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ACC 4010 - Auditing > Chapter 14 > Flashcards

Chapter 14 Flashcards

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1
Q

What must the auditor review before concluding the audit?

A

Ensure all planned procedures were executed and sufficient appropriate audit evidence was obtained.

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2
Q

What must be done with review notes and outstanding items?

A

All review notes must be cleared and outstanding items completed.

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3
Q

What should the auditor do with documentation at audit completion?

A

Verify proper documentation and remove unnecessary items from the file.

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4
Q

What must the auditor assess regarding materiality at completion?

A

Assess the appropriateness of final materiality for evaluating misstatements.

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5
Q

What is evaluated to assess fraud risk at completion?

A

Results of control testing and identified misstatements.

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6
Q

What analytical procedures are done at completion?

A

Final analytical procedures to ensure FS are consistent with auditor’s understanding of the business.

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7
Q

What should the auditor review before signing the audit report?

A

Contingent liabilities, long-term commitments, and subsequent events up to the audit report date.

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8
Q

When does the auditor form an opinion?

A

After evaluating all misstatements and conclusions reached.

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9
Q

What must be prepared as part of audit completion?

A

The audit report, including assessment for any modifications.

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10
Q

What is the purpose of the management representation letter?

A

To obtain written confirmation from management on their responsibilities and representations made during the audit.

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11
Q

Who must the auditor report results to?

A

Management and those charged with governance.

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12
Q

What external document must be reviewed for consistency with the FS?

A

The entity’s annual report.

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13
Q

What is the final step in the audit process?

A

Timely completion and archiving of the audit file.

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14
Q

What must the auditor evaluate before forming an opinion?

A

Whether sufficient and appropriate audit evidence has been obtained.

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15
Q

What is determining sufficiency and appropriateness of audit evidence ultimately based on?

A

Professional judgment.

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16
Q

What are three key factors in evaluating audit evidence?

A

Results of procedures and materiality of misstatements

Quality and persuasiveness of the evidence

Whether evidence supports or contradicts risk assessments at the assertion level

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17
Q

What should the auditor consider when misstatements or control deviations are found?

A

Reason for the misstatement or deviation (isolated vs. systemic)

Impact on risk assessments

Whether additional or modified procedures are needed

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18
Q

What must the auditor consider before evaluating final results?

A

Whether the materiality amount should be revised based on findings during the audit.

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19
Q

Who is responsible for assessing going concern and disclosing related uncertainties?

A

Management

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20
Q

What is the auditor’s responsibility regarding going concern?

A

To assess the reasonableness of management’s assessment and identify:

Conditions/events casting doubt on going concern
Material uncertainties that require FS disclosure

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21
Q

What type of audit report is issued if a material uncertainty exists and is adequately disclosed?

A

An unmodified report with an Emphasis of Matter paragraph titled “Material Uncertainty Related to Going Concern”

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22
Q

What happens if a material uncertainty is not adequately disclosed in the FS?

A

The auditor issues a qualified or adverse opinion, depending on severity.

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23
Q

What is a contingent liability?

A

An existing or possible obligation arising from a past event, with an uncertain outcome depending on future events not fully under the entity’s control.

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24
Q

What are examples of contingent liabilities?

A

Legal claims, product warranties, income tax disputes, loan guarantees.

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25
When should a contingent liability be recorded in the financial statements?
Future event is probable or likely, and Amount can be reasonably estimated
26
When should a contingent liability be disclosed (but not recorded)?
Event is probable/likely but amount cannot be estimated (rare) Exposure exists for liability in excess of recorded amount Outcome is not determinable
27
When is the search for contingent liabilities performed?
At the end of the audit, up to the audit report date.
28
What procedures does the auditor perform to identify contingent liabilities?
Inquire of management Review minutes, legal correspondence, tax letters, and expense accounts Ask management to send a legal inquiry letter to their external legal counsel Review for long-term commitments not disclosed in FS
29
What is a subsequent event in an audit context?
An event occurring after the financial statement (FS) date but before the audit report date, which may require adjustment or disclosure in the FS.
30
What are the two types of subsequent events?
Type 1: Adjusting events — conditions existed at the FS date Type 2: Non-adjusting events — conditions arose after the FS date
31
What are examples of Type 1 subsequent events?
Bankruptcy of a major customer Settlement of existing legal claim Deterioration in financial condition impacting going concern
32
How are Type 1 events treated in FS?
Adjust the FS if the event is material.
33
What are examples of Type 2 subsequent events?
Major fire/flood Sale of business segment M&A activity Share or debt issuance
34
How are Type 2 events treated in FS?
Disclose in the FS (but do not adjust amounts).
35
When is the subsequent events review performed?
At the end of the audit, up to the date of the audit report.
36
Is the auditor responsible for reviewing events after the audit report is issued?
No, but if new info arises, the auditor must decide whether the FS should be amended.
37
What procedures does the auditor perform to identify subsequent events?
Inquire of management Review minutes of meetings Review latest interim FS Review industry trends and economic conditions Understand management’s process for identifying subsequent events
38
What is a misstatement in an audit context?
A difference between a reported FS item (amount, classification, presentation, or disclosure) and what is required by the applicable financial reporting framework.
39
What are the types of misstatements?
Factual (known errors) Projected (from sampling) Judgmental (differences in estimates or interpretations)
40
Can misstatements result from both error and fraud?
Yes — errors are unintentional; fraud is intentional.
41
What does the auditor request management to do with misstatements?
Adjust all misstatements unless they are clearly trivial.
42
What does the auditor do if management refuses to correct a misstatement?
Assess whether this indicates bias or fraud risk.
43
When might the auditor need to revise materiality?
If the client’s final FS results are significantly different from what was estimated at the planning stage.
44
Where does the auditor record all misstatements?
On the Summary of Audit Differences (SAD).
45
What must the auditor consider when evaluating the effect of misstatements?
Cumulative effect of unadjusted misstatements Impact of prior year unadjusted misstatements
46
When is a misstatement considered material?
If it exceeds materiality for: A specific account, class of transactions, or disclosure The FS as a whole
47
What qualitative factors must the auditor consider when evaluating materiality?
Whether the misstatement: Affects compliance with debt covenants or contracts Alters key ratios or causes a profit/loss swing Affects management bonuses or performance targets
48
What three key factors must the auditor evaluate when forming an opinion?
Whether sufficient appropriate audit evidence has been obtained Whether unadjusted misstatements are immaterial, individually and in aggregate Whether the FS are prepared in accordance with the applicable financial reporting framework
49
What specific aspects of the FS does the auditor evaluate when forming an opinion?
Accounting policies: appropriate, consistently applied, and properly disclosed Accounting estimates: reasonable FS present relevant, reliable, and comparable information with adequate disclosure
50
When does the auditor issue an unmodified opinion (aka clean/unqualified)?
When the financial statements are presented fairly, in all material respects, in accordance with the financial reporting framework.
51
What are Key Audit Matters (KAMs)?
Matters that, in the auditor’s judgment, were of most significance in the audit — often areas with complex or significant management judgment.
52
When is the reporting of KAMs mandatory in the audit report?
Only when required by law or regulation (e.g., for listed entities).
53
Can auditors choose to include KAMs even if not required?
Yes — the auditor may elect to report KAMs voluntarily.
54
Does a Key audit matter (KAM) mean a modified opinion?
No, even if a key audit matter (KAM) is discussed it can still be unmodified
55
What is the purpose of key audit matters (KAM)
Improve transparency and communication with users of financial statements
56
When can the auditor date the audit report?
Only after obtaining sufficient appropriate audit evidence and after the financial statements have been approved by those charged with governance.
57
Why is the audit report date significant?
It marks the end of the auditor’s responsibility for reviewing subsequent events or obtaining additional evidence.
58
What are the three main reasons an audit report might be modified?
A significant matter needs to be emphasized (Emphasis of Matter) The FS are materially misstated (GAAP Departure) The auditor is unable to obtain sufficient appropriate evidence (Scope Limitation)
59
What type of paragraph is used to highlight a matter without modifying the opinion?
Emphasis of Matter paragraph — used when a matter is appropriately disclosed but is fundamental to users’ understanding.
60
What is a qualified opinion?
Issued when the FS are materially misstated or there is a scope limitation, but the issue is not pervasive.
61
What is an adverse opinion?
Issued when the FS are materially misstated and the misstatement is pervasive — FS do not present fairly.
62
What is a disclaimer of opinion?
Issued when the auditor cannot obtain sufficient evidence and the lack of evidence is pervasive — auditor does not express an opinion.
63
What is an Emphasis of Matter (EOM) paragraph?
A paragraph used by the auditor to draw attention to a significant matter that is appropriately disclosed in the FS.
64
Does an Emphasis of Matter affect the audit opinion?
No — it does not modify the opinion.
65
Is an Emphasis of Matter the same as a Key Audit Matter (KAM)?
No — an EOM is not a KAM.
66
Where is the Emphasis of Matter paragraph placed in the audit report?
Immediately after the opinion paragraph, under the heading “Emphasis of Matter”.
67
What are common examples where an Emphasis of Matter may be used?
A major catastrophe with significant financial impact Early adoption of a new accounting standard with pervasive effects Significant litigation or regulatory uncertainty
68
What is a GAAP departure in an audit?
A situation where the financial statements do not comply with the applicable financial reporting framework, resulting in a material misstatement.
69
What are three common reasons for GAAP departures?
Incorrect accounting treatment (e.g., operating lease treated as a capital lease) Missing disclosures (e.g., related party transactions not disclosed) Inappropriate valuation (e.g., fair value of financial instruments is wrong)
70
What type of audit opinion results from a GAAP departure?
Qualified opinion if material but not pervasive Adverse opinion if material and pervasive
71
What is a scope limitation in an audit?
A situation where the auditor is unable to obtain sufficient appropriate audit evidence to form a basis for the audit opinion.
72
What are the three main causes of scope limitations?
Imposed by management (e.g. refuses to send legal letter or confirm balances) Beyond the client’s control (e.g. records destroyed by fire/flood) Beyond the auditor’s control (e.g. appointed after year-end, can't observe inventory)
73
What type of audit opinion results from a scope limitation?
Qualified opinion if material but not pervasive Disclaimer of opinion if material and pervasive
74
When is a qualified opinion issued?
When there is a material but not pervasive: GAAP departure, or Scope limitation
75
What does a qualified opinion say about the FS?
The FS are fairly presented “except for” the effects of the matter described.
76
When is an adverse opinion issued?
When there is a material and pervasive GAAP departure — i.e., the FS are materially misleading.
77
When is a disclaimer of opinion issued?
When there is a material and pervasive scope limitation — the auditor cannot obtain sufficient appropriate evidence to form an opinion.
78
What does a disclaimer of opinion mean?
The auditor does not express an opinion on the fairness of the FS.
79
Who typically signs the management representation letter?
The CEO and CFO (or those with primary responsibility for financial reporting)
80
Who prepares the representation letter and on what?
The auditor prepares it, but it is printed on the client’s letterhead
81
What key assertions are included in the representation letter?
Management has fulfilled its responsibility for preparing the FS All information was provided to the auditors All transactions are recorded in the FS Disclosure of any fraud, non-compliance, or contingencies
82
Can the representation letter be used as standalone audit evidence?
No — it is considered audit evidence, but is not sufficient by itself.
83
What happens if management refuses to sign the representation letter?
The auditor must issue a disclaimer of opinion, due to insufficient appropriate audit evidence.
84
What are the three common types of standard financial statement engagements?
Audit Review Compilation
85
What are examples of other engagements an auditor may perform?
Reports using a special purpose framework (e.g., cash basis) Reports on components of FS (e.g., inventory or sales) Reports on compliance with contractual agreements Reviews of interim FS (e.g., for publicly traded companies) Agreed-upon procedures for specific info (e.g., internal controls or expenditures) Compilations of forecasts or projections Reports on the application of accounting principles to specific transactions or FS
86
What must the auditor follow when performing other engagements?
The specific auditing or assurance standard applicable to the type of engagement.
87
What document must be obtained for all engagements?
An engagement letter outlining the scope, terms, and reporting requirements.
88

ACC 4010 - Auditing (14 decks)

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