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Taylor (Audit) > Risk Assessment > Flashcards

Risk Assessment Flashcards

1
Q

Control Environment

A

The overall tone of the organization

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2
Q

Risk Assessment

A

Managements identification of risk

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3
Q

Information and Communications Systems

A

A mean of recording transactions and communicating resposibilities

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4
Q

Monitoring

A

Assessment of internal control performance over time

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5
Q

Existing Control Activities

A

Control Policies and procedures

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6
Q

Five Components of Internal Control

A 
(C) Control Risk
(R) Risk Assessment
(I) Information and Commiunications
(M) Monitoring
(E) Existing Control Activities

“CRIME”
CPA is required to understand each element of “Crime” : as it relates to financial reporting

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7
Q

Information Technology Segregation of Duties

A 
(C) - Control Team
(O) - Operator
(P) - Programmer
(A) - Analyst
(L) - Librarian

“COPAL”

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8
Q

Audit Process

A
  1. General Principles
  2. Engagement Acceptance
  3. Assess Risk & Plan Response
  4. Perform Procedures & Obtain Evidence
  5. Form Conclusions
  6. Reporting
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9
Q

Audit Planning

A

(N) - Nature (preliminary evaluation materiality, audit risk, internal control)
(E) - Extent (Scope of Audit, size and complexity, IT, prior experience)
(T) - Timing (deadlines, key dates,)

(C) - Completeness (account balances, trans, disclosure)
(O) - Cutoff (correct accounting period)
(V) - Valuation, Allocation, and Accuracy act. Balances (account balances, transactions)
(E) - Existence (Balance and trans exist)
(R) - Rights; Obligations
(U) - Understandability,Classification (disclosure is clearly expressed)

“COVER U”

Must be written and can be adjusted as time goes on.

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10
Q

Audit Evidence Hierarchy (Identifying Risk)

A 
Remember your vowels!!!
(A) - Auditors knows 
(E) - External Evidence
(I) - Internal Evidence
(O) - Oral Evidence
(U) - Know it!
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11
Q

Audit Reporting (Private)

A

(M) - Management (R) Responsibility Paragraph
(D) - Design
(I) - Implementation
(M) - Maintenance

(R) Reports
(E) Express
(P) Plan
(O) Obtain
(R) Risk 
(T)Test "Internal Controls"
(S) Statements
(C) Control
(R) Reasonableness
(A) Accounting
(M) Management
(E) Evaluating

“MR DIM REPORTS CRAME”

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12
Q

Is departure from US GAAP allowed if financial statements would be otherwise misleading?

A

Yes, departure from US GAAP is allowed if financial statements would be otherwise misleading.

Still issue unmodified/unqualified opinion.

Disclosure in the notes.

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13
Q

Professional Skepticism

A

is the recognition that circumstances may exist that cause the financial statements to be materially misstated.

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14
Q

Emphasis Of Matter Paragraph

A
  1. Going Concern
  2. Material justified change in accounting principal
  3. Material Misstatement in prior financial statements
  4. Special Purpose Framework

Special: Change in audit opinion could potentially be state in the emphasis of matters paragraph.

You can have a emphasis of matters paragraph with a un modified, modified, adverse, disclaimer

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15
Q

Other Matter Paragraph

A
  1. Restrict use of Report
  2. Prior financial statements audited by prior auditor has not been presented.
  3. Comparative financial statements where current year is audited but PP is not audited.
  4. Material inconsistency in other information
  5. Report of supplementary information within auditors report
  6. Refer to required Supplementary information
  7. report on compliance included in auditors report.

Special: Change in audit opinion could potentially be state in the emphasis of matters paragraph.

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16
Q

Explanatory Paragraph (Issuer/Public)

A
  1. Restrict use of Report
  2. Prior financial statements audited by prior auditor has not been presented.
  3. Comparative financial statements where current year is audited but PP is not audited.
  4. Material inconsistency in other information
  5. Report of supplementary information within auditors report
  6. Refer to required Supplementary information
  7. report on compliance included in auditors report.

Special: Change in audit opinion could potentially be state in the emphasis of matters paragraph.

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17
Q

Standard Audit Procedures to obtain evidence

A

(C) Confirmation

(F) Footing, Cross Footing, Recalculation “Valuation”
(“A Vowel” - Auditor Knows)
(I) Inquiry (“O Vowel” - Oral Evidence)
(V) Vouching (“I Vowel” - Internal Evidence)
(E) Examination/Inspection (“A Vowel” - Auditor Knows)

(C) Cutoff Review “No Back Dating” (“I Vowel” - Internal Evidence)
(A) Analytical Procedures (“A&I Vowel”)
(R) Reperformance (A Vowel)
(R) Reconciliation (I Vowel)
(O) Observation (A Vowel)
(T) Tracing “Expenses & Liabilities are not understated” (I Vowel)

(W) Walk-through (A&O Vowel)
(A) Audit Related Accounts simultaneously (I Vowel)
(R) Representation Letter (I Vowel)
(S) Subsequent Events Review (All Vowels)
1. Contingencies
2. Unrecorded Liabilities
3. Disclosures

“C FIVE CARROT WARS”
Remember the Facebook game Farmville.

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18
Q

Substantive Procedures

A

$$$$$ lets test the money

  1. Transactions Total
  2. Account Balances
  3. Disclosures
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19
Q

Vouching

A 
Risk of overstatement
-Revenue 
-Assets
Testing for existence/occurrence
"Moving Down"

Example: start vouching with the sales journal (financial statements) to invoice

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20
Q

Tracing

A 
Risk of understatement
-Expenses
-Liabilities
Testing for completeness/coverage
"Moving Up"

Example: start tracing with the shipping doc to invoice to sales journal(financial statements) to audit sales

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21
Q

Sampling

A

Rule 1: Always assume that the population being sampled is normally distributed, that is, it can be described by a “normal” or “bell shaped curve” (Central limit theorem)

Rule 2: For the estimates that the CPA makes about the population to have mathematical validity, the samples have to be unrestricted and randomly selected, which means that:

  • every item in a population must have an absolutely equal chance of being selected .
  • The CPA cannot use “Bias” in deciding which items will be selected. No substitute items may be used. (Only area where CPA does not use judgement)

Rule 3: If the sample is large enough and is randomly selected, the sample will likely have the same statistical characteristics (mean and standard deviation) as the underlying population; that is, it will be representative of the population.

Rule 4: Standard deviation is a measure of “variability” which refers to the range of values within the population. (Sample Risk)

“Variability=Uncertainty=Larger sample size”

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22
Q

Does statistical sampling eliminate the need for auditing judgment?

A

No, Judgment is required to set many of the parameters and to evaluate the overall results.

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23
Q

Attribute Sampling

A

Most common in TESTING CONTROLS (Yes or NO MCQ)

Testing for specific characteristics (seeking errors) IC.

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24
Q

Variables Sampling

A

Estimating the dollar value of the population, substantive testing

Risk of incorrect acceptance (Beta Risk, sample results fail to identify an existing material misstatement)

Risk of incorrect rejection (Alpha Risk, lack of efficiency, sample results mistakenly indicate a material misstatement)

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25
Q

Sampling Risk

A

probability that sample is wrong

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26
Q

Non Sampling Risk

A
  • use wrong audit procedures

- improperly evaluate evidence/results

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27
Q

Tolerable Deviation Rate

A

tolerable mistakes = risk of misstatement

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28
Q

Deviation Rate VS Tolerable Rate

A

The deviation rate in the sample is the auditors best estimate of the deviation rate in the population from which it was selected.

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29
Q

Select the Sample (Rule 2)

A

most common random election
systematic selection - same day every month
block (cluster) sampling - ok if has random start

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30
Q

Evaluate the Sample Results (Rule 3)

A

Sample deviation rate (+) Allowance for sampling risk = upper deviation rate.

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31
Q

Sampling Exam Trick

A

examiners sometimes try to trick candidates into using the sample deviation rate (instead of the upper deviation rate) in drawing conclusions about a population. Always consider worst case scenario.

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32
Q

Elements of CPA Firms Quality Controls - identified by Statement on Quality Control Standards (SQCS)

A
  1. leadership responsibilities for quality within the firm
  2. relevant ethical requirements
  3. acceptance and continuance of client relationships and specific engagements
  4. human resources
  5. engagement performance
  6. monitoring
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33
Q

Can a CPA firm disclose the names of its audit clients?

A

A CPA firm may disclose name of clients but the disclosure may not suggest that the client may be experiencing financial difficulties.

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34
Q

Control Environment

A

the foundation of a business is its people and the environment

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35
Q

Risk Assessment

A

organizations must set objectives to identify, analyze, and mange risk

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36
Q

Control Activities

A

Policies and procedures are needed to make sure control objectives are effectively carried out.

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37
Q

Information and communication

A

organizations should create and use information and communication systems to plan, conduct, manage, evaluate, and control their operations.

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38
Q

Monitoring Activities

A

information systems and internal control policies and procedures are monitored and modified as needed.

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39
Q

Fraud Risk

A
  1. Pressures to perpetrate fraud
  2. opportunities to carry out fraud
  3. rationalizations to justify a fraudulent action
40
Q

Duty to Disclose

A

a. to comply with certain legal and regulatory requirements.
b. to a successor accountant management has given permission for communication between the predecessor accountant and the successor accountant
c. in response to a subpoena

41
Q

Fraudulent Reporting

A

usually acts of management

  • manipulation, falsification, or alteration of accounting records or supporting documents
  • misrepresentation in, or intentional omission
  • intentional misapplication of accounting principles
42
Q

Misappropriation of Assets

A

usually acts of one or more individuals among management, employees, or third parties and may involve stealing assets or causing an entity to pay for something that has not been received.
-theft causes the financial statements not to be presented in conformity with GAAP

43
Q

Fraud Risk - Incentive/Pressure

A

under pressure from sources or inside the entity

44
Q

Fraud Risk - Opportunity

A
  • allows a misrepresentation to occur
  • deficiencies in internal control
  • easy to steal assets
45
Q

Fraud Risk - Attitudes/Rationalization

A

employee creates a mindset that justifies the misrepresentation

46
Q

Addressing Letters & Reports

A

Engagement Letter - Can be a person

Auditors Report - Board of Directors

47
Q

Raises concerns regarding managements philosophy

A
  1. Management consumed with meeting the budget
  2. Management dominated by one person
  3. Management compensation contingent upon the entities financial statements
48
Q

Risk Assessment - Existing Control Activities

A 
to have a strong system...
(P) Prenumbering of Documents
(A) Authorization of Transactions
(I) Independent checks to maintain asset accountability
(D) Documentation

(T) Timely and Appropriate Financial Performance Reviews
(I) Information Processing Controls
(P) Physical Controls for Safeguarding Assets
(S) Segregation of Duties

49
Q

Risk Assessment - Segregation of duties

A

should not be combined….
(A) Authorization
(R) Record keeping
(C) Custody of related assets

50
Q

The Auditor would favor interim testing if

A
  1. the assessed risk of material misstatement is low
  2. the controls are strong
  3. the auditor can reduce the risk that misstatements that exist at the period-end are not detected by performing appropriate procedures, and
  4. GAAS does not require testing at the balance sheet
51
Q

Internal Controls (Sales)

A
  1. Preparation of the Sales Order “Serially Numbered”
  2. Credit Approval “approved”
  3. Shipment “serially numbered bill of laden”
  4. Billing “serially numbered sales invoice”
  5. Accounting

Billing and Accounting can be consolidated!

Match order

  1. Shipping
  2. Order
  3. Invoice
52
Q

Internal Controls (AR)

A
  1. Sales
  2. Collection of Cash Receipts
  3. Uncollectible Receivables
  4. Sales Returns “serially numbered”
  5. Sales Discounts
53
Q

Internal Controls (Cash Receipts)

A
  1. Cashier - actually receive receipts and makes deposits
  2. Accounts Receivable Department- enters receipts into the accounts receivable subsidiary records.
  3. Account Department- accounts receivable control account.

3 copies of receipts should be listed in detail.
lock boxes should be used as safeguards.

54
Q

Pass Key (Revenue Cycle)

A

existence is generally a more relevant assertion than completeness when auditing the revenue cycle. The risk that accounts receivable and sales will be overstated is high, while the risk that accounts receivable and sales will be understated is low.

55
Q

Internal Controls (Purchases)

A
  1. Purchase Requisition
  2. Purchase Orders
  3. Receipt of Goods or Service “Blind Copy”

“Properly Approved”

56
Q

Internal Controls (Accounts Payable)

A
  1. Recording Payables
  2. Approving Invoice for Payment and Recording Payment

Match order

  1. Receiving report
  2. PO
  3. Invoice
57
Q

Internal Controls (Cash Disbursements)

A

approving payment and signing a check should be separated duties.

58
Q

Pass Key (Expenditure Cycle)

A

for AP, the completeness and accuracy assertions are generally more relevant than the existence and right and obligations assertions, because the risk of understatement is greater than the risk of overstatement.

59
Q

Lapping

A

Today’s cash receipts cover yesterday’s theft

How to prevent?
Independent comparison of recorded cash receipts with funds actually deposited.

60
Q

Kitting

A

Cash recorded in two places at once.

How to prevent?
look at a bank transfer situation

61
Q

Internal Controls (Inventory)

A
  1. Purchasing
  2. Receiving
  3. Warehouse
  4. Shipping

Perpetual Inventory - if inventory counting is done at a date other than the date of the financial statements, the auditor should obtain evidence about whether changes in inventory + evidence for “gap” period.

auditor should observe inventory count if inventory is significant.
Significant?
Yes- Observe
No-Confirmation

62
Q

Pass Key (Inventory Cycle)

A

inventory observation implies the auditor watches the client count the inventory.

63
Q

Audit Documentation

A
  1. the amount below which misstatements would be regarded as clearly trivial
  2. all misstatements accumulated in audit and if they have been corrected.
  3. auditors conclusion about whether uncorrected misstatements are material, individually or in aggregate.
64
Q

Reasonableness of an Estimate

A
  • significant to the accounting estimate
  • sensitive to variations
  • deviations from historical patterns
  • subject and susceptible to misstatement and bias
65
Q

Auditor Permanent file should include……

A

items that remain relatively unchanged from year to year.

Example: capital stock and other owner’s equity accounts

66
Q

Disagreements with Management and auditor

A

auditor need to communicate any disagreements that could be significant to the FS or auditor report.

Disagreements based on preliminary or incomplete information that were later resolved do not need to be disclosed.

67
Q

Internal Controls (Investment Cycle)

A
  1. Authorization of Purchase of Sale of Investments
  2. Custody of investments
  3. Record Keeping
68
Q

Internal Controls (Investment Transactions)

A
  1. Completeness
  2. Cutoff
  3. Valuation, Allocation, and accuracy
  4. Existence and Occurrence
  5. Understandability and Classification
69
Q

Derivatives

A

Hedging Activities

  • The derivative was designated as a hedge at its inception by management
  • Management has documents the hedging relationship, risk management objective, and strategy and is periodically assessing its effectiveness.
70
Q

Internal Controls (PP&E)

A
  1. Acquisition
  2. Subsidiary Ledgers
  3. Physical Security
  4. Written Polices
  5. Disposition “Sequentially Numbered”
71
Q

Internal Controls (Payroll)

A
  1. Authorization to Employ and Pay
  2. Supervision
  3. Timekeeping and Cost Accounting
  4. Payroll Check Preparation
  5. Check Distribution

Segregation of duties
Observe payroll distribution
IT
Test to ensure that only employees existing in the computer data.

72
Q

Pass Key (Payroll Cycle)

A
  1. payroll department is a record-keeping department
73
Q

Internal Controls (Financing)

A
  1. adequate documentation of all financing agreements
  2. Authorization of new debt financing by the board of directors or management.
  3. Detail Records
74
Q

Internal Controls (Equity)

A
  1. officer will be responsible.

2. Periodic independent reconciliation

75
Q

GAO Standards

A
  1. Self Interest - financial or other interest
  2. Self Review - not properly evaluate
  3. Bias - promote a position
  4. Familiarity - close relationship
  5. Undue Influence
  6. Management Participation
  7. Structural threats
76
Q

Client decides not to make an auditors proposed adjustments that COLLECTIVELY are NOT MATERIAL

A

the auditor can issue a standard report with a unmodified opinion

77
Q

Agreed- Upon Procedures

A

no auditors report or opinion

list procedures performed in the attestation report

78
Q

Predecessor Auditor had a qualified opinion and client will not present

A

managements responsibility paragraph of the successor report is changed to include a statement that the prior years statements were audited by another auditor, the date of the auditors report, the opinion issued, and an explanation if the opinion was other that unmodified.

79
Q

Incorrect Acceptance of a Sample

A

sample shows not material misstated but in fact is material misstated

GOOD THING! WHAT WE WANT!

80
Q

Incorrect Rejection of a Sample

A

sample shows materially misstated but in fact is non material misstated.

BAD THING! WHAT WE DONT WANT!

81
Q

Risk of Assessing Control Risk Too Low

A

sample results indicate a lower deviation rate than actually exists in the population

82
Q

Risk of Assessing Control Risk Too High

A

sample results indicate a higher deviation rate than actually exists in the population

83
Q

Upper Deviation Rate

A

Sample Deviation Rate(auditor best estimate) + Allowance for sampling risk.

84
Q

Matters That Require Special Consideration

A

Auditors Responsibility

  1. Material Misstatements
  2. Consistently applied or changed correctly
85
Q

Agreed Upon Procedures - IAMSURE

A

(I) Independence
(A) Agreement of the Parties
(M) Measurability and Consistency
(S) Sufficiency of the Procedures - specified parties take responsibility
(U) Use of the Report Is Restricted to the Specified Parties
(R) Responsibility for the Subject Matter
(E) Engagements to Perform Agreed-Upon Procedures on Prospective Financial Statements.

86
Q

Prospective Financial statements

A

Partially expired

Completely & Pro forma & Partial Presentation expired ARE NOT considered prospective

87
Q

Prospective Financial statements

A

General Use - Forecast

Limited Use - Forecast & Financial Projection

88
Q

Preparation of Prospective Financial Statements

A

practioner should not prepare

excludes the summary of significant assumptions

89
Q

Compilation

A
  • proper assembling of the financial data based on the responsible party assumptions
  • no assurance
  • read the prospective FS with the summaries of significant assumptions and accounting policies and consider whether they appear to be presented in conformity with AICPA
  • beware of obvious inappropriate assumptions used to construct the statements.
90
Q

Content of Compilation Report

A
  • Identification entity
  • prospective financial information
  • date or period covered
  • management is responsible
  • performed the compilation engagement in accordance with SSARS
  • does not express an opinion, a conclusion, nor provide any assurance
  • prospective results may not be achieved
  • signature, date, city and state
  • FOLLOWS SSARS
91
Q

Examination

A
  • statements are presented in conformity with AICPA and underlying assumptions provide a reasonable basis for the prospective statements
  • Independence required
  • Evidence required

Report: independent, signature, city and state, and date
Identification of the prospective financial statements
criteria against
FOLLOWS AICPA

92
Q

Pro Forma Financial Statements

A

demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical financial statements if it had occurred during the period covered by those financial statements.

  • based on managements assumptions
  • directly attributable to the transactions
  • labeled accordingly
  • may be examined or reviewed
  • understanding of the event and evaluate the pro forma adjustments, including any assumptions on which the adjustments are based.
  • make reference to the FS from which the historical info is derived and state whether such financial statements were audited or reviewed.

CHECK THE MATH

93
Q

successor auditor ask the predecessor auditor….

A

management integrity
disagreements with management
change of auditors
communication if regards to fraud

94
Q

written communication regarding significant deficiencies

A
  • statement “express an opinion on the financial statements, but not effectiveness over controls”
  • “not designed to identify all deficiencies
  • define material weakness, where relevant, term of significant deficiency
  • identify significant deficiencies and mm weakness
  • intended solely for management
95
Q

reasonableness of an estimate

A
  • significant accounting estimate
  • sensitive to variations
  • devotions from historical
  • subject and susceptible to misstatement and bias
96
Q

Perfect opportunity for a fraud in a operating style

A
  • Management consumed with meeting the budget = Pressure
  • Management dominated by one person - opportunity
  • Management compensation contingent upon the entity’s financial performance.

Taylor (Audit) (21 decks)

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