exam

Question 1

What is the biggest threat to being an auditor?

Answer 1

The biggest threat to being an auditor is that the auditor could provide the wrong opinion. Therefore, impacting reputation and creating an inability to do their job due to the lack of confidence from users

Question 2

Auditing

Answer 2

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria

Auditing is the verification of information by an independent source

Question 3

Describe the need for auditing 3 party-accountability framework

Answer 3

Refer to wk 1 class 1 diagram slide 11

Question 4

Describe the 3 levels of assurance

Answer 4

Lowest (75% of transactions) compilation - based on client information provided for internal use. No assurance: “No attempt to verify accuracy or completeness of information”

Middle: Review - some analytical procedures conducted with limited assurance. Negative assurance: “Nothing has come to our attention …”

Highest (95% of transactions) Audit - an intensive examination with the highest level of assurance. Positive assurance: “in our opinion …”

Question 5

Positive assurance vs negative assurance

Answer 5

Negative Assurance “Nothing has come to our attention”

Positive Assurance “In our opinion …”

Question 6

What standards to Canadian auditors apply?

Answer 6

Overall objectives of the independent auditor and the conduct of an audit in accordance with Canadian Auditing Standards

Question 7

What is the purpose of an audit

Answer 7

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework

Question 8

What is audits role in society?

Answer 8

Important decisions are made on the basis of accounting information. Audits reduce the risk that these decisions will be based on inaccurate information. Auditors provide assurance as to the accuracy of accounting information. The role of audits is critical in the current business environment.

Question 9

CPA Enabling Competencies

Answer 9

The CPA Enabling Competencies provide the essential skills for a professional accountant to carry his/her role effectively
- acting ethically and demonstrating professional values
- collaboration
- solving problems and making decisions
- communication
- leadership
- managing self

There are higher ethical standards for auditors as auditors have a set of moral, professional, and legal responsibilities to the society

Question 10

CPA Professional Code of Conduct aspects and the most important part of the CPA code of conduct

Answer 10

The CPA Professional Code of Conduct includes:
- Professional behaviour
- Integrity and due care
- Independence and objectivity
- Professional competence
- client confidentiality

The most important part of the CPA Code of Conduct is INDEPENDENCE and OBJECTIVITY

Question 11

Independence and Obejectivity

Answer 11

Independence - no conflict of interest (current or prior) applicable at the firm level. Independence is the foundation of how the procession maintains trust and confidence

Objectivity - is the mindset of not being driven by a bias applicable at the individual level

Question 12

Threats to Independence & Biggest threats

Answer 12

Threats to Independence:
- Self review (position of having to audit own work)
- Self-interest (financial interest in the client or financial results of client)
- Advocacy - perceived to promote client’s position
- Familiarity - difficult to behave with professional skepticism during the engagement
- Intimidation - client intimidates PA with respect to the content of the audit

Advocacy and Familiarity are the two biggest threats to independence

Question 13

Expectations Gap

Answer 13

An auditing expectations gap is a term used to signify the difference in expectations of users of financial statements and auditors’ expectations concerning audited financial statements

Question 14

Reasonable Assurance

Answer 14

A degree of confidence of 90-95% confidence would be normal. 95% confidence is the most common degree of confidence.

Question 15

Key Responsibilities of a PA

Answer 15

• Keep up to date and comply with professional standards
• Not be associated with false or misleading financial information
• Undergo rigorous professional development
• Contribute to professional body regulation
• May conduct peer reviews

Question 16

Professional Judgement

Answer 16

The application of relevant training, knowledge, and experience within the context provided assurance, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the review engagement.

Question 17

Professional Skepticism

Answer 17

An attitude that includes questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Question 18

What is central to determining the nature, extent, and timing of the audit

Answer 18

Risk of Material Misstatement (RMM) is central to determining the nature, extent, and timing of the audit

Question 19

Key Responsibilities of Management and Auditors

Answer 19

Management is responsible for preparing the financial statements

Auditors are responsible for evaluating the appropriateness of such financial statements

Question 20

Planning a Financial Statement Audit

Answer 20

A financial statement audit needs to be planned using a structure and a systematic approach to determine the extent, nature, and timing of the audit

While planning is performed at the beginning of an audit - it is a continuous activity

To conduct the audit effectively and efficiently

Question 21

Financial Statement Audit timeline

Answer 21

May - Audit Planning
Oct - Interim Fieldwork procedures
Dec 31 - Fiscal year end
Jan - execute confirmations
Feb - year-end fieldwork
Mar - fieldwork complete + QA review
Mar 15 - F/S and Audit report issued

Question 22

Fraud vs Error

Answer 22

Fraud is the intentional circumvention of controls

Errors are not intentional and are simply problems in the systems caused by failures in systems, procedures, or policies

Always start by looking at errors and then will look for fraud. Fraud is usually quite sophisticated and is well thought-out

Question 23

How does an auditor respond to what could go wrongs?

Answer 23

As and when WCGWs are identified
- assign more experiences staff/experts
- assign more resources/time
- review working papers early/during audit
- do more or a different type of testing - gather more or a different type of evidence
- have a second partner review

Question 24

Audit risk

Answer 24

Audit risk (IR x DR x CR) will occur when:
- a material misstatement has been made in the transactions or balances (inherent risk)
- and internal controls fail to detect or correct the misstatement (control risk)
- audit procedures also fail to detect misstatement (detection risk)
- auditors usually like to limit audit risk to less than 5%

Auditors strive to lower audit risk by performing audit work that gives a high level of assurance that statements are correct

Question 25

Inherent Risk (IR)

Answer 25

Inherent Risk is the probability that material misstatements affecting one or more financial statement assertions could have occurred in the first place before any controls were applied. - Do not create or control IR - Consider characteristics of business and types of accounts

Question 26

Control Risk (CR)

Answer 26

Control risk is the probability that managements internal control policies and procedures will fail to prevent material misstatements from occurring in the first place or fail to detect and correct them once they have occurred - Do not create or control - Effectiveness may be tested by the auditor in the audit

Question 27

Risk of Material Misstatement

Answer 27

RMM = IR x CR and is the probability that one or more assertions in the elements of the financial statements are materially misstated due to inherent and control risks.

Question 28

Detection Risk

Answer 28

Detection Risk is the probability that the auditors' procedures will fail to detect a misstatement that has occurred (due to inherent risk) and has not been corrected by the company's internal controls (due to control risk) - can control this risk by conducting substantive tests - inverse relationship between DR and substantive testing: if DR is low, greater testing is needed; AND if DR is high, less testing is needed

Question 29

Goal of audit planning

Answer 29

The goal of audit planning is to establish the nature, extent, and timing

Question 30

Risks that can be experienced when auditing

Answer 30

Auditing is a process of reducing information risk to users of financial statements: Business risk - results from significant conditions/events that might affect the ability to execute strategies Information risk - F/S fail to reflect the economic substance of business activities. F/S will be false and misleading Accounting risk - errors associated with forecasts used in GAAP accounting estimates are not properly disclosed Audit risk - insufficient evidence being gathered on facts concerning the entity's economic circumstances A risk statement is always accompanying with its impact/consequences

Question 31

How can an auditor minimize risk?

Answer 31

- professional skepticism - audit firms are split into service lines (have lots of experience and competency in particular industry or sector) - know the internal and external environment of the business

Question 32

What are the characteristics of good evidence

Answer 32

Acceptable evidence is sufficient and appropriate Sufficient - the right amount (ie enough samples) to draw reliable conclusion Appropriate - the right kind of evidence is obtained

Question 33

Materiality

Answer 33

Materiality is the largest amount of uncorrected miststament that might exist in the F/S that still farily presents the company's financial position and results of operations

Question 34

Materiality

Answer 34

Materiality is the largest amount of uncorrected misstatement that might exist in the F/S that still fairly presents the company's financial position and results of operations

Question 35

Calculating materiality (revenue, expenses, total assets, shareholder equity, normalized pre-tax profit)

Answer 35

1-3% of Revenues or Expenditures 1-3% of Total Assets 3-5% of Shareholder’s Equity 3-7% of Normalized Pre-tax Profit (operating income, gross profit) The goal is to come up with an amount that will drive forward your audit approach. A better understanding of an organization will help determine which is the best way to calculate materiality.

Question 36

Overall materiality vs performance materiality

Answer 36

Overall materiality - amounts based on users' needs Performance materiality - lesser amounts allowing for potential undetected misstatements

Question 37

Assertions

Answer 37

Assert is to state or declare positively and often forcefully or aggressively. Assertions are used by the auditor to consider the different types of potential misstatements that occur when identifying, assessing, and responding to the risks of material misstatement Most common place to find management assertion is financial statements. We use assertions to help us perform our audits more efficiently

Question 38

Transactions/Events - Assertions

Answer 38

Transactions/Events - Assertions: - occurrence - completeness - cut off - classification - presentation - accuracy

Question 39

Account Balances - Assertions

Answer 39

Account Balances - Assertions - Existence - completeness - right and obligations - classification - presentation - accuracy and valuation

Question 40

Assertions process

Answer 40

Auditors take the assertions as the focal point for audit work --> each audit procedure evaluates an assertion

Question 41

Qualitative guidelines of materiality

Answer 41

Qualitative guidelines of materiality - auditors should consider other factors such as user-related factors, nature of the item or issue, effect on share price, and other circumstances

Question 42

Specific materiality

Answer 42

Specific materiality is the third level of materaility the auditor may determine

Question 43

Specific materiality

Answer 43

Specific materiality is the third level of materiality that the auditor may determine for account balances, specific transactions, and disclosures

Question 44

Materiality and audit risk

Answer 44

Materiality refers to the magnitude of a misstatement Audit risk refers to the level of assurance that material misstatement does not exist An auditor will make these assessments independently

Question 45

Audit evidence objective

Answer 45

The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion

Question 46

Primary Evidence gathering techniques (lowest to highest)

Answer 46

Inquiry Analysis Observation Inspection (Scanning, Vouching, and Tracing) Confirmation (Positive or Negative) Reperformance Recalculation

Question 47

Audit working paper management

Answer 47

Permanent file papers (information of continuing interest) Audit administrative papers (documentation of early planing) Audit evidence papers (evidence obtained and decisions made) Index → a page # that allows a working paper to be removed and replaced properly Cross-referencing → connects information between pages in the working paper file Heading → includes the entity under audit, period being audited, and a descriptive title Initials → form the auditor and reviewer Dates → of the preparation and review Tick marks → to indicate the work performed and should be appropriately described In most cases, an auditor CANNOT reveal information in the working papers without the client’s permission.

Question 48

Assertions about classes of transactions and events

Answer 48

Occurrence: transactions and events that have been recorded or disclosed have occurred and pertain to the entity Completeness - all transactions and events that should have been recorded, and all related disclosures that should have been included and included. Accuracy - transactions and events have been recorded appropriately and related disclosures have been appropriately measures and described Cut-off - transactions and events have been recorded in the correct accounting period Classification - transactions and events have been recorded in the proper accounts Presentation - transactions and events are appropriately aggregated or disaggregated and clearly described; related disclosures are relevant and understandable

Question 49

Assertions about account balances and related disclosures

Answer 49

Existence - assets, liabilities, and equity interests exist Rights and obligations - the entity holds or controls the rights to assets and liabilities are the obligations of the entity Completeness - all assets, liabilities, and equity interest that should have been recorded and all related disclosures that should have been included Accuracy, valuation, and allocation - assets, liabilities, and equity interest is included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recoded, and related disclosures are appropriately measures and described Classification - assets, liabilities, and equity interest have been recorded in the proper accounts Presentation - assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly descried; related disclosures are relevant and understandable

Question 50

Primary objective of auditing cash account

Answer 50

Cash Account Primary objective: the cash exists and is owned by the client and all cash transactions at the end of the reporting period are complete and properly disclosed.

Question 51

What is the inherent and control risk of cash being materially misstated?

Answer 51

What is the inherent risk of cash being materially misstated? High-risk Lot of opportunity for cash to be misplaced What is the risk that the controls do not catch processed cash misstatements? It depends on what management is doing Need to understand processes, management, culture, and technologies used

Question 52

Auditing cash: combined approach vs substantive testing

Answer 52

Auditing Cash: Audit Approach Combined Approach Test controls and rely on the most effective controls Plus, always perform substantive controls for select areas Analytical Procedures Substantive Testing More effective when controls are weak or non-existent Substantive evidence considered reliable Analytical procedures, but may provide low quality evidence

Question 53

Relevant 'Cash' Assertions (Account balances, transactions/events, presentation & disclosure)

Answer 53

Relevant 'Cash' Assertions Account balances - existence - completeness - rights & obligations - accuracy & valuation transactions/events - cut-off - classification presentation & disclosure - classification - presentation

Question 54

Cash - how to audit (existence, cut-off, classification & presentation, accuracy & valuation, completeness)

Answer 54

Existence - cash balance stated in B/S exists - Confirm balance - Bank confirmation - Confirm fund balance and any other banking arrangements Cut-Off cash receipts and payments at period end are reported appropriately - review daily cash summaries - duplicate deposit slips - bank statements covering several days before and after year-end date to determine proper cut-off Classification & Presentation - Calculation of bank reconciliation (accuracy) - bank account balances are in a proper currency (amount was converted at the right exchange rate and calculated accurately) (valuation) Auditing Cash (Completeness) Enquire of the client if all accounts are included in the general ledger The bank confirmation also provides evidence that all bank accounts are included in the General Ledger since the bank account balance per the General ledger must agree to the bank account information.

Question 55

Auditing Cash - steps

Answer 55

- obtain bank confirmation (third party evidence) - obtain clients bank reconciliation for each account - obtain cut off bank statement - trace deposits in transit on the reconciliation to the bank deposits early in the next period - trace outstanding cheques on the reconciliation to cheques cleared in the next period - verify mathematical accuracy of the bank reconciliation

Question 56

Four decisions to be made in designing audit procedures

Answer 56

1) the nature of the evidence technique 2) how many items should be tested 3) which items to test 4) when the procedures should be performed

Question 57

Inquiry

Answer 57

Inquiry - involves the collection of oral evidence from the client and independent third parties - requires corroboration - important in understanding client's business - means to understanding strategy and risks and controls

Question 58

Analysis

Answer 58

Analysis - Evalutation of financial items in determining other audit programs and performance analytic procedures that compare recorded amounts to expectations - ex. current year to prior year - ratios to industry standards

Question 59

Observation

Answer 59

Observation - looking at the application of policy or procedures by others - general awareness of events - reliable evidence as to performance at the time of observation

Question 60

Inspection

Answer 60

Inspection - looking at records, documents, or assets having physical substance - reliable for existence, supports valuation - vouching information is selected from an account and the auditor goes back through the system to find the source documentation (supports existence) - tracing - auditor first performs vouching followed by selecting source documents and proceeding forward through the controls system to the final recording of the transaction - scanning - eyes open approach - does not produce direct evidence but can raise questions

Question 61

Vouching supports ....

Answer 61

Vouching supports existence

Question 62

Tracing supports ...

Answer 62

Tracing supports completeness

Question 63

External Confirmation

Answer 63

External Confirmation - consists of (written) enquiry to verify accounting records - can produce evidence regarding existence, ownership, valuation and cut-off - need to ensure it is legitimate - positive confirmations: request a reply in ALL cases - negative confirmations: request a reply only where information is incorrect

Question 64

Recalculation / Reperformance

Answer 64

- Performing independent calculations or recalculating the clients' calculations - Highly reliable mathematical evidence - Addresses existence and valuation for calculated amounts - Applied in control testing

Question 65

A/R relevant assertions (account balances, transactions/events, presentation & disclosure)

Answer 65

Account balances - existence - completeness - rights & obligations - accuracy & valuation Transactions/Events - occurrence - completeness - accuracy - cut-off Presentation and Disclosure - Classification - Presentation

Question 66

Inventory types

Answer 66

- Raw materials - Components - Work in progress - Finished goods - distribution inventory - Maintenace, repair and operating supplies - indirect inventories We mainly care about raw materials, work-in progress, and finished goods Raw materials - materials purchased from suppliers to be used in the manufacturing of finished goods Work in progress - partly manufactured products consisting of materials, direct labor, and overhead applied to the stage of completion Finished goods - manufactured inventory that is available for sale

Question 67

Name some inventory situations impacting RMM

Answer 67

- accounting using a specific policy FIFO, LIFO - Can be tangible or intangible - can be specialized (gold) - inventory counting challenges - can be obsolete or remain unsold

Question 68

auditing inventory - relevant assertions

Answer 68

Account balances: - existence - completeness - rights and obligations - accuracy & valuation Transactions/Events - occurrence - completeness - accuracy - cut-off Presentation and Disclosure: - Valuation - Classification - Presentation

Question 69

PP&E relevant assertions

Answer 69

Account balances - Existence - Completeness - Rights & Obligations - Accuracy & Valuation Transactions/Events - Occurrence - Completeness - Accuracy - Cut-of Presentation & Disclosure - Valuation - Classification - Presentation

Question 70

Why do we not audit shareholders equity?

Answer 70

We do not audit shareholders equity due to the number of transactions. Ex. Amazon would not have a list of transactions. The broker or agent would track transactions that provide the service, they track all stock movement. These brokers/agents get audited themselves so we do not need to audit them.

Question 71

Why is auditing short-term liabilities more risky?

Answer 71

Short term is more risky to audit - less stabilitility, more volatility, and more transactions. Long term is generally consistent and established

Question 72

Auditing liabilities: relevant assertions

Answer 72

Account balances - Existence - Completeness - Rights and Obligations - Accuracy and Valuation Transactions/Events - Occurrence - Completeness - Accuracy - Cut-off Presentation and Disclosure - Valuation - Classification - Presentation

Question 73

Steps in Completing the Financial Statement Audit

Answer 73

Steps in Completing the F/S Audit: 1) Review relevant documentation (What does CAS say?) 2) Perform tests for presentation and disclosure 3) Review for contingent liabilities and commitments 4) Review for subsequent events 5) Perform financial analytical procedures and evaluate results 6) Review working papers and perform quality assurance review 7) Obtain letter of representation and issue auditors report 8) Communicate with audit committee and management (present findings)

Question 74

Contingent liabilities

Answer 74

Contingent liabilities are existing or possible obligations (depending on future events);. They can arise from legal or tax disputes, warranties, guarantees made, etc. Auditors must ensure they are complete, valued correctly, and properly presented and disclosed.

Question 75

Commitments

Answer 75

Commitments are agreements that the company will uphold certain conditions in future. Auditors must ensure all commitments are disclosed Commitments are certain (as opposed to contingent liabilities, where there is uncertainty with respect to the result)

Question 76

Subsequent events

Answer 76

Certain material events that occur after the balance sheet date, but before the end of the field work, require either an adjustment or disclosure. Type 1 events require an adjustment of dollar amounts Type 2 events do not warrant adjustment of financial statements but require a formal disclosure

Question 77

Type 1 Subsequent Events

Answer 77

Subsequent event provides new information regarding a financial condition that exists at the balance sheet date and hence, requires an adjustment Examples: a loss on uncollectible trade accounts receivable as a result of bankruptcy of a major customer OR a settlement of litigation for an amount different than estimated

Question 78

Type 2 Subsequent Events

Answer 78

Occurrences after the balance sheet date, but do not require adjustment of accounts at a balance sheet date No adjustments as cause and manifestation arise after balance sheet date, However, the event may require disclosure to keep financial statements from being misleading at the report date No impact on the financial statement but are important enough to be disclosed.

Question 79

Letter of Representation

Answer 79

A letter of representation depicts management’s responsibility towards preparation of the financial statements

Question 80

Types of Audit Opinion

Answer 80

Audit opinion: Unmodified opinion (immaterial) Modified opinion (material) - Qualified opinion (material; isolated GAPP departures) - Adverse opinion (highly material; pervasive GAAP departures) - Disclaimer of Opinion (highly material. unable to provide opinion)

Question 81

Why is it difficult to detect fraud

Answer 81

Why is it difficult to detect fraud Auditors knowledge of clients I/C may be inferior to that of employees Th fraud will be intentionally concleased Client management may have the ability to override internal controls

Question 82

components of the fraud tringle

Answer 82

rationalization, pressure, opportunity