Audit & Assurance

Question 1

What are the 8 steps to determine materiality?

Answer 1

1. determine users
2. deterine user objectives
3. decide on materiality base basaed on whwich accts are most important to users
4. identify % threshold
5. determine overall materiality
6. performance materiality
7. specific materiality (if any)
8. specific peformance materiality

Question 2

What are the materiality thresholds for common materiality bases?

Answer 2

1. Normalized NI before tax: 3-7%
2. Total assets: 1-3%
3. Revenue/Expenses: 1-3%
4. Equity: 3-5%

Question 3

What factors influence the materiality threshold chosen?

Answer 3

Use a lower threshold if users’ decisions are sensitive to misstatement but higher if they’re less sensitive.

Question 4

What is the threshold for performance materiality?

Answer 4

60-75%

Question 5

What factor is used to decide on which threshold to use for performance materiality?

Answer 5

RMM - higher RMM means lower %

Question 6

When would you decide to include a Specific Materiality %?

Answer 6

If users specifically are affected by certain accts - if an amt lower than overall materiality would affect users’ decisions

Question 7

What are the 2 options for thresholds for specific materiality?

Answer 7

1) can use a percentage of the accounts that the user is concerned about, as long as the amount is less than overall materiality
2) practitioner may simply use a reasonable percentage of overall materiality in the calculation of SM (ex. 50% of overall materiality)

Question 8

Which additional section is required in the audit report when the going concern issue is inappropriate, or if it is appropriate but there is material incertainty?

Answer 8

Called “Material Uncertainty Related to Going Concern”

Question 9

What factor is considered when deciding which Audit Approach to take?

Answer 9

RMM

Question 10

Which Audit approach should be used if Control risk is high?

Answer 10

Purely Substantive

Question 11

Which Audit approach should be used if Control risk is low?

Answer 11

Combined approach

Question 12

Which Audit approach should be used if Control risk is low and the company has few transactions?

Answer 12

Purely Substantive

Question 13

What are the 5 threats to independence?

Answer 13

1. Self interest threats (when auditor has financial interest in client)
2. self review threat
3. advocacy threats (when auditor promotes the client)
4. familiarity threats (auditor is close w client)
5. intimidation threat

Question 14

What is the formula to anuualize financial info?

Answer 14

NI / (# of months of info you have*12)

Question 15

What are the 6 assertions for B/S accts?

Answer 15

• Existence
• Rights and obligations
• Completeness
• Valuation/accuracy
• Classification
• Presentation

Question 16

What are the 6 assertions for I/S accts?

Answer 16

• Occurrence
  
  • Completeness
  • Accuracy
  • Cut-off
  • Classification
  • Presentation

Question 17

What are the 3 types of audit evidence from least reliable to most?

Answer 17

1. Internally generated
2. Externally generated, but held by the client
3. Externally generated

Question 18

What are the 4 types of audit evidence?

Answer 18

○ Physical evidence
○ Confirmation evidence (written communication)
○ Documentary evidence (inspecting internal or external docs)
○ Analytical evidence (performing ratio analysis)

Question 19

What are the 7 types of Audit Procedures?

Answer 19

• Inspection
  
  • Observation
  • Inquiry
  • External confirmation
  • Recalculation
  • Reperformance
  • Analytical procedures

Question 20

What is the format to design a procedure?

Answer 20

1. what the risk is and why it’s a risk