Acct 460 Exam 1

Front 1

What three conditions must be met for auditors to issue a standard unqualified audit report? Pg 612

Back 1

Audit has been performed in accordance with applicable auditing standards. GAAS

The auditor has gathered sufficient evidence

Auditor believes that the financial statementsconform to GAAP

Front 2

Describe the eight elements included in a standard unqualified audit report for public companies? Explain what and why.Pg 612

Back 2

Report title

The addressee

The introductory paragraph

The scope paragraph

The opinion paragraph

An explanatory paragraph referring to the auditof internal control over financial reporting.

The name of the auditor

The audit report date

Front 3

Explain the two reporting options that auditors have when their opinion is based in part on the report of another auditor. Pg615

Back 3

An opinion paragraph and auditing responsibilities

determine the nature of the departure and report, the principal auditor needs to determine the nature of the departure and its significance in relation to the overall financial statements. Don’t need to mention auditor

Front 4

In addition to an audit of internal controls,describe three situations that require auditors to add an explanatory paragraph to there standard unqualified report. Pg 616

Back 4

Reference to the report on the audit of internal control for public companies

Substantial doubt an entity’s ability to continue as a going concern

Lack of consistency in the application of accounting principles due to accounting changes

The need for additional emphasis

Front 5

Describe three conditions that might cause auditors to depart from an unqualified opinion. Pg 619

Back 5

Scope of limitations – a scope limitations results from an inability to collect sufficient component evidence, such as when management or some set of circumstances prevents the auditor from conducting an audit procedure that the auditor considers necessary.

Departure from GAAP – a departure from GAAP exists when the financial statements are prepared or presented in a manner that conflicts with GAAP, whether due to error or fraud.

Lack of independence of the auditor – a lack of independence arises when the auditor and the entity have any financial,business, or personal relationship prohibited by professional standards. The auditor must comply with the second general stand and rule 101 of the code of professional conduct in order to issue an unqualified opinion.

Front 6

Describe three alternatives to the standard unqualified audit report that auditors could choose to issue. Pg 619

Back 6

Qualified – the auditor qualifies his or her opinion when either a scope limitations or a specific departure from GAAP exists, but overall the financial statements present fairly in conformity with GAAP. If the auditor decides to qualify a report for scope limitations, the report describes why the limitation arose and indicates that the financial statements present fairly except for the possible effects of the limitation. If the auditor qualifies a report for a GAAP departure, the report describes the nature and impact of the faulty accounting and indicates that the financial statements present fairly except for the effects of the departure. Note that a qualified report always uses the words “except for.”

Disclaimer – the auditor disclaims an opinion on the financial statements either because there is insufficient appropriate evidence to form an opinion on the overall financial statements or because there is a lack of independence. In a disclaimer the auditor explains the reasons for withholding an opinion and explicitly indicates that no opinion is expressed.

Adverse – the auditor issues an adverse opinion when the financial statements do not present fairly due to a GAAP departure that materially affect the financial statements overall. In an adverse report the auditor explains the nature and size of the misstatement and states the opinion that the financial statements do not present fairly in accordance with GAAP.

Front 7

Describe the relationship between materiality, audit risk, and evidence Pg 15

Back 7

Nature, timing and extent of the audit evidence to be gathered.

Front 8

What is materiality

Back 8

Materality refers to the amount by which set of financial statements could be misstated without affecting the judgement of reasonable people

Front 9

Why is determining materality important to auditors?

Back 9

it is not practical or cost beneficial for auditors to ensure that financial statements are completely free of small misstatements

Front 10

How does materiality influence the audit process?

Back 10

Can change plan and look at more transactions

Front 11

What is audit risk

Back 11

Risk that the auditor expresses inappropriate audit opinion when the financial statements are materially misstated

Front 12

How do auditors manage audit risk?

Back 12

Through the effectiveness and extent of the audit work conducted. The more effective and extensive the audit work, the lower the risk a misstatement will go undetected and that the auditor will issue an inappropriate report.

Front 13

What is a management assertion?

Back 13

Consists of the underling accounting data and any additional information available to the auditor, whether originating from the client or externally.

Types of concerns we are concerned about

Front 14

What makes audit evidence sufficient?

Back 14

Refers to the quantity of evidence the auditor obtains

Front 15

What makes audit evidence appropriate?

Back 15

Refers to whether the evidence is relevant and reliable

Front 16

Why do auditors have to rely on samples of evidence when the test assertions?

Back 16

It is costly and time consuming to test everything. By selecting samples, you are able to determine if the samples meet the requirements for the audit.

Front 17

Describe the seven phrases of the audit process

Back 17

Client acceptance/continuance - purporse is to minimize the likelihood that an auditor will be associated with clients who lack integrity

Preliminary engagement activities - determine the audit engagement team requirements; ensure the independence of the audit team and the audit firm; and establish an understanding with the client regarding the services to be performed and the other terms of the engagement.

Plan the audit - the audit team must have a preliminary assessment of the client's business risks and determine materiality. The outcome of the auditor's planning process is a written audit plan that sets forth the nature, extent, and timing of the audit work.

Consider and audit internal controls - the auditors obtains an understanding of internal control to help the auditor assess risk and identify areas where financial statements might be misstated.

Audit business processes and related accounts - organize audits by grouping financial statement accounts according to the business processes that primary affect those accounts.

Complete the audit - obtain sufficient appropriate evidence in order to reach and justify a conclusion on the fairness of financial statements.

Evaluate results and issue audit report - evaluate results and chose the appropriate audit report to issue

Front 18

What three different opinions about the fairness of financial statements might be expressed in the auditor's report?

Back 18

Unqualified - free of material misstatements

Disclaimer - not enough evidence

Qualify - explaining the financial statements are fairly stated except for the misstatement identified

Adverse - indicating that the financial statements are not fairly stated and should not be relied upon.

Front 19

Describe the primary focus of the following types of auditors

Back 19

External auditors - referred to independent auditors. Audit financial statements for publically traded companies, private governmental, etc.

Internal auditors - employees/individuals within the organization

Governmental auditors - employed by federal, state, and local agencies (compliance)

Forensic auditors - specialized to detect white collar crimes.

Front 20

What three types of non-audit services are offered by most public accounting firms?

Back 20

Tax preparation

Management advisory services

Compilation and review services

Front 21

What is the most important factor in choosing the organizational form for a public accounting firm?

Back 21

Based on risk and liabilities

Front 22

Describe the typical make up of an audit team?

Back 22

Usually consist of partner, manager, one or two seniors, and several staff members.

Front 23

What change occurred in the public accounting profession during the late 1900s and early 2000s that became a great concern after the Enron debacle?

Back 23

The Sarbanes Oxley act was passed. It effectively transferred authority to set and enforce auditing standards for public company audits to the PCAOB.

Accounting firms sought out opportunities. Investors lost confidence

Front 24

In what four ways did the Sarbanes Oxley act affect auditors who service public companies? Pg 43

Back 24

Transferred authority to set and enforce auditing standards for public company audits to the PCAOB.

Mandated that the SEC impose strict independence rules, prohibiting auditors from providing many types of non-audit services to public company auditees.

Audit firms rotate audit partners on audit engagements every 5 years

Public companies obtain an integrated audit (includingaudits of both financial statements and internal control over financial reporting

Front 25

What two misconceptions about auditors’ responsibility are common among readers of financial statements? Pg 44

Back 25

That auditors are responsible for the financial statements or at least that they have a responsibility to detect all errors,fraud, and illegal act.

Can detect all errors

Front 26

What is corporate governance? Pg 45

Back 26

Consists of all the people, processes, and activities in place to help ensure proper stewardship over an entity’s assets.Good corporate governance ensures that those managing an entity properly utilize their time, talents, and the entity’s resources in the best interest of absentee owners, and that they faithfully report the economic condition and performance of enterprise.

Front 27

Who is primary responsible for management oversight in U.S. Corporations? Pg 45

Back 27

The board of directors

Front 28

Describe each of the following agencies influence the auditing profession. Pg 50

Back 28

SEC – administers the securities act of 1933,the securities exchange act of 1934, and the Sarbanes Oxley act of 2002, among others. They have responsibility and authority to oversee FASB, ASB, PCAOB

PCAOB – oversee the audits of public companies in order to protect the interests of investors and further the public interest in preparation of informative, accurate and independent reports. Issues auditing standards for audits of public companies. c.

AICPA – rules and standards that guide audit and related services provided to non-public companies; governmental entities such as state, counties, municipalities, and schools districts, and other entities such as charities.

FASB – establish standards for financial accounting and reporting. Issues accounting principles for use by preparers.

Front 29

What are the three general standards for the GAAP? Pg 53

Back 29

Recognizes that an auditor must have adequate training and proficiency

Requires auditors maintain an attitude of independence on an engagement.

Avoid actions or relationships that may appear to affect independence

Front 30

What are the three standards of field work for the GAAP? Pg 54

Back 30

Deals with planning and supervision. Proper planning leads to a more effective audit that is more likely to detect material misstatements and facilitates completing the engagement in a reasonable amount of time.

Requires auditors to gain a sufficient understanding of the entity’s internal control to effectively plan the nature,timing, and extent of further audit procedures.

Sufficient appropriate evidence

Front 31

What are the four standards of reporting for the GAAP? Pg 54

Back 31

Whether the financial statements are presented in accordance with generally accepted accounting principles

Whether those principles are consistently applied

Whether all appropriate disclosures have been made

What degree of responsibility the auditor is taking as well as the character of the auditor’s work.