Auditing Quiz 2

Front 1

Acceptable audit risk

Back 1

the risk that the auditor is willing to accept that an unqualified opinion will be issued for statements that are materially misstated

Front 2

Achieved audit risk

Back 2

the actual risk that the statements are materially misstated after an unqualified opinion has been issued

Front 3

Inefficient auditing

Back 3

If achieved audit risk < acceptable audit risk, the audit report is supported by the evidence but there was over-auditing

Front 4

Ineffective auditing

Back 4

If achieved audit risk > acceptable audit risk, the audit report is not supported by evidence

Front 5

Audit risk model

Back 5

inherent risk * control risk * detection risk

Front 6

Inherent risk

Back 6

the risk that material misstatements exist before considering the client’s internal controls

Front 7

Control risk

Back 7

the risk that material misstatements will not be prevented or detected by internal controls

Front 8

Detection risk

Back 8

the risk that the auditors’ tests do not reveal material misstatements

Front 9

Risk that financial statements are misstated

Back 9

internal risk * control risk

Front 10

Errors

Back 10

unintentional misstatements

Front 11

Fraud

Back 11

intentional misstatements

Front 12

Risk assessment procedures

Back 12

Analytical procedures
Inquiry of management by others
Observation and inspection

Front 13

Dealing with inherent risk (4 ways)

Back 13

Identify risky areas
Understand the potential misstatements that may result.
Gather appropriate evidence regarding those areas
Assess business risks

Front 14

Business risk

Back 14

any external or internal factors, pressures, and forces that bear on the entity’s ability to survive and be profitable

Front 15

To assess inherent risk, the auditor must gain understanding of (6 points)

Back 15

The client’s industry
Regulatory environment
Nature of client’s business operations and strategies
How external factors (e.g., economy) affect the business
Structure of investing & financing
The financial reporting process

Front 16

Inherent risk warning signs (5 points)

Back 16

Changes in the entity, industry, or IT environment
New products, locations
Operates in a complex, regulated industry in an unstable economy
Going concern issues (liquidity, profitability)
Fraud risks

Front 17

Using the audit risk model

Back 17

1. Set a planned level of audit risk such that an opinion can be issued on the financial statements.
2. Assess inherent risk and control risk.
3. Use the audit risk equation to solve for the appropriate level of detection risk

Front 18

Why does detection risk exist?

Back 18

Sampling and nonsampling risk

Front 19

Sampling risk

Back 19

the auditor samples

Front 20

Nonsampling risk

Back 20

may select ineffective audit procedures
may apply procedures ineffectively
may incorrectly evaluate the results of procedures

Front 21

Relationship between detection risk and audit testwork

Back 21

there is an inverse relationship between detection risk and audit testwork

Front 22

Engagement risk

Back 22

an auditor’s exposure to financial loss and damage to professional reputation due to 3rd party lawsuits or negative publicity

Front 23

The business process approach

Back 23

Financial statement
Financial statement business processes
Management assertions
General audit objectives
Audit procedures

Front 24

The PCAOB classifies assertions with the following:

Back 24

(PERCV)
Presentation and Disclosure
Existence or Occurrence
Rights and Obligations
Completeness
Valuation or Allocation

Front 25

Presentation and disclosure

Back 25

Are components of the financial statements properly classified, described, and disclosed?
1) Classification (current vs. non-cur)
2) Disclosure (footnotes, GAAP, SEC)

Front 26

Existence or occurence

Back 26

Do all of the assets and equities on the Balance Sheet exist and did all of the transactions on the Income Statement occur? Are there overstatements?

Front 27

Rights and obligations

Back 27

Are the assets that are on the B/S owned by the entity and are the reported liabilities the obligations of the entity as of the B/S date?

Front 28

Completeness

Back 28

Have any assets, equities, or transactions been left out? (Are there understatements?)

Front 29

Valuation or allocation

Back 29

Are components of financial statements properly valued in accordance with GAAP?
Have amounts been fairly allocated between accounts (e.g., between asset and expense)?
1) Major: conservative/GAAP value
2) Minor: mechanical accuracy

Front 30

Audit procedures

Back 30

specific acts performed by the auditor to gather evidence to determine whether specific assertions are being met (risk assessment procedures, test of controls, substantive procedures)

Front 31

Substantive audit testing

Back 31

the process of obtaining evidence in support of transactions and balances

Front 32

Test of balance examples

Back 32

Part of substantive audit testing
Confirming A/R, observing inventory taking, reconciling bank balances

Front 33

Test of transactions examples

Back 33

Part of substantive audit testing
Plant asset additions, R&D expenditures, purchases and sales of marketable securities

Front 34

Audit program

Back 34

a set of audit procedures prepared to test assertions for a component of the financial statements

Front 35

Audit workpaper

Back 35

workpaper function is to provide evidence of conformance with GAAS and the PCAOB standards and to show the evidence the auditor has gathered and evaluated to support the audit opinion

Front 36

Competent evidence must be

Back 36

reliable and relevant

Front 37

Reliability is a function of

Back 37

(1) Credibility of source (external > internal)
(2) Conditions (good IC > weak IC)
(3) Manner in which obtained (direct observation > inquiry of client)

Front 38

Relevance

Back 38

based on whether it satisfies the audit objectives (assertions)

Front 39

Types of evidence uses the following acronym:

Back 39

PCRADIOS

Front 40

High reliability evidence

Back 40

Physical examination - inspection or count by the auditor of a tangible asset
Confirmation - receipt of a written or oral response from an independent third party at the auditor’s request

Front 41

Medium reliability evidence

Back 41

Reperformance and recalculation - checking the accuracy of client calculations and transfers of information
Analytical procedures - used in the planning phase to identify areas of high audit risk and as substantive tests
Documentation (vouch/trace) - auditor examines client documents and records

Front 42

Five broad categories of analytical procedures that help develop expectations

Back 42

1. Current vs. prior period
2. Budget vs. actual
3. Interrelationships among components of F/S
4. Client vs. industry
5. Comparisons to nonfinancial data

Front 43

How are analytical procedures used

Back 43

used in the planning phase to identify areas of high audit risk and as substantive tests
look for unusual fluctuations within or between periods and unaudited amounts that differ from auditors’ expectations

Front 44

Physical examination

Back 44

inspection or count by the auditor of a tangible asset

Front 45

Internal documents

Back 45

prepared by the client and have not left the client’s premises (less persuasive)

Front 46

The primary determinant of the competence of internal documents

Back 46

internal control

Front 47

External documents

Back 47

prepared by a third party or processed by a third party (more persuasive)

Front 48

Low reliability evidence

Back 48

Inquiries of client - useful but biased and not persuasive unless supported by another form of evidence
Observation - informal procedure needing follow-up procedures
Scanning (medium) - review of accounting data to identify significant or unusual items