Enron

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2
Q

Industries Enron was a part of

A

Oil and gas

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3
Q

Auditor of Enron

A

Arthur Anderson & Company

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4
Q

Two things Enron is a great example of

A

What happens when companies cannot govern themselves, what happens when the independent auditor is not independent

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5
Q

5 burdensome legislations created because of Enron

A
  1. Sarbanes-Oxley Act of 2002
  2. Creation of the PCAOB
  3. New rules by the DOJ on criminal misconduct by corporations
  4. SEC whistleblower protection/reward program
  5. New rules on auditor independence - prohibited services
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6
Q

PCAOB

A

The auditor of the auditors

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7
Q

7 services prohibited to assure auditor independence due to Enron

A

Bookkeeping, appraisal/valuation, legal services, tax services, financial system design/implementation, internal audit outsourcing, management functions / HR / broker services

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8
Q

Things a business integrity (BI) office and chief compliance officer help do

A

Set the tone for ethical behavior, provides avenue for folks to report their concerns, needs to be well publicized, 3rd party handled, added to annual audit plan

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9
Q

Balance sheet approach

A

A particularly straight-forward and user-friendly way to address the risk-assessment based approach to auditing required by both US and international auditing standards

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10
Q

International auditing standards require an in-depth understanding of

A

The audited company and its environment, a rigorous assessment of the risks of where and how the financial statements could be materially misstated and an improved linkage between the auditors’ assessed risks and the particulars of audit procedures performed in response to those risks

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11
Q

Least level of effort

A

Assurance

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12
Q

Medium level of effort

A

Attestation

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13
Q

Highest level of effort

A

Audit

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14
Q

Assurance

A

Risk advisory, IT system reliability, web site security

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15
Q

Attestation

A

Agreed upon procedures review, reporting on financial forecasts

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16
Q

Audit

A

Financial statements, internal controls over financial reporting, compliance, forensic

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17
Q

2 examples of non-assurance services

A

Tax services and management consulting services

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18
Q

A CPA does what with tax and management consulting services

A

Creates documentation on behalf of the company

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19
Q

An assurance service

A

CPA is taking company data or looking at established procedures/policies and performing analytical procedures to offer an opinion on the adequacy of such items

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20
Q

Attest engagement

A

A practitioner (CPA) is engaged to issue an examination report, a review report or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g. management)

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21
Q

Level of assurance provided in an examination

A

High (“reasonable”)

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22
Q

Level of assurance provided in a review

A

Limited

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23
Q

Level of assurance provided in agreed-upon procedures

A

Summary of findings

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24
Q

Risk of material misstatement in an examination

A

Low

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25
Q

Risk of material misstatement in a review

A

Not defined in stabdards

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26
Q

Risk of material misstatement in agreed-upon procedures

A

Varies by specific engagement

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27
Q

Nature of assurance in an examination

A

“In our opinion…”

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28
Q

Nature of assurance in a review

A

“We are not aware of any material modifications that should be made…”

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29
Q

Nature of assurance in agreed-upon procedures

A

Includes a summary of procedures followed and findings

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30
Q

Examination

A

Referred to as an audit when the subject matter is historical financial statements

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31
Q

Procedures for an examination

A

Select from all available procedures any combination that can limit Attestation risk to a low level

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32
Q

Procedures for a review

A

Generally limited to inquiry and analytical procedures

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33
Q

Procedures for agreed-upon procedures

A

Procedures agreed upon with the specified user or users

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34
Q

Suitable criteria

A

Standards established or developed by groups of experts

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35
Q

Examples of suitable criteria

A

Internal control audit - standards established by a committee of experts on internal control, financial statement audit - standards are GAAP

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36
Q

Financial statement audit suitable criteria

A

Applicable financial reporting framework

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37
Q

Financial statement audit

A

Auditors gather evidence and provide a high level of assurance that these follow GAAP or some other appropriate basis or accounting

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38
Q

Financial statement audit involves

A

Searching and verifying accounting records and examining other documents

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39
Q

Audit evidence

A

This focuses on whether financial statements are presented in accordance with GAAP

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40
Q

Examples of audit evidence

A

Balance sheet contains all liabilities, sales really occurred, sales have been recorded at appropriate amounts, recorded costs and expenses are applicable to period, all expenses have been recognized, financial statement amount are accurate, properly classified and summarized, notes are informative and complete

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41
Q

History of the attest function

A

Went from detection of fraud to determination of fairness

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42
Q

What creates the demand for audits

A

Lend credibility to information by reducing information risk; the risk that information is materially misstated

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43
Q

Financial statement misstatements arise due to

A

Accidental errors, lack of knowledge of accounting principles, unintentional bias, deliberate falsification

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44
Q

Audits do not directly address

A

Business risk

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45
Q

Financial statement users

A

Management, investors, bankers, creditors, financial analysts, government agencies (external)

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46
Q

Compliance audits

A

IRS audit of income tax return

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47
Q

Operational audits

A

Effectiveness of operations of receiving department of a manufacturing company

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48
Q

Integrated audits (SOX)

A

Assurance on both the financial statements and effectiveness of internal control over financial reporting (ICFR)

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49
Q

Audit type of most publicly traded companies

A

Integrated audit

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50
Q

Other types of auditors

A

Internal, government accountability office, state and other government, tax (IRS)

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51
Q

Internal auditors

A

Employee by a company as an employee

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52
Q

Internal auditors often

A

Perform operational and compliance audits, address internal control, report directly to the audit committee of the board of directors and indirectly to the president, ceo, or cfo

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53
Q

Organization of internal auditors

A

The institute of internal auditors

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54
Q

Government accountability office auditors (GAO auditors)

A

Headed by the comptroller general, responsibility for supporting congress

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55
Q

Government accountability office auditors perform

A

Compliance, operational and financial audits of government agencies, examinations of corporations holding government contracts to verify contract payments have been appropriate

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56
Q

Tax auditors

A

Responsible for enforcement of tax laws of various sorts (e.g., state and federal income taxes, property taxes, sales taxes), perform compliance audits of income tax returns

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57
Q

AICPA’s traditional role

A

Establish standards, research and publication, continuing professional education, self-regulation (mostly for private companies)

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58
Q

AICPA Auditing Standards Board (ASB)

A

Issues official pronouncements on auditing matters for non public companies (“non-issuers), statements on auditing standards (SASs), statements on standards for Attestation engagements (SSAEs)

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59
Q

Statements on standards for Attestation engagements (SSAEs)

A

Guidance for attesting to information other than financial statements such as financial forecasts

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60
Q

Accounting and review services committee

A

Statements on data data for accounting and review services (SSARS), standards for compilations or reviews not audits of financial statements

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61
Q

Regulations of individual CPAs

A

Code of professional conduct - ethical rules for CPAs, requirements for regular membership in AICPA

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62
Q

Regulation of public accounting firms

A

Peer review just follows AICPA peer review program

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63
Q

CPA examination

A

Uniform national examination prepared and graded by the AICPA, computerized exam includes multiple choice and simulations in four parts (changing significantly in 2024)

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64
Q

4 parts of CPA exam

A

Auditing and Attestation, financial accounting and regulation (aka “FAR”), regulation, business environment & concepts

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65
Q

FASB (financial accounting standards board)

A

Sets GAAP for entities other than federal state and local governments

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66
Q

GASB (governmental accounting standards board)

A

Standards of financial accounting for state and local government entities

67
Q

FASAB (federal accounting standards advisory board)

A

Accounting standards for the US government

68
Q

IFAC (international federation of accountants)

A

Sets international accounting standards

69
Q

PCAOB role

A

Adopt auditing, Attestation, quality control, ethics and independence standards relating to the preparation of audit reports for SEC registrants, oversee and discipline CPAs and CPA firms that audit public companies

70
Q

Securities and exchange commission (SEC)

A

Agency of the US government, oversight responsibility for the PCAOB

71
Q

Objectives of the SEC

A

Protect investors and public by requiring full disclosure of financial statement information by companies offering securities for sale to the public, prevent misrepresentation, deceit or other fraud in the sale of securities

72
Q

Form S-1

A

Qualify securities for sales, contains audited financial statements, makes SEC major user of financial statements

73
Q

Regulation S-X

A

Lays out the form and content for publisher financial statements, covers non GAAP disclosures

74
Q

Types of professional services

A

Attestation and assurance - traditional auditing, tax, consulting - significant part of a CPA firms revenue, accounting, personal financial planning, litigation support, fraud investigation

75
Q

Categories of public accounting firms

A

Local, regional, national, big 4, alternative practice structures

76
Q

Purpose of an audit

A

Provide an opinion on financial statements are in accordance with the applicable financial reporting framework

77
Q

Premise of an audit

A

Management and those charged with governance has the responsibility to prepare financial statements in accordance with applicable financial reporting framework and provide auditor with needed information and unrestricted access to those in the entity

78
Q

Personal responsibility of the auditor

A

Appropriate competence and capabilities to perform audit in accordance with standards, including maintaining professional skepticism and exercising professional judgment throughout the audit

79
Q

Professional skepticism

A

A questioning mind and a critical assessment of audit evidence. Key to success as an auditor (internal or external)

80
Q

Auditor actions in performing the audit

A

Obtain reasonable assurance about whether financial statements are free from error or fraud

81
Q

Auditor is unable to obtain absolute assurance due to

A

Nature of financial reporting, nature of audit procedures, need to conduct audit within a reasonable period of time, cost involved to obtain absolute assurance

82
Q

Reporting the results of an audit

A

Express in a written report an opinion on findings (or statements that opinion cannot be expressed)

83
Q

3 GAAS General Standards (public)

A
  1. Adequate technical training and proficiency
  2. Independence in mental attitude is to be maintained
  3. Due professional care is to be exercised
84
Q

3 GAAS standards of field work (public)

A
  1. Auditor must adequately plan and properly supervise work
  2. Auditor must obtain a sufficient understanding of entity, and it’s environment, including internal control to assess risk of material misstatements and to design further audit procedures
  3. Auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion
85
Q

4 GAAS Standards of reporting (public)

A
  1. State whether the financial statements are presented in accordance with GAAP
  2. Identify circumstances in which such principles have not been consistently applied
  3. Informative disclosures are adequate unless otherwise stated in the report
  4. Report should clearly state the degree of responsibility assumed by the auditors by expressing an opinion or stating that one cannot be expressed & the reason therefore
86
Q

The 10 PCAOB generally accepted auditing standards

A

General standards:

  1. Technical training
  2. Independence
  3. Exercise due professional care

Standards of field work:

  1. Planned and properly supervised
  2. Internal control must be sufficiently understood
  3. Evidential matter must be obtained

Reporting standards

  1. Presented in accordance with GAAP
  2. Disclosures adequate unless otherwise stated
  3. Identify gaps in GAAP consistency
  4. Degree of auditor responsibility re opinion or contrary
87
Q

Unconditional responsibility

A

Auditor must comply with requirement in all cases where the requirement is relevant

88
Q

Words used to indicate unconditional responsibility

A

Must, shall, is required

89
Q

Presumptively mandatory responsibility

A

Auditor must comply with requirement in all cases in which the requirement is relevant, except in rare circumstances when the auditor makes a judgment that it is necessary to depart from the standard

90
Q

Words used to indicate presumptively mandatory responsibility

A

Should

91
Q

Responsibility to consider

A

Auditor should consider; whether the auditor follows depends on exercise or professional judgment in the circumstances

92
Q

Words used to indicate responsibility to consider

A

May, might, could

93
Q

Standard Auditors Report paragraph 1

A

Defines the auditor’s responsibility

94
Q

Standard auditors’ report paragraph 2

A

Defines how the auditor arrived at their opinikn

95
Q

Major differences between AICPA and PCAOB audit

A

PCAOB audits must provide an opinion on internal control

96
Q

Standard auditors report paragraph 3

A

Provides the auditor’s overall opinion on the financial statements

97
Q

Addressee of auditors reports

A

The board of directors and stockholders or the audit committee of the board

98
Q

5 types of auditors reports

A

Standard unmodified report, unmodified with emphasis of matter, qualified opinion, adverse opinion, disclaimer or opinion

99
Q

Standards unmodified report

A

Unqualified per PCAOB standards, financial statements follow GAAP and auditor does not add additional commentary for any issue

100
Q

Unmodified with emphasis of matter

A

Example: a lack of consistency in application of accounting principles such as a switch from FIFO to LIFO

101
Q

Qualified opinion

A

The “yes, but” opinion, everything was fine excerpt the auditor did not agree with the application of a particular accounting principle

102
Q

Adverse opinion

A

Total disaster, departure from GAAP so significant that financial statements as a whole are misleading

103
Q

Disclaimer of opinion

A

Disaster, unable to arrive at an opinion due to a very significant scope limitation (I.e. auditors have no opinion) since they either could not get access to the data or the data was so incomplete no opinion could be provided

104
Q

Six elements of quality control

A
  1. Leadership responsibilities for quality within the firm
  2. Relevant ethical requirements
  3. Acceptance and continuance of clients and engagements
  4. Human Resources
  5. Engagement performance
  6. Monitoring
105
Q

Leadership responsibilities for quality within the firm

A

Assigns staff with appropriate experience, ability and authority to oversee the QC efforts of the firm

106
Q

Relevant ethical requirements

A

Employees verify in writing at least annually that they are in compliance with the firms policies and procedures regarding independence

107
Q

Acceptance and continuance of clients and engagements

A

Will only accept clients for which the form knows they have the technical expertise to audit and will only accept firms after considering the integrity of the client

108
Q

Human Resources

A

Firm has procedures in place to recruit qualified individuals meeting the firms requirements for education, maturity, ethics and leadership

109
Q

Engagement performance

A

Procedures are in place to monitor the progress on each engagement

110
Q

Monitoring

A

Assure that the firms policies and procedures are being followed on each audit and results of those reviews communicated regularly to senior partners in the firm (quality, independence, rules and regulations)

111
Q

Audit of IFRS or GAAP financials more risky

A

IFRS because of a learning curve

112
Q

5 steps in resolving an ethical dilemma

A

Identify the problem, identify possible courses of action, identify any constraints relating to the decision, analyze the likely effects of the possible courses of action, select the best course of action

113
Q

Ethics

A

Refers to a system or code of conduct based on moral duties and obligations that indicate how an individual should interact with others in society

114
Q

Code of professional conduct

A

Designed to provide a framework for expanding professional services and responding to changes in the profession

115
Q

Three sections for code of professional conduct

A

Principles, rules, interpretations

116
Q

Principles

A

Goal oriented positively stated statements on the professions responsibilities to the public, clients and fellow practitioners

117
Q

Rules

A

The requirements that are enforceable under the AICPA bylaws

118
Q

Interpretations

A

Provide guidelines for the scope and application of the rules

119
Q

3 conceptual frameworks

A

For CPAs in public practice
1. Threats to code compliance
2. Threats to independence

CPAs in business
3. Threats to code compliance

120
Q

11 rules of the AICPA code of professional conduct

A
  1. Independence
  2. Integrity and objectivity
  3. General standards
  4. Compliance with standards
  5. Accounting principles
  6. Acted discreditable
  7. Contingent fees
  8. Commissions and referral fees
  9. Advertising and other forms of solicitation
  10. Confidential client information
  11. Form of organization and name
121
Q

2 types of independence

A

Independence of mind (actual independence) and independence of appearance

122
Q

7 threats to independence

A
  1. Adverse interest
  2. Advocacy of client
  3. Familiarity
  4. Financial self-interest of CPA
  5. Management participation
  6. Self-review
  7. Undue influence
123
Q

Adverse interest

A

Litigation between client and CPA firm

124
Q

Advocacy of client

A

CPA promotes client securities as part of an initial public offering

125
Q

Familiarity

A

Spouse holds a key position with client

126
Q

Financial self-interest of CPA

A

CPA owns stock in the client

127
Q

Management participation

A

CPA serves as officer of clirnt

128
Q

Self-review

A

CPA firm has provided consulting services that relate to audit

129
Q

Undue influence

A

Pressure from client to reduce audit procedures

130
Q

Must be independent within the firm

A

Covered members

131
Q

Covered members

A

Staff working on the attest engagement, individual may influence attest engagement, a partner in the office in which the partner in charge of the attest engagement primarily practices, partners or managers that provides more than 10 hours of non-attest services to client, the public accounting firm and it’s employees benefit plan, any entity controlled by one or more of the above

132
Q

5 independence requirements for all partners

A

No partner or professional employee may own more than 5% of arrest client’s outstanding equity securities

No partner or professional employee may be a director, officer, employee, promoter, trustee, etc of a client

All direct financial interests are prohibited, regardless of amount

Material indirect financial interests are prohibited

Gifts from clients or management may impair independence

133
Q

Key position

A

Primary responsibility for significant accounting accounting functions that support material components of the financial statements, has primary responsibility for the preparation of the financial statements or has the ability to exercise influence over the contents of the financial statements including being a member of the board, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer etc

134
Q

8 consulting services prohibited by SOX

A
  1. Bookkeeping
  2. Financial systems design and implementation
  3. Appraisal, valuation or actuarial services
  4. Internal audit outsourcing
  5. Management functions or human resource services
  6. Investment services
  7. Legal services and expert services
  8. Certain tax services
135
Q

Integrity and objectivity rule

A

Applies to all members of the AICPA and to all services provided by CPAs

136
Q

3 violations to the integrity and objectivity rule

A

Makes or permits or directs another to make materially incorrect entries in a clients financial statements or records

Fails to correct financial statements that are materially false or misleading when a member has such authority

Signs or permits or directs another to sign a document containing materially false and misleading information

137
Q

4 general standards

A
  1. Professional competence
  2. Due professional care
  3. Planning and supervision
  4. Sufficient relevant data
138
Q

Acts discreditable rule

A

Client prepared records should always be returned to the client, client records prepared by the CPA (eg payroll records) should be provided to client except that they may be withheld if they are incomplete or fees are due for them, supporting records (eg adjusting entries) should be provided to client but maybe be withheld if fees are due for them, Cpa working papers (eg audit programs) are CPAs property and need not be provided to client unless required by law

139
Q

Contingent fees rule

A

Allowable for clients for which the cpa provides none of the following services: an audit or review of financial statements, a compilation of financial statements expected to be used by a third party and does not disclose a lack of independence, an examination of prospective financial information

140
Q

Commissions/referral fees

A

Only allowed for a non attest client

141
Q

The four pillars of auditing

A
  1. Role in the economy
  2. Professional standards
  3. Professional ethics
  4. Legal liability
142
Q

Common law

A

case law, develops through case decisions, generally arising due to breach of contract, negligence and fraud

143
Q

statutory liability

A

written law, develops when governmental unit enacts laws and regulations

144
Q

breach of contract

A

occurs when the client or auditor fails to meet the terms and obligations established in the contract (engagement letter)

145
Q

Privity

A

A contract / agreement between two parties

146
Q

Criminal law

A

Statutory law that defined the duties citizens owe to society and prescribed penalties for violations

147
Q

Fraud

A

Actions taken with the knowdkef and intent to deceive

148
Q

Gross negligence

A

An extreme, flagrant or reckless departure from professional standards of dude care or constructive fraud

149
Q

Ordinary negligence

A

An absence of reasonable or due care in the conduct of an engagement

150
Q

Class action

A

Lawsuit filed by one or more individuals on behalf of all persons who may have invested on the basis of the same false and misleading information

151
Q

Scienter

A

Acting with intent to deceive, defraud or with knowledge of a false representation

152
Q

Tort

A

Unlawful acts committed against another business entity that result in a monetary loss

153
Q

Ultramares corporation v touché (1931)

A

A landmark case under common law in that it established that auditors could be held liable to third party beneficiaries for ordinary negligence and to other third parties for gross negligence

154
Q

Credit alliance corp v Arthur Andersen and co (1985)

A

A common law decision establishing that auditors must demonstrate knowledge of reliance on the financial statement by a third party for a particular purpose to be held liable for ordinary negligence to that party

155
Q

Rusch factors Inc v levin (1986)

A

A common law decision in which the auditors were found liable for ordinary negligence to a third party not specifically identified to the auditors although the auditors were aware of the intended use of the financial statements

156
Q

Rosenblum v Adler (1983)

A

Established that the auditors could be held liable for ordinary negligence to all third parties that the CPAs could reasonably foresee as users of the financial statements for routine business purposes

157
Q

Ultramares (privity, near privity, foreseen third parties, reasonably foreseeable)

A

Yes
No
No
No

158
Q

Credit alliance (privity, near privity, foreseen third parties, reasonably foreseeable)

A

Yes
Yes
No
No

159
Q

Rusch factors (privity, near privity, foreseen third parties, reasonably foreseeable third parties)

A

Yes
Yes
Yes
No

160
Q

Rosenblum (privity, near privity, foreseen third parties, reasonably foreseeable third parties)

A

Yes
Yes
Yes
Yes

161
Q

9 ways to prevent litigation

A
  1. Place emphasis within the firm on complying with GAAS and professional ethics
  2. Retain legal counsel that is familiar with CPA’s legal liability
  3. Maintain adequate professional liability insurance
  4. Investigate prospective clients thoroughly
  5. Obtain a thorough knowledge of the client’s business
  6. Use engagement letters to prevent misunderstandings with clients
  7. Carefully assess the risk of errors and irregularities including those indicated by weaknesses in internal control
  8. Exercise extreme care in audits of clients that have a high degree of business risk as indicated by such factors as financial difficulties
  9. Carefully prepare and review working papers
162
Q

4 key Covid 19 audit risks

A
  1. Internal controls
  2. Fraud risk
  3. Non compliance with laws and regs
  4. Auditing accounting estimates
163
Q

Three components of fraud risk

A

Pressure
Opportunity
Rationalization

164
Q

Auditing accounting estimates

A

Allowance for doubtful accounts - are customers still financially solvent

Goodwill- still economic value in acquisition or need to be impaired

Auditing 1 (3 decks)

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