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Audit Midterm Flashcards

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1
Q

What are the Audit Objectives?

A

To obtain reasonable assurance about where the financial statements as a whole are free from material misstatements, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

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2
Q

What is Auditing?

A

The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent, independent person.

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3
Q

Difference between Auditing and Accounting?

A

Accounting is the recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making.

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4
Q

What are the 3 major types of Audits?

A

Operational, Compliance, and Financial

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5
Q

Assurance of Audits, Reviews, Compilations?

A

Audits: High Assurance (95%-99%)
Reviews: Moderate Assurance (60%-70%)
Compilations: No Assurance 0%

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6
Q

What is an audit report?

A

Reports on: what the auditor did, and what conclusions the auditor drew. Serves to communicate the nature and extent of auditor’s association with the financial statements.

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7
Q

What is an Unqualified Audit Report?

A

It is a “clean” audit. Followed the GAAS, statements are presented fairly, is free from material misstatements, and had no scope limitations.

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8
Q

What is an Unqualified with emphasis of matter audit report?

A

Highlights or emphasizes material already in the financial statements or notes. For example a paragraph drawing attention to going concern assumption.

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9
Q

What is an Unqualified with Other Matter Paragraph audit report?

A

Provides information in the client’s financial statement or notes. For example, comment that prior year financial statements were audited by a different firm.

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10
Q

What are the 4 types of Auditor Opinions?

A

Unqualified, Qualified, Disclaimer of Opinion and Adverse.

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11
Q

What is an Unqualified Opinion?

A

No limitation of scope, no departures from accounting principles. Immaterial.

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12
Q

What is a Qualified Opinion?

A

Misstatements that are material but not pervasive cause by either a scope limitation or departure from GAAP

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13
Q

What is an Adverse Opinion?

A

Misstatements that are material and pervasive caused by a departure for GAAP.

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14
Q

Disclaimer of Opinion

A

Auditor cannot express an opinion due to auditor lacks independence, there was an extensive scope limitation, or there is substantial uncertainty or doubts about the company’s ability to continue as a going concern.

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15
Q

What are some Generally Accepted Auditing Standards?

A

Auditor should have, independence, integrity, objectivity, due care, confidentiality, professional competence.

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16
Q

What are the GAAS Reporting Standards?

A

Provide a report on the financial statements that matches findings, communicate findings in accordance with CASs, if modifications are required, should be done with CASs or the auditor should withdraw or resign from engagements.

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17
Q

What is Business Failure?

A

Business is unable to repay its creditors or to meet investor’s expectations.

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18
Q

What is Audit Failure?

A

Incorrect Audit Opinion resulting from failure to adhere to GAAS.

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19
Q

What are they Key Ethical Principles?

A

Conduct in the best interests of the public and the profession’s good reputation
Integrity, due care and professional competence in performing services
Freedom from impairment of objectivity in professional judgment
Confidentiality of client information and a duty not to exploit it for personal gain
Development of a practice based on professional excellence, not self-promotion
Courteous and considerate conduct in relation to professional colleagues

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20
Q

When is an Auditor not independent?

A

When the auditor has a mutual or conflicting interest with client, auditing own work, function as management or employee of client, or advocate of client.

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21
Q

Types of Threats to Independence?

A

Self-Interest, Self-Review, Advocacy, Familiarity, and Intimidation.

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22
Q

What is the Self-Interest Threat?

A

Potential to benefit from a financial, or other self-interest, in a client.

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23
Q

What is a Self-Review Threat?

A

Product or judgement from a prior engagement needs to be evaluated in current engagement

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24
Q

What is an Advocacy Threat?

A

Promotes client’s position or opinion.

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25
What is a Familiarity Threat?
Too sympathetic to client's interest due to close relationship.
26
What is an Intimidation Threat?
Deterred from objectivity by actual or perceived threat.
27
What is professional skepticism?
Makes a critical assessment of evidence, conducts the audit with a questioning mind, neither assumes management is dishonest or honest.
28
What is Reasonable Assurance?
A high, though not absolute, level of assurance.
29
What is a material misstatement?
If it effects the decision of a person relying on the financial statement will be changed or influenced by the misstatement or the aggregate of all misstatements.
30
What can cause Material Misstatements?
Error, Fraud, or illegal acts.
31
What is the likelihood of detecting fraud?
It is lower than the likelihood of detecting error. Audits must be planned to consider the possibility of fraud.
32
What are the types of Assertions?
Occurrence, Existence, Completeness, Valuation, Accuracy, Cutoff, Right and Obligations, Understandability.
33
Occurrence Assertion
Did the transaction occur?
34
Existence Assertion
Do assets exist?
35
Valuation Assertion
Are amounts correct/properly recorded?
36
Accuracy Assertion
Are transactions appropriately recorded or disclosed at appropriate amounts?
37
Cutoff Assertion
Are transactions recorded in the correct period?
38
Rights and Obligations Assertion
Are assets owned? Are liabilities clients? Do disclosures relate to the entity?
39
Classification Assertion
Are amounts classified in the correct accounts?
40
Understandability Assertion
Are disclosures clearly expressed?
41
What is Professional Judgement?
The application of relevant knowledge and experience, in reaching decisions where a choice must be made between alternative possible courses of action.
42
What are the judgement traps?
Confirmation, Overconfidence Bias, Anchoring, Availability
43
What is Confirmation Trap?
More heavily weight information consistent with beliefs.
44
What is over confidence?
Overestimate own ability to complete tasks or assess risks.
45
What is Anchoring?
Unduly tied to initial numbers.
46
What is availability?
Over-reliance on readily available information.
47
What is evidence?
Information used by the auditor in arriving at the conclusions of which the auditor's opinion is based.
48
What determines the persuasiveness of evidence?
Determined by Sufficiency, appropriateness, timeliness.
49
Methods of Obtaining Evidence?
Physical Inspection, Observation, External Confirmation, Recalculation, Reperformance, Analytical Procedures, Inquiry
50
Inspection-Obtaining Evidence
Inspection of records or documents, or tangible assets
51
Observation-Obtaining Evidence
Use of senses to gather evidence.
52
External Confirmation-Obtaining Evidence
Oral or written response from independent third party
53
Recalculation-Obtaining Evidence
Checking mathematical accuracy
54
Reperformance-Obtaining Evidence
Redoing other procedures
55
Analytical Procedures-Obtaining Evidence
Evaluation of financial information through analysis.
56
Inquiry-Obtaining Evidence
Of individuals at client-written or oral
57
When is evidence most reliable?
Obtained directly by the auditor, obtained from an independent source outside the entity, strong internal controls, documentary in form.
58
What is the Hierarchy of Audit Evidence
1. Personal Knowledge 2. External Evidence 3. Internal Evidence 4. Oral Evidence
59
5 Types of Analytical Procedures?
1. Industry Data 2. Prior Period 3. Client-determined 4. Auditor-determined expected results 5. Expected results using non-financial data
60
What are working papers?
Reviewed by managers and partners to determine if sufficient appropriate evidence. May be used in court, are confidential.
61
What is the Final Audit File?
Assembled with 60 days after the report is released/report date and document completion date to be documented.
62
Client Acceptance
Investigate company, Communicate with predecessor auditor
63
Client Continuance
Equally important as deciding to accepts a new client.
64
5 components of understanding Client's Business
1. Industry 2. Business Operations and Processes 3. Management and Governance 4. Client Objectives and Strategies 5. Measurement and Performance
65
Risk Assessment Procedures
Review prior year working papers, inquiries of management and others, observation, inspection of key documents, analytical procedures, and Fraud risk assessment procedures.
66
Preliminary Analytical Review
Key ratios for client and compare to industry. Current Ratio Debt/Equity Equity
67
Materiality
Based on professional judgement, initially determined and documented in the context of the financial statements as a whole.
68
Steps in Applying Materiality
1. Select a Benchmark 2. Identify appropriate financial data for the benchmark 3. Determine the percentage to be applied to the benchmark
69
Common Materiality Benchmarks
``` 5-10% net income before tax ½-5% Gross Profit ½-1% Total Assets ½-5% Shareholders Equity ½-1% Total Revenue Weighted Average of these methods ```
70
Relationship between Materiality and evidence
If materiality is low, the amount of evidence is high If materiality is high, the amount of evidence is low
71
Qualitative Factors in Material
Changes loss into income, has material impact on segment disclosure, effects compliance with debt covenants, increase management's compensation, suggests earnings management.
72
Performance Materiality
An amount less than materiality that the auditor uses to plan and conduct the audit
73
Audit Risk Model
AR=IRxCRxDR
74
Audit Risk
The risk that the auditor expresses an inappropriate opinion on the financial statements.
75
Control Risk
The risk of material misstatement in the financial statements due to absence or failure in the operation of relevant controls
76
Inherent Risk
The risk of material misstatement in the financial statements arising due to error or omission as a result of factors other than failure of controls.
77
Detection Risk
The risk that the auditors fail to detect material misstatement in the financial statements.
78
Assurance Equation
Assurance = 1 - Audit Risk
79
Audit Risk Model Implications
Audit Risk Goes Up, then Detection Risk goes up. Inherent Risk Goes up, then Detection Risk Goes down. If Control Risk goes up, then Detection risk goes down. If Detection Risk goes up, then evidence goes down.
80
What is the Substantive Audit Approach?
Obtain understanding of internal controls, set control risk at maximum, do not test controls, perform more extensive tests of details of balances.
81
What is the Combined Audit Approach?
Obtain understanding of internal controls, consists of tests of controls and substantive procedures, appropriate for most audits.
82
Why obtain an understanding of internal controls?
Determine auditability Assess control risk Identify types of potential misstatements Consider factors affecting risk of material misstatements Determine audit approach
83
Communicating Internal Control Deficiencies
Auditor must communicate material weaknesses in the internal control system found during the audit to the audit committee or equivalent.
84
What is a control deficiency?
Design or operation of controls does not detect and correct misstatements in timely manner.
85
What is a significant deficiency?
Deficiency that is of sufficient importance to be brought to attention of those charged with governance.
86
What is Material Weakness?
A significant deficiency that results in a reasonable possibility internal control will not prevent or detect a material financial misstatement.
87
Risks may Arise from?
Changes in operations, Turnover, Rapid Growth, New Technology, Changes in management
88
If Audit Risk = 0.02
This means there is a 2% chance the auditor will give an incorrect audit opinion.
89
If Inherent Risk = 0.80
There is an 80% chances of a material misstatement due to error not due to controls
90
If Control Risk = 0.50
There is a 50% chances of a material misstatement due to internal controls
91
If Detection Risk = 0.05
There is a 5% chance the auditor will not detect a material misstatement.
92
AR=IRxCRxDR
You always want AR and DR to be low. Having a high IC and CR means more tests therefore means lower detection risk.

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