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Audit Reports Flashcards

1
Q

What should be included for the Auditor’s address?

A

The City and State where located

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2
Q

What is Management Responsible for in regards to the Financial Statements?

A

Preparation and Fair Presentation of Financial Statements in accordance with the Applicable Financial Reporting Framework

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3
Q

What is Management Responsible for in regards to Internal Control?

A

Internal Control Design, Implementation, Maintenance

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4
Q

What are the headings in the Audit Report for an Unmodified Opinion?

A

(TIM-AA) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion

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5
Q

What are the headings in the Audit Report for an Modified Opinion?

A

(TIMA-BA) Title; Introduction; Management Responsibility; Auditor Responsibility; Basis for (Modified) Opinion; Audit Opinion

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6
Q

In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the headings?

A

(TIM-AA EMO) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion; Emphasis-of-Matter; Other-Matter

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7
Q

What are the requirements for referencing a Component Auditor in the Audit Report?

A

Component Financial Statements must be prepared using same Financial Reporting Framework as the Group Financial Statements; Component Auditor must have performed audit in accordance with GAAS or PCAOB Standards.

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8
Q

What must the Group Engagement Partner do if they assume responsibility for the Component Auditor’s work?

A

Perform additional audit procedures; Be involved in Component Auditors work; Perform Risk Assessment procedures; Assess Risk of Material Misstatement

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9
Q

What standards govern SSARS engagements?

A

Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)

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10
Q

Which clients can have compilation engagements?

A

Non-SEC (non-public) registrants only.

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11
Q

What is a Compilation?

A

Accountant puts together financial statements with information PROVIDED BY MANAGEMENT. No opinion is expressed and no assurances are given. Independence is not required.

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12
Q

What disclosures are required for Compilation engagements?

A

Disclosures not necessary must state that they are not included

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13
Q

What standards govern Review engagements?

A

SSARS (Statements on Standards for Accounting and Review Services)

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14
Q

What type of assurance is given in a Review engagement?

A

Reviews give limited assurance.

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15
Q

What procedures are required for Review engagements?

A

Analytical procedures are required for reviews. Compare results to documented predictions.

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16
Q

What is a Review engagement?

A

Financial statements are presented with no opinion expressed- and limited assurances are given. Independence is required for a review engagement.

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17
Q

What is a Forecast?

A

A prospective financial statement that uses normal circumstances. General and limited use allowed.

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18
Q

What is a Projection?

A

A prospective financial statement using hypothetical situations. Only limited use by the client is allowed.

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19
Q

What are the requirements for Agreed Upon Procedures?

A

Independence is required; Only limited use by the client is allowed.

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20
Q

What disclosures are required for remote likelihood of losses?

A

No disclosure required.

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21
Q

What disclosure is required for a probable loss contingency?

A

Accrue if estimable. Emphasis-of-Matter paragraph if not estimable.

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22
Q

What disclosure is made if a loss contingency is reasonably possible?

A

Auditor assesses need for Emphasis-of-Matter paragraph based on loss likelihood.

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23
Q

How is a gain contingency reported?

A

Gain contingencies are not reported.

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24
Q

How does an immaterial GAAP issue affect the audit opinion?

A

It doesn’t. Opinion is Unmodified.

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25
How does a very material GAAP issue affect the Audit Report?
Modified-Adverse Opinion is issued. Emphasis-of-Matter paragraph is added after Opinion paragraph.
26
How do GAS standards compare to GAAS?
GAS is more strict than GAAS.
27
What is required under the Single Audit Act?
Funding Threshold is $750,000. An audit performed under governmental auditing standards (GAS). A report on internal control is required. GAAS and GAS don't require the I/C report.
28
What should be included for the Auditor's address?
The City and State where located
29
What is Management Responsible for in regards to the Financial Statements?
Preparation and Fair Presentation of Financial Statements in accordance with the Applicable Financial Reporting Framework
30
What is Management Responsible for in regards to Internal Control?
Internal Control Design, Implementation, Maintenance
31
What are the headings in the Audit Report for an Unmodified Opinion?
(TIM-AA) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion
32
What are the headings in the Audit Report for an Modified Opinion?
(TIMA-BA) Title; Introduction; Management Responsibility; Auditor Responsibility; Basis for (Modified) Opinion; Audit Opinion
33
In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the headings?
(TIM-AA EMO) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion; Emphasis-of-Matter; Other-Matter
34
What are the requirements for referencing a Component Auditor in the Audit Report?
Component Financial Statements must be prepared using same Financial Reporting Framework as the Group Financial Statements; Component Auditor must have performed audit in accordance with GAAS or PCAOB Standards.
35
What must the Group Engagement Partner do if they assume responsibility for the Component Auditor's work?
Perform additional audit procedures; Be involved in Component Auditors work; Perform Risk Assessment procedures; Assess Risk of Material Misstatement
36
What standards govern SSARS engagements?
Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)
37
Which clients can have compilation engagements?
Non-SEC (non-public) registrants only.
38
What is a Compilation?
Accountant puts together financial statements with information PROVIDED BY MANAGEMENT. No opinion is expressed and no assurances are given. Independence is not required.
39
What disclosures are required for Compilation engagements?
Disclosures not necessary must state that they are not included
40
What standards govern Review engagements?
SSARS (Statements on Standards for Accounting and Review Services)
41
What type of assurance is given in a Review engagement?
Reviews give limited assurance.
42
What procedures are required for Review engagements?
Analytical procedures are required for reviews. Compare results to documented predictions.
43
What is a Review engagement?
Financial statements are presented with no opinion expressed- and limited assurances are given. Independence is required for a review engagement.
44
What is a Forecast?
A prospective financial statement that uses normal circumstances. General and limited use allowed.
45
What is a Projection?
A prospective financial statement using hypothetical situations. Only limited use by the client is allowed.
46
What are the requirements for Agreed Upon Procedures?
Independence is required; Only limited use by the client is allowed.
47
What disclosures are required for remote likelihood of losses?
No disclosure required.
48
What disclosure is required for a probable loss contingency?
Accrue if estimable. Emphasis-of-Matter paragraph if not estimable.
49
What disclosure is made if a loss contingency is reasonably possible?
Auditor assesses need for Emphasis-of-Matter paragraph based on loss likelihood.
50
How is a gain contingency reported?
Gain contingencies are not reported.
51
How does an immaterial GAAP issue affect the audit opinion?
It doesn't. Opinion is Unmodified.
52
How does a very material GAAP issue affect the Audit Report?
Modified-Adverse Opinion is issued. Emphasis-of-Matter paragraph is added after Opinion paragraph.
53
How do GAS standards compare to GAAS?
GAS is more strict than GAAS.
54
What is required under the Single Audit Act?
Funding Threshold is $750,000. An audit performed under governmental auditing standards (GAS). A report on internal control is required. GAAS and GAS don't require the I/C report.
55
What is Audit Sampling?
Taking part of a population- subjecting it to audit procedures- projecting results to a population
56
What are the characteristics of Statistical Sampling?
Based on formulas Helps find an appropriate audit sample Helps evaluate evidence obtained Helps evaluate results and quantify Sampling Risk
57
What are the characteristics of Non-Statistical Sampling?
Based on human decision Equally acceptable as Statistical Sampling
58
What are the characteristics of Substantive Tests?
Variables sampling Probability proportionate to size sampling
59
What type of sampling are Control Tests?
Attribute Sampling
60
What is Sampling Risk?
Risk that your sample isn't representative of population Can happen even if audit is done properly
61
What is the risk of assessing Control Risk too high?
A risk of Control Testing - Auditor works to make Control Risk lower More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency Audit ends up being effective (correct result)- but you do more work
62
What is the risk of assessing Control Risk too low?
A risk of Control Testing - Complement to Confidence Level Inverse relationship to Sample Size Higher accepted risk of assessing Control Risk too low = Smaller Sample Lower accepted risk of assessing Control Risk too low = Larger Sample
63
What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?
Leads to higher Detection Risk - Fewer substantive tests Sample understates Control Risk This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness. Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it
64
What is the risk of Incorrect Acceptance?
A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated Hurts audit effectiveness Wrong conclusion reached Efficient- but not effective
65
What is the risk of Incorrect Rejection?
A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated Hurts audit efficiency Wrong recommendations given Effective- but not efficient
66
What is Non-Sampling Risk?
Risk of human (auditor) missing an error Also called exception- error or deviation.
67
How does Sampling Risk compare to Non-Sampling Risk?
Sampling Risk deals with the chance that your audit sample is flawed Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed
68
What is Attribute Sampling?
Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amounts For example- 5 invoices out of 100 were not properly paid. Error rate is 5% Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.
69
How do you determine if Control Procedures are operating properly or not operating properly?
Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors
70
What is the Tolerable Rate?
Error rate in population that you are willing to accept/tolerate Inverse relationship to Sample Size Higher Tolerable Rate = Smaller Sample Lower Tolerable Rate = Larger Sample If you're willing to accept a higher probability that errors exist- there is less pressure on the sample
71
What is the Expected Population Error Rate?
What Error Rate are you expecting? - Judgment call- based on experience Direct relationship to Sample Size More errors = Larger Sample Less errors = Smaller Sample
72
What is the basic premise of Attribute Sampling?
Attribute in the sample gives information about the entire audit population Used to estimate Internal Control error rate
73
For what is the Expected Population Deviation (error) Rate used?
Used to determine initial level of Control Risk
74
What is the Allowable Risk of Over-reliance?
Risk of Assessing Control Risk too low Gives you the Sampling Risk
75
When is Attribute sampling used?
Attribute sampling is only useful when there is documented evidence (an audit trail) to test Use when the existence of an error needs to be verified or debunked
76
What is Classic Variable Sampling?
Testing for a dollar amount Value in sample gives information about value in entire population.
77
What functions are used in conjunction with Classic Variable Sampling?
Mean Per Unit = Sample Average x Number in Population Stratification - Decreases effect of variance in population and reduces sample size
78
What are the characteristics of Probability Proportionate to Size (PPS) sampling?
A form of Variable Sampling Does NOT use Standard Deviation Auditor focuses on a dollar amount Larger or more valuable items get picked more often as part of the sample
79
What is Projected Misstatement?
Misstatement found in sample - have to project it to remainder of population
80
How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?
PPS: Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design Classic Variables Sampling: Easy to expand sample size- Selecting zero and negative balances easy
81
What factors affect sample size?
Tolerable rate for error - Inverse relationship with sample size Risk of assessing Control Risk too low - Inverse relationship with sample size Expected population error rate - Direct relationship with sample size Population size does NOT affect the sample size - as population is larger- sample size doesn't grow.
82
What is the formula for Audit Sampling?
SER + ASR
83
What is Allowance for Sampling Risk?
The amount that you add to the Sampling Error Rate to get some cushion for your sample. As high as you think the population error rate could go based on experience.
84
What is the Tolerable Error Rate?
The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective If population error rate is more than TER- do more testing to get SER lower or conclude control isn't effective. Do more substantive testing
85
What are the steps to develop a sampling plan?
Determine Test Objective - for example- have sales shipments been billed? Define Population and Deviation - take a sample of shipping document- trace forward to see if billed Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate. Select Sampling Technique
86
After a Sampling Plan is developed- what are the steps in sampling?
Perform the Sampling Plan Evaluate Results Document Results
87
What is Systematic Sampling?
Every certain # of a population is selected Population needs to be randomly ordered Primary advantage is that population doesn't require pre-numbering
88
What is Sequential Sampling?
Also called Stop or Go sampling Each audit step determines the next step
89
What is Discovery Sampling?
Audit is testing an area that is so crucial that zero population errors can be tolerated Any phony employees on payroll?
90
How does Block Sampling compare to other sampling methods?
Easy to implement- but is the worst method of sampling.

Audit - CPA Exam (8 decks)

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