audit final

Question 1

Why is auditing needed?

Answer 1

To provide reliable information to users and ensure financials are free from material misstatement.

Demand arises from information asymmetry between users (investors, creditors) and managers.

Question 2

What are the key steps in the audit process?

Answer 2

1. Planning & Risk Assessment
2. Design & Perform Procedures
3. Evaluate Evidence & Conclude

Question 3

What is the Audit Risk Model formula?

Answer 3

Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR)

Question 4

Define Inherent Risk (IR).

Answer 4

The risk of misstatement without controls, such as complex estimates.

Question 5

Define Control Risk (CR).

Answer 5

The risk that internal controls will not catch errors.

Question 6

Define Detection Risk (DR).

Answer 6

The risk that the auditor does not detect a material misstatement.

Question 7

What is Overall Materiality?

Answer 7

Materiality that would change an investor’s decision, typically around 5-10% of pretax income or 0.5-2% of assets/revenue.

Question 8

What is Tolerable Misstatement (TM)?

Answer 8

Usually 50-70% of Overall Materiality, used to scope accounts.

Question 9

What is the Fraud Triangle?

Answer 9

Incentive, Opportunity, Rationalization.

Question 10

What should auditors do in response to fraud risk?

Answer 10

Conduct unpredictable testing, test new areas/accounts, involve senior staff.

Question 11

What are the components of the COSO Framework?

Answer 11

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information & Communication
5. Monitoring

Question 12

What types of controls are there?

Answer 12

1. Preventive (e.g., approval)
2. Detective (e.g., reconciliations)
3. Automated vs. Manual

Question 13

What is the purpose of testing controls?

Answer 13

To assess design effectiveness and operating effectiveness.

Question 14

What is the difference between Reliance and Substantive audit strategies?

Answer 14

Reliance uses strong, tested controls and results in less substantive testing; Substantive is used when controls are weak or not tested, resulting in more substantive testing.

Question 15

What are Management Assertions?

Answer 15

Existence, Completeness, Valuation.

Question 16

Define Material Weakness.

Answer 16

An adverse opinion on Internal Control over Financial Reporting (ICFR).

Question 17

Define Significant Deficiency.

Answer 17

Communicated but still results in an unqualified opinion.

Question 18

What is the relationship between Detection Risk (DR) and Risk of Material Misstatement (RMM)?

Answer 18

Inverse relationship: ↑ RMM → ↓ DR; ↓ RMM → ↑ DR acceptable.

Question 19

What are the methods to lower Detection Risk (DR)?

Answer 19

1. Higher-quality procedures
2. Year-end testing
3. Larger sample sizes/lower TM thresholds

Question 20

What is the hierarchy of evidence quality in substantive procedures?

Answer 20

1. Direct personal observation
2. Confirmations
3. External documents
4. Internal documents
5. Recalculation
6. Inquiry

Question 21

What is the purpose of documentation requirements in auditing?

Answer 21

To provide evidence that the audit followed GAAS/PCAOB and supports conclusions.

Question 22

What is Sampling Risk?

Answer 22

The risk of incorrect acceptance (false clean opinion) or incorrect rejection (unnecessary work).

Question 23

What are common procedures for auditing Cash?

Answer 23

1. Bank confirmations
2. Reconciliations
3. Cutoff testing

Question 24

What are common procedures for auditing Debt?

Answer 24

1. Confirmations
2. Agreement reviews
3. Recalculating interest

Question 25

What are the roles of regulatory bodies PCAOB, SEC, AICPA, FASB, and IASB?

Answer 25

1. PCAOB: Public company audit oversight 2. SEC: Oversees markets and public firms 3. AICPA: Standards for private entity audits 4. FASB: Sets U.S. GAAP 5. IASB: Sets IFRS

Question 26

What is an Unqualified Audit Opinion?

Answer 26

Financial statements are fairly stated with no major issues.

Question 27

What is a Qualified Audit Opinion?

Answer 27

Financial statements are fairly stated except for an isolated issue.

Question 28

What is an Adverse Audit Opinion?

Answer 28

Financial statements are not fairly stated due to major misstatements.

Question 29

What is a Disclaimer of Opinion?

Answer 29

Due to scope limitation or lack of independence.

Question 30

What are Type I and Type II subsequent events?

Answer 30

Type I: Recognized (conditions existed at year-end); Type II: Non-recognized (after year-end).

Question 31

What is the purpose of a Management Representation Letter?

Answer 31

To acknowledge responsibility and confirm disclosures required for report issuance.

Question 32

What do Explanatory Paragraphs in an audit opinion indicate?

Answer 32

Additional information without changing the opinion, such as going concern.

Question 33

What are CAMs in public audits?

Answer 33

Critical Audit Matters, which are complex or subjective audit matters.

Question 34

What is the frequency of PCAOB inspections?

Answer 34

Annually for public auditors with 100+ issuers, or every 3 years.