Final Review

Question 1

Compilation Engagement

Answer 1

the practitioner formats factual finding mathematically and does not provide an opinion. This means that there is no assurance and no conclusion.

Question 2

Review Engagement

Answer 2

practitioner gathers sufficient evidence and assesses the financial statements for reliability. This is limited assurance and a conclusion but there is no opinion.

Question 3

An Audit

Answer 3

an engagement that expresses an opinion on whether the financial statements are presented fairly and in accordance with the reporting framework. This is reasonable assurance and the highest level of assurance.

Question 4

Reasonable Assurance

Answer 4

Practitioner gathers sufficient evidence and expresses an opinion on whether the financial statements are presented fairly and in material manners and pervasive.

Question 5

Limited Assurance

Answer 5

the practitioner gathers sufficient evidence and assesses the financial statements for reliability.

Question 6

Material

Answer 6

Errors in the financial statements that are large enough or significant enough to impact the users’ decision-making.

Question 7

Pervasive

Answer 7

refers to the extent of the misstatement or issue and how broadly it affects the financial statements. A misstatement is considered pervasive if it is not confined to one particular account or area but affects multiple areas of the financial statements, leading to overall unreliability.

Question 8

Qualified Opinion

Answer 8

is bad and means that something has to be changed on the financial statements.

Question 9

Unqualified Opinion

Answer 9

is good and means that nothing has to be changed on the financial statements.

Question 10

Adverse Opinion

Answer 10

When the financial statements are misstated and the misstatements are material and pervasive.

Question 11

Three responsibilities of an Auditor

Answer 11

1) Professional Scepticism: maintaining independence by always having a questioning mind and not allowing biases.
2) Professional Judgement: by always using knowledge and training to perform their duties.
3) Due Care: being diligent.

Question 12

Three Biases under Professional Scepticism

Answer 12

1) Availability Bias: occurs when the auditor only focuses on the information that easy to remember as being more relevant and more important. This can happen when the auditor does not consider alternatives.
2) Overconfidence Bias: this occurs when the auditor overestimates their ability.
3) Anchoring Bias: this occurs when the auditor starts from one intial numeric value and insufficiently adjusts the value.

Question 13

What are the five audit threats?

Answer 13

1) Self-Interest Threat: occurs when the auditor or audit staff have a financial interest in the client company.
2) Self-Review Threat: occurs when the auditor or staff have to form an opinion on something they worked on.
3) Advocacy Threat: occurs when the auditor or staff acts on behalf and in best interest of the client.
4) Familiarity Threat: occurs when there is a relationship between the assurance team and the client.
5) Intimidation Threat: occurs when the auditor feels pressure and threatened by the client.

Question 14

Two Types of Fraud

Answer 14

Financial Reporting Fraud: when assets are incorrectly values, liabilities are united, delaying revenues and expenses.

Misappropriation of Assets: theft of cash, theft of inventory, unauthorized discounts.

Question 15

Going Concern Risk

Answer 15

justifies valuing an asset on basis that they will continue to be used after they are due.

Question 16

Seven Red Flags of Fraud

Answer 16

1) High auditor turnover.
2) Complex business structure.
3) Unusual transactions.
4) No internal audits.
5) Key Finance personnel refuse to take leave.
6) Weak internal controls.
7) Poor compensation practices.

Question 17

Three parts of the fraud triangle

Answer 17

1) Incentives and Pressures
2) Opportunities
3) Attitudes and Rationalization

Question 18

Audit Risk

Answer 18

Auditor gives an opinion that the financial statements are presented fairly when they contain fraud or error.

Question 19

Three Types of Audit Risk

Answer 19

Inherent Risk: the financial statements contain signifiant misstatement.
Control Risk: risk that the internal controls will not prevent misstatements.
Detection Risk: risk that the auditors procedures will not be effective in detecting misstatement.

Question 20

Performance Materiality

Answer 20

an amount that is less than the planning materiality to reduce the likelihood that a misstatement in a particular account does not exceed overall materiality.