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AUDIT 2024 > A3 > Flashcards

A3 Flashcards

1
Q

Why is the auditor required to perform risk assessment procedures, starting with obtaining an understanding of the entity and its environment?

A

To assess the risk of material misstatement and to make informed judgments about other audit matters such as:
-Materiality & tolerable misstatement
-The entity’s selection and application of accounting procedures
-Areas that require special audit consideration
-Design & performance of further audit procedures

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2
Q

What risk assessment procedures should the auditor use to obtain an understanding of the entity and its environment?

A

Risk assessment procedures include:
-Inquiry
-Analytical procedures
-Risk assessment discussion
-Audit data analytics
-Other procedures when applicable (such as reviewing external information)

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3
Q

What factors should be examined when obtaining an understanding of the entity & environment?

A

When obtaining an understanding of the entity & environment, the auditor should understand:
-Industry, regulatory, & other external factors
-Applicable financial reporting framework
-Technological factors
-Supply chain & economic factors
-The nature of the entity
-Objectives, strategies, and business risks
-Entity’s financial performance
-Company’s selection & application of accounting principles

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4
Q

For what purposes are analytical procedures used in the audit planning phase?

A

To understand the client’s business & to identify unusual transactions and
-Events
-Amounts
-Ratios
-Trends that might represent specific risks relevant to the audit

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5
Q

List government policies & actions that the auditor may consider:

A

-Govt Spending
-Govt Taxation
-Interest Rates
-Political Stability
-Requirements for License & Permits

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6
Q

Business Cycle?

A

Rise & Fall of economic activity relative to its long-term growth trend.

Business cycles consist of economic fluctuations that vary in duration and severity.

Some cycles are quite mild; others are characterized by large increases in unemployment and/or inflation.

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7
Q

Phases of a Typical Business Cycle

A

(1) an expansionary phase characterized by rising growth in economic activity (real GDP)
(2) a peak, or high point of economic activity
(3) a contractionary phase characterized by declining growth in economic activity
(4) a rough or low point of economic activity
(5) a recovery phase, during which economic activity starts to increase and return to its long-term growth trend

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8
Q

Differentiate 3 economic indicators
-LEADING
-LAGGING
-COINCIDENT

A

-LEADING usually predict economic activity & tend to change before the economy follows that trend (ex: orders of goods)
-LAGGING generally follow economic activity & change after an economic trend has already begun (ex: prime rate charged by banks)
-COINCIDENT change at about the same time as the economic trend (ex: industrial production)

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9
Q

Identify some inherent limitations that may exist even with an effective internal control system

A

*Human error or faulty/biased judgment used in decision making
*Issues pertaining to the suitability of the entity’s objectives
*External events beyond the control of the entity
*Management override of controls
*Deliberate circumvention of controls through collusion

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10
Q

Significant Risk?

A

Requires special audit attention: Indicators of Significant Risk
-Nonroutine or unusual or complex transactions
-Improper revenue recognition
-Fraud Risk
-Significant related party transactions
-Accounting estimates or other subjective measurements
-Accounting principles that are subject to different interpretations
-Non compliance w/laws & regulations

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11
Q

Documentation requirements surrounding auditor’s assessment of risk?

A

Auditor should document:
-Discussion among audit team
-Understanding of the entity and it’s environment, including its internal control
-Assessment of the risk of material misstatement
-Basis for the risk assessment
-Identified risks and related controls evaluated

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12
Q

3 ways in which an auditor should respond to assessed risk

A

-An overall response, to address risk at the FS level
-A response at the relevant assertion level
-A response to significant risks

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13
Q

How does the auditor’s assessment of the risk of material misstatement affect substantive procedures?

A

The auditor designs substantive procedures that address the risk of material misstatement for each significant class of transaction, account balance, and disclosure.

*The auditor’s determination that the risk of material misstatement is high necessitates a greater level of assurance from substantive procedures, which may be obtained by varying the nature, extent, or timing of such procedures.

*The auditor’s determinations that the risk of material misstatement is low allows a reduction in the assurance required from substantive procedures. This too may be accomplished by varying the nature, extent, or timing of such procedures.

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14
Q

What should be included in ea. step of the audit plan?

We cast our “NET” over the audit!

A

Ea. step of the audit plan should set out the procedures in detail, specifying the nature, extent, and timing of the work to be performed and including a reference to the assertion under consideration.

Nature
Extent
Timing

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15
Q

What are the 2 approaches an auditor may use to respond to identified risks at the relevant assertion level?

A

*Substantive approach - Only substantive tests are used, either bc there are no effective controls, or bc it would not be efficient to test the operating effectiveness of controls.

*Combined approach - Test of the operating effectiveness of control & tests of substantive procedures are both used.

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16
Q

When are tests of controls performed in a FS audit?

A

When the auditor’s risk assessment is based on the assumption that controls are operating effectively

OR

When substantive procedures alone are insufficient, such as when there is a significant amount of electronic processing or when audit evidence is obtained in electronic form.

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17
Q

What steps should the auditor perform in assessing and responding to risk?

A
  1. Obtain an understanding of the entity and its environment, including its internal control
  2. Assess the risk of material misstatement
  3. Respond to the assessed level of risk by designing further audit procedures based on this assessment
  4. Test internal controls to evaluate their operating effectiveness
  5. Perform substantive tests.
  6. Evaluate the sufficiency & appropriateness of audit evidence obtained.
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18
Q

What procedures might an auditor use to evaluate an estimate?

A

The auditor evaluates estimates by:
*Reviewing & testing management’s procedures
*Developing an independent estimate or range for comparative purposes
*Reviewing subsequent events & transactions that corroborate the estimate value.

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19
Q

What are the auditor’s responsibilities when concluding on the reasonableness of an accounting estimate?

A

Auditor must confirm:

-the assessed risk of material misstatement for the estimate remains appropriate
-management’s recognition, measurement, presentation, and disclosure are in accordance w/the applicable financial reporting framework
-sufficient appropriate audit evidence has been obtained

The auditor considers both corroborative & contradictory info when concluding on the reasonableness of an estimate

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20
Q

RELATED PARTIES

A

Reporting entity’s affiliates, principal owners, and management, as well as any members of their immediate families

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21
Q

Auditor’s primary concern w/respect to related party transactions?

A

Primarily concerned w/proper disclosure of related party transactions in accordance w/GAAP

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22
Q

How can the auditor determine whether related parties exist?

A

-Evaluating the company’s procedures for identifying & accounting for related party transactions
-Asking management
-Reviewing the reporting entity’s filings w/SEC
-Reviewing material transactions for related party evidence
-Reviewing prior year’s audit documentation or inquiring of the predecessor auditor
-Performing procedures over balances w/affiliated entities as of concurrent dates

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23
Q

What are some common audit procedures related to contingencies, including pending litigation or possible future litigation?

A

-Obtaining & reviewing the response from a letter of inquiry to the client’s attorney
-Inquiring of management
-Reviewing minutes of meeting of stockholders, board of directors, and other executive committees
-Reviewing correspondence & invoices from lawyers
-Reviewing contracts, loan agreements, loan guarantees, leases, and correspondence from taxing authorities

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24
Q

What is the effect on the auditor’s opinion if a client refuses to permit inquiry of its attorney, or if the attorney refuses to respond?

A

If a client does not permit inquiry of its attorney, the auditor would generally disclaim an opinion or withdraw from the audit.

If a lawyer has devoted substantial attention to litigation but refuses to respond to the auditor’s letter of inquiry, a scope limitation sufficient to preclude an unmodified option exists (ie a qualified option or disclaimer of opinion would be issued, depending on materiality)

25
Q

What is the going concern period for FS where the applicable financial reporting framework is under the guidance of the following standard-setting bodies?

FASB
GASB

A

FASB: 1 YR after the date the FS are issued (or available to be issued, as applicable)
GASB: 1 YR beyond the date of the FS. GASB requires that, if a governmental entity currently knows info that may raise substantial doubt shortly thereafter, such info should also be considered

26
Q

What conditions & events may indicate substantial doubt an entity’s ability to continue as a going concern?

FINE

A

-Financial difficulties
-Internal matters, such as labor difficulties, substantial dependence on a particular project, etc.
-Negative trends
-External matters, such as legal proceedings, new legislation, loss of a principal customer, natural disasters, etc.

27
Q

What phrases must be included in a separate going concern section (nonissuer) or explanatory paragraph (issuer)?

A

When substantial doubt remains & has not been alleviated by management’s plans, the auditor should include a separate section of the auditor’s report (nonissuer) or an explanatory (issuer) that includes the following terms:

“Substantial doubt”
“Going Concern”

28
Q

List the 3 types of audit procedures and tell why ea is used

A

Risk Assessment procedures - to obtain an understanding of the entity & its environment, including its internal control

Test of controls - to evaluate the operating effectiveness of internal control in preventing or detecting material misstatements

Substantive Procedures - to detect material misstatements in the FS

29
Q

When is audit evidence gathered during an audit?

A

The auditor gathers audit evidence when performing:

-Risk assessment procedures
-Test of controls
-Substantive procedures
-Other audit procedures

30
Q

What influences the auditor’s decision regarding the sufficiency of audit evidence?

A

-The risk of material misstatement
-The quality of the audit evidence

31
Q

What factors should be considered when evaluating the reliability of audit evidence?

A
  1. Source of info (internal vs. external, direct knowledge vs. indirect)
  2. Key attributes of evidence - accuracy, completeness, authenticity, susceptibility to bias
  3. Internal controls in place related to evidence gathered
  4. Form of evidence (oral vs documentary)
  5. Consistency of evidence
32
Q

How is the relevance of evidence determined?

A

To be relevant, evidence must relate to the FS assertions under consideration and the period under audit.

PCAOB standards state that the relevance of audit evidence depends on the design & timing of the audit procedure

33
Q

What factors are relevant to the conclusion that sufficient appropriate evidence has been obtained?

A

*The significance of uncorrected misstatements and the likelihood of their having a material effect on the FS

*The results of audit procedures performed & the achievement of audit objectives

*The auditors risk assessment

*Effectiveness of management’s response & internal controls to address risk

*Experience gained during previous audits

*An understanding of the entity & its environment, the applicable financial reporting framework, and the entity’s system of internal control

34
Q

What are the documentation requirements surrounding the auditor’s response to assessed risk?

A

The auditor should document the:
-Overall response addressing assessed risk at the FS level

-Nature, extent, and timing of further audit procedures

-Linkage or further audit procedures w/assessed risk at the relevant assertion level

-Results of audit procedures

-Conclusions reached regarding the use of prior period evidence

-Basis for not using external confirmation procedures for AR w/ a material balance

-The agreement of recon of the info in the FS to the underlying accounting records

35
Q

List some of the standard auditing procedures used in most audits

C the FIVE CARROT WARS

A

Confirmation
Footing, Cross-footing, and recalculation
Inquiry
Vouching
Examination / Inspection

Cutoff review
Analytical Procedures
Reperformance
Reconciliation
Observation
Tracing

Walk-through
Auditing related accounts simultaneously
Representation Letter
Subsequent events review

36
Q

Analytical Procedures

A

Evaluations of financial information made by a study of plausible relationships among both financial & non-financial data (ex: ratio analysis)

Note: Analytical procedures are required in the planning & final review phases of the audit.

They also may be used (but are not required) in substantive testing.

37
Q

What steps are involved when using analytical procedures for substantive testing?

A

Steps involved when using analytical procedures for substantive testing are as follows:

  1. Determine that analytical procedures are suitable for testing the assertions.
  2. Evaluate the reliability of data from which the auditor’s expectation is to be developed
  3. Develop an expectation of the recorded amount
  4. Perform the analytical procedures & compare the results of the analytical procedures with the expectations
  5. Investigate any significant differences
38
Q

What is the purpose of applying analytical procedures during the overall review stage of the audit?

A

To evaluate the overall FS presentation,
to assess the conclusions reached,
& to assist in forming an opinion on whether the FS are free of material misstatement.

This evaluation is typically performed by the manager or partner

39
Q

What should the direction of testing be if the auditor is concerned about the existence or occurrence assertion?

A

Vouching backward from the accounting records (FS, JE, etc.) to source documents provides evidence of existence or occurrence.

40
Q

What should the direction of testing be if the auditor is concerned about the completeness assertion?

A

Tracing forward from source documents to the accounting records (ex FS, JE, etc.) provides evidence of completeness

41
Q

COMPLETENESS

FAGGO

A

FS
Adjusted Trial Balance
General Ledger Balances
General Journal Entries
Original Source Documents

42
Q

SAMPLE: Deviation rate < tolerable rate = Assess control risk low/medium = Controls operating effectively

A

POPULATION: Deviation rate > tolerable rate = Assess control risk high = Controls not operating effectively

If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, bc the control will be less effective than sample results would indicate.

43
Q

Audit Data Analytics

A

(ADA) are data analytic techniques that enable auditors to analyze & review both financial & nonfinancial data to discover patterns, relationships, & anomalies during an audit.

44
Q

Benefits of Audit Data Analytics

A

-Better understanding of clients & their operations
-Advanced assessment of risk
-Expanded audit coverage through testing of entire populations
-Increased efficiency of applied procedures
-Enhanced fraud detection
-Insights gained from evaluating metadata & relationships among data
-Improved communication through data visualizations and other reports

45
Q

Steps an auditor should use when applying audit data analytics?

A

-Plan the ADA
-Access & obtain the data
-Review & analyze the relevance & reliability of the sourced data
-Perform the ADA using the selected tools & techniques
-Evaluate outcomes to ensure the objective was achieved

46
Q

3 Components of the ETL process

Extract Transform Load

A
  • Data extraction involves the identification & obtaining of source data
    -Transforming data entails taking unstructured data, cleaning it, and validating it to ensure it is accurate & ready for analysis
    -Loading the data into a software program for analysis or into a data storage location is the final step of the ETL process
47
Q

4 broad categories of data analytics that can be applied as audit data analytics

A

-Descriptive analytics
-Diagnostic analytics
-Predictive analytics
-Prescriptive analytics

48
Q

Descriptive Data Analytics

A

Explain what happened or what is happening now.

These techniques help to gain a high-level understanding of the location of central tendency, spread, shape, & other descriptive values of the data being analyzed

49
Q

Diagnostic Data Analytics

A

Work to uncover correlations, patterns, & relationships among data to explain outcomes.

Diagnostic analytics are utilized when an organization wants to understand the underlying cause of results; essentially, why something happened with the data.

50
Q

Predictive Data Analytics

A

Use HISTORICAL DATA to make predication, estimates, & assertions about future events

51
Q

Prescriptive Data Analytics

A

Build on predictive analytics & shift the focus from addressing what will happen to how to make something happen

EX: include what-if analysis & decision support & automation

52
Q

How can audit data analytics be applied to test of details?

A

For tests of details, ADAs can perform sequence checks, test entire populations, compare transactions against external data, & evaluate source data to identify missing data

53
Q

How can audit data analytics be applied to analytical procedures?

A

-compare current year data to preceding year data
-compare industry trends to those at the audited entity
-develop expectations for transaction or balance amounts
-perform drill-down analyses of differences found between expected & actual amounts

54
Q

Relational Database work?

A

A relational database allows data to be stored in different tables, and the tables can be linked through relationships using key values.

55
Q

What different methods can be used to obtain audit data analytics data?

A

-utilizing built-in reporting provided by information systems
-custom queries of information systems
-data mining
-data-pulls
-walk-throughs & interviews of clients
-research & external sites

56
Q

How are data visualizations used in audit data analytics?

A

Data visualizations are used to turn complex content into easy-to-ready graphs or charts to provide the auditor w/insights to make decisions.

57
Q

List some techniques that can be used to interpret audit data analytics results

A

ADA techniques to interpret results include regression analysis, variance analysis, period-over-period analysis, classification, and trend analysis

58
Q

Hierarchy of Audit Evidence ( from most reliable to least reliable )

A
  1. Auditor’s direct personal knowledge
  2. External evidence
  3. Internal evidence
  4. Oral evidence

AUDIT 2024 (10 decks)

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