Ch 6 Flashcards
In a public company, what requirements must members of the board of directors satisfy in order to serve on the audit committee?
3 outside directors, neither officers nor employees; independent.
State the purpose and nature of an engagement letter.
To establish a written understand with the client regarding the terms of the audit engagement. Presents an executor contract between parties.
Discuss what is meant by the phrase “shopping for accounting principles.”
Conduct by some enterprises that discharge one independent auditing firm after seeking out another firm that will sanction disputes of accounting principles or financial statement presentation.
Criticize the following statement: “Throughout this audit, for all purposes, we will define a ‘material amount’ as $500,000.”
Materiality judgements depend both upon the financial reporting framework being used and on the auditors’ professional judgments. pg 198
Materiality doesn’t only rely on amount. It also relies on affect the misstatement could have on future events.
Must consider qualitative and quantitative factors.
Describe the two types of misstatements due to fraud. Which one generally is of more concern to the auditors?
(1) arising from fraudulent financial reporting (management fraud) is more of a concern, and (2) arising from misappropriation of assets (defalcations). pg 204
Should a separate audit program be prepared for each audit engagement, or can a standard program be used for most engagements?
The systems portion of the audit program are generally organized around a companies transaction cycle, addresses tests of internal controls and assessing control risk.
The substantive procedures portion is organized in terms of major financial statement accounts and classes of transactions.
Suggest some factors that might cause an audit engagement to exceed the original time estimate. Would the extra time be charged to the client?
Yes, if legitimate reason.
What problems are created for a CPA firm when audit staff members underreport the amount of time spent in performing specific audit procedures?
Staff time is the basic unit of measurement for audit fees. The CPA firm can’t provide reasonable estimates to future audit clients. They develop a per hour or per diem fee schedule for each category of audit staff.
Why is audit work usually organized around balance sheet accounts rather then income statement accounts?
14
What is meant by making a proper year-end cutoff? Explain the effects of errors in the cutoff of sales transactions in both the income statement and the balance sheet.
16
Define and differentiate between a test of controls and a substantive procedure.
19
Auditing standards require the auditors to have a team meeting regarding the risk of fraud for the engagement. What is the purpose of this meeting?
21
What mechanisms have served to prevent shopping for accounting principles by management?
pg 189. SEC require companies subject to its jurisdiction to file a Form 8-K reporting changes in independent auditors and the reasons therefore. The company must also report details of significant disagreements between management and auditors occurring over the past 3 yrs. Auditors that have resigned or been discharged must provide a response indicating whether they agree with company’s form and provide details.
AICPA AU 915 (PCAOB 625)
Sarbanes-Oxley Act of 2002
