Audit Problems Exam 1

Front 1

auditing is different from other accounting courses in that

Back 1

it is more conceptual in nature and improves the reliability of information for decision makers

Front 2

agents and principals relationship leading to demand for auditing

Back 2

managers and stockholders; principal provides the capital and hires an agents to manage it. Agent hires an auditor to report on the fairness of agents financial reports. Pays to reduce principals information risk. Auditor gathers evidence and issues an opinion to add credibility to the financial statements.

Front 3

auditing services defined

Back 3

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

Front 4

attest services defined

Back 4

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

Front 5

assurance services defined

Back 5

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

Front 6

audit risk

Back 6

the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.

Front 7

reasonable assurance

Back 7

implies some risk that a material misstatements could be present in the financial statements and the auditor will fail to detect it.

Front 8

materiality

Back 8

the magnitude of an omission or misstatement of accounting information, considering surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or statement

Front 9

evidence that assists the auditor in evaluating managements financial statement assertions includes

Back 9

the underlying accounting data and any corroborating information available to the auditor

Front 10

auditors use? to examine the transactions and make a valid opinion

Back 10

1.their knowledge about the transactions and 2. a sampling approach to examine transactions

Front 11

the auditors report (audit opinion) is

Back 11

the main product or output of the audit. The standard unqualified (clean) audit report is the most common type of report issued

Front 12

titles line of the audit report includes the word

Back 12

"independent" and the report is usually addressed to the stockholders of the company

Front 13

an audit report include

Back 13

an introductory paragraph, a scope paragraph, an opinion paragraph, an explanatory paragrah referring to the audit of internal control, the name of the auditor or audit firm, and the date of the audit report.

Front 14

a qualified opinion

Back 14

when a clients financial statements contain a misstatement that the auditor considers material and the client refuses to correct the misstatement, the qualify report will be issued explaining that the financial statements are fairly stated except for the misstatement identified by the auditor.

Front 15

an adverse opinion

Back 15

indicates that the financial statements are not fairly stated and should not be relied upon. Occurs when a misstatement is so material that it effects the interpretation of the financial statements.

Front 16

an auditor needs to understand

Back 16

both accounting and the concepts and techniques of gathering and evaluating evidence to assess managements assertions; and is a fundamentally logical process of thining and reasoning.

E1

Front 17

the sarbanes oxley act

Back 17

ended the era of self regulation and created and transferred authority to the PCAOB to set and enforce standards

Front 18

primary context of auditing

Back 18

what industry or business the client is in. ex. hardware manufacturer; concerned with inventories that arent selling quickly

Front 19

a system of corporate governance is necessary due to the way modern business is managed; to oversee business

Back 19

board of directors and the audit committee.

Front 20

the five components of the business process

Back 20

financing, purchasing, human resource management, inventory management, revenue.

Front 21

management assertions: transactions

Back 21

mgmt asserts that transactions related to inventory actually occurred.

Front 22

management assertions; account balances

Back 22

mgmt asserts that the entity owns the inventory represented in the inventory account

Front 23

management assertions; presentation and disclosure

Back 23

mgmt asserts that the financial statements properly classify and present the inventory.

Front 24

auditing standards serve as

Back 24

guidelines for and measures of the quality of the auditors performance.
PCAOB - public companies
auditing standards board - nonpublic companies

Front 25

*GAAS: general standards

Back 25

independence
due professional care
adequate training and proficiency

Front 26

*GAAS: standards of fieldwork

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adequate planning and supervised assistants
obtain sufficient understanding of client and enviornment including internal controls
obtain sufficient appropriate evidential matter

Front 27

*GAAS: standards of reporting

Back 27

GAAP
consistency
disclosures
opinion

Front 28

minimum standards of performance for auditors

Back 28

GAAS (Generally accepted auditing standards) and SAS (Statements on auditing statements

Front 29

auditing standards

Back 29

standards issued by the PCAOB

Front 30

SAS are classified by two numbering categories

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SAS number puts the ordering in chronological order, and the AU codification organizes the SAS according to topical content.

Front 31

ethics

Back 31

refers to a system or code of conduct based on moral duties and obligations that indicates how we should behave.

Front 32

professionalism

Back 32

refers to the conduct, aims, or qualities that characterize or mark a profession or professional person. All professions operate under some type of code of ethics or conduct

Front 33

audit teams

Back 33

partner
manager
senior/in-charge
associate/staff

Front 34

types of audit services

Back 34

internal control
compliance
operational
forensic

Front 35

types of attest services

Back 35

reporting on internal control
financial forecasts and projections

Front 36

types of assurance services

Back 36

risk assessment
performance measurement
information system reliability and e-commerce

Front 37

non-assurance services

Back 37

tax, management advisory, accounting and review services

Front 38

types of auditors

Back 38

government, forensic, internal, external

Front 39

organizations that affect the public accounting profession

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AICPA: american institute or certified public accountants
SEC: securities and exchange commission
PCAOB: public company accounting oversight board
FASB: financial accounting standards board

E2

Front 40

the standard unqualified report is issued when

Back 40

the auditor has gathered sufficient evidence, the audit was performed in accordance with GAAS and the financial statements conform to GAAP.

Front 41

seven elements of the std unqualified report

Back 41

report titles
addressee
intro paragraph
scope paragraph
opinion paragraph
name of auditor
audit report date

Front 42

explanatory language added to a std unqualified financial statement audit report

Back 42

opinion based in part on the report of another auditor
going concern
agreement with departure from GAAP
lack of consistency
emphasis of a matter

Front 43

opinion based in part on report of another auditory

Back 43

assess the proficiency, independence, and materiality of work relied upon in relation to the whole audit
If portion audited is not material then do not mention other auditors names
if portion audited is material then: unqualified report, the portion audited and the presence of other auditors
qualified report: determine the departure and the nature significance

Front 44

departure from promulgated accounting principles

Back 44

issue an unqualified opinion: an explanatory paragraph should describe the departure, the effects of the departure, and the reasons that compliance with the accounting prinicple results in misleading financial statements

Front 45

changes affecting consistency

Back 45

change in accounting principle
change in reporting entity
correction of an error in principle

Front 46

changes not affecting consistency

Back 46

change in accounting estimate
change in classification and reclassification
change expected to have a material future effect.
correction of an error that does not involve an accounting principle

Front 47

emphasis of a matter

Back 47

under certain circumstances an auditor may way to emphasize a specific matter regarding the financial statements even though he or she intends to express an unqualified opinion. should be presented in an explanatory pargraph

Front 48

conditions for departure

Back 48

scope limitation
departure from GAAP
lack of auditory independence
words "does not present fairly" must be included

Front 49

scope limitation

Back 49

results from an inability to obtain sufficient competent evidence about some component of the financial statements
qualified example: fire
disclaimer example: mgmt limits scope

Front 50

for adverse and qualified opinion, the

Back 50

explanatory paragraph should be included before the opinion paragraph.
other wise the explanatory paragraph comes after the opinion paragraph

Front 51

not in conformity with GAAP: issue a

Back 51

qualified or adverse opinion

Front 52

auditory not independent: issue

Back 52

a disclaimer

Front 53

the predecessor auditor should be the following before reissuing the report

Back 53

read the financial statements of the current period
compare prior period financial statements with the current year financial statements
obtain a letter or representation from the current year or successor auditory