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AUD Flashcards

1
Q

What is Management Responsible for in regards to the Financial Statements?

A

Preparation and Fair Presentation of Financial Statements in accordance with the Applicable Financial Reporting Framework

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2
Q

What is Management Responsible for in regards to Internal Control?

A

Internal Control Design, Implementation, Maintenance

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3
Q

What are the 4 paragraphs in the Audit Report for an Unmodified Opinion?

A

Introduction
Management’s Responsibility for the F/S
Auditor’s Responsibility
Opinion

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4
Q

What are the 5 paragraphs in the Audit Report for an Modified Opinion?

A

Introduction
Management’s Responsibility for F/S
Auditor’s Responsibility
Basis for (Modified) Opinion
(Modified) Opinion

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5
Q

In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the paragraphs?

A

Introduction
Management’s Responsibility for the F/S
Auditor’s Responsibility
Opinion
Emphasis-of-Matter
Other-Matter

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6
Q

What is Audit Sampling?

A

Taking part of a population- subjecting it to audit procedures- projecting results to a population

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7
Q

What are the characteristics of Statistical Sampling?

A

Based on formulas

Helps find an appropriate audit sample

Helps evaluate evidence obtained

Helps evaluate results and quantify Sampling Risk

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8
Q

What are the characteristics of Non-Statistical Sampling?

A

Based on human decision

Equally acceptable as Statistical Sampling

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9
Q

What are the characteristics of Substantive Tests?

A

Variables sampling

Probability proportionate to size sampling

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10
Q

What type of sampling are Control Tests?

A

Attribute Sampling

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11
Q

What is Sampling Risk?

A

Risk that your sample isn’t representative of population

Can happen even if audit is done properly

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12
Q

What is the risk of assessing Control Risk too high?

A

A risk of Control Testing - Auditor works to make Control Risk lower

More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency

Audit ends up being effective (correct result)- but you do more work

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13
Q

What is the risk of assessing Control Risk too low?

A

A risk of Control Testing - Complement to Confidence Level
Inverse relationship to Sample Size

Higher accepted risk of assessing Control Risk too low = Smaller Sample

Lower accepted risk of assessing Control Risk too low = Larger Sample

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14
Q

What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

A

Leads to higher Detection Risk - Fewer substantive tests

Sample understates Control Risk

This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness.

Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it

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15
Q

What is the risk of Incorrect Acceptance?

A

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated

Hurts audit effectiveness

Wrong conclusion reached

Efficient- but not effective

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16
Q

What is the risk of Incorrect Rejection?

A

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated

Hurts audit efficiency

Wrong recommendations given

Effective- but not efficient

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17
Q

What is Non-Sampling Risk?

A

Risk of human (auditor) missing an error

Also called exception- error or deviation.

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18
Q

How does Sampling Risk compare to Non-Sampling Risk?

A

Sampling Risk deals with the chance that your audit sample is flawed

Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed

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19
Q

What is Attribute Sampling?

A

Looking at Control Procedures - Were invoices approved when paid?

Errors are stated in terms of %- not dollar amounts

For example- 5 invoices out of 100 were not properly paid. Error rate is 5%

Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.

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20
Q

How do you determine if Control Procedures are operating properly or not operating properly?

A

Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors

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21
Q

What is the Tolerable Rate?

A

Error rate in population that you are willing to accept/tolerate

Inverse relationship to Sample Size

Higher Tolerable Rate = Smaller Sample
Lower Tolerable Rate = Larger Sample

If you’re willing to accept a higher probability that errors exist- there is less pressure on the sample

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22
Q

What is the Expected Population Error Rate?

A

What Error Rate are you expecting? - Judgment call- based on experience

Direct relationship to Sample Size

More errors = Larger Sample

Less errors = Smaller Sample

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23
Q

What is the basic premise of Attribute Sampling?

A

Attribute in the sample gives information about the entire audit population

Used to estimate Internal Control error rate

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24
Q

For what is the Expected Population Deviation (error) Rate used?

A

Used to determine initial level of Control Risk

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25
Q

What is the Allowable Risk of Over-reliance?

A

Risk of Assessing Control Risk too low

Gives you the Sampling Risk

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26
Q

When is Attribute sampling used?

A

Attribute sampling is only useful when there is documented evidence (an audit trail) to test

Use when the existence of an error needs to be verified or debunked

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27
Q

What is Classic Variable Sampling?

A

Testing for a dollar amount

Value in sample gives information about value in entire population.

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28
Q

What functions are used in conjunction with Classic Variable Sampling?

A

Mean Per Unit = Sample Average x Number in Population

Stratification - Decreases effect of variance in population and reduces sample size

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29
Q

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

A

A form of Variable Sampling

Does NOT use Standard Deviation

Auditor focuses on a dollar amount

Larger or more valuable items get picked more often as part of the sample

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30
Q

What is Projected Misstatement?

A

Misstatement found in sample - have to project it to remainder of population

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31
Q

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

A

PPS:

Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design

Classic Variables Sampling:

Easy to expand sample size- Selecting zero and negative balances easy

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32
Q

What factors affect sample size?

A

Tolerable rate for error - Inverse relationship with sample size

Risk of assessing Control Risk too low - Inverse relationship with sample size

Expected population error rate - Direct relationship with sample size

Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.

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33
Q

What is the formula for Audit Sampling?

A

SER + ASR < TER

SER = Sample Error Rate

ASR = Allowance for Sampling Risk

TER = Tolerable Error Rate

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34
Q

What is Allowance for Sampling Risk?

A

The amount that you add to the Sampling Error Rate to get some cushion for your sample.

As high as you think the population error rate could go based on experience.

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35
Q

What is the Tolerable Error Rate?

A

The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective

If population error rate is more than TER- do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing

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36
Q

What are the steps to develop a sampling plan?

A

Determine Test Objective - for example- have sales shipments been billed?

Define Population and Deviation - take a sample of shipping document- trace forward to see if billed

Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate.

Select Sampling Technique

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37
Q

After a Sampling Plan is developed- what are the steps in sampling?

A

Perform the Sampling Plan

Evaluate Results

Document Results

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38
Q

What is Systematic Sampling?

A

Every certain # of a population is selected

Population needs to be randomly ordered

Primary advantage is that population doesn’t require pre-numbering

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39
Q

What is Sequential Sampling?

A

Also called Stop or Go sampling

Each audit step determines the next step

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40
Q

What is Discovery Sampling?

A

Audit is testing an area that is so crucial that zero population errors can be tolerated

Any phony employees on payroll?

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41
Q

How does Block Sampling compare to other sampling methods?

A

Easy to implement- but is the worst method of sampling.

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42
Q

What is the primary duty of an auditor?

A

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

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43
Q

What is the auditor’s responsibility for detecting theft or fraud?

A

Auditors are not responsible for detecting theft or fraud.

Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.

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44
Q

When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?

A

The earlier the auditor is hired- the better for audit planning and efficiency.

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45
Q

When can audit procedures be performed at interim dates?

A

If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates.

The auditor then reviews changes in the balances at year-end.

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46
Q

When can an auditor accept an engagement offered after the year is already closed?

A

The auditor can take the engagement if they are able to overcome the limitations of the engagement.

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47
Q

For what does an auditor use professional skepticism?

A

To plan the scope of the audit

To plan the objectives of the audit

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48
Q

How can analytical procedures be performed in audit planning?

A

The auditor can compare actual versus forecasted numbers.

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49
Q

What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?

A

If issues relating to predecessor auditor’s work on previous Financial Statements come up during the current audit- Auditor must have client’s permission to discuss the issue.

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50
Q

What questions must an auditor ask with respect to procedures carried out by assistants?

A

Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?

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51
Q

How is audit strategy mapped out?

A

Auditor determines what the reporting objectives are.

Auditor determines the scope of the audit.

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52
Q

What are the foundations of Generally Accepted Audit Standards (GAAS)?

A

Materiality and Audit Risk

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53
Q

What are the General Standards for auditing?

A

Training and Proficiency (Education and Audit Experience)

Independence

Due Professional Care

(TIP)

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54
Q

Describe the key components of maintaining auditor independence.

A

Auditor must be independent in fact and appearance

Honesty

No direct financial interest

No indirect material financial interest

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55
Q

Describe Due Professional Care

A 
Technical abilities mirror those held by peers in the profession
Follow GAAS Standards
Obtain a Reasonable Level of Assurance
Maintain Reasonable Level of Skepticism
Supervise Audit Staff
Review judgment at every level
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56
Q

List the Standards of Field Work

A

Planning and Supervision
Internal Control
Evidence

(PIE)

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57
Q

List the Standards of Reporting

A

Consistency
Disclosures
Opinion
GAAP

(CDOG)

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58
Q

What should an auditor do prior to accepting an audit engagement?

A

Review the previous financial statements

Speak to third parties

Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

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59
Q

What questions should be asked by an auditor prior to taking an engagement?

A

Note: must have permission of client to contact predecessor auditor (no permission = no engagement)

Why the Auditor Change?
Any Serious Discussions with Audit Committee?
How is Management Integrity? Disagreements?
How was Internal Control?
Understand Industry or Be Willing to Learn
Consider Scope Limitation - Limited evidence available = no engagement

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60
Q

What should be included in an audit engagement agreement?

A

Note: must be written

Objectives of Engagement
Limitations of Engagement
Responsibilities of Management - Provide written assertions
Responsibilities of Auditor - Limited error/fraud responsibility
Expectations of Access to Records
Financial Statements (and Disclosures) are Management’s Responsibility
Compliance with Laws
Internal Control

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61
Q

What is management’s responsibility with respect to the financial statements?

A

Management is responsible for financial statements and adequacy of disclosures.

Presentation & Disclosure
Existence (Tests Overstatements)
Rights & Obligations
Completeness (Tests Understatements)
Valuation & Allocation
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62
Q

What is the purpose of the Audit Committee?

A

Responsible for Hiring Auditor

Oversees Internal Control

Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan

Acts as Liaison Between Auditor and the Board

Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

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63
Q

How is Audit Risk calculated?

A

Inherent Risk x Control Risk x Detection Risk

Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report

Based on Auditor Judgment

Measured in both Qualitative and Quantitative

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64
Q

Describe Control Risk

A

Risk that internal control will not detect error or fraud

Auditor cannot control this.

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65
Q

Describe Inherent Risk.

A

Which transactions have a higher level of risk?

Auditor cannot control

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66
Q

Describe Detection Risk.

A

Will the auditor fail to detect a material misstatement?

Auditor CAN control

Do testing at year-end
Increase substantive testing
Run more effective tests

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67
Q

What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?

A

Less Acceptable DR = Run More Substantive Tests

More Acceptable DR = Run Less Substantive Tests

More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR)

Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)

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68
Q

What are quantitative measurements versus non-quantitative measurements with respect to risk?

A

Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages

Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges

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69
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

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70
Q

What is the auditor’s responsibility with respect to fraud and illegal acts?

A

Assess the RISK that such things will lead to material misstatements

Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements

Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee)

Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)

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71
Q

What are the three factors that affect/influence fraud?

A

Fraud is born out of:

Rationalization
Incentive
Opportunity

(RIO)

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72
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

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73
Q

What red flags may indicate higher risk in an audit?

A

Management compensation tied to stock
Aggressive financial forecasting
Former auditor disagreed with Management
Records not available for audit

Current audit procedures may need to be reconsidered if red flags exist.

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74
Q

Describe the characteristics of a Fraud Risk Factor.

A

Has been observed in similar situations

Does NOT necessarily mean that there is a material weakness in internal control

Leads to an auditor taking action

75
Q

What does an examination of internal control accomplish with respect to illegal acts?

A

Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts

76
Q

What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?

A

Strives to make audit engagement procedures less patterned and predictable

Re-evaluates management’s application of accounting procedures

Finds and assigns audit personnel with relevant skills in this area

77
Q

What should be documented with respect to fraud risk factors in an audit?

A

Any fraud risks identified that could lead to material misstatement

Audit procedures performed to assess risks

Nature of communication made to audit committee and company management

Disclosure to third parties regarding fraud not normally the auditor’s responsibility

Fraud by management should normally be reported to the audit committee- NOT the SEC.

78
Q

What was the effect of the SOX Act of 2002?

A

Created PCAOB

Designates Officer responsibility for internal control

Must disclose significant internal control weaknesses to auditor and audit committee

Must disclose any level of fraud discovered by employees with internal control responsibilities

79
Q

What is the Hierarchy of Authoritative Literature?

A
  1. Statements on Auditing Standards (SAS)
  2. Auditing Interpretations- AICPA Guides & SOPs
  3. Industry Articles (no authority)
80
Q

What quality control activities are undertaken by CPA firms with audit practices?

A

Firm Leadership exhibits quality and leads by example and sets the tone for the organization

Firm should Monitor and document that its policies and procedures are being followed

Firm should have Relevant Ethical Requirements

Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality

Firm should have competent and ethical personnel

Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

81
Q

Which literature governs Compilation services?

A

SSARS - Statements on Standards for Accounting and Review Services

These govern reporting for non-public entities only

82
Q

What is the independence requirement for Compilations?

A

Independence NOT required for Compilations

No Internal Control work allowed

No assurance given

83
Q

What type of assurance is provided by a Compilation?

A

Compilations are not an assurance service. No assurance is provided.

84
Q

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE assurance.

85
Q

What is the independence requirement for a Review?

A

Reviews require independence.

No Internal Control work allowed
Performs analytical procedures
No material indirect financial interest allowed
No immaterial direct financial interest allowed

86
Q

For compilations and reviews- what knowledge must a service provider have?

A

Must have an understanding of the client industry.

87
Q

What are attestation services?

A

CPA expresses a conclusion about an assertion - Compliance with laws

NOT considered a Consulting engagement

Independence Required

88
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

89
Q

Describe the limitations on Prospective Financial Statements?

A

Report is restricted to specified users.

Agreed-upon procedures are implemented.

90
Q

What is the majority of an auditor’s work in determining an audit opinion?

A

Collection of evidence to support the opinion.

91
Q

Of what does audit Evidence consist?

A

Evidence consists of client accounting data and supporting documentation from client or from third parties.

92
Q

What is the relationship between Evidence and Detection Risk?

A

Evidence has an inverse relationship with Detection Risk

The one aspect of Audit Risk an auditor can control through (N)ature (T)iming (E)xtent of audit procedures.

Inherent Risk and Control risk are outside of auditor’s control.

93
Q

Which aspects of Audit Risk can an auditor control?

A

Detection Risk which is decreased by gathering evidence.

94
Q

Which aspects of Audit Risk can an auditor NOT control?

A

Inherent Risk and Control Risk are outside of an auditor’s control.

95
Q

How does a high level of acceptable Detection Risk affect an audit?

A

Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong.

Business and transactions should be relatively stable and predictable.

(N) Less-competent Evidence collected
(T) Interim testing acceptable
(E) Fewer transactions are verified.

96
Q

What should occur when a low level of Detection Risk is acceptable?

A

More Evidence collected

(N) More-competent Evidence collected
(T) End of year balance testing
(E) More transactions are verified

97
Q

What are the primary risks in an audit for a typical for-profit company?

A

Auditors are there to verify that

Assets & Revenues are not overstated
Expenses & Liabilities are not understated

Exception - if the CPA Exam states that it is a tax-driven company flip them around

98
Q

What is the primary constraint on audit evidence?

A

Cost vs. Benefit is a primary constraint.

99
Q

What characteristics should audit evidence have?

A

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

100
Q

How does the quality of audit evidence vary depending on who has provided it?

A

Best evidence: Observation of activity by auditor.

2nd Best: Originates from External Parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement)

Weakest: Oral evidence from management.

101
Q

Which documents are the most persuasive and credible?

A

Third party documents are more persuasive and credible than internally-prepared docs

Auditor Knowledge = Most Persuasive

3rd Party info given to auditor

3rd Party info given to client

Internally-prepared doc

102
Q

What are Substantive Procedures?

A

Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don’t test internal controls.

103
Q

What are the substantive tests that are most often performed?

A 
Trace (or Vouch)
Reconcile
Analytical Procedures
Confirmations
Examine evidence that supports management assertions.

(T.R.A.C.E.)

104
Q

When performing audit procedures what should auditors focus on?

A

Auditors focus first on Balance Sheet Accounts then associated Income Statement items

105
Q

How is Cash audited?

A

Assurance Level is High.

Acceptable Detection Risk is Low.

106
Q

How is Accounts Receivable audited?

A

If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong.

If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance.

Corresponding Income Statement Account - Revenue

107
Q

How is Accounts Payable audited?

A

Review purchase orders/invoices

Confirm with Vendors

Corresponding Income Statement Account - Various Expenses

108
Q

How is Inventory audited?

A

Examine purchase agreements

Look at Board Minutes

Is Inventory held as collateral?

Corresponding Income Statement Account - COGS

109
Q

How are beginning balances audited?

A

Should match last year’s ending balance.

110
Q

What is the general presumption for auditing Ending Balances?

A

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

111
Q

How is a Statement of Cash Flows audited?

A

Foot all balances - Check the Math

Trace Cash Flow items to other Financial Statements

Check classifications - Operating Activities Investing Activities Financing Activities

112
Q

Under the Indirect Method what must be disclosed on a Statement of Cash Flows?

A

Interest Paid

Income Taxes Paid

Non-cash Transactions

Cash and Cash Equivalents Definitions

113
Q

Under the Direct Method what must be disclosed on a Statement of Cash Flows?

A

Results as if you had used Indirect Method

Non-cash Transactions

Cash and Cash Equivalents Definition

114
Q

What are Subsequent Events and what do they require?

A

Subsequent events occur after the Balance Sheet Date but before the audit report is issued.

Auditor needs to make inquiries and assess if they affect the audit report.

115
Q

What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?

A

If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement.

Regulatory agencies might need to get involved under some circumstances.

116
Q

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

A

If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute.

Otherwise support for their audit opinion could be jeopardized.

117
Q

When are Analytical Procedures required?

A

REQUIRED When planning the audit (preliminary)

REQUIRED When reviewing the audit (final)

Analytical procedures may be also performed optionally along with the substantive testing.

Use of Analytical Procedures in the audit must be documented.

118
Q

How do Analytical Procedures assist the auditor?

A

Helps the Auditor:

Determine if Management Assertions are reasonable

Develop audit plan

Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

119
Q

What is the focus of Analytical Procedures?

A

Analytical Procedure focus is on dollar amounts (not internal controls)

Analyzes Financial Data: Do Financial Statements Make Sense?

Comparison of data between years

120
Q

How is the Current Ratio calculated?

A

Current Ratio = Current Assets / Current Liabilities

121
Q

How is the Quick Ratio calculated?

A

Quick Ratio = Liquid Assets / Current Liabilities

122
Q

How is the Asset Turnover calculated?

A

Asset Turnover = Net Sales / Average Assets

123
Q

How is the Inventory Turnover calculated?

A

Inventory Turnover = COGS / Average Inventory

124
Q

How is Gross Margin % calculated?

A

Gross Margin % = Gross Margin / Sales

125
Q

What type of testing are ratios?

A

Ratios are Analytical Procedures

126
Q

What type of procedure is a Budget vs. Actual comparison?

A

Budget vs. Actual comparisons are Analytical Procedures.

127
Q

List Common Types of Analytical Procedures

A

Ratio analysis

Budget vs. Actual comparison

Comparison of data between years

Use of non-financial data to predict expected values for financial data

128
Q

How do management assertions affect the audit?

A

Management assertions help the auditor to plan the audit and select substantive tests.

129
Q

What assertions do auditors test?

A

Presentation - Cutoff Classification - Is it in the right period and category?
Existence/ Occurrence - Did it happen? Does it exist?
Rights & Obligations - Does the company own them?
Completeness - Was everything recorded?
Valuation - Are they worth the amount at which they are recorded?

(PERCV)

130
Q

What assertions are tests for transaction classes?

A

Occurrence

Cutoff

Classification

Completeness

Accuracy

131
Q

For which assertions are disclosures tested?

A

Occurrence

Completeness

Classification

Accuracy

132
Q

Is testing the validity of direct evidence a basic audit procedure?

A

No it is an extended procedure.

For example you don’t have to take a loan covenant document and go search out that it’s a valid loan covenant. Instead you consider the source - if it’s externally prepared it’s more persuasive.

133
Q

How are Management Estimates audited?

A

First and foremost you need to understand management’s rationale and methods for developing estimates before you can judge reasonableness.

Next Auditor should formulate their own opinion on what a good estimate should be and compare it.

Finally determine if subsequent events affect the estimate.

134
Q

Whose property are audit documentation (audit workpapers)? In what form must they be?

A

Audit workpapers are the property of the auditor.

They can be paper or electronic.

They must include a WRITTEN audit program (either paper or electronic).

135
Q

What is the Current File?

A

Information pertaining to the current year’s audit.

136
Q

What is the Permanent File?

A

Information used for this audit and future audits which is updated as needed.

137
Q

How long must audit workpapers be maintained?

A

Must be kept for 5 years after the audit release date or according to regulations whichever is longer.

Must be kept for 7 years under PCAOB Audit

PCAOB audits also require an Engagement Completion Document

138
Q

What is the primary requirement for audit workpapers besides being written?

A

Any experienced auditor should be able to look at your work and understand what you did.

139
Q

How should documents added to work papers be treated?

A

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

140
Q

How should documents removed from workpapers be treated?

A

After the audit report is released the firm has 60 days to subtract from the file.

You can still add to the file if you document it but you cannot delete any information after 60 days.

Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.

141
Q

If Internal Control is poor and a company’s accounting practices are sloppy - which risk is higher?

A

Control risk increases with poor Internal Controls and sloppy accounting practices.

142
Q

If Internal Control is poor - what is the effect on the audit?

A

Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.

143
Q

What does Internal Control provide reasonable assurance for?

A

Internal control provides reasonable assurance that

Material misstatements will be prevented

Reliability/integrity of financial statements will be preserved

Assets are protected against misuse

144
Q

What is required in an examination of Internal Control under Sarbanes-Oxley?

A

CEO/CFO must disclose Internal Control deficiencies

Management must provide assessment of Internal Control

Management must certify Financial Statements

145
Q

What is the relationship between Internal Control and Substantive Testing?

A

Inverse Relationship

Stronger Internal Controls - Less Testing Needed

Weaker Internal Controls - More Testing Needed

146
Q

What are the 3 objectives of Internal Control?

A

Reliability of Financial Reporting

Operational Efficiency/Effectiveness

Compliance with Law and Regulations

147
Q

What are the 5 components of Internal Control?

A

Control Environment

Risk Assessment

Information and Communication

Monitoring

Control Activities

148
Q

What is the purpose for a Control Environment assessment?

A

Sets tone for the entire company

149
Q

What are the components of the Control Environment?

A

Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resource Policies
Assignment of Authority/Responsibility
Management’s Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement

150
Q

What does an auditor’s assessment of Detection Risk determine?

A

Detection Risk determines nature- timing- and extent of audit procedures.

151
Q

What determines the acceptable level of Detection Risk?

A

Risk of material misstatement determines acceptable level of Detection Risk

152
Q

What items could increase the risk of material misstatement?

A

Rapid growth in the company.

The methods management uses to identify risk- estimate its significance and assess the likelihood of occurrence

Major changes to operations- personnel- systems- IT- products- corporate organization- and foreign operations.

153
Q

What happens when Control Risk is assessed to be at the maximum level?

A

No Internal Control testing is performed.

All audit procedures are increased in intensity to compensate for increased risk.

154
Q

What happens when Control Risk is below the maximum level?

A

Auditor tests Internal Controls.

Auditor evaluates Control Risk based on tests

Auditor adjusts substantive tests accordingly

Weaker Internal Control - More substantive tests

Stronger Internal Control - Less substantive tests

155
Q

Describe some common examples of Control Activities.

A

Performance Reviews

Information Processing

Physical Controls

Segregation of Duties

156
Q

What should an auditor understand with respect to Information and Communication on an audit?

A

Understand Client’s

Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external reporting process

157
Q

How must an auditor document understanding of Internal Control?

A

Through written documentation such as Internal Control memos- flowcharts- and questionnaires

158
Q

What questions should be asked to determine the risk of material misstatement?

A

Were all transactions recorded?
Were they timely?
Measured appropriately?
Recorded in correct period?
Presented and disclosed properly?
Did Management communicate their responsibilities?

159
Q

What is the purpose of testing Internal Controls?

A

Auditor needs reasonable assurance that controls are functioning as designed and effective

Internal Control Testing should be strong as (IRON) so that nothing gets past them

Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents

If results are as expected- substantive procedures do not need to be adjusted

160
Q

When can controls tested by an auditor in a prior year be used in the current year’s audit assessment?

A

Controls tested by auditor in a prior year can be used in the current year’s audit assuming they are re-tested every third year

Exception If the control has changed since the last audit

161
Q

What happens if Internal Controls are deficient?

A

Control Risk increases

Scope of substantive procedures increases

Detection Risk decreases

Material Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence

162
Q

What is a Material Weakness?

A

Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.

163
Q

What does Tracing test?

A

Tests Completeness

Starts with source document and traces forward to the journal entry.

164
Q

What does Vouching test?

A

Tests Existence.

Starts with a journal entry and searches for a voucher or source document to support the entry.

165
Q

What activities represent Segregation of Duties?

A

Non-compatible duties performed by separate individuals- such as

Authorization of asset disbursement vs. Recording of Assets vs. Custody of assets

If supporting audit evidence doesn’t exit - use Observation and Inquiry

Accounting should be segregated from Production

166
Q

With respect to signing checks - how are duties segregated?

A

Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS

Tip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves

167
Q

With respect to custody of assets - how should duties be segregated?

A

Employees who have custody of assets should not also RECORD those assets

Someone in charge of petty cash should not also control the petty cash records

Treasury Department (custodians) should NOT have record keeping duties

They control assets and should not be able to adjust any recording of those assets

168
Q

What are the limitations on Control Activities?

A

Controls can’t stop collusion or bad judgment

Management can override controls

Cost vs. Benefit relationship of Internal Control

169
Q

What is required if a Material Weakness is identified?

A

A written report to management is required.

Report declaring that no material weaknesses were found is allowed

Previous weaknesses reported that still exist should be reported again

Should be reported no later than 60 days after audit report release date

If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given

170
Q

What is the effect of a Significant Deficiency? What is it?

A

A significant deficiency adversely affects a company’s ability to report in the financial statements according to GAAP.

A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount

171
Q

What must occur if a Significant Deficiency is identified?

A

If a Significant Deficiency is identified- a written report to management required

Report declaring that no significant deficiencies exist is not allowed

Previous deficiencies reported that still exist should be reported again

Should be reported no later than 60 days after the audit report release date

172
Q

What is a Control Deficiency?

A

A control is not operating as intended.

173
Q

What must an auditor ask if using the work of third parties?

A

Are they competent?

Are they objective?

174
Q

What must an auditor understand with respect to internal auditors?

A

Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan

Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors

Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports

They should not be asked to make any decisions or judgments

175
Q

What is required in an examination of Internal Control under Sarbanes-Oxley?

A

CEO/CFO must disclose deficiencies

Management must provide assessment of Internal Controls

Management must certify Financial Statements

176
Q

What is the relationship between Internal Control and Substantive Testing?

A

Has inverse relationship

Stronger Internal Control results in LESS substantive testing

Weaker Internal Control leads to MORE substantive testing

177
Q

What are the three objectives of Internal Control?

A

Reliability of Financial Reporting

Operational Efficiency/Effectiveness

Compliance with Law and Regulations

178
Q

What are the five components of Internal Control?

A

Control Activities

Risk Assessment

Information and Communications

Monitoring

Control Environment

179
Q

What are the components of the Control Environment?

A

Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resources Policies
Assignment of Authority/Responsibility
Management’s Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement

180
Q

What happens when Control Risk is below the maximum level?

A

Auditor tests Internal Controls.

Auditor evaluates Control Risk based on tests

Auditor adjusts substantive tests accordingly

Weaker Internal Control - More substantive tests

Stronger Internal Control - Less substantive tests

181
Q

What should an auditor understand with respect to Information and Communication on an audit?

A

Understand Client’s

Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external communication process

182
Q

How must an auditor document understanding of Internal Control?

A

Auditor must document understanding of Internal Control via Memos - Flowcharts - Questionnaires

183
Q

What is the purpose of testing Internal Controls?

A

Auditor needs reasonable assurance that controls are functioning as designed and effective

Internal Control Testing should be strong as (IRON) so that nothing gets past them

Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents

If results are as expected - substantive procedures do not need to be adjusted

AUD 1 (1 decks)

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