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39 Cards in this Set

  • Front
  • Back
What is Audit Risk?
(1) the risk that an account and its related assertions contains material misstatements (2) the risk that the auditor will not detect such misstatements
What is Inherent Risk?
refers to the likelihood of material misstatement of an assertion, assuming no related internal control
What is control risk?
the likelihood that a material misstatement will not be prevented or detected on a timely basis by internal control
What is detection risk?
the likelihood that an auditor's procedures lead to an improper conclusion that no material misstatement exists in an assertiion when in fact such a misstatement does exist
What is the relationship between the 3 types of audit risk?
inverse - when one goes up another must go down
What is materiality?
the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement
Operationally, the measure of materiality may be . . .
either quantitative or nonquantitative
What is tolerable misstatement?
The amount apportioned among the various accounts after determining a materiality level for the various financial statements. This apportionment may be based on factors such as the realtive size of various accounts and on professional judgement.
What are the five financial statement assertions?
(1)Presentation and disclosure
(2)Existence or occurence
(3)Rights and obligations
What are the two types of intentional misstatements and how are they different?
(1)Fraudulent financial reporting - whatever makes the financial statements misleading
(2)misappropriation of assets - theft, defalcation
Three conditions that are generally present when individuals commit fraud are. . .
This is required either prior to or in conjunction with obtaining information to identify risks of fraud
a staff discussion of the risk of material misstatement
The responses to the results of the assessment as risk are (1)an overall response, (2)a response that specifically addresses identified risks, and (3)a response for the possibility of management override. The response for management override includes. . .
(1)Testing the appropriateness of journal entries and adjustments
(2)Reviewing accounting estiamtes for biases
(3)Evaluating the rationale for significant unusual transactions
Fraud communication responsibility. . .
(1)All fraud involving managment must be communicated to the audit committee
(2)All material fraud should be communicated to the audit committee
(3)The auditor should reach an understanding with the audit committee regarding other communications
Management has a unique ability to perpettrate fraud because. . .
it can be directly or indirectly manipulate accounting records and present fraudulent financial information
In committing fraud, management may. . .
(1)override controls
(2)direct or solicit employees to carry out fraud
What is professional skepticism?
an attitude that includes a questioning mind and a critical assessment of audit evidence
An audit should be conducted with a mindset that recognizes the possibility of material misstaement due to fraud, even if. . .
(1)Past experience with the client has not revealed fraud, and
(2)Regardless of the auditor's belief about management's honesty and integrity
What are fraud risk factors?
events or conditions that indicate incentives/pressures to perpetrate fraud, opportunities to carry out fraud, or attitude/rationalizations to justify a fraudulent action
Identification of a risk of material misstatement due to fraud includes consideration of. . .
(1)Type of risk that may exist
(2)Significance of risk
(3)Likelihood of risk
(4)Pervasiveness of risk
What is fraud risk?
Presumption of improper revenue recognition
The auditor should ALWAYS address the risk of. . .
management override of controls
The requirement of understanding internal control sufficient to plant he audit allows the auditor to. . .
(1)Identify types of potential misstatments
(2)Consider factors that affect the risk of material misstatement
(3)Design tests of controls when applicable
(4)Design substantive tests
General types of responses that address specifically identified risks are. . .
(1)Nature - more reliable evidence or additional corroborative information
(2)Timing - perform at or near end of reporting period, but apply substantive procedures to transactions occuring throughout the year
(3)Extent - increase sample sizes, perform more detailed analytical procedures
Additional examples of responses for a high risk of fraudulent financial reporting may result in increased. . .
(1)Analysis or revenue recognition
(2)Consideration of inventory quantities
(3)Consideration of management estimates
Responses to further address the risk of management override of controls
(1)Examine journal entries and other adjustments
(2)Review accounting estimates
(3)Evaluate the business rationale
Discrepancies in accounting records; examples
(1) Transactions not recorded in a complete or timely manner, or improperly recorded
(2)Unsupported or unauthorized balances or transactions
(3)Significant last-minute adjustments
(4)Evidence of employee inappropriate access to systems
Conflicting or missing audit evidence; examples
(1)Missing, unavailable, or altered documents
(2)Unexplained items on reconciliations
(3)Inconsistent, vague, or implausible reponses to inquires
(4)Unusual discrepancies between records and confirmation replies
(5)Missing inventory or physical assets
(6)Unavailable or missing electronic evidence, inconsistent retention policies
Problematic or unusual relationships between auditor and management; examples
(1)Denial of access to records, facilities, employees, customers, vendors, and others
(2)Undue time pressures
(3)Management complaints, intimidation
(4)Unusual delays in providing information
(5)Tips or complaints about alleged fraud
(6)Unwillingness to facilitate auditor access to electronic files
(7)Denial of access to IT operations staff and facilities
(8)Unwillingness to add or revise disclosures in financial statements
If not already performed, the auditor should perform analytical procedures at the overall review stage of the audit; unusual situations include. . .
(1)Large amounts of income recorded in teh last week or two of the year
(2)Income inconsistent with trends in cash flows from operations
What is the possible cause of net income to cash flows appearing unusual?
Fictitious revenue and receivables
What is the possible cause of changes in inventory, payables, sales, or cost of good sold as compared to preceeding year?
Theft of inventory, but inability to manipulate all related accounts
What is a possible cause of bad debts write-offs being high?
theft of cash receipts
What is a possible cause of sales volume per accounting records differing from production statistics
misstatement of sales
When should an auditor evaluate risks of material misstatement de to fraud?
At or near completion of fieldwork
The risk of fraud may be so high as to cause the auditor to consider withdrawing from engagement; factors affecting decision
(1)Implications about integrity of management
(2)Diligence and cooperation of management or the board of directors
All fraud involving senior management, and any fraud that causes a material misstatement should be reported to. . .
directly to the audit committee
Disclosure of fraud beyond senior managment and its audit committee is not ordinarily a part of the auditor's responsibility, unless. . .
(1)Required b specific legal and regulatory requirements
(2)To a successor auditor
(3)In response to a subpoena
(4)To a funding agency or other specified agency in accordance with requirements of audits of entities that receive governmental financial assistance
What has to be documented when considering fraud?
(1)Discussion among audit team of risk of material misstatement due to fraud, including how and when discussion occurred, participants, and subject matter
(2)Procedures performed to obtain info to identify and asses risks of material misstatement due to fraud
(3)Specific risks of material misstatement due to fraud that were identified and auditor's response to those risks
(4)If auditor has NOT identified improper revenue recognition as a risk of material override of controls
(5)Results of procedures performed to further assess risk of managment override of controls
(6)Other conditions and analytical relationships or other responses required and any further reponses the auditor concluded were appropriate to address such risks or conditions
(7)Nature of communications about fraud made to management, the audit committee, and others