Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ACCT 407 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Framework to describe how the financial reporting process protects investors’ interest

A

CEO/CFO
External Auditor
Regulators (SEC and PCAOB)
Board of Directors (Audit Committee)
Internal Auditor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

“issuer”

A

If they file with the SEC they are an “issuer”
Public company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

SEC oversees…

A

“issuers” or public companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

PCAOB governs…

A

US Companies, “firms,” who AUDIT public companies
(Inspected auditors)
SOX created PCAOB

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Internal Auditor

A

Works for the company
Objective (unbiased)
Partially observe independence
Wide scope of responsibility (reporting, compliance, operations)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Who is responsible for the faithful representation of the financial statements?

A

CEO and CFO
(SOX requires the CFO and CEO to certify that the financial statements are fairly stated)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Who oversees finanical reporting?

A

The Board of Directors, specifically the Audit Committee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Audit Committee

A

Must be fully independent
Tasked with ensuring proper reporting
Oversees the internal auditor and the external auditor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Board of Directors

A

Mix of independent and “inside” members
Strategy, represent investors, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

External Auditor

A

Provide an opinion on the fairness of the financial statements. External auditors are required to be independent.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Should internal auditors be independent?

A

They should be objective, but by definition they aren’t independent because they work for the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Internal audit can focus on more than just financial reporting risk, but…

A

they often play a role in financial reporting quality

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Does the SEC have the authority to investigate issuers for financial reporting misconduct?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Does the SEC have the authority to enforce disclosure quality?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Does the PCAOB have oversight of Deloitte UK?

A

Yes. Big 4 are actually “global conglomerates,” not “global companies” Deloitte UK participates in audity US public companies, so PCAOB has oversight even in the foreign entity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the 2 buckets of PCAOB companies?

A

Companies who are inspected annually and those who are inspected tri-annually (smaller firms)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

SEC EDGAR

A

Used to search filings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Fees paid to the auditor will be listed in the…

A

Proxy statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

10-K

A

Annual
Audited

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

10-Q

A

Quarterly
Not Audited

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

8-K

A

Dissmissal of auditors
Restatement of filings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Proxy

A

Prior to annual meeting
Voting items
Includes fees paid to the auditor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Microsoft paid Deloitte $43 million in 2022.
2022 Microsoft revenue was $198 billion.
Audit cost 0.02% of revenue.

Would the percentage be higher or lower for smaller companies?

A

Higher

SEC tiers company rules because there aren’t economies of scale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Why do audits have value?

A

Information asymmetry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

In 1926, before audits were required by law, __% of NYSE firms paid for audits

A

82%

Demand for reliable information

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Information Asymmetry

A

Agent (management) may use information advantage to maximize self-interst at the expense of the owner

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

When might you be willing to pay for an audit?

A
  • Gas station
  • Buying a used car
  • Ebay
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Demand for Audits increase with…

A
  1. Environmental risk
  2. Information risk
29
Q

Environmental risk

A
  • complexity
  • remoteness
  • time-sensitivity
  • consequences
30
Q

Information risk

A

Probability that information will be false/misleading

31
Q

List Attestation, Assurance, and Auditing in order from broad to narrow.

A

Assurrance
Attestation
Auditing

32
Q

Assurance

A

Lending of credibility by independent and objective intermediaries

33
Q

Attestation

A

When assurance is provided for specific assertions made by management

34
Q

Auditing

A

When assertions are embodied in a company’s financial statements

35
Q

PwC counts Oscar ballots. Parterns ahve memorized every winner in case something happens. What type of credibility is this?

A

Assurance. PwC is hired to lend thier credibility because they are independent of the Oscars.

36
Q

Definition of Auditing:

A

Systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested ussers

37
Q

Economic actions

A

The business

38
Q

Assertions

A

Financial Statements

39
Q

Established criteria

A

GAAP/IFIRS

40
Q

Communicating results

A

Audit reports

41
Q

When a company lists a fixed asset on theri financial statment they are asserting that…

A

they actually own the asset and that the asset really exists

42
Q

Examples of Financial attestation engagements other than audits:

A
  • Financial forecasts and projections
  • Examination of Management’s Disscussion & Analusis
  • From forma financial information
43
Q

Examples of Non-Financial attestation engagements other than audits:

A

***Effectiveness of internal control systems
- Compliance with environmental regualtions
- Sustainability reporting engagements

44
Q

Examples of Assurance Services:

A

Independent professional services that improve the quality of information, or its context, for decision makers
- Internal audit outsourcing
- IT security penetration test

45
Q

What is SOC 1?

A

Report on controls at a service organization relevant to user entities’ internal control over financial reporting

(Very common ATTESTATION engagement)
Provides assurance over internal controls of an outsourced environment
Important because this outsourced environment affects the quality of the user entity’s information

46
Q

Service organization

A

Provide outsourced services
Ex: ADP provides an outsourced payroll software

47
Q

ADP hires BDO to report (attest) the internal controls in its payroll outsourcing service. Exon uses ADP as a payroll service. How is the ADP SOC 1 relevant to Exon?

A

Exon’s auditors (PwC) will rely on the SOC 1 for ADP that was prepared by BDO.

48
Q

SOX 302

A

States that key company officials must certify the financial statments. The CEO and CFO must sign a statement (quarterly) indicating:
1. they have read the financial statements
2. they are not aware of any false or misleading statements (or key omissions)
3. they believe the financial statements present an accurate picture of the company’s financial condition

49
Q

Management’s Financial Statement Assertions (PCAOB)

A
  1. Existence/occurrence
  2. Rights and obligations
  3. Completeness
  4. Valuation/allocation
  5. Presentation and disclosure
50
Q

What is the most important assertion and why?

A

Existence/occurrence. It catches over-statements of revenue.

51
Q

Existence/occurrence

A

Assets and liabilities included in the acounts exist and recorded transactions are valid and have actually occurred

52
Q

Rights and obligations

A

Entity has a legal claim on all assets and revenues reported and has a legal responsibiliy for all liabilities and expenses

53
Q

Completeness

A

All balances and transactions have been recorded in the financial statements

54
Q

Valuation/allocation

A

Assets, liabilities, and recorded transactions have been valued in accordance with GAAP.

55
Q

Presentation and disclosure

A

All accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes

56
Q

Resale shop. I sell suits on consignment. Do I have the right to include the suits in my shop inventory?

A

No
Rights and obligations assertion

57
Q

What assertion catches the understatement of expenses?

A

Completeness

58
Q

Banks have a lot of cash, but they can’t use it all. So they would have a disclosure in the financial statements saying how much they reserved.

A

Presentation and disclosure

59
Q

The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about…

A

Valuation and allocation

What is the reliability of your customers? Will they pay? What should the net A/R be? - Affects the valuation of A/R

60
Q

Cutoff

A

is the transaction recorded int eh right period?

AICPA (private company standard)
Existence and completeness

61
Q

Professional Skepticism

A

Refers to an auditor’s questioning mindset towards representatins made by management and evidential mater gathered

Questioning mindset

Trust but verify

62
Q

Is inquiry alone enough?

A

Never. The auditor must obtain sufficient corroborative evidence. Ask questions, get answers, and then verify the answers.

63
Q

Why must you be skeptical as an auditor?

A

There is a potential conflict of interst between the auditor and the client.

Managment wants to portray the company and its operations in the best possible light.

Auditors want to make sure that this portrayal is fair and accurate as possible.

64
Q

The Audit Report

A
  • Expresses an opinion on financial statements
  • Provides reasonable assurance (high level, but not 100%)
  • Conducted in accordance with auditing standards (PCAOB, AICPA)
  • Asserts that the financial statements are presented fairly, in all material respects, in conformity with an applicable framework (GAAP, IFRS)
65
Q

Beginning in 2004, the auditor must also express an opinion on the issuer’s…

A

internal controls over financial reporting for large, public companies

66
Q

What kind of services are prohibited for audit clients?

A

No service in which auditors may find themselves making management decisions or auditing their own firm’s work

67
Q

Firms cannot provide the following to issuer audit clients:

A
  • bookkeping/related services
  • design or implementation of financial information systems
  • appraisal or valuation services
  • actuarial service
  • internal audit outsourcing
  • managment or human resource services
  • investment or broker/dealer services
  • legal and expert services (unrelated to the audit)
68
Q

Can the firm provide the issuer audit client with tax services and other non-prohibited services if the issuer’s audit committee has approved them in advance?

A

Yes (with some restrictions on tax)

ACCT 407 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions