ch 3 review

Question 1

who issues the audit standards for private company audits?

Answer 1

ASB

Question 2

when considering client acceptance/ continuance some factors you should consider are

Answer 2

management integrity, competance, independence

Question 3

when speaking with predecessor auditors what re some factors to consider

Answer 3

-management integrity
-disagreements with management over accounting policies or audit procedures
- why the change in auditors
-communication with those charged with governance regarding fraud/ IC

Question 4

is an engagement letter required?

Answer 4

yes

Question 5

what is an engagement letter

Answer 5

establishes an understanding with the client regarding services to be performed

Question 6

objective of engagement

Answer 6

express opinion on the financial statementa

Question 7

auditor’s responsibilities

Answer 7

conduct the audit according to audit standards (PCAOB/ ASB)

Question 8

management’s responsibilities

Answer 8

give us access to all documentation and client personnel; prepare and present financial statements; implement and maintain internal controls

Question 9

what are the three phases of an audit

Answer 9

1. risk assessment phase
2. risk response phase
3. reporting phase

Question 10

what happens in the risk assessment phase of the audit

Answer 10

planning - what are the greatest risks for error or fraud in the financial statements; auditors spend more time on high risk areas of the financial statements

Question 11

what happens in the risk response phase of the audit

Answer 11

detailed testing of internal controls and account balances/ transactions (execute out plan)
- may have to revisit audit strategy and make changes

Question 12

what happens in the reporting phase of the audit

Answer 12

conclusion and forming an opinion

Question 13

materiality

Answer 13

an error or omission is material if there is a substantial likelihood that it would influence the judgment made by a reasonable user based on the financial statements

Question 14

qualitative versus quantitive

Answer 14

qualitative is the nature and quantitative is maginitude

Question 15

the three steps involving materiality

Answer 15

1. determine planning (overall) materiality
2. determine performance materiality
3. reevalute materiality throughout entire audit and at conclusion of audit

Question 16

how do you calculate planning materiality

Answer 16

pick a benchmark and take %

Question 17

what is the most common benchmark and percentage for planning materiality

Answer 17

net income before taxes and take 5%

Question 18

how to calculate performance materiality

Answer 18

breakdown planning materiality to apply to each account (account specific!!!)

Question 19

what is the typical performance materiality?

Answer 19

approximately half planning materiality

Question 20

what happens if you raise materiality

Answer 20

would conduct less extensive testing (less audit evidence)

Question 21

what happens if you lower materiality

Answer 21

have to do more extensive testing (more audit evidence)

Question 22

what do you do in the reevaluate materiality?

Answer 22

use professional judgment as to whether or non materiality needs to be altered

Question 23

professional skepticism

Answer 23

maintain a questioning mind and thoroughly investigate all evidence presented by the client

Question 24

availability bias

Answer 24

tendency to be influenced by information or events that are memorable or readily availible

Question 25

confirmation bias

Answer 25

the tendency to place more weight on information that corroborates an existing belief than on information that contradicts that belief

Question 26

overconfidence bias

Answer 26

the tendency to overestimate one's ability to make accurate assessments of risk or other judgments or decisions

Question 27

anchoring bias

Answer 27

the tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed

Question 28

automation bias

Answer 28

a tendency to favor output generated from automated systems even when human reasoning or contradictory information raises questions about whether such output is reliable or fit for purpose

Question 29

what are three ways to overcome audit bias

Answer 29

1. proper training of audit staff 2. supervision of audit staff 3. review of audit work performed

Question 30

financial statements are _________ & __________ made by management

Answer 30

claims; assertions

Question 31

audit risk:

Answer 31

risk that the auditors will give the wrong opinion

Question 32

what is the audit risk model?

Answer 32

a formula that calculates audit risk

Question 33

do you want audit risk to be high or low?

Answer 33

low

Question 34

audit risk (AR) =

Answer 34

Risk of Material Misstatement (RMM) * Detection Risk (DR)

Question 35

what are the two risks calculated into risk of material misstatement in the audit risk model

Answer 35

inherent risk * control risk

Question 36

what is inherent risk?

Answer 36

the susceptibility of an account to be misstated; some accounts are more likely to be based off of complexity, number of transactions, etc.

Question 37

what does the number assigned to inherent risk mean

Answer 37

the percentage of confidence that the auditors will give the right opinion

Question 38

what is control risk

Answer 38

risk that the client's internal controls will not prevent or detect a material misstatement

Question 39

what is detection risk

Answer 39

the risk that our audit procedures so not detect a material misstatement

Question 40

what does the number assigned to control risk mean

Answer 40

90% chance internal controls won't catch misstatement (bad)

Question 41

what does the number assigned to detection risk mean

Answer 41

the % chance that auditors dont detect misstatement

Question 42

the _________ the detection risk the more work/ evidence for the auditor

Answer 42

lower

Question 43

there is an inverse relationship between __________ and ____________

Answer 43

risk of material misstatement and detection risk

Question 43

the __________ the detection risk the less work/ evidence for the auditor

Answer 43

higher

Question 44

what is the "N - E - T " of the audit stand for

Answer 44

Nature; extent; timing

Question 45

what is the nature of the audit

Answer 45

what types of audit procedures to perform

Question 45

what is the extent of the audit

Answer 45

how much audit work to perform

Question 46

what is the timing of the audit

Answer 46

when to perform the audit procedures

Question 47

in what quarter(s) is risk assessment phase

Answer 47

2nd Q

Question 48

in what quarter(s) is reporting phase

Answer 48

end of 3rd Q and YE

Question 49

in what quarter(s) is reporting phase

Answer 49

after year end when field work is does and report is issued

Question 50

have to determine inherent risl for ________

Answer 50

EVERY account level

Question 51

fraud versus error

Answer 51

fraud is an intentional misstatement or omission while an error is unintentional misstatement or omission

Question 52

2 categories for fraud risk

Answer 52

fraudulent financial reporting and misappropriation of assets

Question 53

what is fraudulent financial reporting

Answer 53

"lying" ; not applying GAAP properly; "cooking the books"

Question 54

what's worse for the economy: fraudulent financial reporting or misappropriation of asses

Answer 54

fraudulent financial reporting (think ENRON)

Question 55

what is misappropriation of assets

Answer 55

"stealing" ; "embezzlement"; causes companies to pay for something it didn't receive

Question 56

responsibility of management

Answer 56

to design and implement programs and controls to prevent, deter and detect fraud

Question 57

responsibiltiy of auditor

Answer 57

to plan and perform (design) the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud

Question 58

three fraud risk factors

Answer 58

1. incentives/ pressures 2. opportunities 3. attitude/ rationalization

Question 59

fraud risk assessment

Answer 59

auditors assess and do fraud risk - brainstorm among audit team - document extensively our fraud risk assessment