Audit 1

Front 1

What is Audit Risk?

Back 1

(1) the risk that an account and its related assertions contains material misstatements (2) the risk that the auditor will not detect such misstatements

Front 2

What is Inherent Risk?

Back 2

refers to the likelihood of material misstatement of an assertion, assuming no related internal control

Front 3

What is control risk?

Back 3

the likelihood that a material misstatement will not be prevented or detected on a timely basis by internal control

Front 4

What is detection risk?

Back 4

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

Front 5

What is the relationship between the 3 types of audit risk?

Back 5

inverse - when one goes up another must go down

Front 6

What is materiality?

Back 6

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

Front 7

Operationally, the measure of materiality may be . . .

Back 7

either quantitative or nonquantitative

Front 8

What is tolerable misstatement?

Back 8

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.

Front 9

What are the five financial statement assertions?

Back 9

(1)Presentation and disclosure
(2)Existence or occurence
(3)Rights and obligations
(4)Completeness
(5)Valuation

Front 10

What are the two types of intentional misstatements and how are they different?

Back 10

(1)Fraudulent financial reporting - whatever makes the financial statements misleading
(2)misappropriation of assets - theft, defalcation

Front 11

Three conditions that are generally present when individuals commit fraud are. . .

Back 11

(1)incentive/pressure
(2)opportunity
(3)attitude/rationalization

Front 12

This is required either prior to or in conjunction with obtaining information to identify risks of fraud

Back 12

a staff discussion of the risk of material misstatement

Front 13

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. . .

Back 13

(1)Testing the appropriateness of journal entries and adjustments
(2)Reviewing accounting estiamtes for biases
(3)Evaluating the rationale for significant unusual transactions

Front 14

Fraud communication responsibility. . .

Back 14

(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

Front 15

Management has a unique ability to perpettrate fraud because. . .

Back 15

it can be directly or indirectly manipulate accounting records and present fraudulent financial information

Front 16

In committing fraud, management may. . .

Back 16

(1)override controls
(2)direct or solicit employees to carry out fraud

Front 17

What is professional skepticism?

Back 17

an attitude that includes a questioning mind and a critical assessment of audit evidence

Front 18

An audit should be conducted with a mindset that recognizes the possibility of material misstaement due to fraud, even if. . .

Back 18

(1)Past experience with the client has not revealed fraud, and
(2)Regardless of the auditor's belief about management's honesty and integrity

Front 19

What are fraud risk factors?

Back 19

events or conditions that indicate incentives/pressures to perpetrate fraud, opportunities to carry out fraud, or attitude/rationalizations to justify a fraudulent action

Front 20

Identification of a risk of material misstatement due to fraud includes consideration of. . .

Back 20

(1)Type of risk that may exist
(2)Significance of risk
(3)Likelihood of risk
(4)Pervasiveness of risk

Front 21

What is fraud risk?

Back 21

Presumption of improper revenue recognition

Front 22

The auditor should ALWAYS address the risk of. . .

Back 22

management override of controls

Front 23

The requirement of understanding internal control sufficient to plant he audit allows the auditor to. . .

Back 23

(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

Front 24

General types of responses that address specifically identified risks are. . .

Back 24

(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

Front 25

Additional examples of responses for a high risk of fraudulent financial reporting may result in increased. . .

Back 25

(1)Analysis or revenue recognition
(2)Consideration of inventory quantities
(3)Consideration of management estimates

Front 26

Responses to further address the risk of management override of controls

Back 26

(1)Examine journal entries and other adjustments
(2)Review accounting estimates
(3)Evaluate the business rationale

Front 27

Discrepancies in accounting records; examples

Back 27

(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

Front 28

Conflicting or missing audit evidence; examples

Back 28

(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

Front 29

Problematic or unusual relationships between auditor and management; examples

Back 29

(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

Front 30

If not already performed, the auditor should perform analytical procedures at the overall review stage of the audit; unusual situations include. . .

Back 30

(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

Front 31

What is the possible cause of net income to cash flows appearing unusual?

Back 31

Fictitious revenue and receivables

Front 32

What is the possible cause of changes in inventory, payables, sales, or cost of good sold as compared to preceeding year?

Back 32

Theft of inventory, but inability to manipulate all related accounts

Front 33

What is a possible cause of bad debts write-offs being high?

Back 33

theft of cash receipts

Front 34

What is a possible cause of sales volume per accounting records differing from production statistics

Back 34

misstatement of sales

Front 35

When should an auditor evaluate risks of material misstatement de to fraud?

Back 35

At or near completion of fieldwork

Front 36

The risk of fraud may be so high as to cause the auditor to consider withdrawing from engagement; factors affecting decision

Back 36

(1)Implications about integrity of management
(2)Diligence and cooperation of management or the board of directors

Front 37

All fraud involving senior management, and any fraud that causes a material misstatement should be reported to. . .

Back 37

directly to the audit committee

Front 38

Disclosure of fraud beyond senior managment and its audit committee is not ordinarily a part of the auditor's responsibility, unless. . .

Back 38

(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

Front 39

What has to be documented when considering fraud?

Back 39

(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