Ch 3

Question 0

What does risk refer to in an audit engagement?

Answer 0

Probability that firm could blow the audit opinion

Question 1

risk engagements

Answer 1

Activities before beginning audit engagement

Question 2

Predecessor auditor

Answer 2

Public accounting firm that has been terminated

Or has voluntarily withdrawn from engagement

Question 3

To reduce risk of accepting a problem client, auditing standards require a prospective auditor to…

Answer 3

Find out from predecessor auditor integrity of management

Question 4

Before taking on a client what is looked into by accounting firm? 3 things

Answer 4

1 check financial records
2 criminal background check on management
3 inquiries with people who do business with company
(Bankers, lawyers, underwriters, analysts)

Question 5

What must an accounting firm evaluate about itself before taking on a new audit client?

Answer 5

1 risks of taking engagement
2 accounting firms independence with regard to client
3 consider need for individuals possessing special skills
(IT auditor, valuation specialist, industry specialist)

Question 6

Form 8-K: special events report

Answer 6

Filed with SEC when public company changes auditors

Required when significant events such as changes in control
Or legal proceedings occur

Question 7

Independence in fact

Answer 7

Independence in state of mind of auditor

Question 8

Independence in appearance

Answer 8

Others’ perceptions of auditors’ independence

Question 9

If an auditor is not considered independent from the company’s managment, the audited statement is considered…

Answer 9

Unaudited

Question 10

When is an engagement letter prepared?

Answer 10

When a new client is accepted

or when an audit engagement continues from year to year

Question 11

What 4 things does an engagement letter set forth about the understanding with the client?

Answer 11

1 objectives of engagement
2 management’s responsibilities
3 auditor’s responsibilities
4 limitations if the engagement

Question 12

Termination letter

Answer 12

Documentation provided to former clients dealing with subject
Of future services

Question 13

4 ways termination letter is helpful?

Answer 13

1 access to audit documentation by new auditors
2 reissuance of auditors report for SEC reporting
3 fee arrangements for future services
4 provides reasons for termination

Question 14

Audit plan

Answer 14

Comprehensive list of audit procedures audit team needs to
Perform

To gather evidence for auditors opinion on financial statements

Question 15

Primary reason for engagement planning

Answer 15

Mitigating risks

Question 16

3 additional goals of audit planning

Answer 16

1 make sure qualified staff to conduct audit
2 determine materiality
3 audit procedures: control tests and substantive tests in line with
Professional standards

Question 17

Audit engagement partner

Answer 17

Person with final responsibility for audit and usually industry
Specialist

Question 18

Quality assurance partner

Answer 18

Second audit partner who reviews audit team’s work in critical
Audit areas

Question 19

Objectivity: internal vs. External auditors

Answer 19

Internal auditors can never be considered independent in same
Sense as external auditors

Because internal auditors are employed and compensated by client

Question 20

How is an internal auditor’s competence investigated?

Answer 20

Obtaining evidence about educational and experience qualifications

Question 21

Audit specialists

Answer 21

Persons skilled in fields other than accounting and auditing

Ex. Actuaries, appraisers, attorneys, environmental engineers,
Geologists

Question 22

Interim audit work

Answer 22

Procedures performed several weeks or months before date of

Financial statements

Question 23

Year end audit work

Answer 23

Procedures performed shortly before and after date of

Financial statements

Question 24

Materiality

Answer 24

Amount or event likely to influence financial statement users decisions

Question 25

Performance materiality

Answer 25

Amount less than materiality for financial statements as whole

Question 26

Materiality calculation

Answer 26

Materiality is matter of professional judgement that each | Engagement partner must decide on an audit engagement

Question 27

3 ways audit team uses materiality

Answer 27

1 planning substantive testing procedures 2 determining performance materiality 3 guide decisions about audit report

Question 28

Substantive testing procedures

Answer 28

Directing attention and audit work to items/accounts that are Important, uncertain, susceptible to material misstatement

Question 29

Performance materiality

Answer 29

Make sure aggregate uncorrected/undetected immaterial Misstatements don't exceed materiality level of financial Statement as whole

Question 30

3 purposes for auditors using audit procedures

Answer 30

1 gain understanding of client and client's risks 2 test operating effectiveness and internal controls 3 produce evidence about management's assertions

Question 31

Substantive audit plan

Answer 31

Contains list of audit procedures for gathering evidence Related to relevant assertions Relevant assertions identified for audit client's significant Financial statement accounts and disclosures

Question 32

2 ways to conduct substantive tests

Answer 32

1 substantive analytical procedures 2 tests of details

Question 33

Analytical procedures, what must the auditor develop?

Answer 33

Auditor must develop an independent expectation of what | He or she thinks the account balance should be

Question 34

8 general audit procedures used to gather evidence

Answer 34

``` 1 inspection of records/documents 2 inspection of tangible assets 3 observation 4 inquiry 5 confirmation 6 recalculation 7 reperformance 8 analytical procedures ```

Question 35

Substantive Test of details

Answer 35

Auditor must seek to understand account balance/economic Transaction And that it was recorded in accordance with GAAP

Question 36

Vouching

Answer 36

Audit procedure in which an auditor selects an item of financial Info (usually from journal or ledger) And follows back through the processing steps to origin

Question 37

Tracing direction

Answer 37

Auditor selects basic source document and follows its Processing path forward to find its final recording Final recording found in journal or ledger and ultimately Financial statements

Question 38

What assertions does vouching adequately support?

Answer 38

Existence and occurrence

Question 39

What assertion does tracing support?

Answer 39

Completeness assertion

Question 40

Inspection of tangible assets provides evidence of? 2 things

Answer 40

Existence and valuation

Question 41

Observation

Answer 41

Auditors use observation when they view client's physical Facilities and personnel on an inspection tour They observe personnel carry out accounting and control Activities and participate in surprise payroll distribution

Question 42

Inquiry

Answer 42

Procedure involves collection of oral/sometimes written evidence From independent parties and management

Question 43

Confirmation

Answer 43

Direct correspondence with independent parties

Question 44

What can correspondence produce evidence of? 5 things

Answer 44

``` 1 Existence 2 rights 3 obligations 4 valuation 5 cutoff ```

Question 45

Recalculation

Answer 45

Auditor recalculation of computations previously performed by Client personnel produces compelling evidence

Question 46

Mathematical recalculation so serve which 2 assertions?

Answer 46

Existence and valuation

Question 47

CAATs

Answer 47

Computer assisted audit techniques

Question 48

Analytical procedures

Answer 48

When auditor compares expectation of recorded balance

Question 49

Computerized environment: Audit trail

Answer 49

Chain of evidence provided through coding, cross references and documentation connecting account balances And other summary results with the original transaction source Documents

Question 50

Less human involvement in handling transactions processed by computers can...

Answer 50

Reduce potential for observing errors and fraud

Question 51

5 considerations auditors should make about client's computerized processing on an audit of financial statements

Answer 51

1 complexity of computer operations 2 organizational structure of computerized processing activities 3 availability of data required by auditor 4 CAAT computer assisted audit techniques available 5 need for specialized skills

Question 52

An engagement is not complete without...

Answer 52

Audit documentation

Question 53

Audit documentation

Answer 53

Written record of basis for auditor's conclusions that provides Support for auditor's representations Whether those representations are contained in auditor's report Or otherwise

Question 54

Audit documentation provides...

Answer 54

The auditors' record of compliance with GAAS

Question 55

Permanent files AKA continuing audit files

Answer 55

Contain info of continuing audit significance over many years Audits of the same client

Question 56

Current files

Answer 56

Include all client acceptance and continuance documentation Include planning documentation for year under audit

Question 57

Planning memorandum

Answer 57

Summary of data with specific directions about effect on audit

Question 58

Lead schedule

Answer 58

Summary of accounts or components in an account group

Question 59

Indexing

Answer 59

Each document given an index number

Question 60

Cross referencing

Answer 60

Numbers or memoranda related to other documents carry the | Index of other documents so connections can be followed

Question 61

Heading

Answer 61

Each document is titled with name of company, balance sheet date And title of documents contents

Question 62

Audit marks AKA Tick marks

Answer 62

Abbreviated comments about auditor's work performed