AUD (Misc. 2) Flashcards
(31 cards)
Regardless of the industry in which a firm operates, the firm will maximize profits by producing where…
Marginal cost equals marginal revenue.
Using a combined approach involves…
identifying specific controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions. If those controls are found to be operating effectively, substantive testing can be reduced.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.
D. Performing analytical procedures for indications of possible financial difficulties.
Reviewing confirmations of loans receivable and payable is useful for determining the existence of related party transactions because guarantees are commonly provided by or for related parties.
An attorney letter should be prepared by the ___ and sent by the ___ to the client’s legal counsel (both external and internal counsel).
the client
the auditor
Definition of Substantive Procedures
substantive audit procedures are the tests that auditors employ to gather evidence about whether a company’s financial statements are free of material misstatements.
Examples:
Observing the existence of fixed assets.
Confirming cash balances with banks.
Matching invoices that have been billed with collected funds.
Observing a physical inventory count.
The risk of incorrect acceptance Relates to ___ and affects audit ___.
tests of controls
effectiveness
Variables Sampling
A statistical sampling method used to estimate the numerical measurement of a population, such as a dollar value (e.g., accounts receivable balance).
Sophie wants to perform an analytic that will evaluate whether large sales should have been made to new customers. She will do this by creating a classification model using past transactions that were approved and rejected to determine whether the transactions being evaluated were in line with prior activities. What type of analytic is Sophie executing?
A. Descriptive analytic
B. Prescriptive analytic
C. Predictive analytic
D. Diagnostic analytic
C. Predictive analytics provide expected or predicted outcomes based on historical data. This analytic is using past transactions to create a model that would predict whether current transactions should have been approved or rejected.
Primary responsibility for the process of monitoring internal control is assigned to
Management
According to SEC regulations, each of the following non-audit services will impair an auditor’s independence, except
A Designing a management information system that aggregates source data underlying the financial statements.
B Performing an internal audit function.
C Preparing the audit client’s financial statements that are filed with the SEC.
D Preparing the audit client’s tax return.
D Preparing the audit client’s tax return.
The audit working paper that reflects the major components of an amount reported in the financial statements is the
Lead Schedule
Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?
A Disaster recovery plans that ensure proper back-up of files
B Encrypted hash totals that authenticate messages
C Activity logs that indicate failed transactions
D Hardware security modules that store sensitive data
C Activity logs that indicate failed transactions
Which of the following is usually considered a monitoring activity?
A Segregating duties of employees.
B Processing entity transactions.
C Analyzing new information systems.
D Using information from customer complaints.
D.
Controls being assessed through ongoing activities and evaluations are part of the “Monitoring” component of the internal control framework. Using information from customer complaints to evaluate the flaws and bugs in a control process is considered a monitoring activity.
According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and
A Prior to the date of the audit report
B Prior to the issuance of the audit report
C In writing
D To the audit committee chair
Prior to the issuance of the audit report
Which of the following is a true statement related to types of directors?
A Owners who are directors are called outside directors.
B Managers may not serve as directors.
C A board is not permitted to contain any inside directors.
D Managers who are directors are often called executive directors.
D Managers who are directors are often called executive directors.
Accounts Receivable Turnover
Net credit sales / Avg AR
measures how efficiently a company collects payments from customers who have purchased goods or services on credit
In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would…?
Trace the authorization for the options granted to the board of directors’ approval.
The issuance of stock options is ordinarily a decision made by the board of directors. As such, in performing tests concerning the granting of stock options, the auditor should inspect the minutes of the meeting of the board of directors for corresponding authorization from the board.
Summary of the Four Types of Interpretive Publications Under GAAS…
Auditing Interpretations of GAAS – Provide official clarifications on how to apply GAAS in practice.
AICPA Audit and Accounting Guides – Industry-specific guidance on auditing and accounting principles.
AICPA Statements of Position (SOPs) – Auditing Guidance – Some SOPs include auditing interpretations.
Exhibits to U.S. GAAS – Supplementary materials included in Statements on Auditing Standards (SASs).
____ involve the issuance of a report on a subject matter or an assertion about a subject matter that is the responsibility of another party.
Attestation engagements
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all…
Expenditures for property and equipment have not been charged to expense.
___ is a deficiency or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s financial statements will not be prevented or detected on a timely basis.
Material Weakness
___ is a deficiency or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
significant deficiency
___ exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The various standards don’t use the term material deficiency.
A deficiency in internal control
Which of the following types of audit evidence is the least reliable?
A. Bank statement obtained from the client.
B. Vendor’s invoice.
C. Purchase order.
D. Canceled check.
C. Purchase order.
