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Auditing > Midterm 2 > Flashcards

Midterm 2 Flashcards

1
Q

What is a system and what are some characteristics of a system?

A
  • A system is “a set of interrelated components that interact to achieve a goal”
  • Most systems are composed of smaller subsystems
  • The system concept encourages integration (minimizing the duplication or recording, storing, reporting and processing)
  • The subsystems goals should be in line with the organizations goal (AKA Goal Congruence)
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2
Q

Data vs Information

A
  • Data are facts that are collected, recorded, stored, processed by an information system
  • Organizations collect Data about events that occur (transaction), Resources that are affected by those events (item sold/cash received), Agents who participate in the events (name of client)
  • Information is data that has been organized and processed to provide meaning to a user
  • Better information = better decisions
  • Too much information = information overload
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3
Q

What are some characteristics that make information useful? (don’t memorize but understand - stacey)

A
  • Relevance : serves the purpose that you need it for
  • Reliability : dependable and free from error
  • Completeness : doesn’t leave out anything important
  • Timeliness : available when you need it
  • Understandability : presented in a manner you can comprehend and use
  • Verifiability : nature is such that different people will draw similar conclusions
  • Accessibility : available when you need it and proper format
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4
Q

Who uses information and what type of information do they use?

A

External Users

  • Mandatory (required by govt, bank) example audited FS
  • Essential (required to conduct business with external parties) example purchase orders

Internal Users

  • Use Discretional information
  • Must have positive value
  • Example : do our revenues exceed our costs
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5
Q

What is an AIS? And what are its objectives?

A
  • System that collects, records, stores, and processes data to produce information for decision makers
  • Not necessarily automated, computerized or technologically advanced
    Objectives :
  • Support day to day ops
  • Support decision making by internal decision makers
  • Fulfill obligations relating to stewardship ( stakeholders)
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6
Q

What are the functions of an AIS?

A

A. Collect and Store data about events, resources and agents
B. Transform that data into information that mgmt can use to make decisions about events, resources and agents
C. Provide adequate controls to ensure resources are
- Available when needed
- Accurate and reliable

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7
Q

Why do auditors need knowledge of the AIS? And what do auditors need to understand about an AIS?

A
  • Audit report based on info provided by AIS!
  • How the system is Designed, Implemented, and Used (in order to evaluate internal controls)
  • How financial information is Reported (in order to assess audit risk)
  • How information is Used to Make Decisions (in order to determine what is most important to the users of the FS)
    In short : auditors need to evaluate the accuracy and reliability of information provided by the AIS
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8
Q

What is the definition of a transaction?

A
  • An Agreement between two parties to Exchange goods and services
  • Any Other Event that can be Measured in economic terms by an organization
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9
Q

How does a Business transaction cycle begin and end?

A
  • Begins with Capturing Data about a transaction

- Ends with an Information Output, such as financial statements

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10
Q

What are some business processes?

A
  • Acquiring capital
  • Buying PPE
  • Hiring and training employees
  • Purchasing inventory
  • Doing advertising and marketing
  • Selling goods and services
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11
Q

What are the 5 Financial Statement Cycles?

A
  • Revenue cycle (Revenue and Collection)
  • Expenditure cycle ( Acquisition and Payment)
  • HR / Payroll cycle
  • Production cycle (Inventory and Distribution)
  • Financing cycle (Capital acquisition and Repayment)
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12
Q

What does a Revenue Cycle do? What are some transactions?

A
  • Gets finished goods from production cycle, provides funds to financing cycle, provides data to GL
  • Involves interactions with Customers
  • Sell goods in exchange for cash
    Transactions include:
  • Handle customer inquiries and orders
  • Approve credit sales
  • Update sales and A/R, receive payments
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13
Q

What does a Expenditure Cycle do? What are some transactions?

A
  • Gets funds from financing cycle, provides raw materials to production cycle, provides data to GL
  • Involves transactions with Suppliers
    -By inventory for resale or raw materials to use in production cycle in exchange for cash
    Transactions include :
  • Receive goods and services
  • Receive vendor invoices
  • Pay vendors
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14
Q

What does a HR/Payroll Cycle do? What are some transactions?

A
  • Gets funds from financing cycle, provides labour to production cycle, provides data to GL
  • Involves interactions with employees
  • Employees are hired, trained, paid, evaluated, promoted and terminated
    Transactions include:
  • Give cash; get labour
  • Recruit hire and train employees
  • Update payroll records
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15
Q

What does a Production Cycle do? What are some transactions?

A
  • Gets raw materials form expenditure cycle, gets labour from HR/payroll cycle, provides finished goods to revenue cycle, provides data to GL
  • Raw materials and labour are transformed into finished goods
    Transactions include
  • Give labour and raw materials; get finished goods
  • Design products
  • Manufacture products
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16
Q

What does a Financing Cycle do? What are some transactions?

A
  • Get funds form revenue cycle, provides funds to expenditure and HR/payroll cycle, provides data to GL
  • Involves interactions with investors and creditors
  • Raise capital, repay capital, pay return
    Transactions include
  • Forecast cash needs
  • Sell securities to investors
  • Borrow money from lenders
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17
Q

What is the transaction flow into journals and FS?

A

Transactions -> Journals -> General ledger and subsidiary records -> General ledger trial balance -> Financial Statements

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18
Q

What are the 4 types of data processing?

A
  • Updating data (recording a sale to a customer)
  • Changing data (customer address)
  • Adding data (new customer)
  • Deleting data (removing customer with bad debt)
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19
Q

What are the forms of output and purpose of output?

A

Forms

  • Documents - records of transactions
  • Reports - used to make decisions
  • Queries - request for specific info

Purpose

  • External; FS
  • Internal
  • Planning purposes
  • Control purposes
  • Management of day to day ops
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20
Q

What is the cycle approach?

A

A method of dividing an audit by keeping closely related types of transactions and account balances in the same segment

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21
Q

What are the 5 evidence decisions in regards to procedures?

A
  • Risk : Which risks could result in a risk of material misstatement at the assertion level? Defines what type and extent of evidence collected
  • Nature : Which audit procedure do we use?
  • Extent : What sample size to select for a given procedure?
  • Selection : Which particular items to select from the population?
  • Timing : When to perform the procedures?

All require professional judgment

22
Q

What are some audit procedures (audit tests) to obtain audit evidence?

A

BIG 3

  1. Risk Assessment procedures
  2. Tests of controls
  3. Substantive procedures (tests of details(transactions), analytical procedures, balances)
    - Inspection
    - Observation
    - External Confirmation
    - Recalculation
    - Reperformance
    - Analytical Procedures
23
Q

What are the 4 factors of persuasiveness of audit evidence?

A
  • Appropriateness: measure of the quality of audit evidence
  • Timeliness: covering the appropriate period
  • Relevance: pertinence of the evidence to the assertion or control being tested
  • Sufficiency: measure of the quantity of audit evidence
24
Q

What is inspection?

A
  • Physical examination or count of a tangible asset or inspection of a document
  • Direct means of verifying an asset exists
  • One of the most useful and reliable types of audit evidence
  • Objective means of determining quantity and description of an asset
  • Example: Read the minutes book of BOD and summarize relevant info into working paper
25
Q

What is observation?

A
  • Use of the senses to assess certain activities
  • Useful in obtaining a general impression of the client’s facilities
  • Useful in determining whether accounting personnel are performing their assigned responsibilities
  • Rarely sufficient on its own as a procedure
  • Example: Observe whether the two inventory count teams independently count and record inventory quantities
26
Q

What is external confirmation?

A
  • The auditor’s receipt of a written or oral response from an independent third party verifying the accuracy of information requested
  • The request is made to the independent third party by the client and the third party responds to the auditor directly
  • Generally a very reliable form of evidence (must be controlled by the auditor)
  • Example: Obtain written confirmation from selected clients of accounts receivable balances as at year end date
27
Q

What is recalculation?

A
  • Repeating or checking the mathematical accuracy of calculations completed by the client
  • Testing of arithmetical accuracy
  • Done manually or with computer assisted audit techniques
  • Example: Recompute the unit sales price times the number of units sold for a selected sample of sales invoices and compare the totals to the client’s calculations (**accuracy)
28
Q

What is reperformance?

A
  • The redoing of procedures and internal controls (other than mathematical calcs) of the client by the auditor
  • Relies heavily on computer assisted auditing techniques
  • Doing the same procedure should produce the same information/conclusion
  • Example: For a sample of sales invoices, compare the unit selling price as stated on invoice to the master files of authorized selling prices
29
Q

When performing analytical procedures the auditor compares clients data with…

A
  • Industry data
  • Similar prior-period data
  • Client-determined expected results (budgets)
  • Auditor determined expected results (interest expense)
  • Expected results using non-financial information
30
Q

When performing substantive analytical procedures, the auditor shall…

A
  • Determine the suitability of particular substantive analytical procedures for given assertions
  • Evaluate the reliability of data
  • Develop an expectation (amounts or ratios)
  • Determine the amount of any differences
31
Q

When developing an overall audit strategy, the auditor shall…

A
  • Identify the characteristics of the engagement that define its scope
  • Determine the reporting requirements
  • Consider the factors that are significant in directing the audit team’s efforts
  • Consider the results of preliminary engagement activities
  • Determine the nature, timing and extent of resources necessary to perform the engagement
32
Q

What is the substantive approach in regards to audit strategy?

A
  • Used when the auditor cannot rely on the internal controls with respect to a particular assertion
  • Decide to not rely upon controls and collect audit evidence primarily through substantive tests
33
Q

What is the combined approach in regards to audit strategy?

A
  • Used when auditor can rely on the internal controls with respect to a particular assertion and control risk can be assessed at low or medium
  • Collect audit evidence through a combination of control tests and substantive tests
34
Q

What are the 5 components of internal control?

A
  1. Control Environment
  2. Risk Assessment
  3. Control Activities
  4. Information and communication
  5. Monitoring
35
Q

What are the 5 assertions about classes of transactions and events for the period under audit?

A

Occurrence: event/transaction actually happened

  • Completeness: all transactions/events that should have been recorded are recorded
  • Accuracy: correct amounts have been recorded
  • Cutoff: recorded in correct accounting period
  • Classification: recorded in proper accounts
36
Q

What are the 4 assertions about account balances?

A
  • Existence: Assets, liabilities, equity interests exist
  • Completeness: assets, liabilities and equity interests that should have been recorded have been
  • Valuation and allocation: appropriately recorded in FS
  • Rights and obligations: entity holds or controls the rights to assets, and liabilities are the obligation of the entity
37
Q

What are the 4 assertions about presentations and disclosures?

A
  • Occurrence and rights and obligations: disclosed events/transactions have occurred and pertain to entity
  • Completeness: disclosures that should have been included in FS have been
  • Accuracy and valuation: Financial info disclosed appropriately and at proper amounts
  • Classification and understandability: info is appropriately presented and described
38
Q

What is the purpose of risk assessment procedures? And what are some procedures done?

A
  • Includes inquiries, analytical procedures, inspection and observation
  • Purpose is to understand entity and its environment, including internal controls and assess risk of material misstatement (inherent risk and control risk)
39
Q

What is the purpose of tests of controls? What are the 5 procedures used?

A
  • Assess control risk at at the assertion level
  • Procedures to test the effectiveness of control policies

Procedures

  • Make inquiries of appropriate entity personnel
  • Inspect documents, records an reports
  • Observe control related activities
  • Test data
  • Re-perform client procedures
40
Q

What is included in the information system? The auditor shall obtain an understanding of: (Client Risk Profile)

A
  • Classes of transactions
  • Procedures
  • Accounting records
  • How the information system captures events and conditions
  • Financial reporting process
  • Controls surrounding journal entries
41
Q

What are the three ways to document the understanding of internal controls?

A
  • Narrative
  • DFD
  • Internal control questionnaire
42
Q

What are substantive tests of transactions?

A
  • Used to test the the five transaction related assertions
  • Procedures designed to test for dollar misstatements in each class of transactions
  • Example : select a sample of of entries recorded in cash disbursements journal to determine if valid (the occurrence assertion) by examining supporting documents
43
Q

What are substantive analytical procedures?

A
  • Analytical procedures designed to provide evidence at the assertion level
  • Performed to audit an account balance
  • Indicate possible misstatements
  • Provide substantive evidence
44
Q

What are substantive tests of balances?

A
  • Used to test the 4 balance related assertions
  • Procedures testing for monetary errors or fraud and other irregularities to determine whether the 4 balance related assertions have been satisfied for each significant account balance
45
Q

What are the steps in the audit process?

A

A. Risk Assessment

  1. Client Acceptance
  2. Audit Planning: auditor obtains knowledge of client’s industry, business and control environment
  3. Assess risk of material misstatement: auditor determines audit risk and sets preliminary audit levels

B. Risk Response

  1. Develop Risk Response(overall audit plan): auditor considers different types of tests and type of sampling to be used
  2. Perform Risk Responses: audit tests designed to respond to the risks of material misstatement at the assertion level. Include tests of control, substantive tests of details and substantive analytical procedures
  3. Conclusion: info obtained throughout the audit is combined to reach overall conclusion

C.Reporting
7. Issue auditor’s report

46
Q

What is the difference between analytical procedures and substantive analytical procedures?

A

Analytical Procedures
- Evaluations of financial information through analysis of plausible relationships among financial and non financial data

Substantive analytical procedures
- Analytical procedures designed to provide evidence at the assertion level

47
Q

What type of procedures are used for tests of controls?

A
  • Inspection
  • Observation
  • Inquiries
  • Recalculation
  • Reperformance
48
Q

What type of procedures are used for substantive tests of transactions?

A
  • Inspection
  • Inquiries
  • Recalculation
  • Reperformance
49
Q

What type of procedures are used for analytical procedures?

A
  • Inquiries

- Analytical procedures

50
Q

What type of procedures are used for Substantive tests of balances?

A
  • Inspection
  • Inquiries
  • External confirmation
  • Recalculation
  • Reperformance

Auditing (2 decks)

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