Audit A2

Question 1

What is an audit committee?

Answer 1

subset of the board of directors
3-5 members are outside directors

Question 2

What does the Sarbanes Oxley act require of auditors of issuers?

Answer 2

to report to and be overseen by audit committee

Question 3

what is the audit committee responsible for?

Answer 3

selection and appointment of the external auditor

Question 4

what should the auditor do as part of pre-acceptance activities?

Answer 4

• consider firms quality control policies and procedures related to client acceptance and continuance
  SUCH AS– firms ability to meet reporting deadlines and staffing the engagement, firms independence, integrity of client management, and whether appropriate evidence can be obtained on group audits

Question 5

what preconditions should the auditor ensure are present before accepting a new or existing audit client?

Answer 5

-ascertain whether financial reporting framework used by the client is acceptable
-agreement from management and their responsibilities
-DONT ACCEPT if a scope limitation is imposed by mgmt or governance

Question 6

Before accepting an ERISA plan audit, in addition to the main preconditions, the auditor must also:

Answer 6

ensure managements understanding of their responsibility to maintain a current plan instrument, administering the plan, presenting transactions in accordance with plans provisions, and making appropriate determinations when an erase section 103 a3c audit is elecrted

Question 7

it is required for initial audits that they:

Answer 7

make inquiries of the predecessor auditor with the clients permission

Question 8

risk that the fs are materially misstated (risk of material misstatement or RMM), bu the opinion is not appropriately modified (DR)

Answer 8

audit risk

Question 9

risk that the financial statements are materially misstated

Answer 9

Risk of material misstatement (RMM)
comprised of two risks IRxCR

Question 10

the vulnerability of a relevant assertion to a material misstatement, assuming no related controls

Answer 10

inherent risk

Question 11

risk that a mm that could occur in assertion will not be prevent or detected & corrected on a timely basis by the entity’s system of internal control

Answer 11

control risk

Question 12

risk that the auditor does not detect a material misstatement that exists in an assertion

Answer 12

detection risk

Question 13

what is the only element of the audit risk model that the auditor can control

Answer 13

detection risk

Question 14

how does the auditor control detection risk

Answer 14

by varying the nature, extent, or timing of audit procedures

Question 15

an increase in the auditors assessment of the risk of mm means what for the detection risk

Answer 15

auditor must reduce detection risk to keep overall audit risk low

Question 16

what increases the risk of material misstatement?

Answer 16

an increase in inherent risk and or control risk

Question 17

rmm (IR and CR) have an inverse relationship with

Answer 17

DR

Question 18

There is an inverse relationship between materiality and

Answer 18

Audit risk

Question 19

when is a class of transaction, account balance, or disclosure SIGNIFICANT?

Answer 19

when there is an identified risk of material misstatement at the assertion level

Question 20

a class of transaction, account balance, or disclosure is MATERIAL when?

Answer 20

there is a substantial likelihood that omitting or misstating would influence the judgement of a reasonable FS user

Question 21

what are the two types of fraud risk

Answer 21

fraudulent financial reporting and misappropriation of assets

Question 22

Fraudulent financial reporting is

Answer 22

lying

Question 23

misappropriation of assets is

Answer 23

stealing