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Audit > Audit II > Flashcards

Audit II Flashcards

1
Q

Comfort Letter

A

Letter from auditor to underwriter, signed by auditor

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2
Q

What Makes up Fraud Triangle

A

(1) Incentive/motivation
(2) Opportunity
(3) Rationalization

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3
Q

Analytical Procedures Applied in the Planning of an Audit are Designed to

A

Enhance the auditor understanding of the clients business by comparing data at an aggregate level to the auditors expectations based on knowledge of the client that is not dependent on examining the details of the clients information

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4
Q

Overall Approach Relating to Testing Internal Controls

A

(1) Identify controls that are relevant to specific assertions that are likely to prevent or detect misstatements
(2) Perform test of controls to evaluate effectiveness of those controls

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5
Q

Factors That May Indicate Greater Risk of Misstatement Due to Error

A

(1) Difficulty obtaining information needed to accurately record transaction
(2) Complexity of requirements for accounting for an item

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6
Q

Factors That May Indicate Greater Susceptibility to Fraud

A

(1) Valuable item that might be misappropriated by employees or others
(2) Item for which it is easy to conceal a misstatement
(3) Misstatement of the item has the potential of influencing other actions

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7
Q

Inability of Client to Provide Documentation to Support a Significant Transaction Indicates

A

Heightened risk of fraud

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8
Q

Before Reissuing or Consenting to the Use of a Report Previously Issued on the Financial Statements of a Prior Period, a Predecessor Auditor Should:

A

(1) Read the financial statements of the current period
(2) Compare the prior period financial statements reported on with those to be presented for comparative purposes
(3) Obtain a letter of representation from the successor auditor to make certain nothing has occurred that would affect the report the predecessor had issued

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9
Q

Kiting

A

The practice of writing checks against uncleared deposits

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10
Q

SOX Section 404

A

“Management assessment of internal controls”

(1) Each annual report filed with the SEC must contain internal control report
(2) It is the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting
(3) Includes assessment of effectiveness of internal control structure and procedures

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11
Q

SOX Section 402

A

It is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer

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12
Q

SOX Section 403

A

Requires disclosure from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to section 12 of the securities exchange act of 1934

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13
Q

SOX Section 406

A

Requires disclosure of whether or not the issuer has adopted a code of ethics for senior financial officers (and if not, why not). Any change or waiver in this code requires disclosure

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14
Q

SOX Section 407 Financial Expert Definition

A

A person who:

(1) Has an understanding of GAAP and the financial statements
(2) Is experienced in the preparation or auditing of financial statements and the application of accounting principles
(3) Is experienced with internal accounting controls
(4) Has an understanding of audit committee functions

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15
Q

Factors that Affect the Risk of Material Misstatement

A

(1) Complexity and subjectivity associated with the process
(2) Availability of relevant data
(3) Number and significance of assumptions that are made
(4) Degree of uncertainty associated with those assumptions

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16
Q

Lapping

A

The altering of accounts receivable when cash that is intended for the payment of a receivable is misappropriated

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17
Q

When to Issue a Qualified Opinion Based on the Discovery of Noncompliance

A

If the auditor determines that noncompliance with laws and regulations has a material effect on the financial statements and the act has not been properly accounted for or disclosed - depending on materiality the auditor may decide to issue an adverse opinion

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18
Q

When to Disclaim an Opinion Based on Discovery of Noncompliance

A

If precluded by the client from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance that could be material to the financial statements has or is likely to have occured

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19
Q

When to Withdraw from an Engagement Based on Discovery of Noncompliance

A

If the client refuses to accept the auditors modified report

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20
Q

If Auditor Decides Not to Rely on Controls Related to an Assertion

A

(1) RM will be equal to assertions inherent risk under the assumption there are no relevant controls in place
(2) Will develop a program to test the assertion by applying substantive audit procedures that the auditor believes will provide sufficient appropriate audit evidence

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21
Q

If Auditor Decides to Rely on Controls Related to an Assertion

A

(1) RMM will be reduced from IR, taking into account the effect of CR being below the maximum
(2) Will perform tests of controls selecting from a population that covers the entire period during which the auditor is anticipating that the controls were in place

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22
Q

Auditor will do a ___________ Analysis Before Deciding to Perform Test of Controls

A

Cost/benefit

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23
Q

Steps in Cost Benefit Analysis

A

(1) Auditor estimates the cost of performing a substantive audit without performing tests of controls
(2) Estimates cost of performing test of controls
(3) Estimates cost of reduced substantive testing that will be performed if controls prove to be reliable
(4) Estimates likelihood that controls tested are likely to be reliable
(5) Add cost of performing test of controls to cost of reduced substantive testing that will be performed and multiply by likelihood that controls to be tested are likely to be reliable
(6) Add cost of performing test of controls to cost of reduced substantive testing that will be performed and multiply by one minus likelihood that controls to be tested are likely to be reliable
(7) Total amounts from last two steps and compare to cost of performing substantive audit without performing test of controls; lowest of the two amounts will determine strategy

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24
Q

Dual Purpose Testing

A

Tests that are designed to test effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of managements assertions

25
Q

Sarbanes-Oxley Section 302

A

“Corporate responsibility for financial reports”

(1) Requires that the principal executive officer and principal financial officer, or their equivalent, certify:

  • The signing officer has reviewed the report
  • Based on the signers knowledge the report doesn’t contain a materially untrue statement or omit a material fact
  • Based on the signers knowledge, the financial statements and other information are fairly presented
  • They are responsible for establishing and maintaining internal control
  • The have designed these controls to ensure the receipt of all relevant information during those period sin which periodic reports are being prepared
  • They have evaluated the effectiveness of internal controls within 90 days prior to the report
  • They have presented their conclusions about the effectiveness of internal controls in the report

(2) Officers are also required to report to the auditors and audit committee:
- All significant deficiencies that could adversely affect the reporting process and any material weakness
- Any fraud involving management or employees with a role in internal controls

26
Q

Controls Have a Function of Either

A

(1) Preventing misstatements before they occur

(2) Detecting and correcting misstatements that have occured

27
Q

Transaction Components Auditor Must Obtain an Understanding Of

A

SACRED

1) Start (Initiation
(2) Authorization
(3) Completion or execution
(4) Recording
(5) Evaluate Defenses (Verification)

28
Q

Sales Clerk

A

Accepts orders from customers and prepares written sales orders using internal pre-numbered, preprinted forms (recording)

29
Q

Credit Manager

A

Approves customer credit on orders (authorization)

30
Q

Warehouse Clerk

A

Holds goods inventory awaiting requests for shipment (custody)

31
Q

Shipping Clerk

A

Removes items from inventory to ship to customer (custody)

32
Q

Billing Clerk

A

Prepares sales invoices to send to customers (recording)

33
Q

Receivables Clerk

A

Posts sales and collections to individual customer accounts based on sales invoices and remittance advices respectively (recording)

34
Q

General Ledger Bookkeeper

A

Posts journal entries for sales and collections (recording)

35
Q

Mail Room Clerk/ Receptionist

A

Opens mail containing customer checks (or cash) and remittance advices, prepares a pre-list of checks, referred to as a remittance listing, and directs these items to appropriate parties within the system (custody)

36
Q

Cashier

A

Receives checks, prepares deposit slip, and deposit funds at the bank (custody)

37
Q

Cash Receipts Clerk

A

Receives remittance listing and posts to cash receipts (recording)

38
Q

Receiving Clerk

A

Receives all goods that are being returned and returns them to inventory (custody)

39
Q

Treasurer

A

Approves credit memos for returns and write-offs of uncollectible accounts (authorization)

40
Q

Controller/Internal Audit

A

Bank reconciliations and analyses of past-due accounts receivable should be performed by individuals independent of cash receipts and disbursements (comparison)

41
Q

Sales Order

A

List of goods ordered by the customer along with the prices to be charged. Pre-numbered and make it possible to periodically account for orders to be sure they were processed.

42
Q

Bill of Lading

A

Shipping document that is signed by the carrier, often a trucker, accepting goods from the shipping clerk

43
Q

Sales Invoice

A

Bill that is prepared and sent to the customer after shipment to request payment. Before doing so the billing clerk should compare the sales order and bill or lading to ensure they’re in agreement

44
Q

Sales Register (Journal)

A

Book in which sales invoice information is posted. Cash register records provide similar information for retail outlets and other cash business

45
Q

Subsidiary Receivables Ledger

A

Book that lists the outstanding receivables with a separate record for each customer

46
Q

Remittance Advice

A

Document included in an envelope with the check or other form of payment to indicate the purpose of the check

47
Q

Remittance Listing

A

Summary of the money received that day. This may be called a prelist in some cases and is prepared by the employee first receiving the cash

48
Q

Cash Receipts Journal

A

Book in which the remittance listings are posted

49
Q

Deposit Slip

A

Document signed or stamped by the bank to acknowledge receipt of checks and that is periodically reconciled to postings into the cash receipts journal by an independent employee

50
Q

Preventative Controls

A

Designed to minimize possibility that misstatements will occur - usually most effective but not always feasible to develop controls that will be effective at prevention - cost of developing an effective control may exceed benefit derived

51
Q

Corrective Controls

A

Designed to identify misstatements and establish a means of correcting them on a timely basis

52
Q

Audit Firms Quality Control Policies for the Acceptance and Continuance of Client Relationships and Specific Engagements Should be Designed to Provide the Audit Firm with Reasonable Assurance that it will Undertake or Continue Relationships and Engagements Only When the Firm

A

(1) Is competent to perform the engagement and has the capabilities, including time and resources, to do so
(2) Can comply with legal and relevant ethical requirements
(3) Has considered the integrity of the client and doesn’t have information that would lead it to believe the client lacked integrity

53
Q

Types of Control Activities

A

PRAISE

(1) Physical Controls
(2) Recording
(3) Authorization
(4) Independent checks
(5) Segregation of duties
(6) Evaluate performance

54
Q

Digital Signature

A

A mathematical scheme primarily used to verify the authenticity of a signature, it can also be used to ensure that a message, like a signature, has not be tampered with

55
Q

When to Use Combined Approach

A

(1) Risk assessment includes an expectation of operating effectiveness of controls because the likelihood of material misstatement is lower if control operates effectively
(2) When substantive procedures alone do not provide sufficient audit evidence

56
Q

When to Use Substantive Approach

A

1) Controls appear inadequate/ineffective/weak
(2) Auditor believes that performing extensive substantive procedures is likely to be more cost effective than performing test of controls

57
Q

Substantive vs Combined Approach

A

Substantive Approach - Substantive procedures emphasized

Combined Approach - Both test of controls and substantive procedures used

58
Q

Auditors Responsibility Related to Required Supplementary Information

A

Auditor must apply limited procedures to see if the required information has been provided and whether or not it appears to be correct

59
Q

Attestation Engagement

A

Examination, review or agreed upon procedures engagement performed under the attestation standards related to subject matter or an assertion that is the responsibility of another party

Audit (3 decks)

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