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ACC-423: Auditing > Final Exam - Part 2 (MULTIPLE CHOICE) > Flashcards

Final Exam - Part 2 (MULTIPLE CHOICE) Flashcards

1
Q

What is the most important benefit of having an audit by a CPA firm?

A

Provide REASONABLE (not absolute) assurance to investors and other outsiders that the financial statements are RELIABLE AND FREE FROM MATERIAL MISSTATEMENT, which facilitates decision making

Enhances the degree of confidence that intended users can place on the financial statements

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2
Q

What is the OBJECTIVE of an audit?

A

to attest (“report”) to the FAIRNESS and RELIABILITY of the financial statements for others to rely on them

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3
Q

What does ATTEST mean and what is an ATTEST ENGAGEMENT?

A

Attest: provide assurance as to its RELIABILITY

Attest Engagement: CPA firm ISSUES AN OPINION (report) on an examination (audit), a review, or agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (i.e., client/company management)

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4
Q

In order to provide attestation services, an auditor must have what?

HINT: a GAAS Standard

A

Independence

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5
Q

Which attest engagement provides the highest form of assurance?

A

Examination (audit)

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6
Q

What is an INTEGRATED AUDIT?

A

an audit that includes providing assurance on BOTH the financial statements and EFFECTIVENESS of internal control over financial reporting as required by SOX and the PCAOB.

REQUIRED for publicly traded companies in the US

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7
Q

List some non-assurance services

A

-Tax services
-Management consulting services
-Bookkeeping

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8
Q

Do you need to be independent to provide non-assurance services?

A

No

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9
Q

What financial reporting framework is used in the US?

A

GAAP

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10
Q

In a financial audit, what statements are ordinarily audited?

A

-Balance Sheet
-Statements of Income
-Stockerholders’ Equity
-Cash Flows
-Footnote Disclosures

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11
Q

Who is responsible for the fair presentation of financial statements in conformity with GAAP?

A

Client management (NOT the auditors)

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12
Q

Who “owns” the assertions over the financial statements?

A

Client management

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13
Q

What are the THREE major financial statement components that assertions are established

A
  1. Classes of transactions and events
  2. Account balances
  3. Presentation and disclosure
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14
Q

What are management’s assertions?

HINT: ACCA; COVERUP

A

A = Accuracy
C = Completeness
C = Classification
A = Allocation

C = Cut-off
O = Occurrence
V = Valuation
E = Existence
R = Rights and Obligations
U = Understandability
P = Presentation and Disclosure

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15
Q

Because of the risk of material misstatement, an audit of financial statements in accordance with GAAS should be planned and performed with an attitude of:

A

Professional skepticism (“questioning mind”)

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16
Q

What best describes the purpose of the auditor’s consideration of internal control in a financial statement audit?

A

to determine the NATURE, EXTENT, and TIMING (NET) of audit testing

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17
Q

What is GAAP?

A

Generally Accepted Accounting Principles
-principles for presentation of financial statements and underlying transactions that client management uses in preparing financial statements

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18
Q

What is GAAS?

A

Generally Accepted Auditing Standards
-standards the auditors should follow when conducting an audit

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19
Q

What governing body oversees the audits and standard setting of PUBLIC (issuer) companies?

A

PCAOB (under the SEC)

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20
Q

What governing body oversees the audits and standard setting of NONPUBLIC (non-issuer) companies?

A

AICPA

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21
Q

Who has the authority to regulate CPAs and CPA firms?

A

State Board of Accountancy
-issue and revoke licenses

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22
Q

What are the 3 Responsibilities/General of GAAS?

HINT: TIP

A

T = Training and Proficiency (competence and capabilities) - experience and expertise

I = Independence - independence in fact (in mind) and independence in appearance

P = (Due) Professional Care - level of performance by reasonable auditor in similar circumstances
-Professional Skepticism = questioning mind and critical assessment of evidence
-Professional Judgment = application of relevant training, knowledge and experience

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23
Q

What are the 3 Performance/Fieldwork of GAAS?

HINT: PIC

A

P = Planning and Supervision - preparation of the audit plan (list of audit procedures) and establishing materiality

I = Internal Controls and Understanding of Entity - risk assessment

C = Corroborative Audit Evidence (substantive tests)
-Sufficient = quantity
-Appropriate = quality
*Relevant (does evidence address assertion(s) of interest
*Reliable (from high to low)

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24
Q

What are the 4 Reporting of GAAS?

HINT: ACDE

A

A = Accounting Principles - financial statements prepared in accordance with GAAP

C = Consistency - accounting principles and rules have been consistently applied

D = Disclosures - prepared in accordance with GAAP

E = Expression of Opinion by auditor based on evidence

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25
Q

The Code of Professional Conduct consists of two sections.

What are they and describe each briefly?

A
  1. Principles - “aspirational goals;” provide overall framework; expresses the profession’s responsibilities to the public, clients, and colleagues and provides a framework for the Rules
  2. Rules - govern performance of professional services; a group of ENFORCEABLE ethical standards
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26
Q

What are interpretations?

A

they provide guidelines as to the scope and application of rules

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27
Q

What are the TWO parts of independence?

A
  1. Independence in FACT (in mind) = permits the CPA to perform an attest service without being affected by influences that might compromise professional judgment thereby allowing that individual to act with integrity and to exercise objectivity and professional skepticism
  2. Independence in APPEARANCE = which is the avoidable circumstances that might cause a reasonable and informed third party, aware of all relevant information, including safeguards applied, to reasonably conclude that integrity, objectivity, or professional skepticism of an audit firm or member of the attest engagement team has been compromised
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28
Q

The communication between a CPA and their clients is considered what?

A

CONFIDENTIAL (not privileged like attorneys, clergymen, or physicians)

Information may be subpoenaed in a court of law

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29
Q

Is the successor auditor required to communicate with the predecessor auditor?

A

YES, before accepting the engagement

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30
Q

Can the successor auditor communicate directly with the predecessor auditor?

A

NO, must first get client’s consent

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31
Q

Audit Planning procedures include (4):

A
  1. Develop an AUDIT STRATEGY
  2. Develop an AUDIT PLAN
  3. Develop an AUDIT PROGRAM
  4. Prepare an ENGAGEMENT LETTER
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32
Q

What is an ENGAGEMENT LETTER?

A

a contract between the client and the auditors (required!)

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33
Q

Who prepares the engagement letter?

A

Auditors

34
Q

What is included in an engagement letter (7)?

A
  1. Objective and scope of the audit
  2. Auditor and management responsibilities
  3. Inherent limitations of audit - specialist
  4. Applicable financial reporting framework (GAAP)
  5. Expected form and content of reports to be issued by the auditors
  6. Timing of audit work
  7. Audit fees
35
Q

What is an AUDIT PROGRAM?

A

comprehensive list of the specific audit procedures that the audit team needs to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements

36
Q

What is MATERIALITY?

A

amount at which judgments or decisions based on financial statements may be altered

37
Q

What are the THREE types of AUDIT PROCEDURES?

A
  1. Risk Assessment - understand the client and their cycles (flowcharts, narratives, questionnaires)
  2. Test of Controls - test the operating effectiveness of controls to prevent/detect material misstatements
  3. Substantive Procedures - tests of detailed account balances and analytical procedures (test client’s assertions)
38
Q

What are the functions of the audit work papers?

A

-documents compliance with GAAS
-provides support for the auditors’ reports
-aids in the supervision of reviewing the quality of work performed
-aids in the planning and conducting future audits

39
Q

Who OWNS the audit work papers?

A

Auditors (NOT the client)

40
Q

What ultimately determines the basis for the expression of an opinion by the auditors?

A

Auditors’ judgment

41
Q

What is INHERENT RISK?

A

likelihood that, in the absence of client’s internal controls, material errors or fraud COULD enter the accounting system used to develop financial statements

e.g. business risk - nature of the client and its environment

42
Q

Who “owns” inherent risk?

A

Client (company)

43
Q

What is CONTROL RISK?

A

likelihood that the client’s internal control policies and procedures FAIL TO PREVENT OR DETECT a material misstatement of a relevant financial statement assertion

44
Q

Who “owns” control risk?

A

Client

45
Q

What is DETECTION RISK?

A

likelihood that the auditors’ substantive procedures WILL FAIL TO DETECT a material misstatement that exists within an assertion related to an account balance or class of transactions

46
Q

Who “owns” detection risk

A

Auditors (they want to restrict this!)

47
Q

What is AUDIT RISK?

A

risk that the auditors will EXPRESS AN INAPPROPRIATE AUDIT OPINION when the financial statements are materially misstated

48
Q

Another name for the combination of INHERENT RISK and CONTROL RISK?

A

Risk of Material Misstatement (RMM)

49
Q

What is the primary objective of procedures performed to obtain an understanding of internal controls of the client’s different cycles?

A

to assess the RISK OF MATERIAL MISSTATEMENT and gain the knowledge necessary to determine the nature, extent, and timing (NET) for further audit procedures

50
Q

What type of procedures does an auditor use to document and understand a client’s internal controls by cycle?

A

-Flowchart
-Checklist
-Narrative
-Questionnaire

51
Q

What does a “NO” answer in an internal control questionnaire point out?

A

Indicates a WEAKNESS and/or a potential MISSTATEMENT

52
Q

Test of controls are used to test whether they are operating _________ (how?)

A

Effectively

53
Q

What is the most fundamental and effective control?

A

Segregation of duties

(separate ARC, A = authorization; R = recording; C = custody)

54
Q

When a weakness in internal control is discovered, how would the auditors possibly alter their substantive tests?

A

INCREASE substantive tests of details

55
Q

Relating to internal controls, significant deficiencies and material weaknesses must be communicated to whom?

A

the Audit Committee and/or Board of Directors

56
Q

What are the advantages of statistical sampling?

A

-Provides auditors with a sufficient sample size that controls exposure to sampling risk
-Uses selection methods that expose all items in the population to selection
-Evaluates the sample evidence in such a manner that controls exposure to sampling risk

57
Q

Describe the difference between Statistical Sampling and Nonstatistical Sampling

A

Statistical: applies laws of probability in selecting sample items and evaluating results
-provides sufficient sample size
-control exposure to sampling risk
-evaluated quantitatively

Nonstatistical: does NOT allow audit team to control exposure to sampling risk
-use judgment in determining sample size
-results evaluated on this judgment

58
Q

What are the three components of the fraud triangle?

A
  1. Motivation
  2. Opportunity
  3. Rationalization
59
Q

What is fraud?

A

INTENTIONAL acts that cause the misstatement of the financial statements

60
Q

What are errors?

A

UNINTENTIONAL misstatements or omissions

61
Q

What is the audit risk related to cash?

A

Overstatement

62
Q

What assertion is being tested for the audit of cash?

A

Existence and Presentation/Disclosure

63
Q

What is the assertion and risk that auditors are concerned in the audit of accounts receivable?

A

Existence (assertion) and Overstatement (risk)

64
Q

What audit procedure is the most conclusive form in establishing the existence of accounts receivable?

A

Confirmations

65
Q

Auditors are REQUIRED to confirm accounts receivable per GAAS.

Unless:

A
  1. It is immaterial
  2. the use of confirmations would be ineffective
  3. auditors’ assessment of the risk of material misstatement is low and the auditors plan to obtain sufficient appropriate audit evidence by performing other substantive procedures
66
Q

What type of audit risk is most closely associated with the confirmation of accounts receivable?

A

Detection

67
Q

What should auditors do if there is NO REPLY to an initial A/R confirmation?

A
  1. Send out a second request
  2. They can do more substantive procedures
68
Q

What is the assertion and risk that auditors are concerned in the audit of accounts payable?

A

Completeness (assertion) and Understatement (risk)

69
Q

What is the best audit procedure for determining the existence of unrecorded liabilities?

A

search for unrecorded liabilities

70
Q

When is the search for unrecorded liabilities performed?

A

SUBSEQUENT to the balance sheet date through the date of the audit report

71
Q

When should roll-forward procedures be performed?

A

from the interim date to the date of the financial statements for both tests of controls and substantive tests

72
Q

What is the auditor looking for by performing analytical procedures on the client’s operations?

A

UNUSUAL TRANSACTIONS or VARIANCES from year-to-year

e.g. sales, net income

73
Q

What are the procedures performed at the END of an audit? (6)

A
  1. Search for unrecorded liabilities
  2. Review the minutes of meetings
  3. Perform final analytical procedures
  4. Perform procedures to identify loss contingencies (obtain attorney letter - REQ!)
  5. Perform review of subsequent events (from year-end to date of audit report)
  6. Obtain a client written representation letter
74
Q

What are the 4 things a Written Representation includes?

A
  1. Dated as of the date of the audit report
  2. Signed by members of top management (CEO and CFO)
  3. REQUIRED for audits
  4. NOT a substitute for the application of other audit procedures
75
Q

What is a Management Letter, and is it required by GAAS?

A

NOT required by GAAS

  1. Reports auditor recommendations to client
  2. Assists client in improving its operations
  3. Develops rapport with client
  4. Typically prepared following after the audit report release date
76
Q

What is the complete set of financial statements that an auditor expresses an opinion on?

A
  1. Balance Sheet
  2. Income Statement
  3. Statement of Stockholders’ Equity
  4. Statement of Cash Flows
  5. Footnote Disclosures
77
Q

When is the auditors’ report dated?

A

when the auditor has accumulated SUFFICIENT and APPROPRIATE audit evidence (usually the last day of field work)

78
Q

An audit report for a public company indicates that the audit was performed in accordance with which standards?

A

PCAOB

79
Q

For a publicly traded company, an auditor expresses an opinion on what?

A
  1. Fairness of F/S and related disclosure
  2. Effectiveness of internal control over financial reporting

“INTEGRATED AUDIT”

80
Q

For a non-public company, an auditor expresses an opinion on what?

A

Fairness of financial statements and related disclosures

81
Q

When should related party transactions be disclosed in the footnotes to the financial statements?

A

Related party transactions that are MATERIAL and SIGNIFICANT must be disclosed

ACC-423: Auditing (6 decks)

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