Becker AUD 3.6 - Assessing risks of material misstatements Flashcards Preview

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Flashcards in Becker AUD 3.6 - Assessing risks of material misstatements Deck (16):
1

What is the objective of tests of controls?

Evaluate control polices and see if the internals controls are operating effectively.

2

Test of controls evaluates the assertion that the internal controls ____ and are operating ______. It also supports the planned level of ___ risk.

Exists

and

Operating effectively

Control risk

3

Which procedure or audit activity is done in

Audit Planning Stage or Audit Fieldwork phase:

a) Verification of mathematical accuracy on prior year's transaction items

b) Perform cut off tests on cash receipts and disbursements

c) Conduct analytical procedures in comparing FINANCIAL info to NON-FINANCIAL operating data in order to understand the client and its environment.

d) Conduct analytical procedures to alert the auditor to problems that could require attention in later in the audit

e) Inquiries to gather info on contingencies such as lawsuits

f) Comparing current year sales volume to prior year sales volume

g) Compare current-year ratio of aggregate salaries paid to the number of employees to prior-year's ratio.

h) Recalculating inventory extensions of physical inventory

i) Scanning A/R for amounts over credit limits

j) Confirm bank balances

a) Audit fieldwork phase

b) Audit fieldwork phase

c) Audit Planning phase

d) Audit Planning phase

e) Audit Fieldwork phase

f) Audit Planning phase
Note: this comparison of current year's sales volume vs prior year's sale volume helps the auditor to understand the changes in the client's business in the current period.

g) Audit field work stage.
Even though it is an analytical procedure, it's a analytical procedure on a specific account during the fieldwork stage.

h) Fieldwork stage
Because it is testing on details

i) Fieldwork stage
Because it is testing on details

j) Fieldwork stage
Because it is testing on details

4

Which of the following is:

An analytical procedure -OR- Not an analytical procedure:

a) Compare sales volume in the current period and prior period.

b) reading the letter from client's attorney and consider the threat of litigation

c) reading Financial statements and notes and considering the adequacy of evidence

d) Conduct ratio analysis on certain accounts and compare them to an industry benchmark.

e) Recalculating interest expenses based on notes payable balances

f) Scanning payroll files for terminated employees

g) Confirm Accounts payable

h) Review aggregated data at high level

i) Compare F/S amounts to budgeted amounts.

j) Identify internal control activities that could reduce assessed level of control risk

k) Recalculating inventory extensions of physical inventory

l) Scanning A/R for amounts over credit limits

m) Confirm bank balances

a) Analytical procedure

b) Not analytical procedure

c) Not analytical procedure

d) Analytical procedure

e) Not analytical procedure - it's a test of details.

f) Not analytical procedure - it's a test of details

g) Not analytical procedure - it's a test of details

h) Analytical procedures

i) Analytical procedures

j) Not analytical procedures - IT'S a risk assessment.

k) NOT analytical procedures - it's a DETAILED PROCEDURE (test details)

l) NOT analytical procedures - it's a DETAILED PROCEDURE (test details)

m) NOT analytical procedures - it's a DETAILED PROCEDURE (test details)

5

Per PCAOB, give 3 examples of documents that the auditor may use in its procedures to understand the nature of the company?

1) Observe and read transcripts of EARNINGS CALLS and OTHER PUBLICLY AVAILABLE meetings with investors and ratings agencies.

2) Obtain info from SEC filings and other sources about trading activity in the company's securities and holdings of significant shareholders.

3) Read public information about company relevant to Evaluation of the likelihood of material F/S misstatement and the effectiveness of company's INTERNAL CONTROLS OVER financial reporting.

6

True or false

1) Becoming an investor in the company you are auditing would help you understand the nature of the company.

2) Discovering uncorrected misstatements that should e communicated to the audit committee is ONLY a result of doing analytical procedures during the planning phase of an audit.

3) Analytical procedures also includes documenting risk factors relating to susceptibility of assets misappropriation.

4) Representation from management are obtained at the end of the audit.

5) Communicate with those charged with governance must be made in regards to PRIOR YEAR'S audit adjustments.

6) Inquiries with client's attorney on pending and threatened litigation and assessments can be made in the planning stage of the audit.

7) Comparing the current year account balances for conformity with predictable patterns is part of the analytical procedures in the planning stage to udnerstand the client.

1) False.

This impairs independence and impairs objective judgment to do the audit competently.

2) False.
Discovering uncorrected misstatements that should be communicated to the audit committee is a result of DOING ANALYTICAL PROCEDURES or SUBSTANTIVE TESTING.

3) False.
Documenting the risks of Asset misappropriation is a planning procedure THAT IS NOT an ANALYTICAL PROCEDURE.

4) True.

5) False.
Only communicate on current year audit issues with those charged with governance (assuming Charged with governance people are not involved with management)

6) False.
Inquiries with client attorneys on litigation issues is only made during the FIELDWORK PHASE. Not planning.

7) True.
Understanding the patterns in a client's business is part of the analytical procedures in comparing current year account balances .

7

True or False on Internal controls documentation.

a) When the audit client failed to maintain copies of its manuals and organizational flowcharts about its internal controls, the Auditor document its understanding of client internal controls.

b) Client's inability to show internal control documentation means that the Control Risk is HIGH.

c) The lack of documentation of internal controls results in a qualified opinion on the auditor report.

d) Even with lack of proper documentation on internal controls, the auditor is still responsible to ASSESS internal controls effectiveness.

a) True

b) False.
When the internal control documents are gone, it does NOT imply that the control risk is high. It is possible that the actual controls are working just fine so therefore the auditor should do more work to understand internal controls and apply "tests of controls."

c) False.
Lack of documentation of internal controls by the client does NOT result in a Qualified opinion. Qualified opinion is issued when the auditor is unable to perform a DESIRED AUDIT PROCEDURE or ACCEPTABLE ALTERNATIVE AUDIT PROCEDURE.

So: if there is no documentation on internal controls, the auditor does more audit work to understand the internal controls and documents them.

d) True.

8

Analytical procedures used in Planning Phase of audit should focus on enhancing the auditor's understanding of the ____ and ___ that have occurred since the last day of the previous audit.

TRANSACTIONS and EVENTS

9

During the planning stage of the audit, the auditor performs analytical procedures.

In so doing which item below would develop expectations when reviewing them:

a) Control risk assessment related to specific financial assertion

b) Comments in prior year's management letter

c) Various assertions in planning memorandum

d) Unaudited information from internal quarterly reports.

e) Comparing recorded financial information with anticipated results from budgets and forecasts.

a) No.
This because analytical procedures involves COMPARING recorded amounts to INDEPENDENT EXPECTATIONS.

Assessing control risk is not a comparison procedure. So, not used to develop expectations.

b) No.
This because analytical procedures involves COMPARING recorded amounts to INDEPENDENT EXPECTATIONS.

Reading comments in a prior year's management letter is a NOT comparison procedure since there is nothing to compare from. So, this is not used to develop expectations.

c) No.
This because analytical procedures involves COMPARING recorded amounts to INDEPENDENT EXPECTATIONS.

Reading assertions in a planning memorandum NOT a comparison procedure since there is no amounts to compare from. So, this is not used to develop expectations.

d) Yes.
This because internal quarterly reports have $$ amounts to compare from and develop expectations.

e) Yes.
This is part of analytical procedures where the auditor makes comparison on amounts to expected results.

10

The purpose of applying analytical procedures in planing the audit is to assist in?

Discovering unusual transactions or events that may have an impact on the planning of the audit via determining the the nature, timing, and extent of auditing procedures that will be used to

Obtain audit evidence for specific account balances or transaction classes.

11

To accomplish on gathering audit evidence on balances or transaction classes, the analytical procedures used in planning the audit focuses on what 2 things?

a) Understanding client's business and the transactions and events that have occurred since last audit date

b) Identify the areas that may represent specific risks relevant to audit.

12

Analytical procedures in the planning stage are not good in what 4 things in the audit?

1) Not effective in identify party related transactions.

2) Not effective as tests of controls to identify unauthorized transactions.

3) Not effective in identify acts of non-compliance with laws and regulations that went undetected due to internal control weaknesses.

4) Not effective in the planning stage in identify MATERIAL MISSTATEMENTS.

13

True or false.

Square footage of selling place is most likely used in performing analytical procedures during the planning audit stage on comparing financial and non-financial.

True.

Reason: relationship exists between square footage of selling place and level of sales.

14

Give 3 examples of items NOT used in analytical procedures in comparing non-financial data to financial data.

a) Objectivity of audit committee members

b) Turnover of personnel in accounting department or any other department.

c) MGT's plan to repurchase stock.

15

The audit plan CANNOT be finalized until what two things that got be done first?

1) Sufficient understanding of entity and its environment

2) Company's Internal controls

16

When the auditor's risk assessment is based on EFFECTIVE FUNCTIONING of INTERNAL CONTROL, the auditor should identify _______ to ___________ that are likely to prevent or detect ___ ___ in those assertions.

SPECIFIC INTERNAL CONTROLS relevant TO SPECIFIC ASSERTIONS

MATERIAL MISSTATEMENTS.