EXAM 1 Flashcards
What is the challenge of inventory?
always moving
What are the 5 primary management assertions ?
1) E_____/O____
2) C_____
3) V_____
4) R____/O_____
5) P_____ & D____
1) Existence/Occurrence
2) Completeness
3) Valuation
4) Rights/Obligations
5) Presentation & Disclosure
Define Existence/Occurrence
Definition: asserting they 1) ____ (ex. ____)
-key assertion: how do they know they 2) ____, is it 3) ____
-relevant to any 4) _____ and ____ accts (5) _____)
-can be 6) ____ than it should be
-existence pertains to 7) _____
-occurrence pertains to 8) ____
-Existence/Occurrence are 9) ____
1) actually have it (ex. inventory)
2) have it
3) real?
4) assets and revenues
5) overstatement
6) MORE
7) balance sheet
8) income statement
9) overstated
Define Completeness
Definition: 1) ____ anything ____ (everything is ___)
-relevant to 2) ____ and ____ (3) _____)
-can be 4) ____than it should be
Completeness is 5) ____
1) didn’t leave anything out (everything is there)
2) liabilities and expenses
3) understatement
4) LESS
5) understatement
Define Valuation
Definition: 1) ___ where the value 2) ___?
-accts that have 3) _____, what accts would have 4) ____ (ex. 5) ____ for _____)
-6) ____ is ___ assertion for valuation
-cash equivalent, international cash those would be important to valuation in that case
1) accuracy
2) come from
3) estimations
4) estimations
5) allowance for doubtful accts
6) cash is not
Define Rights/Obligations
-Rights = 1) _____
-is this yours, do you have the 2) ___ to the assets?
-Obligations = is this my 3) ____?
-should it be on my 4) _____
1) ownership
2) rights
3) debt
4) balance sheet
Define Presentation/Disclosure
-Presentation: did you do the 1) ______/_____ right?
-Disclosure: did we 2) _____ that we need to do?
-client is asserting they did disclosed everything stated in the notes
1) statements/formatting
2) disclose everything
What are the 4 components of risk (a persuasive concept) ?
1) ______ Risk
2) ______ _____ Risk
3) ______ Risk
4) ______ Risk
1) Business Risk
2) Financial Reporting Risk
3) Engagement Risk
4) Audit Risk
Define Business Risk
risk that affects the 1) _____ and 2) p _____ _____ of organizational 3) ____
1) operations
2) protentional outcomes
3) activities
Define Financial Reporting Risk
risk that relates to the 1) ____ of _____ and the 2) _____ of the financial data in an organization’s 3) _____ ______
1) recording of transactions
2) presentation
3) financial statements
Define Engagement Risk
risk that auditors encounter by being associated with a 1) ___ ____, including loss of 2) ___, the 3) _____ of the client to 4) ___ the auditor, or financial 5) ___
1) particular client
2) reputation
3) inability
4) pay
5) loss
Define Audit Risk
risk that auditor may provide an 1) _____ ____ on 2) ____ _____ financial statements
1) unqualified opinion
2) materially misstated
What are the elements of communication with the previous auditor?
-required by 1) ____
-2) ___ of management
-3) ____ on accounting or auditing
-predecessors’ understanding of reason for 4) ___
-any issues related to 5) ____,____ or matters related to 6) ____ control
1) standard
2) integrity
3) disagreements
4) change
5) fraud, illegal acts
6) internal
Engagement Letter
-the auditor and client should have 1) ____ of the audit process
-the auditor should prepare an engagement letter to clarify the 2) ___ and ____ of each party and to summarize
1) mutual understanding
2) responsibilities and expectations
What’s the audit formula?
AR = IR x CR x DR
AR = Audit Rick
IR = Inherent Risk
CR = Control Risk
DR = Detection Risk
if the auditor accepts a client with high risk engagement risk
-the auditor must conduct a more 1) ____ audit
-the auditor does this by setting audit risk at 2) ____ ____
1) rigorous
2) low level
Define Inherent Risk
1) _____ of transactions to be recorded in 2) ____, without considering 3) ____ control
Inherent Risk is at the account level is higher for some items
-4) ____ transactions: more likely to be misstated than simple transactions
-5) ____ balances: more likely to be misstated than fact based balances
-6) ____ issues: frequently with estimate issues
-7) ____ of transactions
-8) _____ end activity
-inherent risk is a 9) ____ by the auditor
1) susceptibility
2) error
3) internal
4) Complex
5) Estimated
6) Valuation
7) Volume
8) Significant year end
9) subjective judgement
Define Control Risk
risk that 1)___ ___ ____ system will 2) ____ to 3) _____ a misstatement
1) client internal control
2) fail
3) prevent/detect
Define Detection Risk
risk that 1) ____ procedures will 2) ___ to 3) ____ material misstatements
1) auditors
2) fail
3) detect
Define Materiality
the magnitude of 1) o___ or mi____ of accounting information that in light of surrounding circumstances makes it probable that the 2) j____of a reasonable person 3) __ on the information would have been 4) ch___ or in___ by the omission or misstatement
1) omission or misstatement
2) judgment
3) relying
4) changed or influenced
Materiality
-it’s a 1) _____ determination
-the 2) ____ amount you set for materiality, the 3) ____ ____ you do
-if you set it as $1, you will look at 4) ____ transaction
-if materiality is $1 million you will look at 5) ____
-most firms have 6) ____ for setting materiality (as a percentage)
1) money value determination
2) lower dollar
3) more work
4) every
5) fewer
6) guidelines
What are the 3 uses of materiality
-financial statement materiality
-performance materiality (tolerable misstatement)
-clearly trivial (de minimis)
Define financial statement materiality
def: “how much 1) ____ _____ _____can you 2) ___ with for a 3) ____ ____”
-set 4) ___, use it 5) ___
-6) u_____ impact on 7) ____ statements in total
1) total error misstatement
2) live
3) good opinion
4) first
5) last
6) ultimate
7) financial
Define Performance Materiality (tolerable misstatement)
used to determine extent of 1) ____ for an account (ex. sample size)
reduced amount of 2) ____ ____ scope
1) testing
2) conservative testing
Define Clearly Trivial (De Minimis)
-used in 1) _____ 2) in____ item selection
1) evaluating
2) individual
Define evidence
1) ____, competent 2) ____ matter is to be obtained through audit 3) _____ performed to afford a 4) ____ basis for an 5) ____ regarding the financial statements
1) sufficient
2) evidential
3) procedures
4) reasonable
5) opinion
What are 3 qualities of evidence
-sufficiency
-apprrioatie
-audit procedures
