Audit

Question 1

The auditors are specifically prohibited from drafting AND auditing the financials for SEC-regulated companies.

Answer 1

True, but they can draft and audit for non SEC companies.

Question 2

10 original standards from GAAS?

TID-PIE-GCDO

Answer 2

Training; Independence; Due care (general standards); Planning; Internal control; Evidence (field work standards); GAAP; Consistency; Disclosure; Opinion (reporting standards)

Question 3

What are the 4 themes of the 7 principles used as framework for audits?
(PR-PR)

Answer 3

Purpose/Premise
Responsibilities
Performance
Reporting

Question 4

Which term identifies a requirement for audit evidence?

Answer 4

“sufficient appropriate audit evidence…”

Question 5

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.

Answer 5

Inherent Risk

Question 6

The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.

Answer 6

Control Risk

Question 7

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures (that is, an undetected material misstatement exists in a relevant assertion).

Answer 7

Detection Risk

Question 8

What does a decision table do?

Answer 8

presents in tabular form the conditions and alternative actions related to making a particular decision.

Question 9

If internal controls appear ineffective what do you do?

Answer 9

Use a wholly substantive audit approach, ie: assess control risk at max level.

Question 10

If internal controls appear effective what do you do?

Answer 10

Rely on internal controls and perform “tests of control, “ ie: assess control risk at less than the max level.

Question 11

What procedures are performed to evaluate control risk?

Answer 11

Inquiries of personnel, inspection of documents and records, observation of activities and operations, and reperformance of the control procedure.

Question 12

What are 5 components of COSO’s Internal Control Integrated Framework?

Answer 12

Control Environment
Risk Assessment
Information & Communication Systems
Control Activities
Monitoring

Question 13

At the assertion level, “audit risk” consists of what three component risks?

Answer 13

Inherent Risk
control risk
detection risk

Question 14

What is Inherent Risk?

Answer 14

Inherent risk (IR) : The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.

Question 15

What is control risk?

Answer 15

Control risk (CR) : The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.

Question 16

What is detection risk?

Answer 16

Detection risk (DR) : The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures (that is, an undetected material misstatement exists in a relevant assertion).

Question 17

Adequate segregation of duties requires what three functions be separated?

Answer 17

Authorization, custodial, and recordkeeping

Question 18

Current ratio

Answer 18

Current assets/current liabilities

Question 19

How do you calculate inventory turnover?

Answer 19

Dividing average inventory into COGS

Question 20

Sufficient Evidence refers to…

Answer 20

Quantity of Evidence

Question 21

Appropriate evidence refers to….

Answer 21

quality of evidence in terms of relevance and reliability

Question 22

U.S. professional standards now classify assertions in three separate categories for the auditor’s consideration:

Answer 22

1. Account balances;
2. Presentation and disclosure; and
3. Classes of transactions and events.

Question 23

four assertions specific to “account balances at period end”

Answer 23

1. Existence
2. Completeness
3. Rights and obligations
4. Valuation and allocation

Question 24

four assertions about “presentation and disclosure”

Answer 24

1. Occurrence and rights and obligations
2. Completeness
3. Classification and understandability
4. Accuracy and valuation

Question 25

five assertions about “classes of transactions and events during the period”

Answer 25

1. Accuracy
2. Occurrence
3. Completeness
4. Cutoff
5. Classification

Question 26

Benefits of statistical sampling…

Answer 26

Design an efficient sample, measure the sufficiency of the evidential matter obtained, and evaluate the sample results.

Question 27

Attribute Sampling

Answer 27

Sampling for purposes of deciding whether internal controls are working as designed (tests of controls).

Question 28

Variables Sampling

Answer 28

Sampling for purposes of deciding whether account balances (such as inventory or receivables) are fairly stated (substantive tests of details).

Question 29

How to determine sample size for a test of controls?

Answer 29

Consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the expected deviation rate.

Question 30

Comfort letters provide what type of assurance?

Answer 30

Negative

Question 31

Special reports are issued in connection with what?

Answer 31

Requirements to comply with contractual agreements or regulatory requirements other than GAAP.