exam pt 2 Flashcards
threats to independence and safeguards for possible threats
Threats to Independence
Self review – when the PA is placed in the position of having to audit his/her own work
Self-Interest – when the PA has a financial interest in the client or in the financial results of the client
Advocacy – when the PA is perceived to promote (or actually does promote) the client’s position
Familiarity – occurs when it is difficult for the PA to behave with professional skepticism during the engagement
Intimidation – when the client intimidates the PA with respect to the content of the F/S or the conduct of the audit
Advocacy and Familiarity are the two biggest threats to Independence.
Safeguards For Possible Independence Threats
Safeguards created by the profession, legislation, or regulation (feed experiences back into CPA body)
Safeguards within the assurance client
Safeguards within the firm’s systems and procedures (firm-wide) (protocols - ex auditing previous audits and ensuring that independence and objectivity was maintained)
Safeguards within the firm’s systems and procedures (engagement-specific) (regulators will come in and ensure proper procedure is followed – firm gets audited by SEC)
Expectations Gap
An expectations gap is the users expectations for the financial statements versus the auditors expectations for the financial statements. Expectations gap is caused by an unrealistic user expectations such as:
The auditor is providing complete assurance
The auditor guarantees complete future viability
The auditor will definitely find any fraud
The auditor has checked all transactions
An expectations gap can be reduced by:
Auditors performing their duties appropriately, complying with auditing standards, and meeting the minimum expectations of standards required
Auditing standards being reviewed and updated on a regular basis to enhance the work done
Assurance providers reporting accurately the level of assurance provided (reasonable, limited, none)
What three characteristics should auditors possess when conducting an audit?
The three characteristics that an auditor should possess when conducting an audit are:
PROFESSIONAL JUDGMENT. Professional Judgment is using attributes such as experience and education to make decisions when conducting a financial statement audit.
PROFESSIONAL SKEPTICISM. Professional Skepticism is understanding the business and not taking anything at face value. The auditor maintains a curious/questioning mindset and assesses what situations can cause material misstatements.
DUE CARE. Due care is being diligent while conducting an audit. This includes applying technical and statute-backed standards and documenting each stage in the audit process.
Explain Fundamental principles of ethics that an auditor should be able to follow
PROFESSIONAL BEHAVIOUR – how an auditor carries themselves and acts during the engagement. The auditor follows all standards and guidelines, acts within the code of conduct, and does not tarnish the reputation of the audit community.
PROFESSIONAL COMPETENCE – how well the auditor is educated and can make professional judgements and skepticism with experience and education. The auditor stays up to date with the rigorous professional development of the profession. Must maintain knowledge and skill at a level required by the professional body.
INTEGRITY AND DUE CARE – the auditor acts with integrity and uses its best foot forward when completing an audit. The auditor ensures they are acting with the professional standards. Straightforward and honest.
CONFIDENTIALITY – the auditor keps the information obtained or investigated during the audit to themselves. Refrain from disclosing information to people outside of their working place.
INDEPENDENCE AND OBJECTIVITY – the audit is free from conflict and bias in fact and appearance as well as mindset when on the audit engagement. Personal feelings or prejudices are not allowed to influence professional judgment.
List 5 procedures that the auditor should perform before deciding to accept ACME as a client.
1) Assess independence, objectivity, competency, and availability of resources
2) Contact previous auditor
3) Assess management integrity – do background check or web search
4) Review prior-period financial statements
5) Contact bankers, lawyers, and others that provide services to the entity
Discuss the entity-level audit procedures you will have to follow in order to gain an understanding of ACME’s operations and why these procedures are important
MAJOR CUSTOMERS are identified so that the auditor may consider whether those customers have a good reputation, are on good terms with the client, and are likely able to pay
MAJOR SUPPLIERS are identified to determine whether they are reputable and supply quality goods on a timely basis and pay on a timely basis. Suppliers may refuse to transact with a company that does not pay on time
CAPACITY TO ADAPT TO CHANGES IN TECHNOLOGY and other trends is assessed. If the client is not well positioned to adjust such changes, it risks falling behind competitors and losing market share, which can affect the going concern assumption in the long-run
NATURE OF WARRANTIES provided to customers is assessed. If the client provides warranties on products sold, the auditor needs to assess the likelihood that goods will be returned and the risk the client has underprovided for that rate of return (adequacy of the warranty provision)
TERMS OF DISCOUNTS given by the client to its customers and received by the client from its suppliers are reviewed. Assessment is made on the bargaining power with its customers and suppliers to determine whether discounting policies are putting profit margins at risk.
CLIENTS REPUTATION with its customers, suppliers, employees, shareholders, and the wider community. A company with a poor reputation places future profits at risk. Also, it is not in the best interest of the auditor to be associated with a client with a poor reputation
Explain the relationship between materiality and audit risk
Materiality is the magnitude of the amount that goes undetected. Materiality does not consider audit risk, but both concepts impact the quantity and quality of evidence. By setting a lower planning materiality level, an auditor also needs to increase the quality and quantity of evidence that needs to be gathered. The lower the materiality, the more likely the auditor will conclude that misstatements are material and further testing is required.
Audit risk is the chance that the audit team won’t find all the material transactions and that financial statements might be materially misstated.
The auditor will assess materiality and audit risk independently
Explain the difference between type 1 subsequent events and type 2 subsequent events and provide examples of each event
Type 1: When a transaction occurs after the balance sheet date and an adjusting entry needs to occur due to the impact on the financial statement. Indicate that the going concern assumption in relation to the whole or a part of the entity is not appropriate
Bankruptcy of a customer
Amount received in a insurance claim that was in the course of negotiation as at year end
Evaluating the adequacy of the provision for uncollectible trade receivables
T
ype 2: when a transaction occurs after the balance sheet date and a adjusting entry does not need to occur due to the impact on the financial statement but a disclosure is necessary
Uninsured loss of plant or inventory as a result of a fire or flood
The purchase of a business
The issuance of shares or debt securities
