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Audit Theory > Exam 1 - Chapter 6 - Audit Responsibilities > Flashcards

Exam 1 - Chapter 6 - Audit Responsibilities Flashcards

1
Q

Sarbanes Oxley Act states that Auditors are responsible for:

A
  • Detecting material misstatements in financial statements
  • Report on effectiveness of internal control over financial reporting
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2
Q

These responsibilities fall under management and not under the duties of an auditor:

A
  • Adopting sound accounting policies
  • Maintaining adequate internal controls
  • Preparing financial statements
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3
Q

What is the report of management?

A

Statement of management’s responsibility and relationship to auditor.

  • Provided on an annual or quarterly basis
  • Signed by CEO and CFO
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4
Q

AICPA auditing standards state the auditor’s reponsibilities of financial statement audits as:

A
  1. Obtain reasonable assurance that financial statements are free of material misstatement
  2. Report on the financial statements
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5
Q

In general, what are the objectives of an audit?

A

Auditor has responsibility to detect material errors or fraud within financial statements.

Auditor should consider the effects of laws and regulations and request significant evidence of adherence to such laws.

At which point the auditor can provide a report with reasonable assurance.

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6
Q

What are material misstatements?:

A

Errors in financial reporting that, If combined, would likely influence the decision of a user.

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7
Q
  • What is assurance provided by auditors?
  • What qualifies as reasonable assurance?
A

Assurance: Level of certainty that auditor has obtained

Reasonable assurance: High level of assurance, but never absolute

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8
Q

Why is reasonable assurance never certain?

A
  • Audit tests require use of judgement by auditor
  • Evidence requires sampling data, which increases risk of not finding material misstatements
  • Acct presentations contain estimates
  • Fraudulent financial preparation may be impossible to find
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9
Q

What are the differences in:

  • Errors
  • Fraud
A

Errors

Unintentional misstatement

Fraud

Intentional misstatement

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10
Q

Auditors should maintain professional skepticism to avoid client bias.

What are some tactics for maintaining professional skepticism?

A
  • Maintain questioning mindset
  • Suspension of judgement until evidence is obtained
  • Search for knowledge
  • Interpersonal understanding that motivations can cause bias
  • Autonomy - Decide for oneself, rather than accept claims
  • Self-esteem - Resist persuasion and challenge assumptions
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11
Q
  • Who are the likely culprits of fraud resulting from the following
  • How do these types of fraud harm people?:

Fraudulant financial reporting

Misappropriation of Assets

A

Fraudulant financial reporting

Management fraud.

Harms users of financial information because information is false.

Misappropriation of Assets

Can be caused by employees or management.

Harms creditors and shareholders because assets are not available to them.

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12
Q

Financial statements may be indirectly affected by laws and regulations.

What should auditors do to ensure there is no misstatements caused by this?

A
  • Enquire with management about whether entity is in compliance with laws.
  • Inspect correspondance with relevant licensing or regulatory authorities
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13
Q

If noncompliance with laws is suspected, what steps should auditors take to handling the situation?

A
  • Discuss matters with management above those involved.
  • Obtain legal advice if management does not comply
  • Evaluate effects of noncompliance on other aspects of the audit
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14
Q

What is the cycle approach to dividing an audit into work segments?

A

Divide statement accounts into “cycles” of closely related classes of transactions and account balances

Extra info: Example of cycles

  • Sales and collections
  • Acquisition and payment
  • Payroll
  • Inventory
  • Capital acquisitions (financing business)
    *
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15
Q

When setting audit objectives, the most efficient and effective way to conduct audits are:

A

Obtain some combinatin of assurance for each class (4 classes) of transactions and for the ending balance in the related accounts.

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16
Q

Use this card as an example of four transactions affecting A/R.

A

Beg bal. is assured from last year

Find evidence for each of the red accounts (and End balance)

17
Q

3 groups of audit objectives to provide assurance of accounts exist,

what are they and what are their goals?

A

Transaction-related audit objectives.

objectives for any given class of transactions: sales transactions/sales returns/etc..

Balance-related audit objectives

Objectives for account balances: A/R Balances, A/P Balances, etc…

Presentation and disclosre audit objectives

Objectives related to the presentation and disclosure of financial information: A/R/Notes Payable, etc…

18
Q

What are management assertions?

A

Implied or expressed representations by management about classes of transactions and the related accounts and disclosures.

19
Q

AICPA and International auditing standards classify management assertions into 3 categories.?

What are these?

A
  1. Assertions about classes of transactions and events for period under audit
  2. Assertions about account balances at period end
  3. Assertions about presentation and disclosure
20
Q

The assertions of classes of transactions and events by management include:

A
  1. Occurence - trans. that are recorded have occured pertain to the entity
  2. Completeness - All trans. that should be recorded have been recorded.
  3. Accuracy - Amounts related to trans. are correct
  4. Classification - Trans. have been recorded in proper accounts
  5. Cutoff - Trans. have been recorded in the correct acct. period.
21
Q

The assertions about account balances by management include:

A
  1. Existence - Assets/liabilities/equity interests exist
  2. Completeness - All A/L/E/ interests that should have been recorded have been.
  3. Valuation and allocation - A/LE interests are included in financials at appropriate amounts
  4. Rights and obligations - The entity holds or controls the rights to assets and liabilites are their obligations
22
Q

The assertions about Presentation and disclosures by management include:

A
  1. Occurence and rights - Disclosed events and transactions have occured and pertain to the entity
  2. Completeness - All disclosures that should have been included have been included
  3. Accuracy and valuation - Financial disclosure amounts are appropriate
  4. Classification and understanding - Financial and other information is appropriately presented and described in disclosures
23
Q

Transaction related audit objectives include (there’s six):

A
  1. Occurence - Recorded transactions have actually occured
  2. Completeness - All trans. that should have been included in journals has.
  3. Accuracy - Recorded trans. are stated at correct amounts
  4. Posting and summarization - Recorded trans. are properly included in master files and summarized
  5. Classification - Trans in client’s journals are properly classified
  6. Timing - Transaction are recorded on correct dates
24
Q

Balance-related audit objectives include ( :

A
  1. Existence - BS items exist
  2. Completeness - All BS items are included
  3. Accuracy - amounts are correct
  4. Classification - Amounts included in listings are properly classified
  5. Cutoff - Transactions near balance sheet date are recorded in proper period.
  6. Detail Tie in- details of acct balance agree with related file, foot to total, and agree with general ledger
  7. Realizable value - Assets have been reduced to fair market when necessary
  8. Rights and Obligations - Most assets must be owned before including
25
Q

What are the four phases of a financial statement audit?

A

phase I - Plan and design an audit approach based on risk assessment

Phase II - Perform tests of controls and tests on transactions

Phase III - Perform analytical procedures and tests of details of balance

Phase IV - Complete audit and issue report

26
Q

What are the three steps of Phase I of an audit?

A
  1. Obtain understanding of entity and its environment
  2. Understand Internal control and assess risk control
  3. Assess risk of material misstatement
27
Q

What are the two types of tests done during phase II of an audit?

A

Tests of controls - tests to see if client’s recording processes work well

Substantive tests of transactions - Verify the monetary amounts of transactions

28
Q

What is done during phase III of an audit?

A

Analytical procedures - Evalulate financial information through relationship between financial and non-financial data.

Tests of details of balances - detect monetary misstatements of balances (ask third parties; customers, banks)

Audit Theory (9 decks)

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