Auditing Exam #2

Front 1

Two Types of Fraud Considered in an Audit are...

Back 1

Fraudulent Financial Reporting
Misappropriation of Assets

Front 2

The 7 steps involved in considering the risk of fraud are...

Back 2

1) Audit Team Discussion
2) Identify Information Necessary to Assess Fraud Risk Factors
3) a. Identify Risk Factors Related to Fraudulent Financial Reporting
b. Assess Fraud Risks
4) Respond to Assessed Risks
5) Evaluate Audit Evidence
6) Communicate Fraud Matters
7) Document Fraud Matters

Front 3

The 5 Materiality Judgment Criteria are...

Back 3

1) Absolute Size
2) Relative Size
3) Nature of the Item or Issue
4) Circumstances
5) Cumulative Effects

Front 4

The Audit Risk Model Equation is...

Back 4

AR=IR*CR*AP*TD

Front 5

Audit Risk (AR) is...

Back 5

The amount of Material Misstatement that might remain undetected after the auditor has completed all audit procedures deemed necessary.

Front 6

Business Risk is affected by what 3 factors?

Back 6

1) The degree to which external users rely on the financial statements
2) The likelihood that a client will have financial difficulties after the audit report is issued
3) Auditors evaluation of managements integrity

Front 7

What is "Business Risk"?

Back 7

The risk that the auditor will suffer harm because of a client relationship, even if the audit report rendered was correct

Front 8

Control Risk (CR)

Back 8

Risk that material misstatement will not be prevented or detected on a timely basis by the CLIENTS IC System

Front 9

Inherent Risk (IR)

Back 9

The risk of a material misstatement assuming there are no related internal control structure policies or procedures

Front 10

Analytical Procedures Risk (AP)

Back 10

The risk that analytical procedures would fail to detect material misstatements that are not detected by the IC structure

Front 11

Substantive Test of Details Risk (TD)

Back 11

The risk that substantive test of details would fail to detect material misstatements that are not detected by the IC structure or the analytical procedures

Front 12

Factors that may affect the inherent risk are...

Back 12

1) Nature of Clients Business
2) Fraud Factors
3) Results of previous audits
4) Intial vs. Repeat Engagement
5) Related Parties
6) Non-Routine Transactions
7) Judgement required to correctly record account balances and transactions
8) Susceptibility of Assets to Misappropriation

Front 13

The 3 Fraud Factors are...

Back 13

a. Management's characteristics and influence over controls
b. Industry Conditions
c. Operating characteristics and Financial Stability

Front 14

Vouching

Back 14

Selecting Item of Information from accounting records (Journal, Ledger) and following the path back to the origin

Front 15

Tracing

Back 15

Selecting a source document and following the path forward to entries and posting (Test for Completeness)

Front 16

Scanning

Back 16

To indentify unusual items and events.

Front 17

3 types of Confirmation are...

Back 17

1) Positive with info to be supplied by the recipient
2) Positive with info included on the form
3) Negative (Weakest Type)

Front 18

Five Types of Analytical Procedures

Back 18

1) Compare client and industry data
2) Compare client data with similar prior-period data
3) Compare client data with client-determined expected results
4) Compare client data with auditor-determined expected results
5) Compare client data with expected results, using non-financial data

Front 19

Preengagement Arrangements

Back 19

1-Obtaining and reviewing financial information about the prospective client
2-Inquiring of external parties
3-Considering whether the engagement would require special attention or involve unusual risks
4-Evaluating the accounting firm's independence with regard to the prospective client
5-Considering the need for special skills

Front 20

Burden of communication is on...

Back 20

The Successor Auditor

Front 21

4 things contained in the Engagement Letter

Back 21

1) Objectives of Engagement
2) Management's Responsibilities
3) Auditor's Responsibility
4) Any Limitations of Engagement

Front 22

7 steps to understanding the client's business

Back 22

1-Gaining an understanding of a client's business risk
2-Risk-Based Auditing (RBA)
3-Inquiry and observation of client personnel
4-Identification of related parties
5-Review of prior audit documentation
6-Study industry accounting and auditing practices
7-Considering the work of internal auditors (SAS 65)

Front 23

Analytical Procedures are done how often?

Back 23

Twice in an audit:

1) At the Beginning
2) At the End

Front 24

Managements IC Responsibilities

Back 24

1) Mgt's responsible for establishing and maintaining adequate IC over financial reporting
2) Identifying the framework used to evaluate effectiveness of the entity's IC
3) Mgt's assessments of the effectiveness of the entity's IC

Front 25

Auditors IC Responsibilities

Back 25

1) If a PCAOB audit, auditors must evaluate the effectivness of the internal control over financial reporting and express an opinion on it
2) Auditors must assess the level of control risk, as a means of planning the audit

Front 26

Reasonable Assurance regarding the achievement of objectives in the following three categories:

Back 26

1) Reliability of financial reporting
2) Efficiency and effectiveness of operations (only to extent financial statements)
3) Compliance with applicable laws & regulations (only to extent on financial statements)

Front 27

COSO's five components of Internal Controls are...

Back 27

1-Control Environment
2-Risk Assessment
3-Information and Communication
4-Control Activities
5-Montoring

Front 28

7 Internal Control Objectives for Transactions are...

Back 28

1-Validity
2-Completeness
3-Authorization
4-Accuracy
5-Classification
6-Accounting
7-Proper Period

Front 29

Internal Control Objective test for Validity tests

Back 29

whether transactions did exist or actually did occur

Front 30

Internal Control Objective test for Completeness tests

Back 30

whether every transaction does get recorded

Front 31

Internal Control Objective test for Authorization tests

Back 31

whether transactions were approved by the appropriate people

Front 32

Internal Control Objective test for Accuracy tests

Back 32

whether transactions were recorded at the proper amounts

Front 33

Internal Control Objective test for Classification tests

Back 33

whether transactions were recorded at the correct amounts

Front 34

Internal Control Objective test for Accounting tests

Back 34

whether transactions and accounts are grouped properly

Front 35

Internal Control Objective test for Proper Period tests

Back 35

whether transactions were recorded on the proper date and period

Front 36

The 3 phases of Internal Control Evaluation are...

Back 36

1) Understand and Document the Client's Internal Control
2) Assess the Control Risk (preliminary)
3) Perform Test of Controls and Reassess Control Risk

Front 37

Perform Test of Controls require what 4 things be done?

Back 37

1-Make inquires of appropriate client personnel
2-Examine Documents, records and reports
3-Observe control related activities
4-Reperform client procedures

Front 38

PCAOB requires how many walkthroughs?

Back 38

2

Front 39

Phase 1-Understand and Document the Client's Internal Control requires what 3 things be done?

Back 39

1-Identifying entity-level controls
2-Document the Internal Control Understanding
3-Accounting and Control System Flowcharts-

Front 40

Document the Internal Control Understanding can be accomplished by either of these 2 items?

Back 40

Internal Control Questionnaires
Narrative Descriptions

Front 41

Identifying entity-level controls are accomplished by these 4 steps

Back 41

1-Making inquires of appropriate client personnel
2-Inspecting company documents
3-Observing the application of specific control
4-Tracing transactions through the IS. "walkthrough"

Front 42

Six Step Audit Procedure

Back 42

1-Planning the engagement
2-Using a top-down approach
3-Testing controls
4-Evaluating control deficiencies
5-Wrapping up
6-Reporting on Internal Control

Front 43

Significant Deficiencies

Back 43

Not material but inform audit committee. Could adversely affect financial data

Front 44

Internal Control Letter

Back 44

Is an SAS not PCAOB requirement

Front 45

Management Letter

Back 45

Optional

Front 46

In a PCAOB audit, auditor must...

Back 46

communicate in writing to the management and the audit committee all material weaknesses identified

Front 47

2 limits to Internal Controls are...

Back 47

1-Management override
2-Collusion

Front 48

Inherent Risks in the Revenue and Collection cycle are...

Back 48

1-Revenue Recognition
2-Collectivity of Accounts Receivable
3-Customer Accounts & Allowances

Front 49

5 types of Control Activities for the Revenue and Collection cycle are...

Back 49

1-Segregation of Duties
2-Authorization of Transactions
3-Access to Assets
4-Adequate Documents and Records
5-Independent Checks on Performance

Front 50

Control Risk Assessments should include...

Back 50

1-Activities to understand IC system
2-Test of Controls

Front 51

Audit procedures to test for existence are...

Back 51

Inspection
Inquiry
Examination
Scanning
Analytical
Recalculation

Front 52

3 reasons to justify the omission of a confirmation of a client's accounts receivable

Back 52

1-Not material
2-If the combined level of the inherent risk and control risk is low
3-If the confirmation of accounts receivable is expected to be ineffective

Front 53

May use Negative Confirmation is ALL what are true?

Back 53

1-Combined assessment of IR and CR is low
2-Large number of small balances
3-Receipts expected to give confirmations adequate attention