Wiley Flashcards
Who is primarily responsible for the fairness of an entity’s financial statements?
Management. The financial statements are the representation of management.
Define “Generally Accepted Accounting Principles (GAAP).
The standards by which the quality of the financial statements is judged.
In the U.S.A, who issues auditing standards applicable to audits of public companies (also known as issuers)?
Public Company Accounting Oversight Board (PCAOB)
What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards
The Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board.
In the U.S.A, who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?
AICPA’s Auditing Standards Board.
In the U.S.A, who issues auditing standards applicable to audits of governmental entities?
U.S. Government Accountability Office (GAO)
List some benefits of an audit to a private company (also known as a nonissuer).
More favorable cost of capital;
Insights into adequacy of internal controls;
Benchmark an entity’s performance with other similar entities
What is the auditor’s primary role
To provide an impartial (independent) assessment of the reliability of management’s financial statements
Identify the topics associated with the three field work standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
Planning and supervision
Internal control
Evidence.
Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.
Purpose Premise Responsibilities Reasonable assurance Performance requirements to achieve reasonable assurance Inherent limitations Reporting
Identify the topics associated with the four reporting standards for Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
GAAP
Consistency
Disclosure
Opinion.
Identify the topics associated with the three general standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
Training
Independence
Due professional care.
Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.
Purpose/premise
Responsibilities
Performance
Reporting
Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.
Purpose Premise Responsibilities Reasonable assurance Performance requirements to achieve reasonable assurance Inherent limitations Reporting
What is meant by the term interpretive publications?
These consist of the appendices to the SASs, auditing interpretations of the SASs, the AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.
What type of professional requirement is indicated by the word must in AICPA professional standards?
Unconditional requirement.
What type of professional requirement is indicated by the word should in AICPA professional standards
Presumptively mandatory requirement
What is meant by the term engagement quality control review?
A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)
Services for which a CPA firm is required to have a sytem of quality control
List the six elements of a quality control system.
Who is responsible for the administration of a quality control system?
May be vested in one person but everyone shares responsibility.
List the six elements of a quality control system.
Leadership responsibilities for quality within the firm
Relevant ethical requirements (especially independence)
Acceptance and continuance of client relationships
Human resources
Engagement performance
Monitoring.
List the two types of test of details.
Tests of ending balances
Tests of transactions.
List the two types of substantive audit procedures
Analytical Procedures
Tests of details.
What are some considerations that must be given by the auditor during the planning phase of the audit?
Determine whether to accept or continue the audit engagement
Assess the risk of material misstatement
Evaluate requirements for staffing and supervision
Prepare the required written audit program (also called the “audit plan”).
List the four basic steps in the audit process
Planning
Internal Control Consideration
Substantive Audit Procedures
Reporting.
What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?
Obtain the required understanding of the design of internal control for planning purposes.
Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls.
List the reason(s) for which an entity may receive a disclaimer of opinion.
Scope limitation (material and pervasive effect).
List the four types of opinions that an auditor may give on financial statements.
Unmodified
Qualified
Adverse
Disclaimer.
List the reason(s) for which an entity may receive a qualified opinion.
Misstatement, such as a GAAP departure (material, not pervasive effect) Scope limitation (material, not pervasive effect).
How is an auditor’s unmodified audit report structured under the clarified auditing standards?
An unmodified auditor’s report is presented in 4 sections:
An introduction (1 sentence).
Management’s responsibility section (1 sentence).
Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
Opinion (1 sentence).
Prior to the clarified auditing standards, how was an Unqualified Audit Report structured?
An unqualified audit report was presented in three paragraphs:
Introduction (three sentences),
Scope (five sentences), and
Opinion (one sentence).
How is an auditor’s unmodified audit report structured under the clarified auditing standards?
An unmodified auditor’s report is presented in 4 sections:
An introduction (1 sentence).
Management’s responsibility section (1 sentence).
Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
Opinion (1 sentence).
What is a Compilation?
A compilation is an assembly of the financial records of a private company into a financial statement format without expressing any degree of assurance on the reliability of those financial statements.
What type of assurance is associated with an “audit” of an entity’s financial statements?
Positive assurance. Positive assurance is considered a high level of assurance.
What type of assurance is associated with a “review” of an entity’s financial statements?
Negative assurance, which is considered a moderate level of assurance
To what services are Statements on Standards for Accounting and Review Services (SSARs) applicable?
Statements on Standards for Accounting and Review Services are applicable to reviews and compilations of the financial statements of private companies, that is, non-issuers
What matters are typically addressed in an engagement letter?
The objective and scope of the audit;
The auditor’s responsibilities;
Management’s responsibilities;
A statement about the inherent limitations of an audit;
A statement identifying the applicable financial reporting framework;
Reference to the expected content of any reports to be issued; and
Other matters, as warranted (e.g., fees, etc.).
Who initiates the communications between the predecessor auditor and successor auditor?
The successor auditor initiates the communication with the predecessor by requesting that the client authorize the predecessor auditor to allow the successor auditor to review the predecessor auditor’s working papers.
What is meant by the term initial audit
The prior year’s financial statements have been audited by a predecessor auditor
What is meant by the term preconditions for an audit?
The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted.
What matters should be covered in the (successor) auditor’s inquiry of the predecessor auditor?
Facts related to management’s integrity;
Significant accounting or auditing disagreements;
Any communications with the audit committee (or others charged with governance) about fraud, illegal acts, and significant deficiencies in internal control matters; and
Predecessor’s understanding of the reason(s) for the client’s change in auditors.
What is the difference between an overall audit strategy and an audit plan?
An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.
Identify factors relevant to establishing an overall audit strategy.
Identify characteristics of the engagement affecting its scope;
Identify the reporting objective of the engagement and required communications;
Consider the factors relevant to utilizing the audit team;
Consider the results of preliminary engagement planning activities; and
Determine the nature, timing, and extent of necessary resources for the engagement.
List the audit procedures that should occur during the planning phase of an audit
Review client records Inquire of client personnel Coordinate client assistance Determine if specialists are needed Coordinate staffing requirements
Identify some activities associated with pre-engagement activities
Perform appropriate procedures to address the quality control issues associated with the acceptance/continuance of the audit engagement;
Evaluate the audit team’s compliance with relevant ethical requirements (especially independence issues); and
Establish an understanding in writing of the terms of the engagement
What is the auditor’s basic audit planning responsibility?
The auditor should plan the audit (and design the required written audit program or plan) to be responsive to the auditor’s assessment of the risk of material misstatement.
List several circumstances that impact the extent of planning activities
Size and complexity of the entity
Auditor’s experience with that entity
Auditor’s understanding of the entity and its environment, including its internal control
Identify 3 planning-related issues that should be included in the auditor’s documentation.
The overall audit strategy;
The audit plan; and
Any significant changes made to the audit strategy or the audit plan during the engagement, along with the reasons for any such changes.
What is the basic meaning of the concept of materiality?
An understanding of what is important
What is meant by the term tolerable misstatement?
The application of performance materiality to a particular sampling procedure or application.
The clarified auditing standards introduced the term performance materiality. What does that term mean?
The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
Prior auditing standards referred to planning stage materiality. What did the term planning stage materiality mean?
The size of the misstatements that the audit program was designed to detect.
Prior auditing standards referred to evaluation stage materiality. What did the term evaluation stage materiality mean?
The determination of whether the financial statements were fairly stated in all material respects at the completion of field work.
The terms planning stage materiality and evaluation stage materiality in prior auditing standards has been replaced by what single concept in the clarified auditing standards?
Performance materiality.
What 4 matters should be documented with respect to materiality considerations?
Materiality for the financial statements as a whole;
Materiality level(s) for applicable transactions, account balances, or disclosures;
Performance materiality; and
Any revision of those considerations during the audit engagement.
Define “risk of material misstatement.”
The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR x CR)
What is the audit risk model that is applicable to classes of transactions or to account balances?
Audit Risk = inherent risk x control risk x detection risk.
Define “detection risk.”
The probability that a material misstatement, that was not prevented or detected by internal control, was not detected by the auditor’s substantive audit procedures.
What risk is within the auditor’s control?
Detection risk.
Define “audit risk.”
The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement.
Define “inherent risk.”
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.
Define “control risk.”
The probability that a material misstatement, that occurred in the first place, would not be detected by applicable internal controls.
List the variables of planned audit procedures that can be adjusted to change detection risk.
Nature
Timing
Extent of substantive testing
What is the purpose of analytical procedures in the overall review?
To verify the conclusions reached in the audit.
What is the purpose of analytical procedures in audit planning?
To aid in understanding client activities and in targeting risky areas where material misstatements are more likely to occur.
Define “analytical procedures.”
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.
What matters must be documented in connection with analytical procedures?
The auditor’s expectation and the factors considered in developing it;
The results of the comparison of the recorded amounts (or ratios) with the expectations; and
Any additional auditing procedures performed to investigate significant differences identified by that comparison.
List the four factors that affect the efficiency and effectiveness of analytical procedures for substantive purposes.
Nature of assertion;
Plausibility and predictability of relationship;
Availability and reliability of data;
Precision of expectation.
What 3 purposes might analytical procedures serve?
Required during planning
May be used as substantive evidence (not required)
Required during final review
What are the three categories of fraud-related risk factors that should be considered by the auditor?
Incentives/Pressures (the motivation for committing fraud)
Opportunities (the ability to commit fraud)
Attitudes/Rationalizations (the justification or excuse for committing fraud).
Identify the auditor’s responsibility for detecting fraud in a financial statement audit.
Auditors must design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error;
Auditors are required to specifically assess the risk of material misstatement due to fraud;
Auditors must document the assessment of the risk of material misstatement due to fraud and the resulting response(s) associated with any risk factors identified.
List the two types of financial-statement-related frauds.
Fraudulent financial reporting (sometimes called cooking the books)
Misappropriation of assets (covering up theft by false journal entries).
What is the definition of fraud that is relevant to the auditor?
An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.
Who should be informed when the auditor has identified fraud, but that fraud is not material and does not involve senior management?
The appropriate level of management should be notified (defined to be at least one level above the level where the fraud occurred).
What are the auditor’s responsibilities to communicate fraud identified by the auditor?
If the fraud is not material, the auditor should inform the appropriate level of management.
If the fraud is material (or if senior management is involved, even if not material), the auditor should inform those charged with governance.
What is the required form of the auditor’s communications about fraud-related issues?
May be either written or oral, but should be timely.
Who should be informed when fraud has occurred that is material (whether or not senior management is involved in the fraud).
The auditor should inform those charged with governance.
When might an auditor have a duty to inform others outside of the audited entity of fraud-related matters?
In response to a valid subpoena;
To comply with applicable legal and regulatory requirements;
To respond appropriately to successor auditor’s inquiries when the former client has given permission to the predecessor;
To report fraud to the applicable funding agency under the requirements of government auditing standards.
What actions should an auditor consider when an illegal act has been detected?
Gather additional evidence to determine relevant facts;
Discuss the matter with the appropriate level of management;
Consider consulting with the entity’s attorney and/or relevant specialists;
Consider the implications to other audit areas.
What is the auditor’s responsibility to detect illegal acts?
The auditor should design the audit to provide reasonable assurance of detecting illegal acts having a direct and material effect on the financial statements.
What procedure can an auditor undertake to help detect illegal acts?
Make inquiries of management about the entity’s compliance with applicable laws.
What matters should the auditor document with respect to the entity’s compliance with applicable laws and regulations?
The results of the discussion with management, those charged with governance, and others, as applicable;
Any identified or suspected noncompliance with applicable laws and regulations.
When might an auditor have a duty to inform others outside of the audited entity of illegal acts known to the auditor?
What is meant by the term legal and regulatory framework?
Identify 3 audit procedures might bring to the auditor’s attention noncompliance with laws and regulations that do not have a direct effect on the entity’s financial statements.
Inquiry of management and those charged with governance about noncompliance with applicable laws and regulations;
Inspection of correspondence with regulatory authorities;
Reading the minutes of meetings of those charged with governance.
What reference to a specialist may an auditor make when expressing an unmodified opinion?
The auditor should NOT reference the specialist in an unmodified opinion.
What reference to a specialist may an auditor make when expressing a modified opinion?
The auditor may reference the specialist, if that will facilitate the readers’ understanding of the reason(s) for the modified opinion.
What considerations should be made when an auditor is selecting a specialist?
The auditor should consider the specialist’s competence, capabilities, and objectivity (including professional credentials, reputation, and any relationship to the client).
Define the term specialist.
An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.
List some examples of specialists.
Actuaries, appraisers, engineers, geologists, etc.
What matters are the auditor required to communicate to those charged with governance?
The auditor’s responsibilities under GAAS
The planned scope and timing of the audit
Significant findings from the audit.
Define what is meant by the term those charged with governance.
The person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity.
What is the auditor’s basic responsibility regarding communication with those charged with governance?
The auditor must communicate those matters that are “significant” and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process.
Define what is meant by the term management.
The person(s) with executive responsibility for the conduct of the entity’s operations.
