Audit Exam 1

Front 1

auditing

Back 1

a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence b/w those assertions and established criteria and communicating the results to interested users.

Front 2

attest

Back 2

a service when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about a subject matter, that is the responsibility of another party.

Examples: review, financial forecasts, agreed upon services.

Front 3

assurance

Back 3

independent professional services that improve the quality of information, or its context, for decision makers.

Extending auditors’ activities to assurance services allows the auditors to report on not only the reliability and credibility of information but also on the relevance and timeliness of information.

Front 4

scope

Back 4

nature, timing, and extent of audit work being performed

Front 5

To deal with problem of not being able to examine every transaction, auditor issues

Back 5

1. His or her knowledge about the transactions based on understanding of industry, clients internal control system, or likely items to contain material misstatement

2. A sampling approach to examine a subset of the transactions.

Front 6

Stages of a client’s accounting process on which auditors focus to collect evidence

Back 6

(1) Implementing internal controls to ensure appropriate

(2) capturing and recording of individual transactions which are then

(3) collected into ending account balances and reported on the financial statements.

Front 7

audit phases

Back 7

client acceptance/continuance and establishing an understanding with the client

preliminary engagement activities


plan the audit

consider and audit internal control

audit business processes and related accounts

complete the audit

evaluate results and issue audit report

Front 8

auditing internal control should be designed by management to provide reasonable assurance of achievement of the following objectives

Back 8

reliability of financial reporting
effectiveness and efficiency of operations
compliance with applicable laws and regulations

Front 9

intro paragraph

Back 9

indicates which FS are covered by the report and that the statements are the responsibility of management, and that the auditor’s responsibility is to express an opinion.

Front 10

scope paragraph

Back 10

communicates what audit entails. Indicates conducted in accordance with applicable audit standards. Provides reasonable assurance. Discloses use of samples.

Front 11

opinion paragraph

Back 11

Indicate criteria against which auditor assesses management’s assertions. Expresses concept of materiality.

Front 12

explanatory paragraph

Back 12

refers to internal control

Front 13

for a report to be unqualified

Back 13

(1) the auditor must be independent
(2) there must be no significant limitations imposed on the auditor’s procedures
(3) and the clients FS must be free of material departures from GAAP.

Front 14

essential characteristics of a business

Back 14

governance
objectives
strategies
processes
risks
controls
reporting

Front 15

five process categories

Back 15

financing
purchasing
human resource management
inventory management
revenue

Front 16

three assertions related to FS

Back 16

transactions
account balances
presentation and disclosure

Front 17

assertions about transactions and events for period under audit

Back 17

occurrence
completeness
authorization
accuracy
cutoff
classification

Front 18

assertions about account balances at period end

Back 18

existence
rights and obligations
completeness
valuation and allocation

Front 19

assertions about presentation and disclosure

Back 19

occurrence and rights and obligations
completeness
classification and understandability
accuracy and valuaton

Front 20

GAAS

Back 20

general standards
standards of fieldwork
standards of reporting

Front 21

general standards

Back 21

 1. The auditor must have adequate technical training and proficiency to perform the audit.
 2. The auditor must maintain independence in mental attitude in all maters relating to the audit.
 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.

Front 22

standards of fieldwork

Back 22

 1. The auditor must adequately plan the work and must properly supervise any assistants.
 2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing and extent of further audit procedures.
 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the FS under audit.

Front 23

standards of reporting

Back 23

 1. The auditor must state in the auditor’s report whether the FS are presented in accordance with GAAP.
 2. The auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
 3. When the auditor determines that informative disclosures are not reasonable adequate, the auditor must so state in the auditor’s report.
 4. The auditor must either express an opinion regarding the FS, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor’s report. In all cases where an auditor’s name is associated with the FS, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.

Front 24

SAS

Back 24

o Introduction (100s)
o The General Standards (200s)
o The Standards of Field Work (300s)
o The First, Second, and Third Standards of Reporting (400s)
o The Fourth Standard of Reporting (500s)
o Other Types of Reports (600s)
o Special Topics (700s)
o Compliance Auditing (800s)
o Special Reports of the Committee on Auditing Procedures (900s)

Front 25

local vs regional, national and international firm structure

Back 25

local: proprietorships, general partnerships, corporations

reg, nat, intl: GLP LLP

Front 26

4 major audit types (in addition to FS audit)

Back 26

internal control audits

compliance audits

operational audits

forensic audits

Front 27

examples of assurance services that are not audits or attestations

Back 27

risk assessment (coso)
performance measurement (balanced scorecard)

Front 28

definition of compilations or reviews

Back 28

auditors providing non-audit services relating directly to the FS of a company.

Front 29

types of auditors

Back 29

external
internal
governmental
forensic

Front 30

organizations that affect the profession

Back 30

sec
aicpa
pcaob
fasb

Front 31

standards controlled by AICPA

Back 31

code of professional conduct
quality control and peer review standards
attestation standards
compilation and review standards

Front 32

engagement risk

Back 32

risk that the auditor is exposed to financial loss or damage to professional reputation from litigation, adverse publicity, etc.

Front 33

inherent risk

Back 33

likelihood that a material misstatement exists in the FS without the consideration of internal control.

Front 34

control risk

Back 34

risk that a material misstatement that could occur in a relevant assertion will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. CR will always exist because of the inherent limitations of internal control.

Front 35

detection risk

Back 35

risk that the auditor will not detect a material misstatement.
o Inverse relationship to inherent and control risk. AR = RMM x DR
o Cannot be reduced to zero because:
 Sampling risk - auditor cannot examine 100% of balances or transactions
 Non-sampling risk – risk that auditor might select wrong audit procedure, misapply the procedure, or misinterpret the audit results

Front 36

nature of the entity

Back 36

 Organizational structure and management personnel (governance)
 Sources of funding
 Investments
 Operational characteristics (size and complexity)
 Sources of earnings
 Key supplier and customer relationships
 If it is a public company, need to know about earnings forecasts made by management and news about the company’s stocks.
 Management’s compensation (bonuses, stock options)

Front 37

industry, regulatory, and other external factors

Back 37

Industry conditions
• Market and competition
• Cyclical or seasonal activity
• Product technology
• Supply availability and cost
• Customer/supplier relationship
• General economic factors, interest rate changes

Regulatory environment
• Accounting principles and industry specific practices
• Regulatory framework
• Legislation and regulations
• Taxation
• Government policies affecting conduct
• Environmental requirements

Other external factors
• General level of economic activity (growth, recession)
• Interest rates and availability of financing
• Inflation and currency revaluation

Front 38

objectives and strategies and related business risks

Back 38

 Industry developments
 New products and services
 Expansion of business
 New accounting requirements
 Regulatory requirements
 Current and prospective financing requirements
 Use of IT
 Effects of implementing a strategy, particularly effects that will lead to new accounting requirements

Front 39

entity performance measures

Back 39

 Internal and externally reviewed information
 Internal: FS, budgets, variance analysis, subsidiary information
 External: analysts, credit rating agencies

Front 40

internal control

Back 40

 Policies and procedures designed to provide assurance about the achievement of its objectives.
 Active and qualified B.O.D and audit committee, with independent members
 Effective risk assessment process
 Competent and objective internal audit personnel
 Proper authorization of transactions
 Procedures to ensure assets exist
 Monitoring of controls

Front 41

Auditor should be alert for following condition that may indicate existence of business risks

Back 41

o Significant changes in the entity such as large acquisitions, reorganizations, or other unusual events.
o Significant changes in the industry in which the entity operates.
o Significant new products or services or significant new lines of business.
o New locations.
o Significant changes in the environment.
o Operations in areas with unstable economies.
o High degree of complex regulation.

Front 42

Obtaining understanding of entity is performed with the following risk assessment procedures

Back 42

inquiries of management
personnel and others outside entity

analytical procedures

observation and inspection

Front 43

inquiries of management
personnel and others outside entity

Back 43

 Those charged with governance
 Internal audit personnel
 Employees involved in initiating, authorizing, processing, or recording complex or unusual transactions
 In-house legal counsel
 Production, marketing, sales and other personnel.
 Outside company: customers, suppliers, valuation specialists

Front 44

analytical procedures

Back 44

 Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.

Front 45

observation and inspection

Back 45

 Observation of entity activities and operations
 Inspection of documents (business plans), records, and internal control manuals
 Reading reports prepared by management, those in charge of governance, and internal audit
 Visits to premises and plant facility
 Tracing transaction through information system

Front 46

examples of misstatements arising from fraudulent financial reporting

Back 46

o Inaccuracy in gathering or processing data from which FS are prepared.
o A difference b/w amount of a reported FS amount that would have been reported under GAAP. Not applying GAAP appropriately.
o The omission of a FS element, account, or item. Not disclosing information.
o An incorrect accounting estimate arising from an oversight or misinterpretation of facts.

Front 47

examples of misappropriation of assets

Back 47

o Embezzling cash received, skimming.
o Stealing assets
o Causing the entity to pay for goods or services not received

Front 48

fraud risk identification process

Back 48

• 1. Discussion among audit team regarding RMM due to fraud
• 2. Inquire of management and others on views of fraud and how addressed
• 3. Consider any unusual or unexpected relationships
• 4. Understand client’s period-end closing process and investigate unexpected period-end adjustments

Front 49

in the following circumstances a duty to disclose outside the entity may exist:

Back 49

o To comply with certain legal and regulatory requirements.
o To a successor auditor when they make inquiries in accordance with AU 215, Communications b/w Predecessor and Successor Auditors.
o In response to a subpoena.
o To a funding agency or other specified agency in accordance with requirements for the audits of entities that receive government financial assistance.

Front 50

steps in applying materiality

Back 50

1. determine materiality level for overall FS

2. determine tolerable misstatment

3. evaluate audit findings

Front 51

3 ways to provide high assurance and decrease level of detection risk:

Back 51

• 1. Change a less effective procedure to a more effective procedure.
• 2. Change timing of substantive test (i.e. change from interim to year-end audit)
• 3. Change extent of testing (from small sample size to large sample size).

Front 52

potential red flags of fraud

Back 52

1. Discrepancies in the accounting records.
• Incomplete, unsupported, or unauthorized documentation
• Last minute adjustment entries. Lack of agreement
2. Conflicting or missing evidential matter
• Alterations
• Discrepancies on confirmations (from customers)
3. Problematic or unusual relationships b/w auditor and management
• Denied access or delayed access to documentation.
• Undue time pressure.
• Management complaints or intimidation.
• Overall not cooperative

Front 53

8 elements of an unqualified report for a public company

Back 53

o Report title
o Addressee
o Introductory paragraph
o Scope paragraph
o Opinion paragraph
o Explanatory paragraph referring to internal control over financial reporting
o Name of auditor
o Audit report date

Front 54

four situations requiring modification to an unqualified FS report

Back 54

opinions based on part of another auditor

going concern

lack of consistency due to accounting changes

emphasis of a matter

Front 55

changes affecting consistency

Back 55

 Change in accounting principle (SL to MACRS)
 Change in reporting entity
 Correction of an error in principle

Front 56

changes not affecting consistency

Back 56

 Change in accounting estimate
 Correction of error that does not involve an accounting principle
 Change in classification and reclassification
 Change expected to have a material future effect (immaterial now)

normally disclosed in the notes, does not require explanatory paragraph

Front 57

emphasis of a matter

Back 57

• Significant related-party transactions that are appropriately disclosed by the client.
• Important events occurring after the balance sheet date.

Front 58

conditions for departure from unqualified report

Back 58

scope limitation
departure from GAAP
lack of auditor independence

Front 59

departure from GAAP

Back 59

• Unacceptable accounting principle
• Inadequate disclosure
• Unjustified change in accounting principle

Front 60

professions establish rules of conduct so that

Back 60

o Users of the professional services know what to expect when they purchase such services.
o Members of the profession know what behavior is acceptable.
o The profession can use the rules to monitor the actions of its members and apply discipline where appropriate.

Front 61

3 theories of ethical behavior

Back 61

utilitarianism
rights-based approach
justice-based approach

Front 62

6 ethical principles

Back 62

o Responsibilities
o The public interest
o Integrity
o Objectivity and independence
o Due care
o Scope and nature of services

Front 63

Rules of Conduct

Back 63

o Independence, Integrity, and Objectivity (Section 100)
o General Standards and Accounting Principles (Section 200)
o Responsibilities to Clients (Section 300)
o Responsibilities to Colleagues (Section 400)
o Other Responsibilities and Practices (Section 500)

Front 64

indirect financial interest

Back 64

• (a) an auditor or other covered member has FI in an entity associated with an attest client
• (b) the financial interest is beneficially owned though an investment vehicle, estate or trust
• (c) the auditor does not control the intermediary or have authority to supervise or participate in the intermediary’s investment decisions.

Front 65

3 categories of litigation

Back 65

 Litigation between the client and the CPA
 Litigation by security holders
 Other third-party litigation where the CPA’s independence may be impaired

Front 66

actions that might impair independence

Back 66

• Authorizing, executing, or consummating a transaction on behalf of a client
• Preparing source documents evidencing transaction occurrence
• Having custody of client assets
• Supervising employees in performance of normal recurring activities
• Determining which recommendations of the member should be implemented
• Establishing or maintaining internal controls

Front 67

3 principles of auditor objectivity and independence

Back 67

o Auditor should not audit his or her own work
o Auditor should not function in the role of management
o Auditor should not serve in an advocacy role for his or her client

Front 68

9 categories of non-audit services that are considered to impair independence if provided to public company audit client

Back 68

o Bookkeeping or other services related to the accounting records or FS of the audit client
o Financial information system design and implementation
o Appraisal or valuation services, fairness options, or contribution-in-kind reports
o Actuarial services
o Internal audit outsourcing services
o Management functions or human resources
o Broker or dealer, investment adviser, or investment banking services
o Legal services
o Expert services

Front 69

6 elements of quality control

Back 69

o Leadership responsibilities for quality in the firm (tone at the top)
o Relevant ethical requirements
o Acceptance and continuance of client relationships and specific engagements
o Human resources
o Engagement performance
o Monitoring