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Auditing 2 > Exam revision > Flashcards

Exam revision Flashcards

1
Q

What is test data?

A

Test data involves entering dummy data into the client’s computer system and compare results with predetermined results, to check the accuracy of the computer system being used to calculate e.g. gross wages

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2
Q

Why do auditor’s use CAATs?

A
  1. Larger volumes can be tested, not just a sample, than manual
  2. Cost effective
  3. Can be processed at remote locations
  4. Can independently access data without dependence on the client
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3
Q

What is the difference between statistical and non-statistical sampling?

A

Statistical sampling - each unit has an equal chance of selection
E.g. Monetary, Random, Systematic

Non-statistical sampling - the probability theory is removed (no equal chance of selection)
The auditor will pick which items are tested (i.e. those most likely to cause a material misstatement)
E.g. Block, Haphazard

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4
Q

What are the methods of sampling?

A 
Haphazard 
Block 
Monetary unit 
Random 
Systematic
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5
Q

What is sampling risk?

A

Due to using sampling, the auditor’s conclusion may be different from the conclusion if they had used the whole population in the audit procedure

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6
Q

How can sampling risk be reduced?

A
  1. Increase the number of items in the sample
  2. Remove outliers
  3. Possibly stratify sample - into smaller populations
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7
Q

What is the purpose of the report to management?

A

To ensure the audit runs smoothly

To highlight weaknesses and problems

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8
Q

What are the 3 elements to be included in the report to management?

A
  1. Deficiencies/weaknesses in internal controls
  2. Implications - to the company
  3. Recommendations - what the company should do
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9
Q

What is fraud?

A

An intentional act to obtain an unjust or illegal advantage

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10
Q

What are the elements of the fraud triangle (trust violation)?

A

Pressure - motivation to commit fraud
Opportunity - the knowledge or ability (i.e. low internal controls less likely to notice)
Rationalization - justification of dishonest actions (making it seem right “just borrowing”)

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11
Q

What are the 2 types of fraud?

A

Fraudulent financial reporting

Misappropriation of assets

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12
Q

What is a key audit matter (KAM)?

A

The auditor uses his professional judgement to determine those matters that were most significant in the audit
i.e. areas considered higher risk of material misstatement

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13
Q

How are KAM communicated to management?

A

In the auditor’s independent report

A description of:

  • why the matter was determined to be most significant
  • how the matter was addressed in the audit (procedures performed)
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14
Q

What are the 3 conditions for a provision?

A
  1. A present obligation arising from a past event
  2. Payment is probable
  3. Amount can be estimated reliably
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15
Q

What is a provision?

A

A liability of uncertain timing or amount

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16
Q

What are the 3 modified opinions?

A

Qualified opinion
Disclaimer of opinion
Adverse opinion

17
Q

What is an adverse opinion?

A

When material and pervasive

18
Q

What is pervasiveness?

A

Pervasive means that it affects the rest of the results

If the misstatements are material and pervasive then the financial statements should not be used for decision making

19
Q

What are the 3 elements of a written representation letter?

A
  • Addressed to auditors
  • Appropriately dated
  • Signed by senior financial officer
20
Q

What are the 3 elements of a written representation letter?

A
  • Addressed to auditors
  • Signed by senior financial officer
  • Contains specific information such that auditor may not have been able to obtain sufficient appropriate evidence (e.g. estimates for provisions)
21
Q

What is the purpose of a written representation letter?

A

From management to auditors
Confirms managements responsibilities for the financial statements
The auditor’s use it as a part of their audit evidence

22
Q

What are the 4 C’s (best value audit)?

A

Challenge
Compare
Consult
Compete

23
Q

What are the 3 inventory count methods?

A

Physical counts:

  1. At year end
  2. Before/after year end
  3. Perpetual (continuous) throughout the year
24
Q

What are the procedures to confirm going concern status?

A
  1. Discuss cash flows with management
  2. Confirm existence and terms of borrowing facilities
  3. Read minutes of shareholders meetings with management for reference to financing difficulties
  4. Inquire of the entity’s lawyer regarding litigation and claims
25
Q

What are the audit procedures to confirm going concern status?

A
  1. Discuss cash flows with management
  2. Confirm existence and terms of borrowing facilities
  3. Read minutes of shareholders meetings with management for reference to financing difficulties
  4. Inquire of the entity’s lawyer regarding litigation and claims
26
Q

What are the limitations of an internal audit?

A

Employed by the company - so less independence and objectivity
No professional qualifications required - may have limited knowledge and technical expertise
May not be a dual reporting relationship in place

27
Q

What are the benefits of having an internal audit?

A

Can help to prevent fraud by:

  • assessing internal control systems
  • being mindful when carrying out work
  • reporting any suspicions
28
Q

Before relying on internal audit work, what must the external auditor consider?

A
  1. Objectivity
  2. Technical competence
  3. Systematic and disciplined approach?
  4. Effective communication
29
Q

What is the purpose of a bank reconciliation?

A

To compare client’s records to the banks records
Can see if there are any differences for cash transactions
Auditor can obtain explanations of any large or unusual items not cleared

30
Q

What are substantive procedures?

A

Activities carried out by the auditor to detect material misstatement or fraud at the assertion level

31
Q

What are the 4 assertions of balances?

A

Existence
Rights and obligations
Validity
Presentation

32
Q

What are the RACEDRRIO audit procedures?

A 
Reperform
Analytical procedures
Confirmation
Enquiry
Discuss
Recalculation
Review
Inspection
Observation
33
Q

What should the auditor do if management refuse to amend the financial statements to include a provision?

A

Obtain a management representation point confirming the managements decision on the provision
Proceed to issue a modified audit report

34
Q

What is audit software?

A

Obtains data of audit significance from the client’s computer systems
Processing data for further analysis on the auditor’s own computer system

35
Q

What is the difference between audit software and test data?

A

Audit software is used to ANALYSE client data

Test data is inputting dummy data on a client’s computer system

36
Q

What is the purpose of the receivables confirmation letter?

A

Provides evidence that a customer actually exists and that the balance is correct at the year end

Can be positive or negative confirmation

37
Q

What are the 2 methods of receivable confirmation?

A

Positive confirmation - this is where the customer must respond if they agree or disagree with the balance

Negative confirmation - the client is only required to respond if they disagree with the balance

38
Q

How is a receivables balance agreed if there is no reply from the customer?

A

Send a follow up confirmation with the clients
Then, auditor phone the customer and ask to respond

If still no response:
Agree cash paid at the year end to the bank account (bank reconciliation)
Agree invoices to good despatched notes at each year end

39
Q

What is a substantive test?

And in relation to revenue?

A

Aimed at detecting material misstatements at the assertion level
They include tests of details of transactions, balances, disclosures and substantive analytical procedures
RACEDRRIO

Auditing 2 (4 decks)

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