Audit Midterm # 1

Front 1

What do auditors gather evidence on?

Back 1

Financial Stmts = GAAP

Front 2

Difference between accountants and auditors?

Back 2

accountants prepare the financial stmts
(job ends when fin stmt complete)

audits opine financial stmts
(job begins when fin stmt complete)

Front 3

The risk that Financial Stmts do not = GAAP is called?

Back 3

Information Risk

Front 4

An assurance provider's (auditors) written report on assertions made by a 3rd party (mgmt) is called a what?

Back 4

attest service

Front 5

What is the role of the auditor?

Back 5

Opine on Financial Stmts =GAAP

and if its a public company, the ICs over FRs

Front 6

How many reports do auditors issue on a publically traded audit client?

Back 6

Two:

Fin Stmts = GAAP
effectiveness of IC/FR

Front 7

The fact the insiders have a greater knowledge of their AIS than the auditors coming in is known as...

Back 7

information assymetry

Front 8

Mgmt acting in their best interest rather than stockholders interest is know as...

Back 8

moral hazard

Front 9

The importance of detecting material misstatements, whether due to error or fraud is...

Back 9

equal

Front 10

The auditor's report is addressed to...

Back 10

BoD, Shareholders, anyone but mgmt

Front 11

Aside from legal requirements, whats the benefit of an audit?

Back 11

REDUCE INFORMATION RISK

Front 12

Are audits designed to catch all mistakes?

Back 12

No, only provide reasonable assurance against material misstatements

Front 13

The separation of responsibilities between mgmt and auditors is addressed in?

Back 13

into paragraph of audit report

&

Mgmt Report

Front 14

What is the difference between a material vs. a immaterial misstatement

Back 14

whether or not it will affect the decision of a prudent user

Front 15

What are three reasons that reasonable assurance is not an absolute guarantee?

Back 15

1. sample testing
2. use of estimates
3. collusion is hard to detect

Front 16

What is the difference between errors and frauds?

Back 16

INTENT

Front 17

What are the two kinds of frauds?

Back 17

Misappropriation of Assets

Fraudulent Financial Reporting

Front 18

Are auditors responsible for catching fraud?

Back 18

Auditors make no distinction between searching for errors and/or fraud.

Either way, auditors must obtain reasonable assurance that the FS are free from MM

Front 19

While auditors are have equal for errors and fraud when it comes to a direct-effect on the financial statements, for indirect effects they are must provide...

Back 19

little to no assurance

Ex. Federal Safety violations

Front 20

Audits are broken down in to _________, which are groups of closely related balance sheet/income stmt accounts.

Back 20

cycles

each cycle may have its own team of auditors

Front 21

What are the three ways auditors determine if an acct has been fairly stated?

Back 21

1. Test of Transactions (and underlying controls)
2. Test of Ending Balances (and underlying controls)
3. Tests Presentation & Disclosure(and underlying controls)

Front 22

5 Management Assertions for Test of Transactions

Back 22

Occurrence - is this a real transaction or fake?]

Completeness - did all transactions that should have been recorded get recorded?

Accuracy - correct amounts recorded?

Classification - recorded in correct account?

Cutoff- recorded in correct acctg period?

Front 23

4 Mgmt Assertions for Account Balances

Back 23

Existence- assets, liabilities, and equity interests exist

Completeness - all A, L, E that should have been recorded have been

Valuation & Allocation - all A, L, E are included in FS at appropriate amounts and any resulting valuation adjustments are appropriately recorded

Rights & Obligations - entity holds or controls the rights to assets, and liabilities are obligations of the entity.

Front 24

For a sales transaction, to test for occurrence, you select a sample from the _________ and _________ back to the ________.

Back 24

SJ

vouch

BoL

Front 25

For a cash receipts transaction, to test for completion you select a sample of ____________ and ___________ forward to the ___________.

Back 25

deposit slip

trace

CRJ

Front 26

For a sales transaction, to test for accuracy, you compare the __________ to the __________ to the ___________.

Back 26

customer order

invoice

SJE

Front 27

For a cash receipts transaction, to test for cutoff, you compare the date of the _________ to the date of the __________.

Back 27

CRJ entry

deposit slip

Front 28

How did Russell Wasendorf, CEO of Peregrine Financial Group, hide his fraud?

Back 28

Doctored bank stmts, created a fake PO BOX that he had control of for the auditors to get the bank stmts, and he was the only one that did bank reconciliations, as a CEO. The auditors should have contacted the bank directly!

Front 29

What are the two main characteristics that determine the persuasiveness of evidence?

Back 29

sufficient - quantity

appropriate - quality
relevant - good test design
reliable - can we trust the evidence?

Front 30

What does evidence do and how do auditors do it?

Back 30

helps determine if financial stmts fairly represent GAAP,

By testing validity of mgmt assertions

Front 31

What are the four decisions of Audit Evidence?

Back 31

1. Audit Procedures - Which test to perform?

2. Sample Size?

3. Individual Items - how do we pick the items for the sample?
(random, lg transactions, items near year end?)

4.When do we do our testing?
ideally for TOCs and TOTs -throughout the year
for TOB's - end of the year

Front 32

Reliable Evidence means....

Back 32

1. Independence of provider
2. effectiveness of ICs
3. Auditor Direct Knowledge
4. Qualifications of provider
5. Degree of Objectivity
6. Timeliness of Evidence

Front 33

What are the eight types of audit evidence?

Back 33

1. physical examination - when the auditor inspects or counts a tangible asset

2. Inspection - when auditor inspects documents and records like sale invoices, expense vouchers, lease agreements, board notes, etc. These documents have no inherent value. (after check is cashed it would be an inspection not a physical examination

Front 34

What are the eight types of audit evidence?

Back 34

3. Confirmation- confirms from outside 3rd party (A/R) (big difference between GAAP and IFRS - which doesn't req. confirmation of A/R or inventory)
McKesson-Robins case of 1938

4. Analytical Procedures - big picture tests or reasonableness test of FS amounts (ratios, %s, avgs, industry norms- REQUIRED in planning & completion phase of audit!!!!)

5. Inquires - when auditor asks question and gets an answer - prefer written answers

Front 35

What are the eight types of audit evidence?

Back 35

6. Recalculation- when auditor recalculates company's calculations

7. Reperformance - auditor's independent tests of client's acctg procedures/ICs. Test if design of TOCs = reality

8. Observation - not that reliable but more reliable if corroborated by additional evidence

Front 36

Cost of Audit: The persuasiveness and cost of all alternatives should be considered before selecting the best type(s) of evidence. The auditor's goal is to obtain sufficient and appropriate evidence at the lowest possible total cost without omitting a necessary procedure or not gathering adequate sample size. What are the more expensive types of evidence?

Back 36

More expensive - physical examination and confirmation

Less expensive - observations, inquiries, recalculation

Front 37

Audit documentation is an official record of....

Back 37

1. auditing procedures applied
2. evidence obtained
3. conclusions reached by auditor

Front 38

The most important purpose of audit documentation is?

Back 38

official record to show evidence/ support auditor's opinion

Front 39

Who owns the audit file?

Back 39

auditor

Front 40

Must client's confidential info be safeguarded? Basis?

Back 40

yes - Code of Professional Conduct

Front 41

how long must audit documentation be kept?

Back 41

private - 5 years

public -7 years

Front 42

Name of file that contains items of historical nature which does not often change from year to year?

as opposed to?

Back 42

permanent file

current files (only this years audit)

Front 43

What does Congress do?

Back 43

Pass Laws

SOX
Securities Act of 1933 (every IPO must have audited FS
Securities Act of 1934 (req annual reports)

ALL req. audited FS

Front 44

The main securities regulator that overseers the PCAOB and req. corporate filings (10K, 10Q, 8K)

Back 44

SEC

Securities and Exchange Commission

Front 45

Regulates auditors of PUBLIC companies
-establishes standards
-inspects firms auditing public companies (annually if audit over 100 co. per year, every 3 years if not)
-impose disciplinary action for violations (fines)
-DOES NOT APPLY TO PRIVATE COMPANIES

Back 45

PCAOB

Public Company Accounting Oversight Board

Front 46

Establishes auditing standards for NON-PUBLIC firms
-via Auditing Standards Board (ASB)
-working on Clarity Project
-establishes compilation & review standards for NONPUBLIC companies
-establishes other attestation standards
-writes and grades CPA Exam
-establishes Code of Conduct
ALL BIG 4 + NATIONAL + REGIONAL FIRMS belong

Back 46

AICPA

American Institute of Certified Public Accountants

Front 47

establishes international auditing standards

Back 47

IAASB

International Auditing & Assurance Standards Board

Front 48

U.S. Public Companies

organization?
Framework?
Specific Pronouncements

Back 48

PCAOB

gernal/fieldwork/reporting
TIP/PIE/GIDO

PCAOB Auditing Standards

Front 49

U.S. Private Companies

organization?
framework?
specific pronouncements?

Back 49

AICPA (ASB)

Principles (Clarity Project)
PR^2

Statement on Auditing Standards (SAS's)

Front 50

International Companies

organization?
framework?
specific pronouncements

Back 50

IAASB

Principles
PR^2

International Statement on Auditing (ISA's)

Front 51

Public Co. Framework
PCAOB - Generally Accepted Auditing Standards

General
Fieldwork
Reporting

Back 51

TIP / PIE / GIDO

TRAINING - adequate & proficient
INDEPENDENCE in mental attitude
PROFESSIONAL due care

PLANNING & supervision - proper
INTERNAL CONTROLS - sufficient understanding of
EVIDENCE - sufficient & appropriate

GAAP - whether stmts prepared in accordance w/
INCONSISTENT application of GAAP
DISCLOSURES - adequate info
OPINION - expressed in written report

Front 52

Private Co. Framework
Principles in AICPA Auditing Standards

Back 52

PR^2

PURPOSE of audit
- opine on FS

RESPONSIBILITIES
-possess appropriate competence & capabilities
-comply w/ ethical req.
-maintain professional skepticism & exercise professional judement

PERFORMANCE
-obtain reasonable assurance about whether FS are free of MM
-plan work and supervise assistants
-determine & apply materiality level(s)
-identify & assess risks of MM based on understanding of entity and its environment including ICs
-obtain sufficient & appropriate audit evidence

REPORTING
-express opinion on FS in written report
-whether FS were presented fairly in accordance w/ financial reporting framework (GAAS & IFRS)

Front 53

Internal policies & procedures within a given CPA firm meant to ensure the highest degree of performance are called....

Back 53

Quality Control Standards


apply to all engagements (tax & advisory too)

Front 54

Why do QCS vary across firms?

Back 54

different sizes and offer different kinds of services

Front 55

Examples of QCS include...

Back 55

training, independence questionnaires, monitoring, HR policies

Front 56

Who makes sure firms have QCS?

Back 56

AICPA review of Firm's QCS

a.k.a. Peer Review

Front 57

LO: 4-5 Impairment of Independence

SEC/SOX/PCAOB RULES

APPLIES TO AUDITS OF PUBLIC COMPANIES ONLY!!!

Back 57

Prohibited Services
-bookkeeping
-AIS Design & Implementation
-Appraisal & Valuation Services
-Internal Audit Services
-Mgmt/Legal functions
-broker & investment banker services

Audit Committee of BoD Requirements
-cannot be part of mgmt
-cannot own stock in co.
-least one financial expert

Employee Restrictions on Ex-Auditors
-one year cooling off period
-only applies to key mgmt positions

Partner (Not Firm) Rotational Req.
-applies to Lead & Concurring Partner
-must rotate off engagement after 5 years
-5 year cooling period before can return

Ownership Restrictions
-can't own stock in audit clients

Req. protocols around opinion shopping

Front 58

LO: 4-6 Impairment of Independence

AICPA RULE 101

APPLIES TO ALL AICPA MEMBERS (includes Big 4)

Back 58

No financial interest in Audit Client
-no direct investment for "covered members"
-no materially indirect investments for "covered members" (mutual funds usually okay)

Who are covered Members
-all members on audit engagement
-persons who can influence engagement
-partners & mgmt who provide non-audit services to audit client
-immediate family members

No loans between CPA Firm & Client
(gives rise to financial interest)

No unpaid audit fees over 1 year old
(gives rise to financial interest - like a loan)

No litigation between CPA Firm & Client
(opining under duress)

*Note - For private co., CPA Firm CAN perform both bookkeeping and audit services

Front 59

A __________ audit opinion means that its all good

1. All FS included
2. Sufficient & Appropriate evidence
3. FS=GAAP
4. No MM

Back 59

Unqualified

Front 60

A _____________ audit opinion means that its all good, BUT the auditors wants to call out attention to something.

1. Lack of consistent application of GAAP
(FIFO to LIFO, Change in Dep or other acctg methods)
2. Going Concern - fear of failure within 1 year
3. emphasis of a matter
4. Reports involving other auditors - subcontracted piece of audit to another firm

Back 60

Unqualified with modified working/explanatory paragraph

Front 61

A ___________ opinion means the FS conform to GAAP EXCEPT FOR

1. Failure to Follow GAAP and/or Aggressive estimates
2. limitation in scope (could not verify ending inventory because not hired till after new year

Back 61

Qualified

Front 62

A ______________ audit opinion means that the auditor gives no opinion because

1. auditors independence impaired,
2. material scope restriction (prevents auditor from getting sufficient, appropriate evidence or
3. Going Concern (Mercy Rule - rarely used)

Back 62

Disclaimer

Front 63

A ________ opinion is given when the FS does not equal GAAP

FS are materially misstated
(rarely happens because clients usually agree to fix AJE)

Back 63

Adverse

Front 64

The date on the signed independent auditor's report represents...

Back 64

the last day of fieldwork

auditor is responsible for all findings up until this date (even though it is the next fiscal year)

Front 65

Internal Controls are inversely linked to....

Back 65

# of Test of Transactions