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AUD 1 Audit Standards & Engagement Planning Flashcards

Type of Audits - Compliance Audits - Operational Audits - Financial Statement Audits (246 cards)

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1
Q

What are the types of audits that may be performed in relation to an entity?

A
  1. Compliance Audits
    Compliance audits are performed to determine if an entity is complying with applicable laws and regulations. They are often performed by governmental or regulatory organizations on entities that may be chosen on a random basis or may be selected due to some indication that there may be one or more incidents of noncompliance, such as a tax return with unusual deductions.
  2. Operational Audits
    Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
  3. Financial Statement Audits
    Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework. Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards.
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2
Q

What are the types of audits that may be performed in relation to an entity?

A
  1. Compliance Audits
    • often performed by governmental or regulatory organizations to determine if the entity is complying with appropriate laws and regulations
  2. Operational Audits
    • often performed by internal auditors
  3. Financial Statement Audits
    • may only be performed by CPAs
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3
Q

What is a financial reporting framework?

A

A financial reporting framework is a set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements.

It determines the form and content of the financial statements.

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4
Q

What are two examples of applicable financial reporting frameworks?

A
  1. General purpose framework

2. Special purpose framework.

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5
Q

A general purpose framework is designed to meet the common financial information objectives of a wide range of users.

General purpose frameworks include:

A

General purpose frameworks include:

  • GAAP, issued by the Financial Accounting Standards Board (FASB)
  • International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB)
  • Statements of Federal Financial Accounting Standards (SFFAS), issued by the Federal Accounting Standards Advisory Board (FASAB) for U.S. federal governmental entities
  • Statements of Governmental Accounting Standards issued by the Governmental Accounting Standards Board (GASB) for U.S. state and local governmental entities
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6
Q

General purpose frameworks include:

A

General purpose frameworks include:

  • GAAP, issued by FASB
  • IFRS, issued by IASB
  • SFFAS, issued by the FASAB
  • Statements of Governmental Accounting Standards, issued by GASB
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7
Q

What is a special purpose framework (OCBOA)?

A

A special purpose framework (OCBOA) is a framework other than GAAP that could include the cash basis (modified cash), tax basis, regulatory agency basis, contractual basis or an “other basis of accounting.”

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8
Q

A special purpose framework (OCBOA) is a framework other than GAAP that could include the cash basis (modified cash), tax basis, regulatory agency basis, contractual basis or an “other basis of accounting.”

The auditor:

A

The auditor:

  • Possesses the appropriate qualifications to perform the audit.
  • Applies professional skepticism, an attitude that includes a questioning mind and a critical assessment of audit evidence.
  • Complies with relevant ethical requirements.
  • Exercises professional judgment throughout the engagement.
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9
Q

To express an opinion on the financial statements, the auditor obtains __________ assurance as to whether the financial statements are free from material misstatement.

A

To express an opinion on the financial statements, the auditor obtains reasonable assurance as to whether the financial statements are free from material misstatement.

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10
Q

Reasonable Assurance =

A

Reasonable Assurance =
A high level of assurance, although not equivalent to absolute assurance

o The scope of the audit is limited to items that are considered material.
o The auditor cannot look at evidence supporting all information in the financial statements.

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11
Q

To obtain reasonable assurance, the auditor:

A

To obtain reasonable assurance, the auditor:

  • Plans the work
  • Properly supervises assistants
  • Determine and apply appropriate materiality levels

• Identify and assess risks of material misstatement
o May be due to error or fraud
o Based on auditor’s understanding of entity and environment

• Obtain sufficient appropriate audit evidence
Scope is between 100% and materiality

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12
Q

The 7 Steps in an Audit:

A

The 7 Steps in an Audit

  1. Prepare for the audit
  2. Obtain Understanding of client, its Environment, including Internal Control
  3. Assess Risks of Material Misstatement and Determine Nature, Timing, and Extent of Further Procedures
  4. Perform Tests of Controls
  5. Perform Substantive Procedures
  6. Formulate an opinion
  7. Issue Audit Report
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13
Q

The Generally Accepted Auditing Standards (GAAS) measures ___________

A

GAAS are considered measures the quality of the auditor’s performance.

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14
Q

10 GAAS - Generally Accepted Auditing Standards

A

10 GAAS - Generally Accepted Auditing Standards

3 General Standards - Qualification of auditor and quality of work.

  1. Training and Proficiency
  2. Independence
  3. Due Professional Care

3 Standards of Fieldwork - How audit is planned and how audit evidence is accumulated and evaluated.

  1. Planning and Supervision
  2. Internal Controls
  3. Corroborative Audit Evidence

4 Standards of Reporting - Preparation and content of the audit report [ GAAS audit to check for GAAP. ]

  1. Accounting Principles in Conformity with U.S. GAAP
  2. No new Accounting Principles applied – Consistency
  3. Omitted Informative Disclosures – None
  4. Expression of an Opinion
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15
Q

The 10 Generally Accepted Auditing Standards (GAAS) include (TIPPICANOE):

A

The 10 Generally Accepted Auditing Standards (GAAS) include (TIPPICANOE):

General Standards

  1. Training and Proficiency
  2. Independence
  3. Professional Care

Standards of Fieldwork

  1. Planning and supervision
  2. Internal Controls
  3. Corroborative Appropriate Audit Evidence

Reporting Standards

  1. Accounting Principles in Accordance with GAAP
  2. No New Principles – Consistency
  3. Omitted Disclosures – None
  4. Express an Opinion
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16
Q

What are GAAS 3 General Standards for qualification of auditor and quality of work?

A

GAAS 3 General Standards

Qualification of auditor and quality of work.

  1. Training and Proficiency
  2. Independence
  3. Due Professional Care
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17
Q

What are GAAS 3 Standards of Fieldwork on How audit is planned and how audit evidence is accumulated and evaluated?

A

GAAS 3 Standards of Fieldwork

How audit is planned and how audit evidence is accumulated and evaluated

  1. Planning and Supervision
  2. Internal Controls
  3. Corroborative Audit Evidence
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18
Q

What are GAAS 4 Standards of Reporting on Preparation and content of the audit report?

A

GAAS 4 Standards of Reporting

Preparation and content of the audit report

  1. Accounting Principles in Conformity with U.S. GAAP
  2. No new Accounting Principles applied – Consistency
  3. Omitted Informative Disclosures – None
  4. Expression of an Opinion
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19
Q

Statements on Auditing Standards (SAS) are interpretations of GAAS issued by the _________ .

A

Statements on Auditing Standards (SAS) are interpretations of GAAS issued by the Auditing Standards Board of the AICPA.

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20
Q

To perform an audit, the auditor is responsible for:

A

To perform an audit, the auditor is responsible for:

  • Having appropriate competence and capabilities in the form of adequate technical training and proficiency as an auditor.
  • Complying with relevant ethical requirements, including remaining independent from the audit client.
  • Maintaining professional skepticism and exercising professional judgment.
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21
Q

Auditors are responsible for having appropriate competence and capabilities to perform the audit.

This is obtained through:

A

Auditors are responsible for having appropriate competence and capabilities to perform the audit.

This is obtained through:
• Proper Education in accounting
• Knowledge of industry and business
• Practical experience
• Continuing professional education (CPE)
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22
Q 
The Accountant must maintain independence for attestation engagements
E \_\_\_\_\_\_\_
R \_\_\_\_\_\_\_
A \_\_\_\_\_\_\_
S \_\_\_\_\_\_\_
A

The Accountant must maintain independence for attestation engagements (ERAS)

  • Examinations (Audits)
  • Reviews
  • Agreed-upon procedure engagements and other engagements covered by the attestation standards leading to findings
  • Special reports
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23
Q

Independent is not needed for

A

Need not be independent for:
• Compilations (when a lack of independence is indicated)
• Taxes
• Consultations
• Financial Statement Preparation Engagement
• Other non-attest services such as bookkeeping or payroll

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24
Q 
Independence required for:
• Audit  ?
• Review ?
   o Compilation ?
   o Taxes ?
   o Consultation ?
   o F/S Preparation Engagement ?
A

Attest Function = Must be Independent

Independence required for:
• Audit – Yes
• Review – Yes
   o Compilation – No
   o Taxes – No
   o Consultation – No
   o F/S Preparation Engagement
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25
An auditor is also required to comply with those other ethical requirements that are relevant to financial statement audit engagements. The standards cite the fundamental principles of professional ethics, which are:
The standards cite the fundamental principles of professional ethics, which are: * Responsibilities (ET 0.300.020) * The public interest (ET 0.300.030) * Integrity (ET 0.300.040) * Objectivity and independence (ET 0.300.050) * Due care (ET 0.300.060) * Scope and nature of services (ET 0.300.070)
26
All engagements should be planned and performed with professional skepticism. Applying professional skepticism means ________.
Applying professional skepticism means: • Being alert to information from different sources being contradictory; • to the possibility that documentary evidence may not be reliable; • to indications of fraud. • Alerts the accountant that procedures beyond those required for an engagement may be necessary.
27
Auditing standards indicate that applying professional skepticism reduces the risks associated with:
Auditing standards indicate that applying professional skepticism reduces the risks associated with: * Overlooking unusual circumstances; * Drawing conclusions from audit procedures that are over-generalized; and * Making decisions regarding the nature, timing, and extent of audit procedures and evaluating the results of procedures, using inappropriate assumptions.
28
Professional skepticism and judgment The auditor is aware of the possibility that the financial statements might be materially misstated and will be alert to indications, including:
Alert indications: * Some audit evidence may contradict other audit evidence. * Information may raise questions as to the reliability of documentary evidence and responses to auditor inquiries. * Conditions may indicate the possibility of fraud. * There may be a need to apply audit procedures in addition to those required by GAAS.
29
The auditor will apply professional judgment when making decisions related to:
* Materiality; * Audit risk; * The nature, timing, and extent of audit procedures to be applied; * Evaluations as to whether audit evidence is appropriate and sufficient; * The evaluation of management’s judgments; and * Drawing conclusions from the evidence obtained.
30
The auditor applies professional judgment throughout the audit, which should be adequately documented such that ____________________ will understand significant judgments made in reaching conclusions.
The auditor applies professional judgment throughout the audit, which should be adequately documented such that an experienced auditor will understand significant judgments made in reaching conclusions.
31
Auditing standards differ from auditing procedures in that auditing procedures relate to acts to be performed, whereas standards deal with _________________ of the auditor’s performance of those acts.
Auditing standards differ from auditing procedures in that auditing procedures relate to acts to be performed, whereas standards deal with measures of the quality of the auditor’s performance of those acts. Materiality and relative risk underlie the application of all the standards.
32
Assurance services =
Assurance services = "Independent professional services that improve the quality of information, or its context, for decision makers.” (defined by the AICPA Special Committee on Assurance Services)
33
To decide whether to accept an engagement, one of the two key considerations is obtaining management’s agreement that it understands and accepts certain responsibilities: What are the management's responsibilities?
Management's Responsibilities Agreement : 1. Preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework - Including all appropriate informative disclosures related to a special purpose framework when used to prepare the financial statements 2. Design, implementation, and maintenance (DIM) of internal control relevant to reliable financial reporting that is free from material misstatement, whether due to fraud or error; and 3. Providing the auditor with access to all relevant information of which management is aware; additional information requested by the auditor; and unrestricted access to entity personnel (no client-imposed scope limit).
34
The first step in planning an engagement is to decide whether to accept the engagement, which will depend on whether the preconditions for an audit have been met. There are two key considerations in making this decision:
There are two key considerations: 1. Determining the acceptability of the applicable financial reporting framework being applied. 2. Obtaining management’s agreement that it understands and accepts certain responsibilities.
35
The auditor will also want to make certain that the financial statements are ______. If the accounting records are inadequate, the auditor may not have the ability to gather sufficient appropriate audit evidence, and will have to refuse the engagement.
The auditor will also want to make certain that the financial statements are auditable.
36
An auditor will not wish to associate with an entity that has management that lacks _______ .
An auditor will not wish to associate with an entity that has management that lacks integrity. If the auditor cannot trust the key officers of the business, all evidence related to the financial statements will be subject to serious doubt.
37
One of the required steps toward the end of an audit is to obtain a _____________________ from management on certain key items.
One of the required steps toward the end of an audit is to obtain a client representation letter from management on certain key items. If the auditor does not trust management, it will be impossible to place reliance on the representations, so the auditor will have to refuse the engagement.
38
When an auditor accepts an engagement for an initial audit AU-C Section 510 requires the auditor to pay special attention to __________.
When an auditor accepts an engagement for an initial audit, AU-C Section 510 [Opening Balances – Initial Audit Engagements, Including Reaudit Engagements] requires the auditor to pay special attention to beginning balances.
39
Beginning balances are significant for a variety of reasons. Beginning balance sheet amounts affect:
Beginning balances are significant for a variety of reasons. • Beginning balance sheet amounts affect items reported on the current period’s income statement, statement of cash flows, and statement of changes in stockholders’ equity. A misstatement in beginning inventory, for example, will result in a misstatement in the current period’s cost of goods sold. * The auditor is required to determine if accounting principles have been applied on a basis that is consistent with the prior period. * Opening balances for certain items, such as contingencies and commitments may have ongoing implications that affect the current period’s disclosures.
40
An auditor accepts an engagement for an initial audit: What are some examples for the auditor to obtain sufficient appropriate audit evidence regarding opening balances?
Examples for an auditor to obtain sufficient appropriate audit evidence regarding opening balances: • The auditor will read the entity’s most recent financial statements and the predecessor’s report for: o Opening balances and disclosures (contingencies and commitments) o Consistency in the application of the applicable financial reporting framework • If the prior statements were audited, the auditor should request that management authorize the predecessor to: o Allow the successor to review the predecessor’s documentation (i.e., read most recent financial statements and the predecessor’s report; if modified opinion, evaluate effect on current period financial statements) o Respond fully to inquiries by the successor
41
Once the client has authorized communication, the successor auditor will generally make inquiries of the predecessor auditor about several key issues:
Communication with predecessor auditor about several key issues (RID-C): * Reasons for change – The successor needs to know why the predecessor understands that they are no longer the continuing auditor of the client. * Integrity of management – The predecessor should inform the successor whether they believe management can be trusted. * Disagreements during audit – If any conflicts arose regarding the application of accounting principles or the performance of auditing procedures during the time the predecessor was the auditor of the client, the predecessor should provide necessary details for the successor to understand the nature of the disagreements and how they were resolved. * Communication with Management or those charged with Governance, such as the audit committee, regarding fraud and noncompliance with applicable laws and regulations, including illegal acts, and significant deficiencies and material weaknesses in internal control. Any one of these may cause the successor to get rid of the prospective new client and C (see) you later!!
42
What are the key issues that successor auditor will communicate with predecessor auditor?
Communication with predecessor auditor (RID-C): * Reasons for change * Integrity of management * Disagreements during audit * Communication with Management or those charged with Governance (the audit committee) regarding fraud and noncompliance with applicable laws and regulations, including illegal acts, and significant deficiencies and material weaknesses in internal control.
43
If financial statements audited by a predecessor auditor are found to require substantial revision, it is the responsibility of the _______ auditor to request that the client arrange a meeting among the three parties to discuss and attempt to resolve the matter.
If financial statements audited by a predecessor auditor are found to require substantial revision, it is the responsibility of the successor auditor to request that the client arrange a meeting among the three parties to discuss and attempt to resolve the matter.
44
If the predecessor auditor’s report on the previous period’s financial statements included a modified opinion, the ________ auditor should evaluate the effect on the current period’s financial statements.
If the predecessor’s report on the previous period’s financial statements included a modified opinion, the successor should evaluate the effect on the current period’s financial statements. During the course of the engagement, the successor may become aware of misstatements contained in opening balances that could materially affect the current period’s financial statements. If the auditor concludes that the misstatements also affect the current period’s financial statements, the auditor should communicate the misstatements to management and those charged with governance.
45
If the auditor determines that, because of the misstatements, the previous period’s audited financial statements may require restatement, the auditor should ________________ allow communication between the successor and predecessor regarding the matter.
If the auditor determines that, because of the misstatements, the previous period’s audited financial statements may require restatement, the auditor should request that management allow communication between the successor and predecessor regarding the matter. * The successor should provide the predecessor auditor with whatever information the successor deems appropriate to assist the predecessor in resolving the matter. * If the client refuses permission or if the circumstances are otherwise not resolved to the satisfaction of the successor, the successor should consider the implications in relation to the current period’s audit, including whether the auditor should withdraw from the engagement.
46
During the course of the engagement, the successor may become aware of misstatements contained in opening balances that could materially affect the current period’s financial statements. If the auditor concludes that the misstatements also affect the current period’s financial statements, the auditor should communicate the misstatements to ________ and _________________ .
If the auditor concludes that the misstatements also affect the current period’s financial statements, the auditor should communicate the misstatements to management and those charged with governance.
47
Evidence regarding opening balances may affect the auditor’s report on the current period’s financial statements. If the auditor is unable to obtain sufficient appropriate audit evidence regarding opening balances, or if the auditor determines that the opening balances contain a material misstatement that is not appropriately accounted for or disclosed, the auditor will modify the report, expressing a ________ opinion or issuing a _______ .
If the auditor is unable to obtain sufficient appropriate audit evidence regarding opening balances, or if the auditor determines that the opening balances contain a material misstatement that is not appropriately accounted for or disclosed, the auditor will modify the report, expressing a qualified opinion or issuing a disclaimer. The auditor will also issue a qualified or adverse opinion if accounting policies have not been consistently applied or if changes in accounting principles have not been appropriately accounted for and adequately disclosed.
48
The auditor will issue a ________ or ________ opinion if accounting policies have not been consistently applied or if changes in accounting principles have not been appropriately accounted for and adequately disclosed.
The auditor will also issue a qualified or adverse opinion if accounting policies have not been consistently applied or if changes in accounting principles have not been appropriately accounted for and adequately disclosed.
49
When the auditor is engaged for recurring audits, the auditor may determine that the terms of the preceding engagement may or may not need ______. If the terms do not need revision, the auditor should remind the client of the terms of the engagement, which may be done in ______ or orally, but should be ________.
When the auditor is engaged for recurring audits, the auditor may determine that the terms of the preceding engagement may or may not need revision. If the terms do not need revision, the auditor should remind the client of the terms of the engagement, which may be done in writing or orally, but should be documented.
50
If the terms of the preceding engagement do not need revision, the auditor should remind the client of the terms of the engagement. Indications that the terms of the preceding engagement may need to be revised include:
Indications that the terms of the preceding engagement may need to be revised include: * Indications that management does not understand the objective and scope of the engagement * Revised or special terms * Changes to senior management or a significant change in ownership * A significant change in the entity’s size or the nature of its business * Changes to legal or regulatory requirements * A change in the applicable financial reporting framework * A change in other reporting requirements.
51
During the conduct of an audit, there are several items that the auditor is required to communicate regarding the entity. In such cases, the auditor will communicate with those charged with governance, which may include management. Examples:
The auditor will communicate with those charged with governance, which may include management. * Members of management may serve as executive members of the board of directors. * In owner-managed entities, management and governance are the same. Those charged with governance may also include: • Members of the entity's legal structure, such as company directors. • Parties external to the entity, such as certain government agencies. • A collective group of people, such as a Board of Directors.
52
Management includes those with _______________ for the conduct of the entity’s organization.
Management includes those with executive responsibility for the conduct of the entity’s organization.
53
Those charged with governance are responsible for overseeing the ________ direction of the entity and the obligations related to __________ .
Those charged with governance are responsible for overseeing the strategic direction of the entity and the obligations related to accountability.
54
For entities with formal structures, the outside auditor meets with the audit committee of the board of directors, which is a sub-committee made up of board members who are not officers or employees of the company. They must be ________.
For entities with formal structures, the outside auditor meets with the audit committee of the board of directors, which is a sub-committee made up of board members who are not officers or employees of the company The audit committee members must be independent.
55
The audit committee members:
The audit committee members will have no special interest in supporting the financial representations of management, and this provides them with the objectivity necessary to: * Serve as members of the board of directors that are disinterested in the day-to-day operations (must be Independent). * Hire and fire the outside auditors. * Receive their reports and communications. * Oversee the internal audit function of the company.
56
The audit committee members:
* Serve as members of the board of directors that are disinterested in the day-to-day operations (must be Independent). * Hire and fire the outside auditors. * Receive their reports and communications. * Oversee the internal audit function of the company.
57
_______ , entities that are not subject to the provisions of Sarbanes-Oxley, may not have an audit committee.
Nonissuers, entities that are not subject to the provisions of Sarbanes-Oxley, may not have an audit committee. When that is the case, the individuals who oversee the accounting and financial reporting processes for the entity as well as the audit are considered to be the audit committee. In some cases, this may be only one person.
58
The prospective auditor negotiates with the ___________ to enter the audit engagement and establish an understanding, which is required to be documented in the form of a written engagement letter or a comparable document, and may be sent to the audit committee for the client's signature.
The prospective auditor negotiates with the audit committee to enter the audit engagement and establish an understanding, which is required to be documented in the form of a written engagement letter or a comparable document, and may be sent to the audit committee for the client's signature.
59
Certain matters should be communicated to those charged with governance. These communications may be ____ or in _______ , and may be communicated during the audit or after the audit report is issued. Matters communicated orally should be documented by the auditor.
Certain matters should be communicated to those charged with governance. These communications may be oral or in writing, and may be communicated during the audit or after the audit report is issued. Matters communicated orally should be documented by the auditor.
60
Matters communicated orally to those charged with governance should be documented by the auditor. Among the matters the auditor should communicate are: [ mnemonic DISAPPROVE ]
Matters communicated orally should be documented by the auditor. Among the matters the auditor should communicate are: * Disagreements with management about accounting policies or audit procedures * Noncompliance with laws and regulations * Significant accounting policies adopted or changed by management * Adjustments proposed by the auditor with a significant impact on the financial statements * Prior discussions with management before acceptance of the engagement. * Problems or significant difficulties arising during the audit * Responsibilities of the auditor under GAAS * Other information discussed or dealt with by management when those charged with governance are not all involved in management * Views of the accountant regarding the qualitative aspects of the entity’s significant accounting policies, estimates, and disclosures * Estimates in the accounting records and the process used to obtain them The mnemonic DISAPPROVE reminds us that audit committees would disapprove of an auditor who failed to inform them about these matters.
61
Also, the auditor should not discuss the __________ or specific_____________ with the audit committee or management, since it might reduce the effectiveness of the audit.
Also, the auditor should not discuss the detailed audit plan or specific audit procedures with the audit committee or management, since it might reduce the effectiveness of the audit.
62
Under Sarbanes-Oxley (SOX), the audit committee of an issuer is required to be made up of independent directors, and at least one member of the audit committee is required to be a ____________ . If there is not a ___________ on the audit committee, the reasons must be disclosed.
"Financial Export" Under Sarbanes-Oxley (SOX), the audit committee of an issuer is required to be made up of independent directors, and at least one member of the audit committee is required to be a financial expert. If there is not a financial expert on the audit committee, the reasons must be disclosed.
63
A financial expert has:
A financial expert has: * An understanding of GAAP and financial statements * Experience preparing or auditing comparable financial statements and experience in applying financial statement or audit knowledge to the accounting for estimates, accruals, and reserves * Experience with internal accounting controls • An understanding of the functions of the audit committee o Need not be a CPA
64
The PCAOB established requirements for matters to be communicated to those charged with governance when performing an audit of the financial statements of an entity that is subject to Sarbanes-Oxley. The auditor should discuss with the audit committee any significant issues discussed with management regarding ________ or retention of the auditor.
The auditor should discuss with the audit committee any significant issues discussed with management regarding appointment or retention of the auditor.
65
The auditor should establish an understanding of the terms of the engagement with the audit committee, which should be documented in an _________ letter and executed by the appropriate party on behalf of the entity.
the auditor should establish an understanding of the terms of the engagement with the audit committee, which should be documented in an engagement letter and executed by the appropriate party on behalf of the entity. The understanding will include the objectives of the engagement, the responsibilities of the auditor, and the responsibilities of management.
66
In regard to the engagement itself, the auditor should inquire as to whether the ____________ is aware of relevant matters, which may include violations or possible violations of applicable laws or regulations.
In regard to the engagement itself, the auditor should inquire as to whether the audit committee is aware of relevant matters, which may include violations or possible violations of applicable laws or regulations.
67
The auditor will also communicate with the __________ regarding an overview of the overall audit strategy and timing, as well as significant risks identified during the performance of risk assessment procedures performed in obtaining an understanding of the entity and its environment.
The auditor will also communicate with the audit committee regarding an overview of the overall audit strategy and timing, as well as significant risks identified during the performance of risk assessment procedures performed in obtaining an understanding of the entity and its environment.
68
Communication with the audit committee regarding the overall strategy will include:
Communication with the audit committee regarding the overall strategy will include: * Specialized skill or knowledge needed to perform risk assessments, plan or perform the engagement, or evaluate results. * The extent to which internal auditors will be used in the engagement and to which internal auditors and other personnel will be used under the supervision of the audit committee in the audit of internal control over financial reporting. * Information about other accounting firms expected to perform audit procedures. * The basis for concluding that the auditor can serve as principal auditor when parts of the audit are performed by other auditors.
69
The auditor will communicate with the audit committee the results of the audit the following:
The auditor will also communicate with the audit committee the results of the audit the following: * Significant accounting policies and practices * Critical accounting policies and practices – those most significant to the entity’s financial position and results, and requiring management’s most difficult, subjective, or complex judgments * Critical accounting estimates * Significant unusual transactions Communicate auditor’s evaluation of: • The financial statement presentation and related disclosures • New accounting pronouncements with a potential future effect on the entity’s financial statements • Alternative accounting treatments discussed with management
70
Other matters to be communicated with the audit committee include:
Other matters to be communicated with the audit committee include: * The auditor’s responsibilities for other information in documents containing the audited financial statements * Difficult or contentious matters for which the auditor sought outside consultation * Going concern issues * Uncorrected and corrected mistakes * Material written communications provided to management * Modifications to the audit report * Disagreements with management * Difficulties in performing the audit Unlike the communication under GAAS, the auditor is required to submit the communication to those charged with governance prior to issuance of the auditor’s report.
71
Unlike the communication under GAAS, the auditor is required to submit the communication to those charged with governance prior to issuance of the __________ report.
The auditor is required to submit the communication to those charged with governance prior to issuance of the auditor’s report.
72
The auditor is required to agree upon the terms of the _________ with the client.
The auditor is required to agree upon the terms of the engagement with the client. The agreement may be with management or with those charged with governance, whichever is appropriate based on the structure of the entity. The auditor is required to obtain management’s agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.
73
The auditor is required to agree upon the terms of the engagement with the client. The agreement may be with ________ or with those _____________ , whichever is appropriate based on the structure of the entity.
The engagement agreement may be with management or with those charged with governance, whichever is appropriate based on the structure of the entity. The auditor is required to obtain management’s agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.
74
The auditor is required to obtain _________ agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.
The auditor is required to obtain management’s agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.
75
Once the auditor has made the decision to accept the engagement, the auditor is required to send a ________________ letter or a ___________________ to the client.
Once the auditor has made the decision to accept the engagement, the auditor is required to send a written engagement letter or a comparable written agreement to the client. In it, the auditor will confirm the scope and nature of the engagement and the responsibilities of the various parties. The engagement letter is signed by both the client and the auditor.
76
The auditor's responsibilities include:
The auditor's responsibilities include: • Conducting an audit in accordance with GAAS (this doesn't guarantee that errors and fraud will be detected) • Informing the client of improvements in control or economy of operations that come to the auditor’s attention during the engagement
77
The client's responsibilities include:
The client's responsibilities include: * Making available all records * Not limiting the scope of the auditor's work * Paying the fee based on the agreed-upon method
78
The written understanding with the client will also include:
The written understanding with the client will also include: * A statement that, due to the inherent limitations of an audit and internal control, material misstatements may not be detected * Identification of the applicable financial reporting framework (AFRF) * Reference to the expected form and content of the report with an indication that the actual report may differ
79
The auditor is required to establish an understanding with the client and document it through a written communication with the client. The understanding includes:
This communication is required as this reduces the risk of miscommunications between the parties. The understanding includes: * Objective and scope of the audit * Responsibilities of the Auditor * Responsibilities of management • An indication that, even though the audit is properly planned and performed in accordance with GAAS, there is an unavoidable risk that some material misstatements may not be detected due to the inherent limitations of an audit and the inherent limitations of internal control * The identification of the applicable financial reporting framework * The expected form and content of any report expected to be issued, accompanied by an indication that circumstances may require the report to differ in form and content * Other relevant information * Reporting – expected form and content
80
Other matters may be referred to in the engagement letter: examples
Other matters may be referred to in the engagement letter, such as: * Further elaboration of the scope of the audit * Communication of the results of the engagement in addition to the audit report * Matters related to the planning and performance of the engagement, such as the composition of the engagement team * The anticipation that management will provide written representations * Management’s agreement to provide information on a timely basis to enable the timely completion of the engagement * Management’s agreement to inform the auditor of subsequent events and subsequently discovered facts relevant to the financial statements * Fees and billing arrangements * A request for management’s acknowledgment, evidenced by their signature on the engagement letter, of receipt of the engagement letter and agreement to its terms
81
When appropriate, the engagement letter may also include reference to:
When appropriate, the engagement letter may also include reference to: * The involvement of other auditors and specialists * The involvement of internal auditors and other entity staff * In an initial audit, arrangements to be made with the predecessor * Restrictions on the auditor’s liability * The auditor’s obligations to provide audit documentation to other parties * Additional services to be provided by the auditor * Any further agreements between the auditor and the entity
82
What are the elements of the engagement letter? [ FACSIMILE ]
The mnemonic FACSIMILE can be used to illustrate the elements of the engagement letter. ``` F = Fees A = Auditor’s responsibility (GAAS) C = Confirmation of Engagement ``` S = Scope and Objective of Engagement (Stmts auditing and obj is an opinion on F/S) I = Internal Control (Comm. significant deficiencies and Material weaknesses in I/C) M = Management’s Responsibility (Prep and fair pres of F/S, Design, Implementation and Maintenance (DIM) of I/C and access to info) I = Irregularities - Fraud L = iLLegal acts (Noncompliance with applicable laws and regulations) E = Errors
83
What are the elements of the engagement letter? [ FACSIMILE ]
The mnemonic FACSIMILE can be used to illustrate the elements of the engagement letter. ``` F = Fees A = Auditor’s responsibility (GAAS) C = Confirmation of Engagement ``` ``` S = Scope and Objective of Engagement I = Internal Control M = Management’s Responsibility I = Irregularities - Fraud L = iLLegal acts E = Errors ```
84
The auditor should not discuss in detail the audit procedures that will be performed because ________ .
The auditor should not discuss in detail the audit procedures that will be performed, partly because (1) these procedures will vary depending on the evidence obtained during the engagement, and partly because (2) the effectiveness of many procedures depends on the client not knowing in advance what specific evidence will be examined.
85
Who should be involved in the planning of the audit?
The engagement partner and other key members of the engagement team should be involved in the planning of the audit.
86
Who plans the audit to be responsive to the assessment of the risk of material misstatement?
The engagement team (engagement partner and other key members) plans the audit to be responsive to the assessment of the risk of material misstatement.
87
The engagement team plans the audit to be responsive to the assessment of the _________________ based on the auditor’s understanding of the entity and its environment, including its internal control.
The engagement team plans the audit to be responsive to the assessment of the risk of material misstatement based on the auditor’s understanding of the entity and its environment, including its internal control.
88
The nature, extent and timing of audit planning will vary with:
The (N) nature, (E) extent and (T) timing of planning will vary with: * The size and complexity of the entity * The auditor’s experience with the entity * Knowledge of the entity’s business and industry * Knowledge of the entity and its environment, including internal control
89
Early appointment or near year-end appointment of the auditor is preferred and advantageous?
Early appointment of the auditor is preferred and advantageous as it allows the auditor to plan the audit prior to the balance-sheet date; however, an auditor may be appointed at or near year-end as well.
90
At the beginning of the audit engagement, the auditor will perform preliminary engagement activities, including:
Preliminary engagement activities: * Procedures regarding acceptance and continuance of the client relationship and the engagement; * Evaluation of compliance with relevant ethical requirements; and * Establishing an understanding with the client, documented in the form of an engagement letter.
91
The auditor’s planning activities, applied in developing the overall strategy, include:
The auditor’s planning activities: * Identifying characteristics of the engagement that affect the scope of the audit; * Determining the reporting objectives to plan the nature and timing of communications; * Considering other factors that the auditor deems significant to the direction of the audit; * Considering the preliminary activities and relevant knowledge gained from other engagements; and * Ascertaining the nature, timing, and extent of resources needed to perform the engagement.
92
The development of a detailed audit plan, including audit programs, is required in order to achieve the ______ of the audit.
The development of a detailed audit plan, including audit programs, is required in order to achieve the objectives of the audit.
93
The ______________ ensures that the auditor applies the necessary procedures to verify the financial statement assertions for account balances, classes of transactions, and presentation and disclosure, and to provide support for the auditor's _______ .
The audit program ensures that the auditor applies the necessary procedures to verify the financial statement assertions for account balances, classes of transactions, and presentation and disclosure, and to provide support for the auditor's opinion.
94
The audit plan will include a description of:
The audit plan will include a description of: * The nature and extent of the risk assessment procedures that are planned to be performed in obtaining an understanding of the entity and its environment and assessing the risks of material misstatement; * The nature, timing, and extent of further audit procedures determined to be required at the assertion level in response to assessed risks and to the evaluation of audit evidence obtained; and * Other procedures that are planned to be carried out in order for the engagement to be in compliance with GAAS.
95
When developing audit programs from those of the prior period:
When developing audit programs from those of the prior period: * The auditor will consider which procedures are required by GAAS to be performed on every engagement. * The auditor will identify areas that represent more or less risk than in the prior period based on information gathered about the client and its industry during the period. * The auditor will make certain that the programs are dissimilar enough to avoid the approach being predictable, allowing the client to negate the effectiveness of some aspects of the audit.
96
Audit programs are often designed using information from ____ engagements or templates, including checklist systems developed by commercial providers, or some combination of the two.
Audit programs are often designed using information from prior engagements or templates, including checklist systems developed by commercial providers, or some combination of the two.
97
When audit programs are developed using templates, the process generally involves the ________ of procedures from the template.
When audit programs are developed using templates, the process generally involves the elimination of procedures from the template.
98
The audit program prepared during early planning should include a list of ________ tests that are planned to be performed later in the engagement; therefore, it is necessary for the auditor to estimate the level at which they'll be assessing RMM.
The audit program prepared during early planning should include a list of substantive tests that are planned to be performed later in the engagement; therefore, it is necessary for the auditor to estimate the level at which they'll be assessing RMM.
99
The preliminary assessment of RMM is usually based on prior experience with the client or the audits of _______.
The preliminary assessment of RMM is usually based on prior experience with the client or the audits of predecessors.
100
The final assessment of RMM won't take place until the auditor gains an understanding of the client and its environment, including its ___________ structure.
The final assessment of RMM won't take place until the auditor gains an understanding of the client and its environment, including its internal control structure.
101
If assessment of RMM is different from the preliminary assessment, the audit program will have to be modified to increase or decrease the amount of ________________ to be performed.
If assessment of RMM is different from the preliminary assessment, the audit program will have to be modified to increase or decrease the amount of substantive testing to be performed.
102
As the auditor performs risk assessment procedures, used in obtaining an understanding of the entity and its environment, including its internal controls, the auditor may decide to place a higher or lower reliance on ____________ .
As the auditor performs risk assessment procedures, used in obtaining an understanding of the entity and its environment, including its internal controls, the auditor may decide to place a higher or lower reliance on internal controls.
103
A higher reliance on internal controls | = _____ (...er) the amount of substantive testing
A higher reliance on internal controls = Lower the amount of substantive testing A higher reliance will involve performing tests of controls and, if controls prove to be effective, a reduction in the nature, timing, and extent of further audit procedures to be performed.
104
A lower reliance on internal controls | = _____ (...er) the amount of substantive testing
A lower reliance on internal controls = Higher the amount of substantive testing A lower reliance will mean that the auditor will not perform tests of controls and will enhance the nature, timing, and extent of further audit procedures to be performed.
105
The auditor will also prepare a ___ budget for the engagement. This is accomplished by estimating the amount of ____ each step in the audit program is expected to require.
The auditor will also prepare a time budget for the engagement. This is accomplished by estimating the amount of time each step in the audit program is expected to require, including time for review and for the engagement team to respond to review comments. The time budget is one means the auditor has of communicating to staff the areas that are perceived to represent the highest risk as these are areas that will generally have the most extensive procedures and will be allocated the most time.
106
An __________ is a step-by-step list of audit procedures, which is required for every GAAS audit.
An audit program is a step-by-step list of audit procedures, which is required for every GAAS audit.
107
An audit program is designed so that:
An audit program is designed so that: * The procedures will achieve specific audit objectives, which relate to management’s assertions. * It supports the auditor’s conclusion. • It describes the (N) nature, (T) timing, and (E) extent of: o Risk assessment procedures sufficient to assess the risks of material misstatement (RMM). o Further audit procedures at the relevant assertion level for each material class of transactions, account balance, and disclosure. o Other procedures to be performed to comply with GAAS.
108
What are several key considerations in the development of the audit program?
There are several key considerations in the development of the audit program: * Materiality * Risk of Material Misstatement (RMM) * Business and Industry considerations
109
When the auditor expresses an opinion regarding the fair presentation of the financial statements in accordance with the applicable financial reporting framework, it is based on whether the financial statements contain a _______________ that will influence users, or the financial statements are ______________ as a whole.
When the auditor expresses an opinion regarding the fair presentation of the financial statements in accordance with the applicable financial reporting framework, it is based on whether the financial statements contain a material misstatement that will influence users, or the financial statements are materially misstated as a whole.
110
Misstatements and omissions are considered material if they are expected to, individually or in the aggregate, _______ the decisions a user will make based on the financial statements.
Misstatements and omissions are considered material if they are expected to, individually or in the aggregate, influence the decisions a user will make based on the financial statements. AU-C 320
111
The auditor’s measurement of materiality is a matter of professional _______ , taking into account the anticipated needs of financial statement users.
The auditor’s measurement of materiality is a matter of professional judgment, taking into account the anticipated needs of financial statement users. It is applied in the planning of the engagement as well as its performance.
112
The auditor will apply the concept of materiality in:
The auditor will apply the concept of materiality in: * Deciding upon the risk assessment procedures to be performed in obtaining an understanding of the entity, its environment, and its internal control; * Assessing the risks of material misstatement; * Determining the nature, timing, and extent of further audit procedures; and * Evaluating identified misstatements in the performance of the engagement and the effects of uncorrected misstatements on the financial statements.
113
In planning the engagement, the auditor determines _______ in relation to the financial statements, which will be used to determine if the financial statements, taken as a whole, are materially misstated.
In planning the engagement, the auditor determines materiality in relation to the financial statements, which will be used to determine if the financial statements, taken as a whole, are materially misstated.
114
Separate lower _______ levels may be established for specific classes of transactions, account balances, or disclosures.
In addition, separate lower materiality levels may be established for specific classes of transactions, account balances, or disclosures. This would be the case when a misstatement to one of those items that is lower than the materiality level designated for the financial statements, taken as a whole, would influence users of the financial statements
115
Materiality is often measured by applying a percentage to some __________ .
Materiality is often measured by applying a percentage to some benchmark. Common benchmarks include categories of income, including profit before tax, total revenue, gross profit, or total expenses; total equity; or assets.
116
What are factors that will influence materiality benchmark?
The selection of an appropriate benchmark will be influenced by a variety of factors: * The make-up of the elements of the financial statements; * Items on the financial statements that are expected to be of particular interest to the users; * The nature of the entity, including its level of maturity, its industry, and the economic environment in which it operates; * The entity’s ownership and organizational structure; * How the entity is financed; and * The volatility of the benchmark.
117
When the materiality level is different for the various financial statements, the _______ ( ....... est) aggregate dollar amount will be selected.
When the materiality level is different for the various financial statements, the smallest aggregate dollar amount will be selected. For example, if the materiality level is identified as $10 million on the balance sheet and $3 million on the income statement, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of $3 million or more.
118
Materiality is based on Auditor’s ________ .
Materiality is based on Auditor’s judgment. Materiality judgments involve both Quantitative and Qualitative considerations.
119
Assessment of Audit Risk as Low = Set ___ Materiality level Assessment of Audit Risk as High = Set ___ Materiality level
There is an inverse relationship between audit risk and the materiality consideration. Assessment of Audit Risk as Low = Set High materiality level Assessment of Audit Risk as High = Set Low materiality levell.
120
The auditor also determines performance materiality or ________ misstatement, which takes into account that a misstatement that is not material when considered in relation to the financial statements taken as a whole may reach that level of materiality when combined with other identified misstatements.
The auditor also determines performance materiality or tolerable misstatement, which takes into account that a misstatement that is not material when considered in relation to the financial statements taken as a whole may reach that level of materiality when combined with other identified misstatements. As a result, Performance materiality or the tolerable misstatement is lower than materiality at the financial statement level.
121
Tolerable misstatement is ____ than materiality at the financial statement level.
Tolerable Misstatement < Materiality Performance materiality or the tolerable misstatement is lower than materiality at the financial statement level. It is estimated at an amount such that the aggregate of uncorrected and undetected misstatements will not reach the level of financial statement materiality, causing the financial statements to be materially misstated as a whole.
122
Whenever the auditor proposes an adjustment to reduce the balance used as the basis for materiality, misstatements that were originally considered immaterial should be _______ to make certain they are still immaterial considering the reduced measurement.
Whenever the auditor proposes an adjustment to reduce the balance used as the basis for materiality, misstatements that were originally considered immaterial should be re-evaluated to make certain they are still immaterial considering the reduced measurement. During the engagement, the auditor may become aware of issues that will change the measurement of materiality. If, for example, materiality was measured as a % of sales and, as a result of audit procedures applied, the auditor determines that sales were overstated, the auditor will propose an adjustment to materiality accordingly. Example: If materiality was to be measured at 5% of sales, and the client's trial balance indicated sales of $5,000,000, a misstatement under $250,000 would not be considered material. A proposed adjustment reducing sales to $4,500,000 as a result of the overstatement detected by the audit procedure would reduce the measurement of materiality to $225,000. As a result, a misstatement between $225,000 and $250,000, which would previously have been considered immaterial, would now be considered material.
123
Materiality | The auditor is required to document:
Materiality The auditor is required to document: * Materiality for the financial statements taken as a whole; * Materiality for specific classes of transactions, account balances, or disclosures, if appropriate; * Performance materiality; and * Revisions to any of the materiality measurements occurring during the engagement.
124
Similar to GAAS, the auditor is required to establish _______ levels for the financial statements as a whole and for particular accounts or disclosures, as well as determining the ________ misstatement.
The auditor is required to establish materiality levels for the financial statements as a whole and for particular accounts or disclosures, as well as determining the tolerable misstatement. Auditors of issuers are required to perform their engagements in accordance with auditing standards issued by the PCAOB, which include requirements as to how materiality affects the audits of issuers. In addition, similar to GAAS, the auditor is required to reevaluate materiality levels as the audit progresses.
125
Inherent risk (IR) is the risk of a material misstatement due to the ____ of an element of the financial statements. Control risk (CR) is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to a lack of effective _____ controls.
* Inherent risk (IR) is the risk of a material misstatement due to the nature of an element of the financial statements. * Control risk (CR) is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to a lack of effective internal controls. The auditor must make a preliminary assessment of the Risk of Material Misstatement (RMM) Risk of Material Misstatement = Inherent Risk x Control Risk RMM = IR x CR
126
_______ risk is the risk of a material misstatement due to the nature of an element of the financial statements.
Inherent risk (IR) is the risk of a material misstatement due to the nature of an element of the financial statements.
127
_______ risk is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to a lack of effective internal controls.
Control risk (CR) is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to a lack of effective internal controls.
128
_______ risk is the risk that a material misstatement will not be detected by the auditor.
Detection risk (DR) is the risk that a material misstatement will not be detected by the auditor. Detection risk is used to determine the amount and types of substantive testing performed by the auditor with the goal of reducing detection risk to an acceptable level. The higher the RMM, the lower the auditor will wish to reduce detection risk.
129
______ risk is used to determine the amount and types of substantive testing performed by the auditor with the goal of reducing ______ risk to an acceptable level.
Detection risk is used to determine the amount and types of substantive testing performed by the auditor with the goal of reducing detection risk to an acceptable level. The higher the RMM, the lower the auditor will wish to reduce detection risk.
130
_________ is considered at the financial statement level as well as at the account balance, class of transaction, and disclosure levels. It is assessed in order to determine the acceptable level of detection risk (DR).
Risk of Material Misstatement (RMM) is considered at the financial statement level as well as at the account balance, class of transaction, and disclosure levels. It is assessed in order to determine the acceptable level of detection risk (DR), which is the risk that a material misstatement will not be detected by the auditor.
131
Assessing the Risk of Material Misstatement (RMM) * The ________ assessment of RMM is usually based on prior experience with the client or the audits of predecessors. * The ______ assessment of RMM won't take place until the auditor gains an understanding of the client and its environment, including its internal control structure.
Assessing the Risk of Material Misstatement (RMM) * This preliminary assessment of RMM is usually based on prior experience with the client or the audits of predecessors. * The final assessment of RMM won't take place until the auditor gains an understanding of the client and its environment, including its internal control structure. If this is different from the preliminary assessment, the audit program will have to be modified to increase or decrease the amount of substantive testing to be performed. The audit program prepared during early planning should include a list of substantive tests that are planned to be performed later in the engagement. Therefore, it is necessary for the auditor to estimate the level at which they'll be assessing RMM.
132
In planning the audit, the auditor should consider:
In planning the audit, the auditor should consider: * The entity’s accounting policies and procedures; * Materiality levels; * Audit risk and, specifically, the planned assessed level of Risk of Material Misstatements (RMM); * Matters relating to the entity’s business and the industry in which it operates to understand the events and transactions that may have an effect on the client’s financial statements; * The methods used to process accounting information, which influences the design of internal control; * Financial statement items likely to require adjustment; * Conditions that may require extension or modification of audit tests; and * The nature of reports expected to be issued.
133
The steps in Planning an audit (Planning Procedures) include: [ BRAINSTOPS ]
The steps in Planning an audit (Planning Procedures) include: 1. B = Basic discussions with the client about the nature of the engagement and the client's business and industry 2. R = Review of audit documentation from previous audits 3. A = Ask about recent developments in the company 4. I = Interim financial statements 5. N = Non-audit personnel 6. S = Staffing for the audit 7. T = Timing of the audit procedures 8. O = Outside assistance 9. P = Pronouncements reflecting changes in accounting principles 10. S = Scheduling with the client The mnemonic BRAINSTOPS reminds you that an auditor's brain stops if they don't plan out the audit carefully before beginning the detailed testing of client records.
134
Supervision The auditor with ___ responsibility for the audit is responsible for planning the nature, extent and timing of direction and the supervision of assistants
Supervision The auditor with final responsibility for the audit is responsible for planning the (N) nature, (E) extent and (T) timing of direction and the supervision of assistants
135
Supervision involves directing assistants in accomplishing the audit objectives and subsequently determining whether those objectives were accomplished. Supervision includes:
Supervision includes: • Instructing assistants. • Reviewing the work performed. • Dealing with differences of opinion among firm personnel. o Differences may not be resolved to the satisfaction of all parties. o Dissenting parties should document the difference and ask to be disassociated from the matter’s resolution.
136
What is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated?
Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.
137
What is the risk that material errors, fraud, or acts of noncompliance with laws and regulations, including Illegal acts, may cause the financial statements to be materially misstated, and that the auditor will not detect or properly understand them, resulting in the issuance of an inappropriate report?
Audit Risk This is the risk that material errors, fraud, or acts of noncompliance with laws and regulations, including Illegal acts, may cause the financial statements to be materially misstated, and that the auditor will not detect or properly understand them, resulting in the issuance of an inappropriate report.
138
What is a function of the risk that relevant assertions in the financial statements are materially misstated (RMM) and the risk that the auditor will not detect such material misstatements (DR)?
Audit risk (AR) is a function of the risk that relevant assertions in the financial statements are materially misstated (RMM) and the risk that the auditor will not detect such material misstatements (DR).
139
Audit risk is the product of two different component risks: (1) Risk of _____________ _________ Risk _________ Risk (2) _________ Risk
Audit risk is the product of two different component risks: 1. Risk of Material Misstatements (RMM) 1. 1 Inherent risk (IR) 1. 2 Control risk (CR) 2. Detection risk (DR) Audit Risk = Risk of Material Misstatement x Detection Risk Audit Risk = RMM x DR Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk Audit Risk = IR x CR x DR
140
Audit Risk = Risk of Material Misstatement x ________
Audit Risk = Risk of Material Misstatement x Detection Risk Audit Risk = RMM x DR Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk Audit Risk = IR x CR x DR
141
Audit Risk = ( Inherent Risk x Control Risk ) x _________
Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk Audit Risk = IR x CR x DR
142
What is the risk that the relevant assertions related to account balances, classes of transactions, or disclosures contain misstatements that could be material to the financial statements when aggregated with other misstatements?
Risk of Material Misstatements (RMM) The risk that the relevant assertions related to account balances, classes of transactions, or disclosures contain misstatements that could be material to the financial statements when aggregated with other misstatements. RMM = Inherent risk (IR) x Control risk (CR)
143
What is the risk that the client's internal control structure will fail to prevent or detect and correct a material misstatement on a timely basis?
Control Risk (CR) The risk that the client's internal control structure will fail to prevent or detect and correct a material misstatement on a timely basis. This is a function of the effort put forth by the client's management to safeguard assets and ensure reliable financial records. As a result, it is affected by the actions of the client but not the auditor.
144
What is the risk that audit procedures will incorrectly lead to a conclusion that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist?
Detection Risk (DR) The risk that audit procedures will incorrectly lead to a conclusion that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist. This is a function of the effort put forth by the auditor in performing tests of details of transactions and accounts, and analytical procedures. It is the only risk component that the auditor can affect. It is the risk that the Auditor will not detect a misstatement that exists in a relevant F/S assertion.
145
Detection risk (DR) can be broken down into its two components: o Test of _______ risk o _________________ procedures risk
Detection risk (DR) can be broken down into its two components: o Test of details risk (TD) o Substantive analytical procedures risk (AP) Detection Risk = Test of Details Risk x Substantive Analytical Procedures Risk DR = TD x AP
146
Audit Risk | = ( Inherent Risk x Control Risk ) x ( Test of ____ Risk x Substantive Analytical Procedures Risk)
Audit Risk = Risk of Material Misstatement x Detection Risk Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk Audit Risk = ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive Analytical Procedures Risk) AR = ( IR x CR ) x ( TD x AP )
147
Audit Risk | = ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive ______________ Risk)
Audit Risk | = ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive Analytical Procedures Risk)
148
Audit Risk | = ( Inherent Risk x Control Risk ) x ( Test of ____ Risk x Substantive ______ Procedures Risk)
Audit Risk | = ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive Analytical Procedures Risk)
149
Acceptable Detection Risk = ____ Risk / Risk of Material Misstatement
Audit Risk = Risk of Material Misstatement x Detection Risk Detection Risk = Audit Risk / Risk of Material Misstatement Acceptable Detection Risk = Audit Risk / Risk of Material Misstatement Acceptable DR = AR / RMM Detection risk should bear an inverse relationship to Risk of Material Misstatement (IR × CR). The greater the risk of material misstatement the auditor believes exists, the less the detection risk that can be accepted and vice versa.
150
Inherent risk and control risk (RMM) differ from detection risk in that they exist __________ of the audit.
Inherent risk and control risk (RMM) differ from detection risk in that they exist independently of the audit, whereas detection risk relates to the auditor’s procedures and can be altered by adjusting the nature, timing, and extent of substantive procedures.
151
Detection risk relates to the auditor’s procedures and can be altered by adjusting the _____ , _____, and _____ of substantive procedures.
Detection risk relates to the auditor’s procedures and can be altered by adjusting the nature, timing, and extent of substantive procedures.
152
Auditors determine the acceptable level of audit risk, the risk that the auditor is willing to take, incorporating ____ and benefit considerations, that a material misstatement may not be detected by the audit.
Auditors determine the acceptable level of audit risk (AR), the risk that the auditor is willing to take, incorporating cost and benefit considerations, that a material misstatement may not be detected by the audit.
153
Auditors assess the risk of material misstatement (RMM) by evaluating the inherent risk (IR) associated with financial statement elements and assessing _____ risk based on the auditor’s understanding of internal control.
Auditors assess the risk of material misstatement (RMM) by evaluating the inherent risk (IR) associated with financial statement elements and assessing control risk (CR) based on the auditor’s understanding of internal control.
154
Auditors determine the level of detection risk that is necessary to achieve the desired ____ risk.
Auditors determine the level of detection risk (DR) that is necessary to achieve the desired audit risk (AR).
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Based on an inherent risk of 75% and a control risk of 80%, RMM is 60% (75% × 80%). To achieve an audit risk of 6%, detection risk must be reduced to __ %. RMM = IR × CR = 75% × 80% = 60% AR = RMM × DR = 60% × __% = 6% DR = AR / RMM DR = 6% / 60% = __%
Based on an inherent risk of 75% and a control risk of 80%, RMM is 60% (75% × 80%). To achieve an audit risk of 6%, detection risk must be reduced to 10%. RMM = IR × CR = 75% × 80% = 60% ``` AR = RMM × DR 6% = 60% × DR ``` DR = AR / RMM DR = 6% / 60% = 10% Detection risk is a function of the (N) nature, (T) timing, and (E) extent of audit procedures, and, as such, may be changed by the auditor.
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Assume the auditor decides an audit risk of 6% is acceptable, indicating that the auditor is willing to accept that there will be a __ % probability that a material misstatement that would cause the auditor to modify the report will not be detected in the audit. AR = RMM × DR
Assume the auditor decides an audit risk of 6% is acceptable, indicating that the auditor is willing to accept that there will be a 6% probability that a material misstatement that would cause the auditor to modify the report will not be detected in the audit. AR = RMM × DR 6% = RMM × DR
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The client has established potentially effective internal controls in some key areas but they are not universal throughout the organization or the processes relevant to financial reporting. • As a result, the auditor may assess control risk _____ maximum.
* As a result, the auditor may assess control risk below maximum. * Assume a value of 80%, indicating that, if a material misstatement does occur, there is an 80% probability that it will neither be prevented nor detected and corrected on a timely basis.
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The components of the audit risk (AR) model may be assessed in quantitative terms, such as % , or in non-quantitative terms such as ___ , ___ , or ___ risk.
The components of the audit risk (AR) model may be assessed in quantitative terms, such as %, or in non-quantitative terms such as high, medium, or low risk.
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There is an inverse relationship between Audit Risk and ________ .
There is an inverse relationship between Audit Risk and Materiality.
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The auditor may make a combined assessment of inherent risk and control risk or _______ assessments of inherent risk and control risk.
The auditor may make a combined assessment of inherent risk and control risk or separate assessments of inherent risk and control risk.
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The assessment of risk of material misstatement (RMM) is a matter of professional _______ rather than a precise measurement of risk.
The assessment of risk of material misstatement (RMM) is a matter of professional judgment rather than a precise measurement of risk, the auditor should have an appropriate basis for that assessment. This basis may be obtained through risk assessment procedures performed to obtain an understanding of the entity and its environment, including its internal control, and through the performance of test of controls.
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The auditor's responsibility is to plan and perform the audit to obtain reasonable assurance that no errors or acts of ____ have caused the financial statements to be materially misstated.
The auditor's responsibility is to plan and perform the audit to obtain reasonable assurance that no errors or acts of fraud have caused the financial statements to be materially misstated.
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A misstatement may refer to:
A misstatement may refer to any of the following: * A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the amount, classification, or presentation that would have been reported under GAAP. * The omission of a financial statement element, account, or item. * A financial statement disclosure that is not presented in accordance with GAAP. * The omission of information required to be disclosed in accordance with GAAP.
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Misstatements should not just be evaluated quantitatively, but qualitatively: Examples
Misstatements should not just be evaluated quantitatively, but qualitatively, such as: * Misstatements that affect trends of profitability. * Misstatements that change losses into income. * Misstatements that affect segment information. * Misstatements that affect compliance with legal and contractual requirements.
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The use of estimates in accounting increases the risk of material misstatements. Because estimates require the application of ________ .
The use of estimates in accounting increases the risk of material misstatements. Because estimates require the application of judgment: * They are subject to human error. * They are susceptible to manipulation, resulting in fraudulent financial reporting.
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The auditor generally examines samples as a basis for drawing conclusions about a ___________ .
The auditor generally examines samples as a basis for drawing conclusions about a population. Misstatements that are detected in a sample often indicate that comparable misstatements may be present proportionately within the population, implying a likely proportional misstatement of the population.
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Material misstatements in the financial statements can result from _____s, meaning unintentional mistakes, or _____, meaning intentional misbehavior, and both may be known or likely.
Material misstatements in the financial statements can result from errors, meaning unintentional mistakes, or fraud, meaning intentional misbehavior, and both may be known or likely. 1. Errors 2. Fraud
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_____ = Unintentional mistakes, misjudgments or omissions of amounts or disclosures
Errors • Unintentional mistakes, misjudgments or omissions of amounts or disclosures. • May be due to human error or the incompetency of employees.
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______ = an intentional act by one or more individuals among management, those charged with governance, employees, or third parties involving the use of deception that results in a misstatement in financial statements that are the subject of an audit.
Fraud – an intentional act by one or more individuals among management, those charged with governance, employees, or third parties involving the use of deception that results in a misstatement in financial statements that are the subject of an audit.
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Two types of fraud (Intentional Acts): 1. Fraudulent financial ________ 2. _____________ of assets
Two types of fraud (Intentional Acts): 1. Fraudulent financial reporting (Management fraud, or “cooking the books”) – Misrepresentation of facts 2. Misappropriation of assets – Defalcation schemes
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Provide examples for "Misappropriation of assets – Defalcation schemes"
Misappropriation of assets – Defalcation schemes ▪ Embezzlement of funds ▪ Theft of other assets ▪ Misuse of entity assets
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Provide examples for "Fraudulent financial reporting"
Fraudulent Financial Reporting (management fraud, or “cooking the books”) – Misrepresentation of facts – Integrity of management. ▪ Manipulation, falsification, alteration of accounting records or supporting documents. Inability to produce or locate relevant documents may also be indicative of fraud. ▪ Misrepresentation or omission of events, transactions or information. ▪ Intentional misapplication of accounting principles. ▪ The non-recording of transactions.
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An auditor evaluates two types of misstatements resulting from errors or fraud. They are (1) known or (2) ____ly.
An auditor evaluates two types of misstatements resulting from errors or fraud. They are (1) known or (2) likely. 1. Known misstatements are misstatements specifically identified during the audit 2. Likely misstatements are misstatements that have not been specifically identified, but are considered likely to exist based on audit evidence obtained or due to a difference between management and auditor judgments.
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____ly misstatements are misstatements that have not been specifically identified, but are considered likely to exist based on audit evidence obtained or due to a difference between management and auditor judgments.
Likely is one of the two types of misstatements resulting from errors or fraud. Likely misstatements are misstatements that have not been specifically identified, but are considered likely to exist based on audit evidence obtained or due to a difference between management and auditor judgments. ▪ Likely misstatements may be based on the assumption that known misstatements identified in a sample are proportionately present in the population. ▪ Likely misstatements may be based on the auditor’s knowledge of the entity, its industry, or its environment and a disparity with information presented in the financial statements.
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Misstatements resulting from errors or fraud The auditor must communicate all known and likely misstatements (even immaterial), identified during the audit, to the appropriate level of _____________ on a timely basis.
Misstatements resulting from errors or fraud The auditor must communicate all known and likely misstatements to the appropriate level of management on a timely basis. The auditor must communicate all known and likely misstatements (even immaterial), identified during the audit, other than those the auditor believes are trivial, to the appropriate level of management on a timely basis. • Management must correct all known misstatements and should evaluate items for which there are likely misstatements.
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The auditor is required to __________ all knowledge or suspicion of fraud to management and/or governance.
The auditor is required to communicate all knowledge or suspicion of fraud to management and/or governance, although the auditor is required to communicate with governance when senior management is involved in the fraud. The communication may be oral or in writing, but should be documented by the auditor. The auditor may want to consult with legal counsel.
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In considering fraud while planning an audit, the auditor will consider three conditions that are generally assumed to be present whenever a successful fraud occurs, referred to as the fraud triangle. What are those 3 conditions?
3 conditions that are generally assumed to be present whenever a successful fraud occurs (Fraud Triangle): * Reason or Motivation (Incentive/pressure) * Opportunity * Rationalization
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Fraud Triangle "Some perpetrators perceive they have no choice since the repercussions of not perpetrating the fraud would be too severe." - This is an example of 1, 2, or 3 ? 1. Reason or Motivation (Incentive/pressure) 2. Opportunity 3. Rationalization
Fraud Triangle Answer: 3 Rationalization 1. Reason or Motivation (Incentive/pressure) o Personal gain o Pressure, such as to meet analysts’ expectations 2. Opportunity o A lack of internal controls or internal controls that are not being enforced o Authority to override controls or the ability to circumvent controls, such as through collusion 3. Rationalization – the perpetrator’s belief system. o They do not believe it is really wrong (common practice, eliminating an unfair advantage) o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.
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Fraud Triangle "Some perpetrators believe that their action is a common practice." - This is an example of 1, 2, or 3 ? 1. Reason or Motivation (Incentive/pressure) 2. Opportunity 3. Rationalization
Fraud Triangle Answer: 3 Rationalization 1. Reason or Motivation (Incentive/pressure) o Personal gain o Pressure, such as to meet analysts’ expectations 2. Opportunity o A lack of internal controls or internal controls that are not being enforced o Authority to override controls or the ability to circumvent controls, such as through collusion 3. Rationalization – the perpetrator’s belief system. o They do not believe it is really wrong (common practice, eliminating an unfair advantage) o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.
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Fraud Triangle "Some perpetrators have the ______ because of the authority to override controls or the ability to circumvent controls, such as through collusion." - This is an example of 1, 2, or 3 ? 1. Reason or Motivation (Incentive/pressure) 2. Opportunity 3. Rationalization
Fraud Triangle Answer: 2 Opportunity 1. Reason or Motivation (Incentive/pressure) o Personal gain o Pressure, such as to meet analysts’ expectations 2. Opportunity o A lack of internal controls or internal controls that are not being enforced o Authority to override controls or the ability to circumvent controls, such as through collusion 3. Rationalization – the perpetrator’s belief system. o They do not believe it is really wrong (common practice, eliminating an unfair advantage) o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.
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Fraud Triangle "A lack of internal controls or internal controls that are not being enforced create ______." - This is an example of 1, 2, or 3 ? 1. Reason or Motivation (Incentive/pressure) 2. Opportunity 3. Rationalization
Fraud Triangle Answer: 2 Opportunity 1. Reason or Motivation (Incentive/pressure) o Personal gain o Pressure, such as to meet analysts’ expectations 2. Opportunity o A lack of internal controls or internal controls that are not being enforced o Authority to override controls or the ability to circumvent controls, such as through collusion 3. Rationalization – the perpetrator’s belief system. o They do not believe it is really wrong (common practice, eliminating an unfair advantage) o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.
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Fraud Triangle "the perpetrator committed the fraud to meet analysts’ expectations." - This is an example of 1, 2, or 3 ? 1. Reason or Motivation (Incentive/pressure) 2. Opportunity 3. Rationalization
Fraud Triangle Answer: 1 Reason or Motivation (Incentive/pressure) 1. Reason or Motivation (Incentive/pressure) o Personal gain o Pressure, such as to meet analysts’ expectations 2. Opportunity o A lack of internal controls or internal controls that are not being enforced o Authority to override controls or the ability to circumvent controls, such as through collusion 3. Rationalization – the perpetrator’s belief system. o They do not believe it is really wrong (common practice, eliminating an unfair advantage) o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.
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3 conditions of Fraud Triangle:
3 conditions that are generally assumed to be present whenever a successful fraud occurs (Fraud Triangle): 1. Motivation 2. Opportunity 3. Rationalization
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The auditor is required to communicate knowledge or suspicion of noncompliance with applicable laws and regulations, also referred to as ______ acts, to those charged with governance, other than those that are clearly inconsequential.
The auditor is required to communicate knowledge or suspicion of noncompliance with applicable laws and regulations (AU-C 250), also referred to as illegal acts, to those charged with governance, other than those that are clearly inconsequential.
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____________ is the acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations.
Noncompliance is defined as acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. The auditor distinguishes between those with a direct effect on the amounts and disclosures in the financial statements, which result in adjusting entries, and those with an indirect effect, which generally result in contingencies.
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Illegal Acts * Illegal acts with a ____ and material effect may include nonpayment of payroll taxes or business license fees. * Illegal acts with an _____ effect may include antitrust violations, price-fixing, or purchasing securities based on insider information.
Illegal Acts * Illegal acts with a direct and material effect may include nonpayment of payroll taxes or business license fees. * Illegal acts with an indirect effect may include antitrust violations, price-fixing, or purchasing securities based on insider information. Other examples include violations of occupational safety laws (OSHA) that might result in financial losses from government fines; or the Foreign Corrupt Practices Act, which makes payment of bribes to foreign officials’ illegal and requires publicly held companies to maintain systems of internal control sufficient to provide reasonable assurances that such activities are detected.
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Illegal Acts * The auditor’s responsibility is to consider laws that have both a _____ effect and those that do not have a direct effect ( ______ effect) on the financial statements. * The auditor should communicate with those charged with ________ , matters involving noncompliance, other than inconsequential matters, as soon as practicable. * The documentation should include a description of the identified or suspected noncompliance and the results of the discussion with management and those charged with ________ and other parties inside or outside the entity.
Illegal Acts * The auditor’s responsibility is to consider laws that have both a direct effect and those that do not have a direct effect (indirect effect) on the financial statements. * The auditor should communicate with those charged with governance, matters involving noncompliance, other than inconsequential matters, as soon as practicable. * The documentation should include a description of the identified or suspected noncompliance and the results of the discussion with management and those charged with governance and other parties inside or outside the entity.
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Illegal Acts When noncompliance is identified or suspected, the auditor should obtain an understanding of the ____ of the illegal act and the circumstances under which it occurred and any further information that may assist in evaluating the potential impact on the financial statements. * The matter should be discussed with management or those charged with ________, as appropriate, to determine if support can be provided indicating compliance. * If compliance cannot be supported and the amount is potentially material, the auditor should consider consulting with _____ counsel.
Illegal Acts When noncompliance is identified or suspected, the auditor should obtain an understanding of the nature of the illegal act and the circumstances under which it occurred and any further information that may assist in evaluating the potential impact on the financial statements. * The matter should be discussed with management or those charged with governance, as appropriate, to determine if support can be provided indicating compliance. * If compliance cannot be supported and the amount is potentially material, the auditor should consider consulting with legal counsel.
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The auditor should pay special attention to _____ risk factors that increase the probability of fraudulent financial reporting or defalcation.
The auditor should pay special attention to fraud risk factors that increase the probability of fraudulent financial reporting or defalcation.
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The auditor is required to communicate to governance knowledge or suspicion of _________ with applicable laws and regulations, also referred to as illegal acts.
The auditor is required to communicate to governance knowledge or suspicion of noncompliance with applicable laws and regulations, also referred to as illegal acts. An entity is not in compliance when, intentionally or unintentionally, it commits acts contrary to prevailing laws or regulations or omits acts required by laws or regulations.
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Certain laws and regulations have a _____ effect on the amounts and disclosures in the financial statements, such as the nonpayment of payroll taxes or, in some jurisdictions, business license fees. These will result in ______ entries. Others may have an _______ effect, such as those that are fundamental to the operations of the business, fundamental to the entity’s ability to continue as a going concern, or necessary to avoid a potentially material penalty.
Certain laws and regulations have a direct effect on the amounts and disclosures in the financial statements, such as the nonpayment of payroll taxes or, in some jurisdictions, business license fees. These will result in adjusting entries. Others may have an indirect effect, such as those that are fundamental to the operations of the business, fundamental to the entity’s ability to continue as a going concern, or necessary to avoid a potentially material penalty. These may result in contingencies or may have no financial statement effect, although they may require disclosure.
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What are the types of audits that may be performed in relation to an entity?
1. Compliance Audits 2. Operational Audits 3. Financial Statement Audits
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C__________ audits are performed to determine if an entity is complying with applicable laws and regulations. They are often performed by governmental or regulatory organizations on entities that may be chosen on a random basis or may be selected due to some indication that there may be one or more incidents of noncompliance, such as a tax return with unusual deductions.
Compliance Audits Compliance audits are performed to determine if an entity is complying with applicable laws and regulations. They are often performed by governmental or regulatory organizations on entities that may be chosen on a random basis or may be selected due to some indication that there may be one or more incidents of noncompliance, such as a tax return with unusual deductions.
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Compliance Audits • Are they following l__s and regulations? o IRS audits o Governmental units to determine compliance with laws and regulations o CPA to determine compliance with provisions of a bond or note agreement
Compliance Audits • Are they following laws and regulations? o IRS audits o Governmental units to determine compliance with laws and regulations o CPA to determine compliance with provisions of a bond or note agreement
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O_________ audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
Operational Audits Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
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Operational Audits • Effectiveness / Efficiency / Economy – done by I_______ Auditors, Governmental auditors or CPAs. o Audit a department or division of a corporation to see if meeting organizational goals. o Review by governmental auditors to determine the effectiveness and benefit of specific gov. funded programs.
Operational Audits • Effectiveness/Efficiency/Economy – done by Internal Auditors, Governmental auditors or CPAs. o Audit a department or division of a corporation to see if meeting organizational goals. o Review by governmental auditors to determine the effectiveness and benefit of specific gov. funded programs.
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Operational audits are generally performed by i______ auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
Operational Audits Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
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Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with i_______ controls.
Operational Audits Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
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F________ _______ audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework.
Financial Statement Audits Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework.
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Financial statement audits are performed exclusively by ___s, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework.
Financial Statement Audits Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework. Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards. • Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an Applicable Financial Reporting Framework (AFRF), such as U.S. Generally Accepted Accounting Principles (GAAP).
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Financial Statement Audits Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of non_____ entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards.
Financial Statement Audits Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards.
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Financial Statement Audits • Examination for the purpose of giving an objective opinion as to the f_____ of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an Applicable Financial Reporting Framework (AFRF), such as U.S. Generally Accepted Accounting Principles (GAAP).
Financial Statement Audits • Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an Applicable Financial Reporting Framework (AFRF), such as U.S. Generally Accepted Accounting Principles (GAAP).
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Financial statement audits are performed exclusively by CPAs.
Financial Statement Audits Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework. Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards. • Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an Applicable Financial Reporting Framework (AFRF), such as U.S. Generally Accepted Accounting Principles (GAAP).
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In 2009, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “c_____” standards, to make Generally Accepted Auditing Standards (GAAS) easier to understand and apply.
Clarity Standards In 2009, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “clarity” standards, to make Generally Accepted Auditing Standards (GAAS) easier to understand and apply.
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To make Generally Accepted Auditing Standards (GAAS) easier to understand and apply, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “c_____” standards
Clarity Standards To make Generally Accepted Auditing Standards (GAAS) easier to understand and apply, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “clarity” standards
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Clarity standards apply to audits of non______ (Non-public companies) and are issued by the Auditing Standards Board (ASB) of the AICPA.
Clarity standards apply to audits of nonissuers (Non-public companies) and are issued by the Auditing Standards Board (ASB) of the AICPA.
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Clarity standards apply to audits of nonissuers (Non-public companies) and are issued by the A____ S______s Board (ASB) of the AICPA.
Clarity standards apply to audits of nonissuers (Non-public companies) and are issued by the Auditing Standards Board (ASB) of the AICPA.
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Clarity Standards These standards clarify the auditing standards, make them easier to follow, easier to understand and to increase the convergence with I__________ Standards on Auditing (ISA).
Clarity Standards These standards clarify the auditing standards, make them easier to follow, easier to understand and to increase the convergence with International Standards on Auditing (ISA).
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Clarity Standards
Clarity Standards In 2009, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “clarity” standards, to make Generally Accepted Auditing Standards (GAAS) easier to understand and apply. These standards, effective for audits of financial statements for periods ending on or after December 15, 2012, are organized in a uniform manner. These standards clarify the auditing standards, make them easier to follow, easier to understand and to increase the convergence with International Standards on Auditing (ISA). These standards apply to audits of nonissuers (Non-public companies) and are issued by the Auditing Standards Board (ASB) of the AICPA.
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In anticipation of issuing the clarity standards, the Auditing Standards Board (ASB) issued a pronouncement that described two levels of requirements that are imposed on auditors, (1) unc__________ requirements and (2) pres________ly mandatory requirements that apply to an audit performed in accordance with GAAS.
Clarity Standards In anticipation of issuing the clarity standards, the ASB issued a pronouncement that described two levels of requirements that are imposed on auditors, (1) unconditional requirements and (2) presumptively mandatory requirements that apply to an audit performed in accordance with GAAS.
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Clarity Standards What are the two levels of requirements that are imposed on auditors in accordance with GAAS? (1) unc__________ requirements and (2) pres________ly mandatory requirements
Clarity Standards In anticipation of issuing the clarity standards, the ASB issued a pronouncement that described two levels of requirements that are imposed on auditors, (1) unconditional requirements and (2) presumptively mandatory requirements that apply to an audit performed in accordance with GAAS.
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Clarity Standards What are the two levels of requirements that are imposed on auditors in accordance with GAAS? (1) _________ requirements and (2) ___________ mandatory requirements
Clarity Standards In anticipation of issuing the clarity standards, the ASB issued a pronouncement that described two levels of requirements that are imposed on auditors, (1) unconditional requirements and (2) presumptively mandatory requirements that apply to an audit performed in accordance with GAAS.
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Clarity Standards • (1) An unconditional requirement must be complied with for the auditor to complete an engagement in accordance with GAAS. An auditor is required to comply with an unconditional requirement, which will always include the word ”m____” or the phrase “is r_______ed to” in every circumstance to which it applies.
Clarity Standards In a standard entitled “Defining Professional Requirements in Statements on Auditing Standards”, the Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement must be complied with for the auditor to complete an engagement in accordance with GAAS. An auditor is required to comply with an unconditional requirement, which will always include the word ”must” or the phrase “is required to” in every circumstance to which it applies.
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The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement must be complied with for the auditor to complete an e_________ in accordance with GAAS. An auditor is required to comply with an unconditional requirement, which will always include the word ”must” or the phrase “is required to” in every circumstance to which it applies.
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement must be complied with for the auditor to complete an engagement in accordance with GAAS. An auditor is required to comply with an unconditional requirement, which will always include the word ”must” or the phrase “is required to” in every circumstance to which it applies.
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The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every circumstance to which it applies. In rare circumstances, however, the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective, but must d________ how an alternate procedure was sufficient to achieve the objective of the standard (i.e., the auditor must document an explanation for not doing so). A presumptively mandatory requirement will always include the word “should.”
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every circumstance to which it applies. In rare circumstances, however, the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective, but must document how an alternate procedure was sufficient to achieve the objective of the standard (i.e., the auditor must document an explanation for not doing so). A presumptively mandatory requirement will always include the word “should.”
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The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement A presumptively mandatory requirement will always include the word “s_______.”
Clarity Standards A presumptively mandatory requirement will always include the word “should.”
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Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A p_______ly m_________y requirement is one that the auditor is also expected to comply with in every circumstance to which it applies.
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every circumstance to which it applies.
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• (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every c_________ to which it applies.
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every circumstance to which it applies.
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Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every circumstance to which it applies. In rare circumstances, however, the auditor may depart from a presumptively mandatory requirement if the required procedure would be ine_______,
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (2) A presumptively mandatory requirement is one that the auditor is also expected to comply with in every circumstance to which it applies. In rare circumstances, however, the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective, but must document how an alternate procedure was sufficient to achieve the objective of the standard (i.e., the auditor must document an explanation for not doing so). A presumptively mandatory requirement will always include the word “should.” o On some occasions, a standard will include an indication that the auditor should consider a procedure. o This establishes a presumptively mandatory requirement to consider the procedure or item being referenced, but does not establish a requirement to perform the procedure.
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Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement always include the word ”m____” or the phrase “is r______ to” • (2) A presumptively mandatory requirement always include the word “s____.” • These terms apply for Public and Non-Public audits, as well as GAGAS audits.
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement always include the word ”must” or the phrase “is required to” • (2) A presumptively mandatory requirement always include the word “should.” • These terms apply for Public and Non-Public audits, as well as GAGAS audits.
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Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement always include the word ”m____” or the phrase “is r______ to” • (2) A presumptively mandatory requirement always include the word “s____.” • These terms apply for P____ and Non-P_____ audits, as well as GAGAS audits.
Clarity Standards The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors: • (1) An unconditional requirement always include the word ”must” or the phrase “is required to” • (2) A presumptively mandatory requirement always include the word “should.” • These terms apply for Public and Non-Public audits, as well as GAGAS audits.
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The c_____ project also changed the format, with each standard including the following sections: * Introduction * Objectives * Definitions * Requirements * Application and Other Explanatory Material
The clarity project also changed the format, with each standard including the following sections: * Introduction * Objectives * Definitions * Requirements * Application and Other Explanatory Material Each standard begins with an Introduction, which includes the purpose and scope of each standard. This tells us when the individual standards do or do not apply.
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Clarity Standards Each standard begins with an Introduction, and then follows with an indication of the o______ of that standard * Introduction * Objectives * Definitions * Requirements * Application and Other Explanatory Material
Clarity Standards Each standard begins with an Introduction, which includes the purpose and scope of each standard. This tells us when the individual standards do or do not apply. Each standard follows with * an indication of the objective of that standard (i.e., what requirements are expected to be achieved), * which the auditor uses in planning and performing the audit, * considering the interrelationships within GAAS, to achieve the overall objectives of the auditor.
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Clarity Standards Each standard follows with an indication of the objective of that standard. This assists the auditor: • In determining if audit procedures in addition to those required are necessary, which will be the case when, in the auditor’s judgment, performing the required procedures will not achieve the o______
Clarity Standards Each standard follows with an indication of the objective of that standard. This assists the auditor: * In determining if audit procedures in addition to those required are necessary, which will be the case when, in the auditor’s judgment, performing the required procedures will not achieve the objective * In evaluating whether the auditor has obtained sufficient appropriate audit evidence
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In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering e_________ obtained in achieving other objectives * Extending work performed to comply with a requirement, such as by increasing a sample size * Performing procedures in addition to those required
In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other objectives * Extending work performed to comply with a requirement, such as by increasing a sample size * Performing procedures in addition to those required
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In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other o________s * Extending work performed to comply with a requirement * Performing procedures in addition to those required
In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other objectives * Extending work performed to comply with a requirement, such as by increasing a sample size * Performing procedures in addition to those required
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In making the determination, the auditor will evaluate whether s_______ a________ audit e______ can be obtained.
In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained.
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In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other objectives * Ext___ing work performed to comply with a requirement, such as by increasing a s_____ size * Performing procedures in addition to those required
In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other objectives * Extending work performed to comply with a requirement, such as by increasing a sample size * Performing procedures in addition to those required
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In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other objectives * Extending work performed to comply with a requirement * Performing p_______s in addition to those required
In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of: * Considering evidence obtained in achieving other objectives * Extending work performed to comply with a requirement, such as by increasing a sample size * Performing procedures in addition to those required
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The auditor may determine that the objective of a relevant standard may not be achievable. This may prevent the auditor from achieving the overall o________ of the engagement, which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.
The auditor may determine that the objective of a relevant standard may not be achievable. This may prevent the auditor from achieving the overall objective of the engagement, which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.
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The auditor may determine that the objective of a relevant standard may not be achievable. This may prevent the auditor from achieving the overall objective of the engagement, which will lead the auditor to either m_____ the audit report or withdraw from the engagement when allowed under applicable law or regulation.
The auditor may determine that the objective of a relevant standard may not be achievable. This may prevent the auditor from achieving the overall objective of the engagement, which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.
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The auditor may determine that the objective of a relevant standard may not be achievable. This may prevent the auditor from achieving the overall objective of the engagement, which will lead the auditor to either modify the audit report or w______ from the engagement.
The auditor may determine that the objective of a relevant standard may not be achievable. This may prevent the auditor from achieving the overall objective of the engagement, which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.
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The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit p_________s considered necessary to achieve the objective.
The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
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The auditor will fail to meet an o_______ when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
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The auditor will fail to meet an objective when: * The auditor is p________ed from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
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The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant req_________s. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
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The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply a_______ audit procedures considered necessary to achieve the objective.
The auditor will fail to meet an objective when: * The auditor is prevented from complying with relevant requirements. * The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.
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The inability to achieve an objective is considered a significant finding, which the auditor is required to d________.
The inability to achieve an objective is considered a significant finding, which the auditor is required to document. The auditor is not required to individually document the achievement of each objective, documenting the failure to achieve an objective assists the auditor in evaluating whether the overall objectives of the audit have been achieved.
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The inability to achieve an o_______ is considered a significant finding, which the auditor is required to document.
The inability to achieve an objective is considered a significant finding, which the auditor is required to document.
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The inability to achieve an objective is considered a significant finding, which the auditor is required to document. The auditor is not required to individually document the achievement of each o_______, documenting the failure to achieve an o______ assists the auditor in evaluating whether the overall o_________s of the audit have been achieved.
The inability to achieve an objective is considered a significant finding, which the auditor is required to document. The auditor is not required to individually document the achievement of each objective, documenting the failure to achieve an objective assists the auditor in evaluating whether the overall objectives of the audit have been achieved.
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Each clarified standard identifies requirements in a section that includes all unconditional or presumptively mandatory requirements. The auditor is expected to c_____ with every requirement to achieve the objective of the standard.
Each clarified standard identifies requirements in a section that includes all unconditional or presumptively mandatory requirements. The auditor is expected to comply with every requirement to achieve the objective of the standard.
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The auditor is expected to comply with every requirement to achieve the objective of the standard. The only exceptions will apply when: * An entire section of G___ does not apply * A specific requirement does not apply because the condition it is intended to provide audit evidence for, does not e____
The only exceptions will apply when: * An entire section of GAAS does not apply * A specific requirement does not apply because the condition it is intended to provide audit evidence for, does not exist
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The auditor is expected to comply with e_____ requirement to achieve the objective of the standard. The only exceptions will apply when: * An entire section of GAAS does not apply * A specific requirement does not apply because the condition it is intended to provide audit evidence for, does not exist
Each clarified standard identifies requirements in a section that includes all unconditional or presumptively mandatory requirements. The auditor is expected to comply with every requirement to achieve the objective of the standard. The only exceptions will apply when: • An entire section of GAAS does not apply (e.g., the section on reliance on the work of internal auditors is not applicable when the client does not have an internal audit department). • A specific requirement does not apply because the condition it is intended to provide audit evidence for, does not exist (e.g., the requirement to communicate significant deficiencies and material weaknesses in internal control does not apply when no such weaknesses exist).
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Clarified standards impose some new requirements that the auditor will need to fulfill. • The auditor is required, for example, to evaluate the acceptability of the applicable financial reporting framework. The auditor needs to: o E______ the NEEDS of Users o E______ whether the applicable framework MEETS those needs o E_______ whether it is the MOST APPROPRIATE FRAMEWORK under the circumstances
Clarified standards impose some new requirements that the auditor will need to fulfill. • The auditor is required, for example, to evaluate the acceptability of the applicable financial reporting framework. The auditor needs to: o Evaluate the NEEDS of Users o Evaluate whether the applicable framework MEETS those needs o Evaluate whether it is the MOST APPROPRIATE FRAMEWORK under the circumstances
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Clarified standards impose some new requirements that the auditor will need to fulfill. • The auditor is also required to apply Q_____ Control procedures at the engagement level.
Clarified standards impose some new requirements that the auditor will need to fulfill. • The auditor is also required to apply Quality Control procedures at the engagement level.
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Clarified standards impose some new requirements that the auditor will need to fulfill. • The auditor is required, for example, to evaluate the acceptability of the applicable financial reporting framework. * Management now has 2 major responsibilities added to the audit report * The auditor is also required to apply Quality Control procedures at the engagement level.
Clarified standards impose some new requirements that the auditor will need to fulfill. • The auditor is required, for example, to evaluate the acceptability of the applicable financial reporting framework. The auditor needs to: o Evaluate the NEEDS of Users o Evaluate whether the applicable framework MEETS those needs o Evaluate whether it is the MOST APPROPRIATE FRAMEWORK under the circumstances * Management now has 2 major responsibilities added to the audit report * The auditor is also required to apply Quality Control procedures at the engagement level. There were also significant changes made to both the form and content of the audit report,

CPA AUD Flashcards (62 decks)

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