Auditing Exam 2

Front 1

Auditing

Back 1

Systematic process of objectively obtaining evidence regarding management assertions

Front 2

Purpose of an audit

Back 2

Enhance user confidence in financial statements

Front 3

Objective of an audit

Back 3

Express opinion.

Give reasonable assurance financial statements are prepared in all material respects and in accordance with applicable reporting framework.

Front 4

Business risk

Back 4

Risk entity fails to meet its goals and objectives

Front 5

Information risk

Back 5

Probability information circulated by the company will be false or misleading

Front 6

Risk of material misstatement

Back 6

Likelihood error or fraud will exist in financial statements prior to considering Auditors work.

Determines nature timing and extent of further audit procedures.

Combination of inherent and control risk

Front 7

Inherent risk

Back 7

Probability in the absence of internal control material error or fraud could enter the accounting system.

Based on the type of business

Front 8

Control risk

Back 8

Management's internal controls will not detect or prevent a material misstatement.

Front 9

Purpose of Enterprise risk management (COSO)

Back 9

Helps improve assessment and Mitigation Of Business risk

Front 10

8 elements of ERM

Back 10

Internal environment

Objective setting

Event identification

Risk assessment

Risk response

Control activities

Information and communication

Monitoring

Front 11

Audit risk

Back 11

Risk the auditor will give an incorrect opinion

Front 12

Detection risk

Back 12

Auditors procedures fail to detect material misstatement undetected by managements internal controls.

Front 13

Employee fraud

Back 13

Either embezzlement or larceny to steal from an employer.

3 phases:

Fraudulent Act

Conversion of funds to fraudsters use

Cover up

Front 14

Embezzlement

Back 14

Employees or not employees misappropriating funds or property that has been entrusted to their care custody and control often accompanied by fultz accounting entries

Front 15

Larceny

Back 15

Simple theft

Front 16

Defalcation

Back 16

Misappropriation of assets.

Employee fraud embezzlement and larceny

Front 17

Audit risk

Back 17

Likelihood that an error or fraud will occur and not be caught by either internal controls or Auditors procedures.

Eg.: unmodified opinion where material misstatements are present :(

Front 18

Significant account or disclosure

Back 18

May contain material misstatements, regardless of internal controls.

Front 19

Relevant assertions

Back 19

Management assertions that have a reasonable possibility of containing material misstatements without regard to the effective internal controls

Front 20

AR = 0.5

Back 20

Relatively low audit risk.

5% of audit opinions would be wrong

Front 21

IR = 0.9

Back 21

Audit team thought valuation of inventory balance was subject to Great inherent risk

Front 22

CR = 0.5

Back 22

Internal control not very effective

Front 23

Audit committee

Back 23

Subsets of board of directors composed of outside members who can provide a buffer between audit firm and management

Front 24

Analytical procedures

Back 24

Reasonableness test used to gain understanding of financial statement accounts and relationships.

Required during beginning and end of the audit.

Can be used as substantial testing procedures to gather evidence

Front 25

ERM

Back 25

Responsibilities of company management

Front 26

Aunt made several large adjustments at or near

Back 26

Audit team should perform extended procedures

Front 27

Risk of material misstatement is composed of which audit risk components?

Back 27

Inherent risk and control risk

Front 28

Analytical procedures are generally used to produce evidence from...

Back 28

Relationships among:

Current & prior financial balances,

Forecast

Non-financial data (minutes of meetings)

Front 29

Analytical procedure for budgets and forecasts

Back 29

Compare current account balance with expected balance

Front 30

Audit strategy memorandum

Back 30

Specifications of procedures for financial statements under audit

Front 31

Private Securities litigation Reform Act

Back 31

Independent Auditors are required to report to the SEC all instances of non-compliance with the ACT they believe having material effect on financial statements if the board of directors does not first report it