II. Assessing Risk and Developing a Planned Response (25–35%) Flashcards
Does the PCAOB have the legal authority to prosecutive criminal violations?
No. The PCAOB is a non-profit not a government entity. They can impose sanctions on firms (by revoking their registration) or individual auditors (by restricting them from acting as engagement partners), it cannot prosecute criminal violations. The U.S. Department of Justice handles criminal matters
What is an audit program and what is its purpose?
An audit program is a step-by-step list of audit procedures to ensure that the auditor achieves specific audit objectives (like detecting misstatements) related to management’s assertions.
When is the audit program finalized?
The audit program is finalized after the auditor have considered materiality, RMM (which includes internal controls), business and other industry factors.
What is the purpose of audit documentation?
The primary support of audit documentation is for the audit opinion. This means that that the support will show that the accounting records have been reconciled with the financial statements.
Is there a Governmental Auditing Standards Board (GASB)?
No. Audit Standards for government audits are from the GAO (Government Accountability Office - the government holds federal assistance recipients accountable)
What is deflation?
Deflation happens when prices fall due to low aggregate demand because consumers and businesses are deferring purchases and/or investments in anticipation of a better deal which results in manufacturers lowering prices leading to lower wages and less investment spending. Deflation signal impending recession.
What is control risk?
The risk that the internal control will not detect a material misstatement in a financial statement assertion.
What is inherent risk in a financial statement audit?
It is the susceptibility of a financial statement assertion to a material misstatement assuming no controls
What are the different functions within payroll?
Authorization(hire/fire), Recording(calculate pay), Custody (sign/distribute checks), Comparison(bank recs)
Can the same individual approve time cards and sign payroll checks?
No, because this combines the recording and custody functions and thus should be separated.
If a service auditor is unable to obtain a written assertion from the service organization’s management, what is the most appropriate action to take?
Withdraw from the engagement unless prohibited by the law. The auditor cannot proceed without written assertions.
The service auditor can communicate this to the service organization’s governance, but the appropriate action to take is withdrawal.
What are the primary concerns of microeconomics?
Microeconomics is considered about the price of foods and services that affect individuals (households) in the economy. This field is concerned with supply and demand.
What are the primary concerns of macroeconomics?
The primary concerns are: contraction and unemployment, national and global economies, national output and income, expansion and inflation. This is the study of the economy as a whole.
What is a receiving report?
This is the document generated by the company warehouse for goods received from the supplier. This is what a auditor would review to determine if the POs were correctly filled by the supplier .
What are purchase requisitions?
This is an internal request for goods to be ordered from the supplier by the purchasing department.
Does ineffective governance provide a motivation to commit fraud?
No, it creates an opportunity but not a motivation.
What are the steps involved in accessing and preparing data for purposes of Audit Data Analytics.
- Extract the data from information system
- Transform the data into a usable format
- Load the data into analysis software
What are the steps in audit data analytics (ADA)?
- Plan the ADA
- Access and prepare the data for the ADA
- Consider the relevance and reliability of the data used
- Perform the ADA
- Evaluate the results
Why would an auditor review the reconciliation of payroll tax forms?
To see if there are potential liabilities for unpaid payroll taxes. Unrecorded liabilities is a concern in an audit. When reviewing the payroll reconciliation, the auditor is reviewing the report of withheld taxes to the taxes remitted to uncover any unrecorded/unpaid tax liabilities
When the group auditor assumes responsibility for the group audit and rely on work by the component auditor, what do they do and not do?
The group auditor reviews the component auditor’s work and they do NOT refer to the component auditor in the audit report
Is there a risk of RMM if management argues with the auditor about accounting matters?
Yes because it may indicate an organizational culture that supports aggressive accounting and even a willingness to do fraudulent financial reporting
If the group auditor is going to reference the component auditor, what will they not do?
The group auditor will not review the component auditor’s work papers, visit the component auditor or determine if the component auditor understands internal control. The group auditor is not assuming responsibility for the component auditor’s work.
What will the group auditor do if they plan on referencing a component auditor?
They will make inquiries about the component auditor’s professional reputation and independence of the component auditor.
Can an auditor use an internal auditor to conduct tests of controls?
Yes. Because internal audit reviews of internal controls can assist in planning. What the internal auditor cannot do, is audit something that has a significant impact on the financial statements.
