Audit II Flashcards
Comfort Letter
Letter from auditor to underwriter, signed by auditor
What Makes up Fraud Triangle
(1) Incentive/motivation
(2) Opportunity
(3) Rationalization
Analytical Procedures Applied in the Planning of an Audit are Designed to
Enhance the auditor understanding of the clients business by comparing data at an aggregate level to the auditors expectations based on knowledge of the client that is not dependent on examining the details of the clients information
Overall Approach Relating to Testing Internal Controls
(1) Identify controls that are relevant to specific assertions that are likely to prevent or detect misstatements
(2) Perform test of controls to evaluate effectiveness of those controls
Factors That May Indicate Greater Risk of Misstatement Due to Error
(1) Difficulty obtaining information needed to accurately record transaction
(2) Complexity of requirements for accounting for an item
Factors That May Indicate Greater Susceptibility to Fraud
(1) Valuable item that might be misappropriated by employees or others
(2) Item for which it is easy to conceal a misstatement
(3) Misstatement of the item has the potential of influencing other actions
Inability of Client to Provide Documentation to Support a Significant Transaction Indicates
Heightened risk of fraud
Before Reissuing or Consenting to the Use of a Report Previously Issued on the Financial Statements of a Prior Period, a Predecessor Auditor Should:
(1) Read the financial statements of the current period
(2) Compare the prior period financial statements reported on with those to be presented for comparative purposes
(3) Obtain a letter of representation from the successor auditor to make certain nothing has occurred that would affect the report the predecessor had issued
Kiting
The practice of writing checks against uncleared deposits
SOX Section 404
“Management assessment of internal controls”
(1) Each annual report filed with the SEC must contain internal control report
(2) It is the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting
(3) Includes assessment of effectiveness of internal control structure and procedures
SOX Section 402
It is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer
SOX Section 403
Requires disclosure from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to section 12 of the securities exchange act of 1934
SOX Section 406
Requires disclosure of whether or not the issuer has adopted a code of ethics for senior financial officers (and if not, why not). Any change or waiver in this code requires disclosure
SOX Section 407 Financial Expert Definition
A person who:
(1) Has an understanding of GAAP and the financial statements
(2) Is experienced in the preparation or auditing of financial statements and the application of accounting principles
(3) Is experienced with internal accounting controls
(4) Has an understanding of audit committee functions
Factors that Affect the Risk of Material Misstatement
(1) Complexity and subjectivity associated with the process
(2) Availability of relevant data
(3) Number and significance of assumptions that are made
(4) Degree of uncertainty associated with those assumptions
Lapping
The altering of accounts receivable when cash that is intended for the payment of a receivable is misappropriated
When to Issue a Qualified Opinion Based on the Discovery of Noncompliance
If the auditor determines that noncompliance with laws and regulations has a material effect on the financial statements and the act has not been properly accounted for or disclosed - depending on materiality the auditor may decide to issue an adverse opinion
When to Disclaim an Opinion Based on Discovery of Noncompliance
If precluded by the client from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance that could be material to the financial statements has or is likely to have occured
When to Withdraw from an Engagement Based on Discovery of Noncompliance
If the client refuses to accept the auditors modified report
If Auditor Decides Not to Rely on Controls Related to an Assertion
(1) RM will be equal to assertions inherent risk under the assumption there are no relevant controls in place
(2) Will develop a program to test the assertion by applying substantive audit procedures that the auditor believes will provide sufficient appropriate audit evidence
If Auditor Decides to Rely on Controls Related to an Assertion
(1) RMM will be reduced from IR, taking into account the effect of CR being below the maximum
(2) Will perform tests of controls selecting from a population that covers the entire period during which the auditor is anticipating that the controls were in place
Auditor will do a ___________ Analysis Before Deciding to Perform Test of Controls
Cost/benefit
Steps in Cost Benefit Analysis
(1) Auditor estimates the cost of performing a substantive audit without performing tests of controls
(2) Estimates cost of performing test of controls
(3) Estimates cost of reduced substantive testing that will be performed if controls prove to be reliable
(4) Estimates likelihood that controls tested are likely to be reliable
(5) Add cost of performing test of controls to cost of reduced substantive testing that will be performed and multiply by likelihood that controls to be tested are likely to be reliable
(6) Add cost of performing test of controls to cost of reduced substantive testing that will be performed and multiply by one minus likelihood that controls to be tested are likely to be reliable
(7) Total amounts from last two steps and compare to cost of performing substantive audit without performing test of controls; lowest of the two amounts will determine strategy