Becker AUD 4.4 - Evaluating Audit Findings Flashcards Preview

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Flashcards in Becker AUD 4.4 - Evaluating Audit Findings Deck (26):
1

Who is the individual in the CPA firm that has comprehensive knowledge of client's business and industry is the one to read the F/S and disclosures to perform analytical procedures in the review stage?

Audit Manager or Audit Engagement Partner

FYI -- Note:
* It would not be the staff accountant performing substantive audit procedures (substantive testing)

* It would NOT be managing partner responsible for all audit engagements with different clients at the practice office

* it would NOT be CPA firm's quality control manager or partner who has responsibility for firm's peer review program.

2

(1) What is the purpose of applying analytical procedures during the overall review stage of an audit?

(2) Whether or not misstatement considered material is ultimately a matter of ___ ____

1)
(a)To evaluate the overall F/S PRESENTATIONS
(b) To assess CONCLUSIONS reached
(c) To assist in forming OPINION on whether the F/S as a whole are FREE of MATERIAL MISSTATEMENT (in accordance with an applicable financial reporting framework; Give one of these opinions: unmodified, qualified, adverse, or disclaimer)

(2) PROFESSIONAL JUDGMENT

3

In the overall review stage of the audit:

(1) The auditor should determine whether ____ evidence has been gathered in response to ____ or ____ balances identified during the audit.


The auditor may also discover additional ____ or ____ balances, transactions, events, or relationships, including ___ ___, during this overall review stage, and should consider whether additional ____ procedures are warranted.

(1) ADEQUATE

UNUSUAL or UNEXPECTED

(2) Unusual or Unexpected

FRAUD RISK

AUDIT procedures

4

(1) PCAOB standards (for issuer / public companies) state that the nature and the extent of analytical procedures performed during the overall review stage may be similar to analytical procedures performed as a ____ ___ procedures.

(2) The auditor should perform analytical procedures relating to ___ through the end of reporting period.


(3) The auditor MUST evaluate the audit evidence gathered to determine whether F/S are ___ of ___ ____ due to ___ or ____

(1) Risk assessment

(2) REVENUE

(3) FREE of MATERIAL MISSTATEMENT

due to ERROR or FRAUD

5

PCAOB Standards (for issuer / public companies) state that Auditor's Evaluation of Audit results should include evaluation of

What 6 items?

(1) The results of Analytical procedures performed during the OVERALL REVIEW of F/S

(2) MISSTATEMENTS FOUND during the audit, including UNCORRECTED misstatements

(3) QUALITATIVE aspects of company's ACCOUNTING practices

(4) CONDITIONS identified during audit related to FRAUD RISK

(5) PRESENTATION of F/S, including DISCLOSURES

(6) SUFFICIENCY and APPROPRIATENESS of AUDIT EVIDENCE obtained.

6

(1) PCAOB Standards (for issuer / public companies) state that the auditor must evaluate whether the F/S are presented fairly, in all material respects, in conformity with the __ ___ ___ ___ .

(2) To do so, the auditor should consider the __, ___, and ___ of the F/S and accompanying notes, including terminology used, the amount of detail given, the classifications of items in the statements, and the bases of amounts set forth.

(1) applicable financial reporting framework

(2) form, arrangement, and content

7

PCAOB Standards (for issuer / public companies) state that:

The auditor should accumulate misstatements identified during the audit, other than those that are clearly trivial.

(1) "Clearly trivial" is not the same as "__ ___."

(2) Matters that are trivial are _____, both individually and in aggregate, and when judged by any criteria of size, nature, or circumstance.

(3) If there is UNCERTAINTY about whether an item is clearly trivial, then it cannot be considered ___.

(4) Auditor may designate an amount below which misstatements are clearly trivial and do not need to be _____ .

The amount should be set so that any misstatement below the amount would not be ____ to the F/S, individually or in aggregate, considering the possibility of ___ misstatement.

(1) not same as "MATERIAL MISSTATEMENT."

(2) INCONSEQUENTIAL

(3) TRIVIAL

(4) ACCUMULATED

UNDETECTED

8

PCAOB standards state what 8 additional QUALITATIVE FACTORS that should be considered when evaluate the material of an uncorrected misstatements?

(1) Misstatement EFFECT on SEGMENT INFO

(2) EXISTENCE of STATUTORY or REGULATORY REPORTING REQUIREMENTS that affect MATERIALITY THRESHOLDS

(3) Effects of MISCALCULATIONS, for example, between OPERATING and NON-OPERATING income or recurring and non-recurring items.

(4) Significance of MISSTATEMENT relative to NEEDS OF USERS

(5) Existence of OFFSETTING EFFECTS of individually significant but DIFFERENT MISSTATEMENTS

(6) Likelihood that a MISSTATEMENT that is currently IMMATERIAL will have a MATERIAL EFFECT in the FUTURE

(7) COSTS to do the correction

(8) RISK that possible ADDITIONAL UNDETECTED MISSTATEMENT could affect the AUDITOR'S EVALUATION.

9

PCAOB standards state that when Evaluating audit findings, the auditor should consider any potential bias in management's judgments about the amounts and disclosures in the F/S.

Example of management BIAS include: (name 5 examples)

(1) SELECTIVE CORRECTION of misstatements brought to MGT's attention during the audit

(2) The Identification by MGT of ADDITIONAL ADJUSTING ENTRIES that OFFSET misstatements ACCUMULATED by the auditor

(3) BIAS in SELECTION and APPLICATION of ACCOUNTING PRINCIPLES

(4) BIAS in ACCOUNTING ESTIMATES

(5) If the auditor identified BIAS in MGT's judgments, the auditor should evaluate whether this bias, together with the EFFECT of UNCORRECTED MISSTATEMENTS,

RESULTS in: MATERIAL MISSTATEMENTS in F/S.

10

To evaluate the MATERIALITY of ALL misstatements found during the auditor:

The auditor evaluates the materiality based on what 5 things?

(1) SIZE of misstatement - in comparison to relevant FINANCIAL BASE (net income, gross sales, total assets, or total liabilities)

(2) Consider the effects, the individually and in aggregate of UNCORRECTED MISSTATEMENTS (both KNOWN and LIKELY)

* Evaluate the misstatements in relation to SPECIFIC ACCOUNTS or DISCLOSURES involved and F/S as a whole, considering all QUANTITATIVE and QUALITATIVE factors

(3) Aggregate of known and likely misstatements approaches materiality level - The auditor consider the risk that adding undetected misstatements could breach this Materiality level.

(4) PRIOR PERIOD misstatement affecting CURRENT PERIOD

(5) Qualitative considerations sometimes may cause an otherwise IMMATERIAL misstatement to BECOME MATERIAL.

11

(1) Explain WHY that specific circumstances surrounding an entity may lead to situations in which misstatements that do not exceed materiality limits are likely to influence the economic decisions of users.

(2) Misstatements are MORE LIKELY to become MATERIAL if they (what 5 things)?

(1) The reason is because there could be a $$ amount (lesser than the material amount) pertaining to a certain account like a Loan or a exotic investment or maybe some transaction with a related party that if something goes wrong it would impact the F/S users' decisions in the current period and in later periods.

(2)

(a) Affect TRENDS in PROFITABILITY or mask a change in trend or change loss into income or change income into loss

(b) Affect entity's COMPLIANCE with LOAN COVENANTS, CONTRACTS, or REGULATORY PROVISIONS

(c) INCREASE MGT COMPENSATION: this indicates MGT bias or there is a fraud / illegal act involved

(d) Affect SIGNIFICANT F/S elements, such as those INVOLVING EARNINGS (not non-recurring items)

(e) Can be OBJECTIVELY DETERMINED (not subjectively determined)

12

Communication to MGT on misstatements

(1) All misstatements must be communicated to MGT, does that include trivial misstatements?

(2) Who corrects the misstatements in the F/S: Auditor or Management?

(3) In communication to manager by auditor on misstatements, the auditor should do what 2 things?

(4) After the MGT makes the corrections, what the auditor do next?

(5) If MGT not correct some or all KNOWN and LIKELY misstatements, what the auditor should do then?

(1) No. This because trivial misstatements are inconsequential misstatements. These have little importance and has no impact at all to the F/S.

(2) It's always the MGT that is responsible to correct misstatements in the F/S.

The auditor does not correct them. The auditor only reports them to the MGT to get these material misstatements fixed.

(3)

(a) Auditor makes it clear on which one is the KNOWN misstatements and which one is the LIKELY MISSTATEMENT.

FYI - Known misstatement = identified misstatement
Likely misstatement = Not identified, but it exists based on Auditor's JUDGMENT via a measure of misstatements. This INCLUDES an ESTIMATE of POTENTIAL ERRORS.

(b) Auditor requests MGT to review the these misstatements and MAKE CORRECTIONS.

(4) Auditor reevaluate the remaining misstatements to determine if they are material that needs more adjustments or they are immaterial and just leave them alone.

(5) Auditor consider the implications on the auditor's report to whether:

If immaterial somehow, just issue Unmodified
Or, if those not corrected, determined to be material then issue Qualified or Adverse opinion.

13

(1) What are the documentation requirements for the auditor to document on misstatements that are trivial, corrected, and/or not corrected?

(2) Documentation of uncorrected misstatements should include what 2 things.

(1) Document the following:

(a) Amount below Misstatements that are trivial (inconsequential)

(b) ALL MISSTATEMENTS accumulated during the audit and WHETHER they are CORRECTED.

(c) Summary of Uncorrected misstatements (known and likely)

and

Auditor's assessment on whether these uncorrected misstatements can still cause the F/S to be materially misstated and state the basis for such conclusion.

(2) Documentation on Uncorrected items:

(a) Separate those misstatements that are KNOWN; Separate those misstatements that are LIKELY

(b) Have an aggregate effect of these Uncorrected misstatements and determine its effect on the F/S.

14

Concurring Approval of Issuing of Auditor report:

(1) Under PCAOB standard, the firm CANNOT give the client permission to use the engagement report until what?

(2) What condition that the Engagement Quality Review may provide concurring approval of issuance?

(1) Until the engagement quality review provides concurring approval of issuance.

(2) Condition: no significant engagement deficiencies exist.

15

Before Engagement quality review concur approval of issuing engagement report:

A significant deficiencies may exist when (state 4 situations):

(1) Engagement team FAILED to obtain sufficient appropriate evidence

(2) Engagement team reached an INAPPROPRIATE OVERALL CONCLUSION

(3) Engagement REPORT is NOT appropriate for the circumstances

(4) Firm is NOT INDEPENDENT of client.

16

(1) What is the purpose of reviewing the work of others in the audit engagement?

(2) TRUE or FALSE: The partner with the final responsibility for the audit may delegate some of the review to SENIOR members on the audit team consistent with the firm's quality control system.

(1) Review other audit team members' work to determine whether the work was ADEQUATELY PERFORMED and DOCUMENTED

and

EVALUATE the results of the audit work to present an appropriate conclusion on the AUDITOR REPORT.

(2) True.

The final with final responsibility can delegate responsibility to others on the audit team.
It is WISE to delegate to more SENIOR experienced audit team members to do the review just be sure everything is covered, done adequately, and nothing significant left out.

17

Reviewing other audit members work consist of what first 4 items (out of the 7 total)

(1) Work has been performed IN ACCORDANCE with PROFESSIONAL STANDARDS and APPLICABLE LAWS and REGS

(2) SIGNIFICANT FINDINGS or ISSUES that need FURTHER CONSIDERATIONS

(3) APPROPRIATE CONSULTATIONS have been TAKEN PLACE and have been DOCUMENTED and IMPLEMENTED

(4) The NATURE, EXTENT, TIMING of WORK performed is APPROPRIATE & does NOT need REVISION

18

Reviewing other audit members work consist of what last 3 items (out of the 7 total)

(5) Work performed SUPPORTS CONCLUSION reached and is appropriately documented (like areas that are really, really misstated or areas that are definitely not misstated)

(6) EVIDENCE obtained is SUFFICIENT and APPROPRIATE to support the AUDITOR REPORT

(7) Audit Engagement OBJECTIVES have been ACHIEVED.

19

True or False

(1) Engagement partner should review the significant findings /issues only during the LAST STAGES of the audit and before the auditor report date (last day of audit work) to allow resolution.

(2) The three significant findings/issues the Engagement partner reviews are:

(a) Critical ares of judgment, esp. involving contentious matters

(b) SIGNIFICANT RISKS

(C) Deficiencies found during the audit work.

(1) False.

Engagement partner reviews significant findings / issues DURING THE AUDIT (like throughout the audit from beginning to the very end before Auditor report date)

(2) FALSE.

Engagement partner reviews the following 3 significant findings / issues:

(a) CRITICAL AREAS of JUDGMENT

(b) SIGNIFICANT RISKS

(c) OTHER AREAS of Engagement the Engagement CONSIDERS IMPORTANT

20

Documentation Requirements on Reviewing the Audit members work are what 2 things?

(1) Document who perform the work and Date of work completed

(2) Who reviewed the audit DOCUMENTATION and list the Date when review was done.

21

(1) PCAOB standards require what 3 things to happen during the very last stages of completing an audit.

(2) Many CPA firms do NOT require engagement quality reviews for non-issuer audits (audits on private companies)

(3) Engagement Quality review is prepared by whom in the audit firm.

(4) Engagement Quality Reviewer must have what 4 things in order to do the Engagement quality review properly?

(1)

(1a) Engagement quality review to be done by

(1b) Concurring approval of audit report tot be issued for all audits of issuer (companies)

(1c) for each engagement, review the INTERIM F/S.

(2) FALSE

Many firms do REQUIRE engagement quality review on auditing private companies (non-issuer companies).

(3) Engagement quality review done by a PARTNER who is NOT otherwise associated with the engagement.

(4) Engagement quality reviewer must have:

(4a) Competent
(4b) Independent
(4c) Objective
(4d) Act with intergirty

22

Engagement Quality Review Process:

(1) Under PCAOB standards, the Engagement quality reviewer is required to do what with the Engagement Partner and the audit team towards Audit Documentation and the Significant judgments and overall conclusion on the audit engagement.

(1) Engagement Quality Review is required to HOLD DISCUSSION with Engagement Partner and Audit team members to

(a) To go over audit documentation
(b) Use the audit documentation to evaluate the Significant judgments made by the team
(c) And discuss the overall conclusion reached on the engagement to determine if the conclusion is appropriate

23

Engagement Quality Reviewer should do the first 5 things in the engagement quality review.

(1) Evaluate the SIGNIFICANT JUDGMENTS related to engagement planning, including firm's PRIOR experience with client, identified risks to client, and judgments on MATERIALITY

(2) Evaluate the ENGAGEMENT TEAM'S assessment of and responses to SIGNIFICANT RISKS, including FRAUD RISK.

(3) Evaluate SIGNIFICANT JUDGMENTS about MATERIALITY, corrected and uncorrected MISSTATEMENTS, and CONTROL DEFICIENCIES

(4) Review the EVALUATION of FIRM'S INDEPENDENCE in relation to engagement

(5) Review the engagement COMPLETION DOCUMENT and confirm there are NO UNRESOLVED MATTERS.

24

Engagement Quality Reviewer should do the last 5 things in the engagement quality review.

(6) Review the F/S, MGT's report on INTERNAL CONTROL, and ENGAGEMENT REPORT

(7) Read OTHER INFO to be FILED w/ SEC and determine whether APPROPRIATE ACTION has been taken with respect to MATERIAL INCONSISTENCIES or MATERIAL MISSTATEMENTS

(8) Evaluate the CONSULTATIONS, DOCUMENTATION, and CONCLUSIONS related to DIFFICULT or CONTENTIOUS (heated argumentative) matters.

(9) Evaluate COMMUNICATIONS with MGT, the AUDIT COMMITTEE, and REGULATORY BODIES

(10) Evaluate whether ENGAGEMENT DOCUMENTATION indicates that the Engagement Team responded appropriately to SIGNIFICANT RISKS and whether such DOCUMENTATION supports the CONCLUSIONS reached by the engagement team.

25

(1) Which of the following descriptions fits one of these:

* Overall audit review stage
* Planning audit stage
* Fieldwork - substantive testing change

(a) Detect fraud that may cause financial statements to be stated

(b) Gather evidence from tests of details to corroborate the F/S assertions

(c) Analytical procedures to assist the auditor in evaluating the overall F/S presentation

(d) Identify the account balances that represent specific risks relevant to audit

(e) Performing tests of transactions to corroborate F/S assertions

(f) Gathering evidence concerning account balance that have NOT changed from prior year

(g) Considering unusual or unexpected account balances that were not previous identified.

(h) Additional tests of details are required after analytical procedures of several accounts have found unexpected relationships than seen before during the audit fieldwork.

(2) Which of the following is:

* Correct application of accounting principle
* Management bias

(a) Management reporting all insurance purchases initially as an expense then adjust the unexpired portion into prepaid insurance at end of period.

(b) Management decreasing the allowance for doubtful accounts when there has been no change in the level of write-offs during the period

(c) The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor.

(d) Selective correction of misstatements brought to management's attention during the audit.

(3) Under PCAOB standards, which of the following statements is:

* Qualitative standard
* Quantitative standard

when evaluating materiality of uncorrected misstatements:

(a) Dollar amount of error

(b) Cost of correction

(c) Effects of classifications between operating and non-operating

(d) Significance of misstatement relative to needs of users

(e) The cutoff amount of analyzing $$ amounts of a certain account not going above this limit

(f) Effect of misstatement on segment information

(g) Existence of statutory or regulatory reporting requirements affecting materiality thresholds

(h) Existence of Offsetting effects of individually significant but different misstatements

(i) Analytical procedures showing an unusual patterns in trends on the income statement

(j) Risk that misstatement that is immaterial now but will be material in the future

(k) Risk that a possible additional undetected misstatements could affect the auditor's evaluation.


(a) Fieldwork - substantive testing change
Note: Analytical procedures cannot detect fraud.

(b) Fieldwork - substantive testing change

(c) Overall audit review stage (the last stage)

(d) Audit planning stage
Note: analytical procedures are required in Planning Stage and Overall review stage.

(e) Fieldwork - substantive testing change

(f) Fieldwork - substantive testing change

(g) Overall audit review stage (the last stage)

(h) Overall audit review stage (the last stage)

(2)

(a) Correct application of accounting principle
This because of the MGT taking measures to fix a mistake so the F/S are fairly stated.

(b) Management bias
This because there is no reason for the MGT to reduce Allowance for Doubtful Accounts when nothing has changed. This lowering was probably done to increase revenues on the Income Statement to increase Share price and probably get their MGT performance bonus.

(c) Management bias
MGT was probably involved in the override of making adjustments that are in contrast to Auditor's accumulated misstatements.

(d) Management bias
Being selective on making certain corrections shows the MGT bias and picking and choosing certain items to correct in order to make the F/S looking really good, but not accurate.

(3)

(a) Quantitative standard

(b) Qualitative standard

(c) Qualitative standard

(d) Qualitative standard

(e) Quantitative standard

(f) Qualitative standard

(g) Qualitative standard

(h) Qualitative standard

(i) Quantitative standard

(j) Qualitative standard

(k) Qualitative standard

26

(1) What transaction cycle that the auditor should perform analytical procedures on if not already done so in overall review stage of the audit?

(2) What does the auditor document when he/she discovers that the client prefers not to correct the misstatements and at the same the misstatements are not that material?

(3) True or false: Tests of controls are not part process in the overall review audit stage.

(4) True or false. During the final review stage of the audit, the Auditor focuses on the overall financial statement presentation and testing every detail.

(5) True or False: During the final review stage, the auditor evaluates the overall F/S presentation and consider whether there are any unusual or unexpected balances that were not previous identified.

(6) True or False: Analytical procedures in the final review stage can be used to enhance auditor's understanding of subsequent events, evaluate internal control activities effectiveness, and identify procedures omitted by staff accountants.

(7) If more receivables are potentially Uncollectible in the current year (in contract to Prior year),

The Allowance for Doubtful Accounts as a % of receivables should INCREASE -or- DECREASE to reflect the greater level of estimated bad debts.

(8) Write off of a specific account receivable reduces both the Allowance account and the Receivable account by amount written off. If there were twice as many write offs in previous year than in current year, the allowance for doubtful accounts as % of receivable would not stay the ___.

(9) If there is more Merchandise sold to customers of poor credit, then the Allowance account as % of receivables will increase or decrease.

(10) If sales and accounts receivable in current year (more than past year) and then for some reason the Allowance as % of A/R remains, the same, what would be the cause for this?

(11) True or False: An auditor expects that a material misstatement exists when the MGT does not emphasize on meeting earnings (net income) projections.

(12) True or False: Inadequate record-keeping with respect to assets (like inventory or fixed assets), such as failing to reconcile the physical inventory count to accounting records, provides an opportunity for fraud or error to occur.

(13) What is the difference between:

"Known Misstatement"
and
"Likely Misstatement"?

(14) State which ratio below is meaningful in its use during the final review stage of audit, focusing on the overall presentation of balance sheet:

a) A/R / inventory

b) Total debt/ total assets

c) Quick assets / current assets

d) Interest payable / interest receivable

(15) Identification of unexpected relationships as a result of analytical procedures during the Final Review stage does not mean what 3 things?

(16) Do changes in assumptions to develop estimates in prior year to current means that there is a material misstatement going on in the F/S?

(17) Differences between reconciliations of CONTROL Accounts and subsidiary records (ledgers) are not investigated means that there is a high chance that material misstatement exists in the F/S?

(18) What is a control account?

What is a subsidary record?

(1) Revenue cycle

The auditor should do analytical procedures on this because of presumption of Revenue fraud in all audits.

Note: For F/S (financial accounting), MGT is concerned to increase Revenues at all costs in order to get their bonus and also help increase share price of the company and/or make the company look good in order to get a loan and/or get more investors' money.

(2) Document the summary of uncorrected errors (not corrected/adjusted by MGT)

and also Document the CONCLUSION that the uncorrected errors do NOT cause the F/S to be materially misstated.

(3) True.
Test of controls are not part of the analytical procedures in the final review stage. Control testing is done in the planning audit stage and control testing is not the same as Analytical procedures.

(4) False
During Final Review stage, Auditor focuses on the overall F/S presentation and NO testing on details.

(5) True.

(6) False.
Analytical procedures in the final review stage does not involve with understanding subsequent events, identify omitted procedures, and evaluate internal control effectiveness.

Analytical procedures in the final review stage involves:
* Overall F/S presentation
* Find any unusual transactions or events to determine if additional audit evidence needs to be gathered via application of further audit procedures.

(7) INCREASE:

More uncollectible A/R = HIGHER Allowance account

(8) SAME.

More write offs in Prior year, then in current year, there should be a Smaller A/R amount and a Smaller Allowance account.

(9) INCREASE

More A/R sales, then higher Allowance of doubtful accounts as % of A/R.

(10) Open a second store that will increase more sale and A/R accounts. Then, have the collection rate from these A/R sales to be same.

So, that way, the Allowance account as % of A/R remains the same.

(11) FALSE.

A misstatement most likely occur when MGT engages in aggressive accounting policies to increase earnings.

(12) True
Significant differences between physical inventory account and the accounting records is a sign that fraud or error is occurring and must be investigated.

(13)
* KNOWN misstatement = identified misstatement. Misstatement identified during the audit.

* LIKELY misstatement = Not identified, but it exists based on Auditor's JUDGMENT via a measure of misstatements. This INCLUDES an ESTIMATE of POTENTIAL ERRORS.

(14)

a) A/R / inventory = Not meaningful

b) Total debt / total assets = Meaningful ratio on analyzing the B/S since it indicates a portion of the assets financed by credits.

c) Quick assets / current assets = Not meaningful
Only focus on area of the B/S not the overall big picture of the B/S.

d) Interest payable / interest receivable = Not meaningful
This because these two are not linked to each other.

15)

ONE: Not mean irregularities exist in relevant account balances

TWO: Not mean that Internal control activities are not operating effectively

THREE: Not mean that communication with those charged with governance (Board of directors / audit committee) need to be REVISED.

16) No.
It is normal that assumptions to create estimates changes. This because assumptions on making estimates changed due to getting new information in making a more accurate estimate in the F/S

17) Yes.
Control accounts in General ledger not reconcile with Subsidiary ledger means that there could be a problem with transactions being recorded and posted. So, a material misstatement exists in the F/S.

(18)
Control accounts = General Ledger accounts that has no errors in it. It also go by Master account.

Subsidiary records = subsidiary ledgers that is a group of similar accounts whose combined balances equal the balance in a specific general ledger account.

Subsidiary records / ledgers are inside a control account.