3 Planning and Risk Assessment Flashcards
(167 cards)
1
Q
What are the preconditions for an audit?
A
Before agreeing to conduct an audit, the auditor should determine that manatement:
- uses an acceptable financial reporting framework (ex- GAAP) in preparation and fiar presentation of the financial statements
- understands its responsibility for the preparation and fair presentation of the financial statements
- understands its responsibility for the design, implementation, and maintenance of internal control
- understands its responsibility to provide access to all information and persons deemed necessary for the audit
2
Q
What is client acceptance?
A
Client acceptance includes the continued evaluation of existing clients and the evaluation of new clients.
3
Q
What happens if an audito concludes that management lacks integrity?
A
It causes the auditor to reject a potential client or to end a relationship with an existing client.
4
Q
Should the auditor communicate with the predecessor auditor befoer final acceptance of the engagement?
A
Yes
5
Q
Who is responsible for initiating the communication when determining client acceptance?
A
The auditor
6
Q
Should the client and the predecessor auditor obtain client permission to have discussions about the integrity of management and other audit-related issues?
A
Yes, AICPA Code of Professional Conduct requires members to protect the confidentiality of client information
7
Q
What inquiries should be made to the predecessor auditor?
A
- facts that are relevant to the integrity of management
- disagreements with management about accounting principles, audit procedures, or other similar matters
- communications to those charged with governance (ex- the audit committee) about fraud and noncompliance with laws and regulations
- communications to management and those charged with governance about significant deficiencies and material weaknesses in internal control
- the predecessor’s understanding as to the reason for the change in auditors
7
Q
What inquiries should be made to the predecessor auditor?
A
- facts that are relevant to the integrity of management
- disagreements with management about accounting principles, audit procedures, or other similar matters
- communications to those charged with governance (ex- the audit committee) about fraud and noncompliance with laws and regulations
- communications to management and those charged with governance about significant deficiencies and material weaknesses in internal control
- the predecessor’s understanding as to the reason for the change in auditors
8
Q
What happens if the client refuses to grant permission to communicate with the predecessor auditor or the predecessor auditor fails to respond fully?
A
This requires the auditor to consider the implications when deciding whether to accept the engagement.
9
Q
If management requests to change the terms of the engagement, what should the auditor do?
A
Evaluate the changes for reasonableness
10
Q
If management’s changes are unreasonable and the auditor is not permitted to continue the original engagement, what should the auditor do?
A
The auditor should withdraw and communicate the circumstances to those charged with governance
11
Q
If management’s changes are unreasonable and the auditor is not permitted to continue the original engagement, what should the auditor do?
A
The auditor should withdraw and communicate the circumstances to those charged with governance
12
Q
What is quired for the terms of the engagement?
A
- the auditor should agree with management or those charged with governance up on the terms
- the terms should be documented in an engagement letter
- an engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise
13
Q
In relation to the terms of engagement, when should the auditor accept the engagement?
A
The preconditions for an audit are present and a common understanding of the terms has been reached.
14
Q
What are preconditions of an engagement?
A
They relate to the fundamental responsibilities of management and, if appropriate, those charged with governance.
These are included in a statement of responsibilities in an engagement letter.
15
Q
What are preconditions of an engagement?
A
They relate to the fundamental responsibilities of management and, if appropriate, those charged with governance.
These are included in a statement of responsibilities in an engagement letter.
16
Q
What should be included in an engagement letter?
A
- objective and scope of the audit
- responsibilities of the auditor and management
- inherent limitations of the audit and internal control
- the financial reporting framework
- the expected form and content of audit reports
17
Q
When is a contract formed between a CPA and a client?
A
If the client agrees to the terms by signing a copy of the engagement letter and returning it to the CPA.
18
Q
What is the initial step in planning an audit?
A
Developing an overall audit strategy.
19
Q
What can affect audit planning?
A
The size and complexity of the entity, the auditor’s experience with the entity, and changes in circumstances during the audit.
20
Q
How long does audit planning last?
A
Planning continues throughout the audit.
21
Q
What should the auditor consider in develping the audit strategy?
A
- characteristics of the engagement and reporting objectives
- determination of materiality
- areas of high risk of material misstatement
- involvement of specialists and use of component auditors
- management’s commitment to sount internal control
- relevant entity-specific, industry, or financial developments
- audit resources required
- the results of preliminary engagement activities related to matters such as continuance of the client, compliance with ethical requirements, and the terms of the engagement.
22
Q
What is the engagement partner’s role in an audit?
A
They are responsible for directing, supervising, and performing the audit in accordance with professional standards, legal and regulatory requirements, and firm policies.
23
Q
What is an audit plan?
A
An audit plan, based on the audit stragegy, is developed and documented for all audit engagements and includes the nature, timing, and extent of procedures expected to reduce audit risk to an acceptably low level.
24
What is included in an audit plan?
1. a description of risk assement procedures
2. a description of further procedures at relevent assertion levels for material classes of transactions, account balances, and disclosures
3. a description of any other procedures required by GAAS or the PCAOB
25
When are further procedures to be performed?
In response to assessed risks and evaluations of audit evidence collected to date.
26
What are futher procedures based on?
This element of the plan is based on:
1. the decision whether to test the operating effectiveness of controls
2. the nature, timing, and extent of planned substantive procedures
27
The overall audit strategy and audit plan are likely to be adjusted as the audit progresses. What is an example?
The auditor may change the nature, timing, and extent of further audit procedures as risk assessments are revised.
28
Are changes in the overall audit strategy and the audit plan documented?
Yes
29
Planning also involves determining whether and to what extent the services of IT, Tax and other specialists will be required. Should the auditor have supervisory responsibility for the specialists?
Yes
30
When involving specialists in an audit, what should the auditor have sufficient knowledge to do?
1. communicate their objectives
2. evaluate whether their planned procedures will achieve the objectives
3. evaluate the results
30
When involving specialists in an audit, what should the auditor have sufficient knowledge to do?
1. communicate their objectives
2. evaluate whether their planned procedures will achieve the objectives
3. evaluate the results
31
When communicating with management about performing the audit, what should the auditor do?
Discuss elements of planning, but the communication should not compromise the audit, for example, by making detailed procedures too predictable.
31
When communicating with management about performing the audit, what should the auditor do?
Discuss elements of planning, but the communication should not compromise the audit, for example, by making detailed procedures too predictable.
32
What are examples of additional planning considerations for initial audits?
1. performance of quality control procedures, such as those related to acecptance and continuance of clients and engagements, assignment of engagement teams, ethical requirements, and performance
2. communicate with the predecessor auditor
3. major issues discussed with management
4. planned audit procedures regarding opening balances to gain assurance
33
Gaining assurance about opening balances is perfmormed to provide?
1. assurance that opening balances do not contain misstatements that materially affect the current period's financial statements
2. assurance that accounting policies reflected inthe opening balances have been consistently applied in the current period's financial statements
34
When the prior-period statements were audited by a predecessor auditor, what should the auditor request management to authorize the predecessor to do?
Management should authorize the predecessor to:
1. allow a review of audit documentation
2. respond fully to inquiries by the auditor
35
When the prior-period statements were audited by a predecessor auditor, what should the auditor request management to authorize the predecessor to do?
Management should authorize the predecessor to:
1. allow a review of audit documentation
2. respond fully to inquiries by the auditor
36
Ordinarily, what does the predecessor permit the auditor to review?
Audit documentation, including documentation of:
1. planning
2. risk assessement procedures
3. further audit procedures
4. audit results
5. other matters of continuing accounting and audit significance
37
What may be affected by a predecessor's denial or limitation of access?
1. the auditor's assessment of risk regarding the opening balances
2. the nature, timing, and extent of the auditor's procedures applied to the opening balances and the consistency of accounting principles
38
What happens if a possible material misstatement is discovered in the prior-period financial statements audited by a predecessor?
The successor auditor should request a meeting with management and the predecessor auditor to address the issue.
39
AU-C 220 addresses quality control for an audit, what does it state about informing team members?
Direction and Supervision - it states that informing team members involves:
1. Their responsibilities, including ethical requirements and planning and performing the audit with professional skepticism.
2. The objectives of the work
3. The nature of the entity's business
4. Risks
5. Potential problems
6. The specific approach to the engagement
40
Why should team members hold discussions about the engagement?
So that questions about the engagement may be raised.
41
What considerations about the competencies of team members does supervision of the engagement include?
Considerations of the competencies of the team members:
1. Whether they have enought time for the work
2. Whether they understand the instructions
3. Whether they can carry out the work in accordance with the audit plan
42
What does supervision of an audit include?
1. tracking engagement progress
2. addressing significant findings
3. modifying the approach if necessary
## Footnote
matters may arise that should be considered by qualified team members during the engagement
43
According to AU-C 220 and QC 10, differences of opinion within the engagement team, with a consultant, or between the engagement partner and quality control reviewer should be resolved by?
The firm's related policies and procedures
44
According to QC 10, how should disagreements be documented?
The disagreement should be documented with the conclusions reached after appropriate consultation
1. conclusions should be documented and implemented
2. the report should be released only after resolution of the matter
45
What is the difference between external and internal auditing?
External auditors express an opinion on the fairness of the financial statements, an internal auditor's work is more comprehensive.
46
According to The Institute of Internal Auditors, what is internal auditing?
An independent, objective assurance and consulting function that adds value and improves an organizatin's operations. Internal auditors evaluate and improve the effectiveness of governance, risk management, and control processes.
46
According to The Institute of Internal Auditors, what is internal auditing?
An independent, objective assurance and consulting function that adds value and improves an organizatin's operations. Internal auditors evaluate and improve the effectiveness of governance, risk management, and control processes.
47
Internal auditors evaluate risks and the adequacy and effectiveness of controls regarding?
1. The reliability and integrity of financial and operational information
2. The effectiveness and efficiency of operations
3. The safeguarding of assets
4. Compliance with laws, regulations, and contracts
## Footnote
Internal auditor's plans are more detailed and cover areas that normally are not considered by the independent auditor
47
Internal auditors evaluate risks and the adequacy and effectiveness of controls regarding?
1. The reliability and integrity of financial and operational information
2. The effectiveness and efficiency of operations
3. The safeguarding of assets
4. Compliance with laws, regulations, and contracts
## Footnote
Internal auditor's plans are more detailed and cover areas that normally are not considered by the independent auditor
48
Internal auditors evaluate risks and the adequacy and effectiveness of controls regarding?
1. The reliability and integrity of financial and operational information
2. The effectiveness and efficiency of operations
3. The safeguarding of assets
4. Compliance with laws, regulations, and contracts
## Footnote
Internal auditor's plans are more detailed and cover areas that normally are not considered by the independent auditor
49
Why do auditors obtain an udnerstanding of the entity and it's environment?
1. to determine materiality for planning the audit and evaluating it during the audit
2. considering accounting policies and disclosures
3. identifying areas for special audit consideration - Ex. complex financial transactions
4. setting expectations for results of analytical procedures
5. designing further audit procedures
6. evaluating audit evidence - related to management's assumtions and representations
49
Why do auditors obtain an understanding of the entity and it's environment?
1. to determine materiality for planning the audit and evaluating it during the audit
2. considering accounting policies and disclosures
3. identifying areas for special audit consideration - Ex. complex financial transactions
4. setting expectations for results of analytical procedures
5. designing further audit procedures
6. evaluating audit evidence - related to management's assumtions and representations
50
How do auditors obtain an understanding of the entity and it's environment, including internal controls?
They perform risk assessment procedures
51
What risk assessment procedures are performed by an auditor?
1. inquiries of management, appropriate individuals in the internal audit function, and others within the entity
2. analytical procedures
3. observation and inspection
## Footnote
They may also perform other appropriate procedures, such as inquiring of external parties (ex. legal counsel) or reviewing externally generated informatoin (ex. financial publications).
51
What risk assessment procedures are performed by an auditor?
1. inquiries of management, appropriate individuals in the internal audit function, and others within the entity
2. analytical procedures
3. observation and inspection
## Footnote
They may also perform other appropriate procedures, such as inquiring of external parties (ex. legal counsel) or reviewing externally generated informatoin (ex. financial publications).
52
What risk assessment procedures are performed by an auditor?
1. inquiries of management, appropriate individuals in the internal audit function, and others within the entity
2. analytical procedures
3. observation and inspection
## Footnote
They may also perform other appropriate procedures, such as inquiring of external parties (ex. legal counsel) or reviewing externally generated informatoin (ex. financial publications).
53
When inquiries are within the entity, who are they directed to?
They maybe directed to:
1. those responsible for financial reporting
2. those charged with governance
3. to evaluate accounting policies, employees involved in complex or unusual transactions
4. legal counsel
5. marketing, sales, and production managers
6. the risk management function
7. information systems personnel
8. others at different levels of authority who may have informatoin about the risks of material misstatements (RMMs)
54
What are examples of observation and inspection that provide support for inquiries and direct evidence about the entity and its environment?
1. observing activities and operations
2. inspecting documents and records
3. reading reports - Ex. internal audit reports, interim statements, quarterly reports, and minutes of board meetings
4. tours of facilities
5. tracing financial transactions through the information system (a walk-through)
55
The understanding of the entity should go beyond informatoin in the general and subsidiary ledgers, what does this include?
1. industry, regulatory, and other external factors, including accounting framework
2. the nature of the entity, including its operating characteristics
3. ownership and governance structures, expecially complex structures such as those that include subsidiaries or multiple locations
4. investments and investment activities, such as acquisitions, divestitures, and capital outlays
5. financing activities
6. selection and application of accounting principles, including any changes
7. objectives and strategies and the related business risks, sushc as those related to new products, markets, or expansion
8. measurement and review of financial performance as an indication of what the entity considers important
56
How do business risks arise?
They can result from:
1. significant factors that could adversely affect an dntity's ability to achieve objectives and execute strategies
2. setting inappropriate objectives and strategies
## Footnote
The auditor should obtain an understanding of the entity's objectives and strategies and the related business risks with immediate or longer-term consequences that may result in risks of material misstatement. Ex. - risks may result from developing new products that may fail.
57
How should prior-period information be used?
It should be used to gain an understanding of the entity and it's environment (structure, nature of business, controls, and responses to prior misstatements). However, procedures should be performed to evaluate its current relevance
57
How should prior-period information be used?
It should be used to gain an understanding of the entity and it's environment (structure, nature of business, controls, and responses to prior misstatements). However, procedures should be performed to evaluate its current relevance
58
When designing auditing procedures what is specifically assessed?
The risk of material misstatement (RMM) due to fraud. This assessment is considered in designing auditing procedures.
59
In the assement of RMMs due to fraud, the audit team members should discuss and document what?
1. the susceptibility of the entity's financial statements to material misstatement, whether due to fraud or error
2. the application of the financial reporting framework
60
What other pertinent information may an auditor consider?
1. the auditor's client acceptance (or continuation) procedures
2. previous engagement for the client
3. other sources
61
Why does an auditor obtain an understanding of relevant internal controls?
1. to determine the types of possible misstatements
2. to identify what affects the RMMs
3. to design further procedures (tests of controls and substative procedures)
62
What should an auditor consider in an audit of an issuer?
1. reading public information about the company
2. obtaining information from earnings calls to investors and rating agencies
3. gaining an understanding of compensation for senior management
4. obtaining information about trading activities in the company's securities
5. company performance measures that could create incentives or pressures on management to manipulate the financial information
63
What are audit data analytics (ADA or ADAs)?
They are defined as the science and art of discovering and analyzing patterns, indentifying anomalies, and extracting other useful information in data underlying or related to the subject matter of an audit through analysis, modeling, and visualization for the purpose of planning or performing an audit.
64
ADAs are methods of performing various audit procedures including those applied in?
1. risk assessment (planning)
2. tests of controls
3. substative analytical procedures
4. tests of details
5. final review (forming an overall conclusion)
65
What does the term "visualization" refer to related to ADAs?
The use of various types of graphics (charts, scatter diagrams, trend lines), tables, or combinations thereof in formats often called dashboards.
66
What can ADAs help auditors to do?
Process large volumes of complex data
67
What are the five basic steps an auditor might use to plan, perform, and evaluate the results of an ADA?
1.Plan the ADA
2. Access and prepare the data
3. Consider the relevance and reliability of the data used
4. Perform the ADA
5. Evaluate the results and conclude whether the purpose and specific objectives have been achieved
68
What is involved in planning the ADA?
Determining the overall purpose and objectives of the ADA and select the ADA that is likely best suited for the intended purpose and objectives, including methods, tools, graphics, and tables to be used.
69
What is involved in accessing and preparing the data for an ADA?
Formatting and filtering the data, considering the ability to maintain data security and integrity.
69
What is involved in accessing and preparing the data for an ADA?
Formatting and filtering the data, considering the ability to maintain data security and integrity.
70
What is involved in consdering the relevance and reliability of the data used in an ADA?
Evaluating the relevance, availability, and reliability of the data.
71
What is involved in performing an ADA?
Obtaining output and judging whether the identified items warrant further auditor consideration.
72
What is involved in performing an ADA?
Obtaining output and judging whether the identified items warrant further auditor consideration.
73
What is involved in evaluating the results of an ADA to conclude whether the purpose and specific objectives have been achieved?
Documenting the steps and results in the audit documentation (working papers).
73
What is involved in evaluating the results of an ADA to conclude whether the purpose and specific objectives have been achieved?
Documenting the steps and results in the audit documentation (working papers).
74
What are analytical procedures?
Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data.
75
What should the auditor do when applying substantive analytical procedures?
1. Determine their suitability for specific assertions after considering the assessed RMMs and tests of details.
2. Evaluate the reliability of data used to develop an expectation of an amount or ratio.
3. Develop an expectation and determine whether it is sufficiently precise to identify a material misstatement.
4. Use them to assist in forming an overall conclusion near the end of the audit about whether the statements are consistent with the auditor's understanding of the entity.
76
What are the 5 sources of information used to develop analytical procedures?
1. Financial information from comparable prior periods
2. Anticipated results
3. Relationships among elements of financial information
4. Comparable information from the client's industry
5. Relationships between financial and relevant nonfinancial information
77
What are the factors that determine the effectiveness and efficiency of analytical procedures?
1. nature of the assertion
2. plausibility and predictability of the relationship
3. availability and reliability of the data used to develop the expectation
4. precision of the expectation
78
What is the nature of the assertion?
Analytical procedures may be effective when tests of details may not indicate potenial misstatements. For example, they may be effective for testing the completeness assertion.
79
What is plausibility and predictibility of the relationship?
Relationships in stable environments are more predictable than those in unstable environments, and income statement amounts tend to be more predictable than balance sheet amounts.
## Footnote
Amounts subject to management discretioin may be less predictable.
80
Why are income statement amounts more predictable than balance sheet amounts?
Income statement amounts are based on transactions over a period of time, but balance sheet amounts are for a moment in time.
81
What are some factors that affect reliability of data?
1. information tends to be more reliable when obtained from independent external sources.
2. informaton may not be comparble. For example, industry data may not be comparable with data for an entity with specialized products.
3. the nature and relevance of information affect its reliability. For example, the nature and relevance of budgetary information depend on whether it is intended as a set of goals or as expected results.
4. information tends to be more reliable if controls over its preparation are designed to promote its completeness, accuracy, and validity.
82
What is scanning?
A type of analytical procedure using auditor judgment to identify significant or unusual items to test.
83
When substantive analytical procedures are performed, how should the auditor document the procedure?
The auditor should document:
1. the expectation
2. the factors used to develop the expectation
3. the results of the comparison of the expectation with the recorded amounts or ratios
4. any additional auditing procedures performed to resolve differences and their results
84
What is the current ratio?
Current assets / current liabilities
## Footnote
if the ratio is less than 1.0 equal increases in the numerator and denominator increase the ratio, and equal decreases decrease the ratio. If the current ratio is more than 1.0, equal increases in the numerator and denominator decrease the ration, and equal decreases increse the ratio.
85
What is the current ratio?
Current assets / current liabilities
## Footnote
if the ratio is less than 1.0 equal increases in the numerator and denominator increase the ratio, and equal decreases decrease the ratio. If the current ratio is more than 1.0, equal increases in the numerator and denominator decrease the ration, and equal decreases increse the ratio.
86
What is the quick ratio (acid-test)?
Cash and equivilents + marketable securities + net receivables
or
current assets - inventory - prepaids / current liabilities
87
What is the receivables turnover ratio?
net sales / average net receivables
## Footnote
the ratio can also be calculated using gross receivables rather than net receivables. The key is to be consistent with the values in the ratios used for comparison purposes.
88
What is the days' sales in receivables ratio?
number of days in year / receivables turnover
## Footnote
The number of days in a year may be 365, 360 (a banker's year), or 300 (number of business days).
89
What is the days' sales in receivables ratio?
number of days in year / receivables turnover
## Footnote
The number of days in a year may be 365, 360 (a banker's year), or 300 (number of business days).
90
What is the days' sales in receivables ratio?
number of days in year / receivables turnover
## Footnote
The number of days in a year may be 365, 360 (a banker's year), or 300 (number of business days).
91
What is the inventory turnover ratio?
cost of goods sold / average inventory
## Footnote
Auditors often calculate this ratio using the ending inventory as the denominator because it is the balance being audited.
92
What does a high inventory turnover ratio indicate?
The entity does not hold excessive inventories that are unproductive and lessen its profitability. It also implies that the inventory is truly marketable and does not contain obsolete goods.
93
What is the days' sales inventory ratio?
number of days in a year / inventory turnover
## Footnote
The number of days in a year may be 365, 360 (a banker’s year), or 300 (number of business days).
94
What is the total asset turnover ratio?
net sales / total assets
## Footnote
the denominator also may be average total assets
95
What does the total asset turnover ratio calculate?
How many times the total assets turn over in sales
96
What is the debt-to-equity ratio?
total debt / total equity
97
What is the debt-to-equity ratio?
total debt / total equity
98
What does the debt-to-equity ratio measure?
How much external parties contribute to assets relative to owners
## Footnote
The ratios of total assets to total equity and total assets to total debt provide similar analysis and conclusions.
99
What is the times interest earned ratio?
net income + interest expense + income tax expense / interest expense
## Footnote
Taxes are added back to net income because interest is paid before taxes. Interest is added back to net income because it is included in the calculation of net income.
100
What does the times interest earned ratio measure?
The ability of an entity to pay its interest charges.
101
What is the cost of good sold ratio?
cost of goods sold / net sales
## Footnote
This ratio measures the percentage amount of sales consumed by cost of goods sold. Nonproportional changes in either affect the ratio.
102
What is the gross margin percentage ratio?
net sales - cost of goods sold / net sales
## Footnote
The gross margin percentage measures earnings from the sale of products. Nonproportional changes in net sales and cost of goods sold affect the ratio.
103
What is the net operating margin percentage ratio?
Operating income / net sales
## Footnote
Operating income is calculated before subtracting interest and taxes. Nonproportional changes in either operating income or net sales cause a change in the ratio.
104
What is the net operating margin percentage ratio?
Operating income / net sales
## Footnote
Operating income is calculated before subtracting interest and taxes. Nonproportional changes in either operating income or net sales cause a change in the ratio.
105
What is the return on equity ratio?
net income / total equity
## Footnote
This is an overall measure of a rate of return on investment. Changes in net income or changes in equity may affect this ratio. A return on average total equity or on common equity also may be calculated.
106
What is the return on equity ratio?
net income / total equity
## Footnote
This is an overall measure of a rate of return on investment. Changes in net income or changes in equity may affect this ratio. A return on average total equity or on common equity also may be calculated.
107
What are the 3 conditions ordinarily present when fraud exists?
1. pressures or incentives
2. opportunity
3. capacity to rationalize misconduct
108
What are the types of fraud relevant to the auditor?
Misstatements arising from:
1. fraudulent financial reporting
2. misappropritaion of assets
109
What does misappropriation of assets result from ?
1. Theft of physical assets or intellectual property
2. Embezzlement (ex. stealing collections of receivables)
3. An action that causes payment for items not received
4. Using entity assets for personal reasons
110
The auditor should inquire whether the entity has entered into any significant unusual transactions. What should the inquiry include?
1. Their nature
2. The terms
3. The purposes
4. Whether related parties are involved
111
The auditor should inquire whether the entity has entered into any significant unusual transactions. What should the inquiry include?
1. Their nature
2. The terms
3. The purposes
4. Whether related parties are involved
112
How should the auditor apply analytical procedures to revenue accounts?
By comparing recorded sales and production capacity to detect fictitious sales.
113
How should auditors address the risk of management override?
Management override of controls should be addressed in all audits because of its unpredictability.
114
How should auditors address the existence of a fraud risk relating to improper revenue recognition?
The auditor ordinarily should assume the existence of a fraud risk relating to improper revenue recognition. The contrary conclusion should be documented in the working papers.
115
At what levels are identified fraud risks assessed?
At the statement and assertion levels, and they are treated as significant. This assessment is ongoing after the initial assessment
116
How should the auditor obtain and undrstanding of the relevant controls and evaluate them?
They should evaluate whether those controls have been suitably designed and implemented and whether they reduce the risks.
117
How should the auditor obtain and undrstanding of the relevant controls and evaluate them?
They should evaluate whether those controls have been suitably designed and implemented and whether they reduce the risks.
118
The responses to the assessment of fraud risks should reflect a critical evaluation of the audit evidence. Responses may?
1. have an overall effect on the audit
2. involve futher audit procedures performed in response to assessed fraud risks at the assertion level
3. address management override
119
What are examples of overall effects responses to fraud risk may have on an audit?
- One is to assign more experienced personnel, or individuals with special skills, or to increase supervision
- Two is to consider accounting princples, especially those involving subjective measurements and complex transactions and whether they indicate a collective bias
- Three is to make unpredictable choices of audit procedures
120
Audit procedures vary with fraud risks and the balances, transactions, and assertions affected. Procedures may?
1. Provide more reliable evidence or increase corroboration
2. Be performed at year end or throughout the reporting period
3. Involve larger samples or the use of computer-assisted techniques
121
Material misstatements may result from inappropriate journal entries or adjustments, particularly those made at year end. The auditor should therefore?
1. understand the fnancial reporting process and controls
2. identify, select, and test entries and adjustments after considering the risk assessments, effectiveness of controls, nature of the reporting process, and audit evidence (electronic or manual)
3. choose whether to test entries during the period
4. make inquiries about inappropriate or unusual activity
## Footnote
The auditor should understand significant unusual transactions.
122
Fraud may result from intentional misstatement of accounting estimates. How should the auditor look at accounting estimates?
The auditor should perform a restrospective review of estimates in the prior-year statements that are based on sensitibe assumptions or significant management judgment.
123
When evaluating audit evidence at or near the end of the field work, what should the auditor do?
Evaluate earlier assessments of fraud risk and perform additional procedures if necessary. Furthermore, the auditor responsible for the audit should determine that information about fraud risks has been properly communicated to team members.
124
When evaluating audit evidence at or near the end of the field work, what should the auditor do?
Evaluate earlier assessments of fraud risk and perform additional procedures if necessary. Furthermore, the auditor responsible for the audit should determine that information about fraud risks has been properly communicated to team members.
125
When evaluating audit evidence what should the auditor consider regarding identified misstatements?
Whether they indicate fraud, with consequent effects on materiality judgments. If the fraud it not material, the auditor still should evaluate the implications for the audit, ex - the management's representations and integrity.
126
When evaluating audit evidence regarding identified misstatements, what should the auditor do if management (especially senior management) is involved?
1. reevaluate the assessment of fraud risks and its effects on audit procedures
2. consider the possibility of collusion
127
When evaluating audit evidence regarding identified misstatements, what should the auditor do if the fraud risk is great?
The auditor ay consider withdrawing and communicating the reasons to those charged with governance and, possibly, to regulators.
128
How should an auditor communicate about fraud?
Communications about fraud are required given evidence that fraud may exist. Inconsequential fraud should be communicated to the appropriate management. Other fraud should be reported directly to those charged with governance. In determining a responsibility to report fraud outside the entity, the auditor’s legal obligation may, in some circumstances, override the duty of confidentiality.
129
What should be included in the documentation of the consideration of fraud?
1. decisions made during he discussions among the engagement team
2. identified and assessed risks at the statement and assertion levels
3. overall responses, procedures performed, and the connection to assessed risks at the assertion level
4. reasons for not identifying improper revenue recognition as a fraud risk
5. results of procedures, including those addressing management override
6. fraud communications
130
What is noncompliance?
Noncompliance is an intentional or unintentional act or omission by the entity that is contrary to laws or regulations.
## Footnote
Whether an act constitutes noncompliance is a legal determination normally beyond the auditor’s competence.
131
Are acts of personal misconduct by the client's personnel unrelated to their business activities included in noncompliance?
No
132
How does noncompliance relate to financial statements?
It varies, the further removed it is from the financial statements, the less likely the auditor is to become aware of or recognize noncompliance.
133
How should the auditor laws and regulations in regard to the effect on the financial statements?
They should be recognized as having a direct effect on the determination of material amounts and disclosures, such as tax laws.
134
What are examples of laws and regulations less likely to have a direct and material effect on financial statements?
1. environmental protection
2. food and drug administration
3. securities trading
4. antitrust
135
What are the auditor's primary responsibility regarding noncompliance?
They should obtain a general understanding of the legal and regulatory framework applicable to the entity and how it is complying with the framework. Thus, the auditor’s primary responsibility for noncompliance is to obtain sufficient appropriate audit evidence regarding material amounts and disclosures that are determined by laws and regulations generally recognized to have a direct effect on their determination.
136
Other laws and regulations do not have a direct effect on financial statements, how does compliance with them affect the entity?
1. They may be fundamental to the entity's operations
2. They may be fundamental to the continuance of its business
3. They may be necessary to avoid material penalties
137
What is the auditors responsibility regarding the second category of laws and regulations?
To perform specicified procedures to identify noncompliance that may materially affect the financial statements.
138
What is the auditors responsibility regarding the second category of laws and regulations?
To perform specicified procedures to identify noncompliance that may materially affect the financial statements.
139
What is the second category of laws and regulations?
Other laws and regulations that do not have a direct effect on financial statements.
140
What are the two categories of laws and regulations?
1. laws and regulations that have a direct effect on financial statements
2. other laws and regulations that do not have a direct effect on financial statements.
141
What is another responsibility of an auditor in detecting noncompliance?
The auditor must remain alert during the audit to the possibility that other procedures may detect noncomopliance or suspected noncompliance.
142
What procedures should the auditor perform to identify noncompliance with other laws and regulations?
1. inquiring of management and, if appropriate, those charged with governance about whether the entity is in compliance with other laws and regulations
2. inspecting correspondence, if any, with the relevant licensing or regulatory authorities
143
Does an audit usually include audit procedures specifically designed to detect noncompliance that does not have direct effects on financial statements?
No
144
Why does an audito usually not include audit procedures specifically designed to detect noncompliance that does not have direct effects on financial statements?
A properly planned and performed audit may not detect some material misstatements resulting from such noncompliance because of the:
1. inherent limitations of an audit
2. the possibility of concealment of noncompliance
3. the nature of such noncompliance
145
What results of normal procedures should raise questions about the possibility of noncompliance?
1. investigations by a governmental or regulatory agency
2. unauthorized or improperly recorded transactions
3. unexplained payments to consultants, affiliates, employees, or government officials
4. unusual payments in cash, purchases of bank checks payable to bearer, or transfers to numbered accounts
5. failure to file tax returns or pay governmental fees
6. excessive sales commissions on agents' fees
7. violations cited in reports by regulators
146
What should the auditor do if information comes to the auditor's attention indicating noncompliance or suspected noncompliance?
The auditor should apply appropriate audit procedures
147
What should the auditor do if information comes to the auditor's attention indicating noncompliance or suspected noncompliance?
The auditor should apply appropriate audit procedures
148
What audit proceduers should be applied in the event information comes to the auditor's attention indicating noncompliance or suspected noncompliance?
1. obtaining an understanding of the act and the circumstances in which it occured, and further information to evaluate its financial statement effects
2. inquiring of mangement at a level above those involved or, if appropriate, those charged with governance
3. consulting with the entity's legal counsel or external legal counsel
149
How should the auditor respond to detected noncompliance?
They should consider the effects on the financial statements and the implications for other aspects of the audit, especially the reliability of management's representations. The auditor should:
1. consider the qualitative and quantitative materiality of the noncompliance
2. consider the adequacy of disclosure
3. communicate material problems to those charged with governance
150
What type of opinion should the auditor express if material noncompliance has not been accounted for properly?
A qualified or adverse opinion
## Footnote
If unable to collect sufficient appropriate evidence, the auditor usually disclaims an opinion.
151
What should the auditor do if it is concluded that noncompliance has or is likely to have occurred?
Discuss the matter with the approprite level of management and request that any necessary remedial actions be taken.
152
What should the auditor do if the alleged noncompliance has a material effect on the financial statement, or the client does not take the necessary remedial action?
The auditor should express a qualified or an adverse opinion, depending on the level of materiality, or withdraw from the engagement
153
What should the auditor do if the alleged noncompliance has a material effect on the financial statement, or the client does not take the necessary remedial action?
The auditor should express a qualified or an adverse opinion, depending on the level of materiality, or withdraw from the engagement
154
Does the auditor have a responsibility to disclose possible noncompliance with laws and regulations to outside parties?
No, it would violate the duty of confidentiality. Any disclosure would be the responsibility of management.
155
In what situations would an auditor have a responsibility to disclose noncompliance with laws and regulations to outside parties?
1. If they need to comply with certain legal and regulatory requirements
2. if they need to communicate with a successor auditor in accordance with auditing standards
3. if they need to respond to a court order
4. if they need to report to a funding or other specified agency in accordance with governmental audit requirements, such as those established by the Single Audit Act.
156
How is performance materiality calculated?
Fixed assets (gross) at beginning of period + capital expenditures - dispositions x total materiality % x performance materiality
157
How do you determine expected sales of a product in which the volume (quantity) decreased but the price increased?
Take PY sales - the volume change + the price change
Example: PY sales 75,000
volume decrease 10%
price increase 25%
75,000 x .9 = 67,500
67,500 x .25 = 16,875
67,500 + 16,875 = 84,375 expected sales
