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70 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What has been the most extensive legislation affecting the audit industry since 1933?
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What is the historical significance of the Sarbanes-Oxley Act of 2002?
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What is the Audit Opinion Formulation Process?
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1. Assessing Client Acceptance and Retention Decisions
2. Understanding the CLient 3. Obtaining Evidence about Controls and Determining the Impact on the Financial Statement Audit 4. Obtaining Substantive Evidence about Account Assertions 5. Wrapping Up the Audit and Making Reporting Decisions |
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What is Corporate Governance?
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What is the process by which the owners and the creditors of an organization exert control and require accountability for the resources entrusted to the organization?
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Stakeholders and owners often require accountability on what matters?
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Financial performance, Transparency, Stewardship, Internal Controls, and Executive Composition are all matters of what concern to stakeholders and owners?
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What powers does the PCAOB have?
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Setting audit standards.
Setting standards of audit reports on internal control. Inspections of public acct. firms to determine performance and if necessary, require improvements in order to retain registered status. Requiring all public acct. firms that audit public firms to register with PCAOB and become licensed. |
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Section 201 of SOX prohibits...
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...any registered public acct. firms from providing certain* nonaudit services contemporaneously with audit services.
*e.g. consulting, preparing tax returns of top management, etc. |
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Section 203 of SOX requires...
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...audit partner rotation every 5 years.
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Section 304 of SOX requires...
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...executives to forfeit any bonus or incentive-based pay or profits from sale of stock received in the 12 months prior to an earnings restatement.
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The Audit Committee must be composed of...
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..."Outside Directors".
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The various authorities that set audit standards all share one fundamental goal:
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To provide assurance to the public that audits are conducted in a professional manner and that misstatements are prevented and the financial results are clearly communicated, is the common thread among various authorities designated for what purpose?
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What are the four types of audit standards?
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Auditing
Assurance Attestation Compilation and Review Standards |
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GAAS standards are developed under what three categories?
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General standards
Fieldwork standards Reporting standards are all categories of what? |
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What is the purpose of General GAAS Standards?
What are the General GAAS Standards? |
What category of GAAS standards guide the profession in selecting and training its professionals to meet the public trust?
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1.The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor.
2. The auditor must maintain independence in mental attitude in all matter relating to the assignment 3. The auditor must exercise due professional care in the performance of the examination and the preparation of the report. |
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What are the Fieldwork GAAS Standards?
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1. The auditor must adequately plan the work and must properly supervise any assistants
2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. |
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What are the Reporting GAAS Standards?
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1. The auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles.
2. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. 3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report. 4. The auditor must either express an opinion regarding financial statements, taken as a whole, or state that an opinion cannot be expressed in the auditor's report. |
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Review the AICPA's 11 Attestation Standards
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Pg. 57
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What does Phase II of the Audit Opinion Formulation Process involve?
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Planning Meeting
pg. 58 Developing an Understanding of Materiality pg. 59 Developing a Preliminary Audit Program pg. 59 |
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What does Phase III and IV of the Audit Opinion Formulation Process involve?
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Testing Assertions
pg. 60 |
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What does Phase V of the Audit Opinion Formulation Process involve?
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Summarizing Audit Evidence and Reaching an Audit Conclusion
pg. 61 |
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What are the characteristics of high-quality decisions?
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Unbiased, meet the expectations of users, are in compliance with professional standards, and are based on sufficient factual information to justify the rendered decision.
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Describe the generalized, structural approach to decision making
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pg. 81
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Distinguish between an ethical problem and an ethical dilemma.
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What situation occurs when an individual is morally or ethically required to take action that may conflict with immediate self-interest? What occurs when there are conflicting moral duties or obligations?
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Describe the Utilitarian Theory.
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What theory holds that what is ethical is whatever action that achieves the greatest good for the greatest number of people?
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How is Utilitarianism applied?
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1) Identify the potential problem and courses of action
2) Identify the potential direct or indirect impact of actions on each affected party who may have a vested interest in the outcome of the actions taken 3) Assess the desirability of each action 4) Assess the overall greatest good for the greatest number |
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Describe the "Rights Theory".
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Rights Theory focuses on evaluating actions based on the fundamental rights of the parties involved. It requires that the rights of the affected parties should be examined as a constraint on ethical decision-making.
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Outline the ethical framework that incorporates both utilitarian and rights theories.
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1.) Identify the Ethical Issues
2.) Determined Affected Parties and Their Rights 3.) Determine the Most Important Rights 4.) Develop Alternative Courses of Action 5.) Determine the Likely Consequences 6.) Assess the Possible Consequences and Estimate the Greatest Good for the Greatest Number 7.) Decide on the Appropriate Course of Action pg. 84-85. |
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What are the five fundamental principles of the Code of Ethics from the International Ethics Standards Board for Accountants?
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1.) Integrity - Straightforwardness and honesty
2.) Objectivity - Unbiased, non-conflicted, non-influenced 3.) Professional Competence and Due Care - Due diligence 4.) Confidentiality 5.) Professional Behavior - Compliance with relevant laws and regulations |
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What is a "covered member"?
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A covered member is a person to whom Rule 101 of Independence applies. Such covered members are:
- Individuals on the attest engagement team - Individuals in a position to influence the attest engagement - Partners in offices which leading attest engagement partners primarily practice in relation to the attest engagement. - Covered member's immediate family |
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Distinguish between a direct financial investment and an indirect financial investment.
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A direct financial investment is one that is directly owned and/or controlled. An indirect financial investment is one that is neither directly owned nor controlled.
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For the purposes of determining material financial interest, the financial interests of a covered member should be...
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...aggregated.
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What is the threshold for materiality of financial interest?
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5%
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Loans may be issued to covered members from firms that are also clients, under what stipulations?
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Standard terms, unexceptionally large, and non-investment purposes.
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Performance of non-audit services to private firms may be provided under what stipulations?
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That the work does not compromise the appearance of independence, and that management of the firm does not cede decision-making authority to the CPA.
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Under what circumstances may a CPA divulge confidential information?
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-Assuring the adequacy of accounting disclosures required by GAAP,
-Complying with a validly issued and enforceable subpoena or summons or to comply with applicable laws and government regulations, -Providing relevant information for an outside quality review of the firm's practice under PCAOB, AICPA, or state board of accountancy authorization, -To initiate a complaint with, or respond to an inquiry made by, the AICPA's professional ethics division or trial board or investigative or disciplinary body of a state CPA society or board of accountancy. |
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Under what circumstances are contingent fees prohibited?
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Whenever the prospective fees would be from the client to whom the auditor provides attestation services.
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All of the SEC statements on independence follow from four basic principles, which dictate that independence is impaired when:
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1) A mutual or conflicting interest is created
2) The accountant is in the position of auditing his/her own work 3) The accountant is acting as management or employee of the audit client 4) The accountant is in a position of being an advocate for the client. |
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What nonaudit services are prohibited from being provided by auditors to public firms?
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Bookkeeping, Financial information systems design and implementation, Appraisal and valuation services, fairness opinions, or contribution-in-kind-reports, actuarial services, internal audit outsourcing services, management functions, human resources, broker-dealer, investment adviser, investment banking services, legal services, expert services unrelated to the audit, etc.
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What tax-related services are prohibited from being provided by public accounting firms to audit clients?
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Tax services to certain members of management serving in financial reporting oversight roles or to their immediate family members, and providing services related to marketing, planning, or opining in favor of tax treatments of certain confidential transactions or based on an aggressive interpretation of applicable tax laws and regulations.
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Distinguish independence in fact vs independence in appearance
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Independence in fact means that the auditor is actually objective and unbiased in their conduct. Independence in appearance means the auditor is perceived by knowledgeable users of financial statements as independent. An auditor may be independent in fact by virtue of objectivity and independence, but if an auditor has an direct and indirect financial interest in the client, and a knowledgeable user of the financial statements is aware of this, then independence in appearance may be vitiated.
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Who is the ultimate client?
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The Shareholders
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What are the major threats to independence?
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Compensation schemes, Familiarity with the client,
Time pressures, Rationalizing behavior, Providing nonaudit services |
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What provides guidance and rules to all CPAs?
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The AICPA Code of Conduct
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What are the AICPA Principles of Professional Conduct?
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Responsibilities - Exercise sensitive professional and moral judgment
Public Interest - Obliged to serve the public interest Integrity - Loyalty to principles Objectivity and Independence - Unbiased and independent in fact and appearance Due Care - Due diligence Scope and Nature of Services |
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Distinguish between Rules of Conduct and Rulings.
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Rules of Conduct are specific guidelines that reflect the broad principles of the profession
RULINGS are issued in response to member questions about specific situations |
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Auditor independence is impaired when...
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mutual or conflicting interest between the accountant and the audit client is created
accountant is placed in the position of auditing his or her own work accountant is acting as management or an employee of the audit client An accountant is placed as an advocate for the audit client |
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What are the rules regarding client confidentiality?
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In order for an auditor to develop a complete understanding of the client, there must be a free flow and sharing of information between client and auditor. To ensure this happens, the client must be assured that the auditor will not communicate confidential information to outside parties.
Rule 301 prohibits members from disclosing confidential client information obtained during an engagement except with client consent. |
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What are the rules regarding Commissions and Referral Fees?
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Members in public practice are prohibited from receiving commissions for recommending products and services to attest clients. Why? The commission gives the auditor a financial interest in his/her client's decisions.
Commissions are allowed for recommending products or services to non-attest clients, but must be disclosed to the client Members may pay or receive fees for referral of any professional services (including attest services) as long as the client is notified of the fee |
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What are the means of managing threats to independence?
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-Establishing and monitoring corporate codes of conduct
-Developing appropriate compensation schemes -Implementing high-level reviews of decisions to accept or retain clients -Separating consulting activities from audit activities -Performing within-firm reviews of audit work and audit documentation -Performing reviews and inspections within the profession |
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What is the importance of the role of the Audit Committee?
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-Oversight of engagement of company’s external auditor
-Overseeing auditors independence -Preapprove permitted services provided by auditor -Require firms to communicate certain information related to the firm’s independence |
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What are the ways in which the Code of Ethics is enforced?
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-Members who violate the AICPA code may have their membership terminated
-Members who violate a State Board of Accountancy's code are subject to disciplinary action including suspension or revocation of the member's certificate and license to practice. -If the State Board suspends the member's certificate, it can mandate conditions, such as additional continuing education, that must be satisfied before the member's certificate is reinstated. |
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In general, what does an auditor need to understand about risks?
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What risks affect the client's operations, and how well the management identifies and deals with those risks.
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What two basic risks originate in the client and its environment?
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1) Business Risk:
Risk that affects the operations and outcomes of the firm's activities (e.g. economic, technological, etc.) 2) Financial Reporting Risk: Risks that relate to the recording of transactions (e.g. corporate culture, management incentives, etc.) |
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What can the auditor do to understand business risk and financial reporting risk?
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Reviewing previous audits, the client's internal control, and risk management processes, carrying out discussions with management, and analyzing the curring economic environment are ways that the auditor can understand what?
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Audit risk is...
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...the risk that the auditor fails to find material misstatements.
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How can the auditor control audit risk?
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Eliminating engagement risk, i.e. eliminating the firm as a potential client, or
Setting audit risk at a level that the auditor is confident will exceed the probability that a material misstatement be detected, are two ways of doing what? |
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What are the factors that affect the auditor's decision to accept/retain a client?
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Management integrity,
Independence and competence of management and board of directors, Management's risk management Reporting requirements, Participation of key stakeholders, Existence of related-party transactions, Financial health of the firm. |
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How can an auditor find out if there has been a dispute between the client and the preceding auditor?
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Meet with previous auditors.
If permission to do so is denied, then look for SEC form 8-K In addition, the auditor can consult prior year's audit workpapers, which will reveal such disputes. |
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High risk firms are generally characterized by...
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Inadequate capital
Lack of long-run strategic and operational plans Low cost of entry into the market Dependence on a limited product range Imminent threats to creative destruction Cash flow volatility Questionable history of acct. practices Previous inquiries by the SEC or regulatory agencies |
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The purpose of an engagement letter is to..
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...ensure a mutual understanding of the nature of the audit services to be performed, the timing of these services, the expected fees and the basis on which they will be billed, the responsibilities of the auditor and the client, and other services to be provided..
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What is audit risk? Does the auditor determine audit risk or does the auditor assess it? What factors most influence audit risk?
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Audit risk is a determination of risk based on engagement risk; it is the risk that a material misstatement will go undetected. The auditor determines audit risk and assesses engagement risk -- in other words, audit risk expressed (or in principle, can be expressed) as a discrete, numerical computation, e.g. ".01" or ".05". Engagement risk, from what I understand, is arrived at intuitively, while based on professional expertise and experience, hence is more of an "assessment".
Factors of audit risk primarily revolve around environmental risk and detection risk. Environmental risk pertains to risk associated in the client's internal controls (Control Risk), and in the nature of the client's transactions (Inherent Risk). Detection risk is the risk that the auditor may overlook at material misstatement, and is a risk that is controllable by the auditor. In addition, business risk and financial reporting risk also factor into audit risk. Business risks pertain to economic, technological, and geographic circumstances, whereas financial risk involves aforementioned Environmental Risks, in addition to cultural, competency, and incentive issues that exist in corporate management. |
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Explain how the concepts of audit risk and materiality are related. Must an auditor make a decision on materiality in order to implement the audit risk model?
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If the audit risk is set very low, then presumably this indicates a high risk client. Under such precarious circumstances, materiality will require a lower threshold and therefore be much more "sensitive"; conversely, if the audit risk is high, then the client is clearly a low-risk engagement. In this case, materiality will not need to be adjusted to be more sensitive to misstatements.
In other words, the lower the audit risk, the lower the threshold for materiality will be -- which is intuitive with a high engagement risk situation. |
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What are the major limitations of the audit risk model? How should those limitations affect the auditor's implementation of the audit risk model?
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The audit risk model has components which are not amenable to measuring in a discrete fashion, as one can with a ruler or measuring stick. For instance, the Inherent Risk that stems from the nature of the clients transactions can be intuitively grasped as risky, but that is the limit to which one can assess such riskiness.
Also, none of the components can be analyzed with precision due to technological constraints. This necessitates the use of discretion in auditors, and therefore yields further detection risk. Moreover, the components in the audit risk model are each interrelated in reality, i.e. they are ALL part of Environmental Risks; to use an analogy, they essentially exist in a Ecosystem of Risks, where each and every risk is either directly or indirectly related to every other risk. However, the audit risk model lends itself to the notion that all the risk components are separate, isolated factors. This may over-simplify the auditor's thinking, and thereby lead to overlooking complex interrelationships that can uncover material misstatements. In addition, the determination of audit risk is ultimately discretionary, and to that extent, is subject to human error. |
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Describe the audit risk model and its components
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AR = f(IR, CR, DR)
Inherent Risk is susceptibility to error due to the nature of transactions. Control Risk is the likelihood that a material misstatement could occur undetected by a client's internal control. Detection Risk is the risk that the direct testing of an account balance will not detect a material misstatement. |
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In order to battle any reduced reliability of internally generated evidence, what key things should the auditor develop an understanding of?
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The firm: its strategies and operations
The market: Economic trends, product trends, and competitor actions The economics of client-transactions And from this understanding, the auditor should develop an expectation about financial results or transactional outcomes. |
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What background information might be useful to the auditor in planning the audit to assist in determining whether the client has potential inventory obsolescence or receivables problems? Identify the various sources the auditor would utilize to develop this background information.
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For problems pertaining to inventory obsolescence and receivables, the auditor will want to focus on the firm's business processes. For information on inventory, the auditor will find it useful to inquire into the nature of the firm's distribution and supply chain management. Sources of information for this include management inquiries, budgets, and even personal tours of the clients plants/operations.
From a broader perspective, the auditor can also develop expectations from other sources of information, such as economic and commercial trends. For instance, in a recessionary economic climate, fewer consumers will purchase more goods, thereby leading to idle and perhaps obsolete inventory. Sources for this include newspapers (WSJ), on-line websites (Hoovers), and so on. |
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What are some sources of information about key processes?
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Pg. 139
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How does the auditor manage risk?
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1) Adjusting audit staffing to reflect the risk associated with the client
2) Developing substantive tests of account balances consistent with the detection risk 3) Anticipating potential misstatements or accounting problems likely to be associated with account balances 4) Adjusting the timing of audit tests to minimize overall audit risk |
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In order to understand the risk management and control processes in place, what techniques may the auditor use?
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Pg. 141
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Generally speaking, what is the basic preliminary technique of analysis that auditors use to identify areas of heightened risk of misstatement?
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To analyze the client's unaudited financial statements and industry data, thereby developing expectations.
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What are the types of analytical procedures?
What does each involve? |
Trend analysis:
Ratio analysis: |
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