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AUDITING THEORY > PRTC HANDOUTS > Flashcards

PRTC HANDOUTS Flashcards

1
Q

What audit procedure is considered to be the most costly?

A

Confirmation

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2
Q

What audit procedure is the least reliable and is used extensively to compliment other procedures?

A

Inquiry

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3
Q

What are the characteristics of a suitable criteria?

A

a. Relevance
b. Reliability
c. Completeness
d. Neutrality
e. Understandability

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4
Q

What is a facsimile?

A

Facsimile is an exact copy of something, especially written/printed materials.

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5
Q

A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final amount that will appear in the financial statement is referred to as?

A

Working trial balance.

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6
Q

A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount is referred to as a?

A

Lead Schedule.

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7
Q

A tick mark is used to?

A

A tick mark indicates the audit procedures performed and their results in the preparation of working papers.

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8
Q

In accordance with the PSAs, final assembly of audit files should take place on a timely basis ordinarily after how many days?

A

Not more than 60 days after the auditor’s report date

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9
Q

Ignoring any particular or legal/regulatory requirement, how long should audit documentation be retained?

A

A minimum of 5 years.

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10
Q

It refers to the risk that the auditor may incur a loss resulting from litigation, adverse publicity, or other events arising in connection with FS audit.

A

Auditor’s business risk OR Engagement risk

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11
Q

If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor should?

A

Disclose the fact that permission to disclose has been denied by the client.

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12
Q

What are preconditions for an audit?

A

These refer to the use by management of an acceptable financial reporting framework in the preparation of FS and the agreement of management and TCWG to the premise on which an audit is conducted.

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13
Q

Which of the following factors most likely would influence the auditor;s determination of the auditability of an entity’s FS?

a. complexity of accounting system
b. existence of related-party transactions
c. the adequacy of accounting records
d. operating effectiveness of control procedures

A

C.

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14
Q

Who normally signs the engagement letter for a public company?

A

The AUDIT COMMITTEE, if publicly listed

If not publicly listed, any officer of the entity.

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15
Q

What is maximum fee basis?

A

The client is charged on a per diem basis with a cap/ceiling amount. It combines lump sum and per diem methods.

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16
Q

It refers to the risk that the auditor may incur a loss resulting from litigation, adverse publicity, or other events arising in connection with financial statements audit.

A

Auditor’s business risk.

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17
Q

Who normally signs the engagement letter?

A

If publicly listed - AUDIT COMMITTEE

If not publicly listed - ANY OFFICER OF THE ENTITY, AS APPROPRIATE.

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18
Q

Are auditors really REQUIRED to decide on combined amount of misstatements in FS early on in the audit?

A

Yes, they are REQUIRED.

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19
Q

Materiality for an audit of NOT-FOR-PROFIT organizations is most likely to be determined as a percentage of which of the following?

a. Total assets
b. Excess revenue over expenses
c. Total expenses
d. Pre-tax income

A

C. Total Expenses

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20
Q

What is another term for performance materiality?

A

Tolerable misstatement. It is the materiality allocated to a specific account.

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21
Q

In accordance with PSA, analytical procedures are required in what phases of the audit?

A

a. Planning phase / Assessment of risk of material misstatements
b. Completion phase / Overall review of the audit

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22
Q

In which stage of the audit is analytical procedures tend to use DETAILED/DISAGGREGATED DATA?

A

In the substantive testing procedures.

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23
Q

What are the inherent limitations of internal control?

A
  1. Collusion
  2. Human Error
  3. Management Override
  4. Breakdowns of internal control

MISSING/LACK OF SEGREGATION/INCOMPATIBLE DUTIES IS NOT AN INHERENT LIMITATION OF INTERNAL CONTROL.

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24
Q

Proper segregation of functional responsibilities calls for the separation of what functions?

A

Authorization, execution, recording, and custody.

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25
Q

What is another term for bill of lading?

A

Shipping advice.

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26
Q

What are further audit procedures?

A

Further Audit Procedures consists of:

  1. Test of Controls
  2. Substantive Procedures
    a. Tests of details of balances
    b. Tests of details of transactions
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27
Q

Which of the following is the most valid reason why an auditor must consider FS assertions when designing further audit procedures?

a. To be able to obtain RELIABLE audit evidence
b. To be able to obtain RELEVANT audit evidence
c. To be able to obtain SUFFICIENT audit evidence
d. To minimize the cost of obtaining audit evidence

A

b. To be able to obtain RELEVANT audit evidence

28
Q

Which of the following is the most important consideration of the auditor when designing FAP?

a. Nature
b. Timing
c. Extent
d. All are equally important

A

A. NATURE

29
Q

Which materiality level is applied when DESIGNING FAP?

a. Materiality for FS as a whole
b. Materiality for a particular financial statement account and disclosure
c. Performance materiality / Tolerable Misstatement
d. Clearly trivial misstatement

A

c. Performance materiality / Tolerable Misstatement

30
Q

Test of controls addresses each of the following questions except?

a. How were the procedures performed?
b. Why were the procedures performed?
c. Were the necessary procedures performed?
d. Who performed the procedures?

A

b. Why were the procedures performed?

31
Q

Which of the following statements relating to auditor’s responses to assessed risk of material misstatement considered significant risk is incorrect?

a. The auditor shall obtain an understanding of the relevant control activities intended to address the risk
b. The auditor shall test the operating effectiveness of the internal control in place to address the risk
c. The auditor shall perform substantive procedures that are specifically responsive to significant risk
d. When the approach to a significant risk consists only of substantive procedures, those procedures shall include tests of details.

A

b. The auditor shall test the operating effectiveness of the internal control in place to address the risk

32
Q

How frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely in the current year?

a. Monthly
b. Each audit
c. At least every 2nd audit
d. At least every 3rd audit

A

d. At least every 3rd audit

33
Q

Test of controls would be most extensive when the assessed level of control risk is?

a. High
b. Moderate
c. Low
d. All of the above

A

c. Low

34
Q

Rank the following confirmations from the most reliable to the least reliable

  1. Negative confirmation
  2. Blank form positive confirmation
  3. Positive confirmation with information included
A

2-3-1

35
Q

Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to

a. decrease
b. increase
c remain the same
d. become more difficult to ascertain

A

b. increase

36
Q

A partial period bank statement and the related canceled checks, duplicate deposit slips and other documents included in bank statements mailed by the bank directly to the CPA firms office is called?

A

A cutoff bank statement.

37
Q

What is channel stuffing?

A

Channel stuffing is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public. Channel stuffing typically would take place just before quarter-end or year-end so that management, fearful of bad consequences to their compensation, can “make their numbers.”

38
Q

What is the auditor’s primary concern involving repairs and maintenance expense accounts?

A

Expenditures for property and equipment have not been charged to expense.

39
Q

What is directional testing?

A

Directional testing is an auditing technique that has based the same principle to audit the financial statements. As we understand for every debit “effect” in books of account there must be a credit effect with the equal amount. Thus if trial balance is agreeing and the debits are correctly done, then more chances are that credits are also done correctly.

It is an auditing technique by which work is reduced by testing debits only for overstatement and credits only for understatement

40
Q

What is a dual purpose test?

A

A dual-purpose test is an audit procedure that is used as both a test of controls and a substantive test. This test improves the efficiency of an audit, since two tests are being combined into one procedure.

41
Q

Define the following:

  1. Probability-proportional-to Size Sampling (PPS)
  2. Combined attributes-variable sampling (CAV)
  3. Cumulative monetary amount sampling (CMA)
  4. Dollar-unit Sampling (DUS)
A
  1. Probability proportional to size (PPS) sampling is a method of sampling from a finite population in which a size measure is available for each population unit before sampling and where the probability of selecting a unit is proportional to its size.
  2. The combined variables-attributes test plans for single acceptance sampling are proposed to protect “good lots” from attributes aspect and to optimize sample sizes from variables aspect.
  3. Auditors use monetary unit sampling, also called probability-proportional-to-size or dollar-unit sampling, to determine the accuracy of financial accounts. With monetary unit sampling, each dollar in a transaction is a separate sampling unit. A transaction for $40, for example, contains 40 sampling units. Auditors usually use monetary unit sampling to sample and test accounts receivable, loans receivable, and inventory.
42
Q

Which sampling technique is often the least desirable sampling method for use by an auditor?

A

Block selection.

43
Q

Which of the following would most likely be deemed a direct-effect illegal act?

a. Violation of employment laws
b. Violation of environmental laws
c. Violation of income tax laws
d. Violation of civil rights laws

A

C. Violation of income tax laws

44
Q

When is a violation considered having a direct-effect illegal act?

A

It is considered having a direct effect when IT HAS AN EFFECT ON THE FINANCIAL STATEMENTS.

45
Q

Which of the following statements is usually true?

a. It is easier for the auditor to uncover fraud than errors
b. It is easier for the auditor to uncover indirect-effect illegal acts than fraud
c. The auditor’s responsibility for detecting indirect-effect illegal acts is similar to the responsibility to detect fraud
d. The auditor’s responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.

A

d. The auditor’s responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.

46
Q

What is a Type 1 report? (PSA 402)

A

A report that comprises:

(i) A description, prepared by management of the service organization, of the service organization’s system, control objectives and related controls that have been designed and implemented as at a specified
date; and

(ii) A report by the service auditor with the objective of conveying reasonable assurance that includes the service auditor’s opinion on the description of the service organization’s system, control objectives and
related controls and the suitability of the design of the controls to achieve the specified control objectives.

47
Q

What is a Type 2 report? (PSA 402)

A

A report that comprises:
(i) A description, prepared by management of the service organization, of the service organization’s system, control objectives and related controls, their design and implementation as at a specified date or
throughout a specified period and, in some cases, their operating effectiveness throughout a specified period; and

(ii) A report by the service auditor with the objective of conveying reasonable assurance that includes:
a. The service auditor’s opinion on the description of the service organization’s system, control objectives and related controls, the suitability of the design of the controls to achieve the specified control objectives, and the operating effectiveness of the controls; and
b. A description of the service auditor’s tests of the controls and the results thereof.

48
Q

Differentiate Type 1 and Type 2 report.

A

Type 1 reports on the DESIGN of the service organization’s system, control objectives and related controls that have been designed and implemented.

Type 2 reports on the DESIGN AND OPERATING EFFECTIVENESS of the service organization’s system, control objectives and related controls that have been designed and implemented.

49
Q

What are the types of misstatements? Define each.

A
  1. Factual Misstatement - Factual misstatement is a misstatement that occurs on the client’s accounts balances or transactions of which there is no doubt. In general, supporting documents are usually available for auditors to review for factual misstatements.
    Examples of typical factual misstatements include wrong debit or credit entry, incorrect amount of transactions or balances posted into the client’s accounting system, wrong classification of accounts and missing of disclosure, etc.
  2. Judgmental Misstatement - Judgmental misstatement is a misstatement that occurs in an audit due to the DIFFERENCES BETWEEN THE CLIENT MANAGEMENTS’ AND AUDITORS’ JUDGMENT. These include the accounting estimate and accounting policies on judgmental areas, where auditors consider inappropriate. Examples of judgmental misstatements include unreasonable depreciation rate and inappropriate revaluation amount of fixed assets, etc.
  3. Projected Misstatement - Projected misstatements are the auditors’ best estimate of misstatements in populations that arise from the misstatements that auditors have identified in audit samples and make a projection to the entire populations which the samples were drawn from. Auditors usually make an evaluation of projected misstatements to consider whether further audit testing is appropriate.
  4. Uncorrected Misstatement
50
Q

What comprises the risk of material misstatements?

A

Inherent and control risks.

51
Q

Differentiate kiting, lapping, and window-dressing.

A

Lapping - occurs when cash is stolen upon receipt from one customer’s account. Later, the cash that is received from a second account is applied to the first account to cover up the original theft. Either a certain amount of money has been taken, or this amount could be increased by the theft of additional funds. All customer accounts stay relatively current by the posting of later received funds from additional customer remittances.

Kiting - occurs when funds are stolen from the company and, to cover this theft, the employee transfers money from one bank account to another account right before year-end. The employee records an in-transit increase in one bank account in Year 1, but records the decrease in the other account in Year 2. This fraud is most convenient and prevalent at period end, especially when there are often several legitimate items of cash always in transit between accounts.

Window dressing refers to actions taken or not taken prior to issuing financial statements in order to improve the appearance of the financial statements. It is used to make balance sheet and profit and loss statement appear good when in reality they are not. Its a practice known for improving the performance of the organization in paper, which is not in reality.

52
Q

T or F

PSA have specified how audit files should be organized to facilitate timely review of working papers.

A

False.

53
Q

If management or TCWG impose a scope limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the FS, the auditor shall:

a. not accept such a limited engagement as an audit engagement, unless required by law or regulation
b. not accept such limited engagement as an audit engagement in all cases
c. accept such limited engagement as an audit engagement as the auditor serves the public interest
d. accept such limited engagement as an audit engagement as long as documented in audit engagement letter

A

a. not accept such a limited engagement as an audit engagement, unless required by law or regulation

54
Q

Which of the following is least likely considered part of the audit engagement team?

a. Partner
b. Staff
c. Auditor’s’ internal expert
d. Auditor’s external expert

A

d. Auditor’s external expert

55
Q

How can audit strategy and program best be described at the beginning of the audit process?

a. Tentative
b. Conclusive
c. Comprehensive
d. Optional

A

a. Tentative - subject to change

56
Q

Which of the following statements is true with respect to planning meetings held at the beginning of an audit engagement and debriefing meetings held at its conclusion?

a. Planning meetings are required by GAAS, debriefing meetings are not so required
b. Debriefing meetings are required by GAAS, planning meetings are not so required
c. Both planning and debriefing meetings are required by GAAS
d. Both planning and debriefing meetings are not so required by GAAS

A

a. Planning meetings are required by GAAS, debriefing meetings are not so required

57
Q

Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have an _____ effect on the balance sheet

a. Reduced
b. Undetermined
c. Equal
d. Increased

A

c. Equal

58
Q

Auditing standards ___ that the basis used to determine the preliminary judgment about materiality be documented in the audit files

a. Permit
b. Require
c. Strongly encourage
d. Do not allow

A

b. Require

59
Q

Which of the following would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

a. Turnover of personnel in the accounting department
b. Objectivity of audit committee members
c. Square footage of selling space
d. Management plans to repurchase stock

A

c. Square footage of selling space

60
Q

In which of the following stages of audit analytical procedures tend to use detailed and disaggregated data?

a. Planning
b. Substantive procedures
c. Overall review
d. All of the above

A

b. Substantive procedures

61
Q

Which of the following is least likely to be comparable between similar corporations in the same industry line of business?

a. Accounts receivable turnover
b. Earnings per share
c. Gross profit
d. Return on Assets before interest and taxes

A

b. EPS

62
Q

An auditor typically follows a ___ approach in obtaining an understanding of internal control

a. Top-down
b. Down-top
c. Paralled
d. All of the above

A

a. Top-down

63
Q

T or F
The auditor should not evaluate the overall effectiveness of the internal control, but should separately evaluate each of the transaction cycles.

A

True.

64
Q

Which of the following is not a medium that can normally be used by an auditor to record information concerning a client’s internal control policies and procedures?

a. Decision table
b. policy manual
c. checklist
d. questionnaire

A

b. policy manual

65
Q

What is a decision table?

A

Logic diagrams in matrix form

66
Q 
Which of the following is the most important consideration of the auditor when designing further audit procedures?
a, Nature
b. Timing
c. Extent
d. All are equally important
A

A. Nature

AUDITING THEORY (17 decks)

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