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Flashcards in Auditing and Attestion Deck (106):
1

What should be included for the Auditor's address?

The City and State where located

2

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

3

What is Management Responsible for in regards to Internal Control?

Internal Control Design, Implementation, Maintenance

4

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

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

5

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

6

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

7

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.

8

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

9

What standards govern SSARS engagements?

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

10

Which clients can have compilation engagements?

Non-SEC (non-public) registrants only.

11

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.

12

What disclosures are required for Compilation engagements?

Disclosures not necessary must state that they are not included

13

What standards govern Review engagements?

SSARS (Statements on Standards for Accounting and Review Services)

14

What type of assurance is given in a Review engagement?

Reviews give limited assurance.

15

What procedures are required for Review engagements?

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

16

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.

17

What is a Forecast?

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

18

What is a Projection?

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

19

What are the requirements for Agreed Upon Procedures?

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

20

What disclosures are required for remote likelihood of losses?

No disclosure required.

21

What disclosure is required for a probable loss contingency?

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

22

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

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

23

How is a gain contingency reported?

Gain contingencies are not reported.

24

How does an immaterial GAAP issue affect the audit opinion?

It doesn't. Opinion is Unmodified.

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 the majority of an auditor's work in determining an audit opinion?

Collection of evidence to support the opinion.

56

Of what does audit Evidence consist?

Evidence consists of client accounting data and supporting documentation from client or from third parties.

57

What is the relationship between Evidence and Detection Risk?

Evidence has an inverse relationship with Detection Risk

The one aspect of Audit Risk an auditor can control through (N)ature (T)iming (E)xtent of audit procedures.

Inherent Risk and Control risk are outside of auditor's control.

58

Which aspects of Audit Risk can an auditor control?

Detection Risk which is decreased by gathering evidence.

59

Which aspects of Audit Risk can an auditor NOT control?

Inherent Risk and Control Risk are outside of an auditor's control.

60

How does a high level of acceptable Detection Risk affect an audit?

Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong.

Business and transactions should be relatively stable and predictable.

(N) Less-competent Evidence collected
(T) Interim testing acceptable
(E) Fewer transactions are verified.


61

What should occur when a low level of Detection Risk is acceptable?

More Evidence collected

(N) More-competent Evidence collected
(T) End of year balance testing
(E) More transactions are verified

62

What are the primary risks in an audit for a typical for-profit company?

Auditors are there to verify that

Assets & Revenues are not overstated
Expenses & Liabilities are not understated

Exception - if the CPA Exam states that it is a tax-driven company flip them around

63

What is the primary constraint on audit evidence?

Cost vs. Benefit is a primary constraint.

64

What characteristics should audit evidence have?

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

65

How does the quality of audit evidence vary depending on who has provided it?

Best evidence: Observation of activity by auditor.

2nd Best: Originates from External Parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement)

Weakest: Oral evidence from management.

66

Which documents are the most persuasive and credible?

Third party documents are more persuasive and credible than internally-prepared docs

Auditor Knowledge = Most Persuasive

3rd Party info given to auditor

3rd Party info given to client

Internally-prepared doc

67

What are Substantive Procedures?

Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don't test internal controls.

68

What are the substantive tests that are most often performed?

Trace (or Vouch)
Reconcile
Analytical Procedures
Confirmations
Examine evidence that supports management assertions.

(T.R.A.C.E.)

69

When performing audit procedures what should auditors focus on?

Auditors focus first on Balance Sheet Accounts then associated Income Statement items

70

How is Cash audited?

Assurance Level is High.

Acceptable Detection Risk is Low.

71

How is Accounts Receivable audited?

If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong.

If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance.

Corresponding Income Statement Account - Revenue

72

How is Accounts Payable audited?

Review purchase orders/invoices

Confirm with Vendors

Corresponding Income Statement Account - Various Expenses

73

How is Inventory audited?

Examine purchase agreements

Look at Board Minutes

Is Inventory held as collateral?

Corresponding Income Statement Account - COGS

74

How are beginning balances audited?

Should match last year's ending balance.

75

What is the general presumption for auditing Ending Balances?

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

76

How is a Statement of Cash Flows audited?

Foot all balances - Check the Math

Trace Cash Flow items to other Financial Statements

Check classifications - Operating Activities Investing Activities Financing Activities

77

Under the Indirect Method what must be disclosed on a Statement of Cash Flows?

Interest Paid

Income Taxes Paid

Non-cash Transactions

Cash and Cash Equivalents Definitions

78

Under the Direct Method what must be disclosed on a Statement of Cash Flows?

Results as if you had used Indirect Method

Non-cash Transactions

Cash and Cash Equivalents Definition

79

What are Subsequent Events and what do they require?

Subsequent events occur after the Balance Sheet Date but before the audit report is issued.

Auditor needs to make inquiries and assess if they affect the audit report.

80

What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?

If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement.

Regulatory agencies might need to get involved under some circumstances.

81

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute.

Otherwise support for their audit opinion could be jeopardized.

82

When are Analytical Procedures required?

REQUIRED When planning the audit (preliminary)

REQUIRED When reviewing the audit (final)

Analytical procedures may be also performed optionally along with the substantive testing.

Use of Analytical Procedures in the audit must be documented.

83

How do Analytical Procedures assist the auditor?

Helps the Auditor:

Determine if Management Assertions are reasonable

Develop audit plan

Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

84

What is the focus of Analytical Procedures?

Analytical Procedure focus is on dollar amounts (not internal controls)

Analyzes Financial Data: Do Financial Statements Make Sense?

Comparison of data between years

85

How is the Current Ratio calculated?

Current Ratio = Current Assets / Current Liabilities

86

How is the Quick Ratio calculated?

Quick Ratio = Liquid Assets / Current Liabilities

87

How is the Asset Turnover calculated?

Asset Turnover = Net Sales / Average Assets

88

How is the Inventory Turnover calculated?

Inventory Turnover = COGS / Average Inventory

89

How is Gross Margin % calculated?

Gross Margin % = Gross Margin / Sales

90

What type of testing are ratios?

Ratios are Analytical Procedures

91

What type of procedure is a Budget vs. Actual comparison?

Budget vs. Actual comparisons are Analytical Procedures.

92

List Common Types of Analytical Procedures

Ratio analysis

Budget vs. Actual comparison

Comparison of data between years

Use of non-financial data to predict expected values for financial data

93

How do management assertions affect the audit?

Management assertions help the auditor to plan the audit and select substantive tests.

94

What assertions do auditors test?

Presentation - Cutoff Classification - Is it in the right period and category?
Existence/ Occurrence - Did it happen? Does it exist?
Rights & Obligations - Does the company own them?
Completeness - Was everything recorded?
Valuation - Are they worth the amount at which they are recorded?

(PERCV)

95

What assertions are tests for transaction classes?

Occurrence

Cutoff

Classification

Completeness

Accuracy

96

For which assertions are disclosures tested?

Occurrence

Completeness

Classification

Accuracy

97

Is testing the validity of direct evidence a basic audit procedure?

No it is an extended procedure.

For example you don't have to take a loan covenant document and go search out that it's a valid loan covenant. Instead you consider the source - if it's externally prepared it's more persuasive.

98

How are Management Estimates audited?

First and foremost you need to understand management's rationale and methods for developing estimates before you can judge reasonableness.

Next Auditor should formulate their own opinion on what a good estimate should be and compare it.

Finally determine if subsequent events affect the estimate.

99

Whose property are audit documentation (audit workpapers)? In what form must they be?

Audit workpapers are the property of the auditor.

They can be paper or electronic.

They must include a WRITTEN audit program (either paper or electronic).

100

What is the Current File?

Information pertaining to the current year's audit.

101

What is the Permanent File?

Information used for this audit and future audits which is updated as needed.

102

How long must audit workpapers be maintained?

Must be kept for 5 years after the audit release date or according to regulations whichever is longer.

Must be kept for 7 years under PCAOB Audit

PCAOB audits also require an Engagement Completion Document

103

What is the primary requirement for audit workpapers besides being written?

Any experienced auditor should be able to look at your work and understand what you did.

104

How should documents added to work papers be treated?

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

105

How should documents removed from workpapers be treated?

After the audit report is released the firm has 60 days to subtract from the file.

You can still add to the file if you document it but you cannot delete any information after 60 days.

Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.

106

What does an audit procedures should be applied to Required Supplementary Information?

The auditor should make management inquiries about RSI and obtain written assertions regarding its preparation. The auditor should compare the RSI to the rest of the financial statements to ensure consistency.