Ch 4 And Ch 5 Class Notes

Question 0

Name a business risk of Walmart?

Answer 0

Not having product on the shelf

Question 1

Audit risk equation

Answer 1

Planning tool for what audit procedures to do

Question 2

Inherent risk

Answer 2

Risk of error or misstatement before considering controls

Question 3

Control risk

Answer 3

Risk internal controls fail to detect fraud/error

Question 4

Direct effect noncompliance, define, example

Answer 4

Material effects on financial statements

Ex. Violation of tax and pension laws

Question 5

Audit strategy memorandum, who writes it?

Answer 5

Written by manager and looked over by partner

Question 6

Indirect effect noncompliance

Answer 6

Violations laws in non material misstatements

Ex. Insider trading, OSHA violation

Question 7

Stuff channels

Answer 7

Company gives product to distributor and records sale

Question 8

Information risk

Answer 8

Risk management will provide false/misleading information

Question 9

How does Walmart manage levels of inventory?

Answer 9

Perpetually, by having cash registers electronically linked to
Headquarters to track sales and inventory level

Question 10

Test count

Answer 10

Sample count to calculate inventory

Question 11

Do auditors or manager select the inventory samples that auditors count?

Answer 11

Auditors select inventory samples to count

Question 12

5% difference from assertion

Answer 12

May or may not be worth checking

Question 13

When do auditors count inventory?

Answer 13

Year end after client counts inventory

Question 14

Audit risk

Answer 14

Risk of Giving clean opinion when shouldn’t have

Question 15

Who asses management fraud risk?

Answer 15

Auditor assesses management fraud risk

Question 16

Red flag in management fraud risk

Answer 16

High turnover of management

Question 17

Errors

Answer 17

Unintentional

Question 18

Irregularities

Answer 18

Fraud and intentional

Question 19

Revel’s business decision to build a casino last year was…

Answer 19

A bad business decision

Question 20

Employee fraud

Answer 20

Employee takes assets from company

Question 21

Embezzlement

Answer 21

Steal money from organization of money you are entrusted with

Question 22

Larceny

Answer 22

Misappropriation of assets

Basic stealing

Question 23

How can short shipment from vendors be prevented?

Answer 23

Should be counted to prevent

Question 24

Where are minutes meetings disclosed

Answer 24

Disclosed in footnotes

Question 25

How can auditor discover fictitious sales?

Answer 25

Auditor must look at sales journal and check shipping document Then check invoices

Question 26

What should be looked at when shipments aren't recorded?

Answer 26

Look at shipping to sales

Question 27

Checking failure to disclose litigation?

Answer 27

Auditor will ash clients for analysis of legal expenses and ask for legal invoice

Question 28

When and how should litigation be disclosed in financial statements?

Answer 28

Booked in consolidated if probable and estimable If either probable or estimable than disclosed in footnotes

Question 29

Circularity attorneys

Answer 29

Send confirm to client's attorneys Attorneys should respond directly to auditors

Question 30

PHAE

Answer 30

Proposed adjusting journal entries Proposed adjustments from auditors to management

Question 31

Management override

Answer 31

The boss tells you what to report Management can override internal controls

Question 32

Operating characteristics red flag: personnel

Answer 32

Personnel are lax or inexperienced in their duties Note: info from inexperienced employees is unreliable to Quantify control risk

Question 33

High control risk and high inherent risk must have...

Answer 33

Low detection risk

Question 34

AR= .32

Answer 34

32% chance audit opinion will be incorrect

Question 35

To lower detection risk an auditor must...

Answer 35

Turn over a lot of stones

Question 36

Sampling risk

Answer 36

Risk of choosing unrepresentative sample

Question 37

Non sampling risk

Answer 37

Risk auditor may reach inappropriate decision based upon Available evidence Ex. When unauthorized personnel approves transaction, Auditor must ask client why

Question 38

Can auditors record receivables other than year end?

Answer 38

Yes, if strong internal controls Ex. Where client monitors receivables and customer credit scores

Question 39

Inquiry of client is a lot less effective than...

Answer 39

Confirmation, But inquiry of client is more efficient than confirmation

Question 40

Function of analytics?

Answer 40

Point out red flags

Question 41

Significant difference example

Answer 41

$1 million and $2 million has a 100% difference in accounts

Question 42

Purchase commitment

Answer 42

contract to purchase certain quantity of product at fixed price For certain period of time Must be disclosed

Question 43

Preliminary planning

Answer 43

Attention getter Brainstorming occurs during planning

Question 44

Red flags of potential noncompliance: unauthorized transactions, how are they discovered?

Answer 44

Discovered because employee is careless and greedy