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ACCT 407 > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether…

A

caused by error or by fraud

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2
Q

Who has ultimate responsibility for the financial statements?

A

Management

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3
Q

What are the 2 parts of PCAOB Inspection Reports?

A

Part I: deficiencies within individually-inspected engagements
Part II: deficiencies within quality control system

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4
Q

AICPA

A

Private organization
Auditing standards for public companies until 2002

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5
Q

PCAOB

A

Quasi-private organization
Has legal authority to set standards for all public company audits

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6
Q

Regulation of Audit Firms - AICPA

A

Peer Review Program
- For firms who audit nonpublic companies
– Review of a firm’s practice conducted by another public accounting firm

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7
Q

Regulation of Audit Firms - PCAOB

A
  • For firms who audit issuers (public companies)
  • Monitors public accounting firms through inspections
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8
Q

Inspections

A

Firms auditing more than 100 public entities are inspected annually.
Firms auditing less than 100 public entities are inspected every 3 years
Inspection reports list deficiencies in audits conducted by registered firms

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9
Q

AICPA has _____ expertise, but _____ independence

A

increased
decreased

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10
Q

PCAOB has _____ expertise, but _____ independence

A

decreased
increased

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11
Q

System of Quality Control provices firm with reasonable assurance that the firm and its personnel…

A

– Comply with professional standards and regulatory/legal requirements
– Issue reports that are appropriate in the circumstances
(has nothing to do with the clients, its about the audit firm)

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12
Q

System of Quality Control

A
  1. PCAOB selects a sample of audits to inspect
  2. PCAOB looks at system of quality control
  3. PCAOB reports audits with deficiencies

If the auditors don’t remit deficiencies, PCAOB releases a “Part 2” which is a public report and a BIG DEAL!

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13
Q

Elements of System of Quality Control

A
  1. Leadership responsibilities for quality within the firm (“tone at the top”)
  2. Relevant ethical requirements
  3. Acceptance and continuance of client relationships and specific engagements
  4. Human resources
  5. Engagement performance
  6. Monitoring
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14
Q

What is the equivalent of GAAP for audit?

A

GAAS (Generally Accepted Auditing Standards)

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15
Q

What is the purpose of GAAS?

A

to achieve the following objectives of an audit examination…
– Obtain reasonable assurance about whether financial statements are free of material misstatement, whether due to error or fraud
– Issue a report on the financial statements

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16
Q

Components of GAAS

A
  1. Fundamental Principles
    (general conduct)
  2. PCAOB Auditing Standards and ASB Statements on Auditing Standards
    (supporting principles)
  3. Interpretive Publications
    (application guide)
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17
Q

Flow of an Audit

A
  1. Obtain/retain client
  2. Engagement planning
  3. Risk assessment
  4. Audit evidence
  5. Reporting
18
Q

Responsibilities principle

A
  • Competence and capabilities
  • Independence
  • Due Care
  • Professional skepticism and professional judgment
19
Q

Competence and capabilities

A

Education, experience, expertise

20
Q

Due Care

A

Level of performance (effort) by reasonable auditor in similar circumstances (prudent auditor)

21
Q

Professional skepticism

A

appropriate questioning and critical assessment of evidence

22
Q

Professional judgement

A

application of training, knowledge, and experiences

23
Q

Which of the following best demonstrates the concept of professional skepticism?
a) Relying more extensively on external evidence rather than internal evidence
b) Focusing on items that have a more significant quantitative effect on the entity’s financial statements
c) Critically assessing verbal evidence received from the entity’s management
d) Evaluating potential financial interests held by auditors in the client

A

C.

Critical mindset, how do you approach the evidence that was gathered?

24
Q

Performance Principle

A

Goal is to provide reasonable assurance that financial statements do not contain material misstatements
* Planning and supervision
* Materiality
* Risk assessment
* Obtain sufficient appropriate audit evidence

25
Q

Sufficient

A

Quantity

26
Q

Appropriate

A

Quality (relevant and reliable)

27
Q

Planning and Supervision

A

You can’t just put interns on an audit and call it good

28
Q

Materiality

A

Amount that woudl influence and investor’s decision

29
Q

Risk assessment

A

Auditors focus their procedures where there is higher risk

30
Q

Sufficiency: the greater risk of misstatemetn likely requires a _______ quantity of audit evidence

A

Higher

31
Q

Sufficiency: Higher quality audit evidence often results in a ______ quantity of audit evidence

A

lower

32
Q

Appropriateness: Reliability

A
  1. Independent source outside the entity
  2. Effectiveness of internal control
  3. Auditor’s direct personal knowledge
  4. Documentary evidence
  5. Original documents
33
Q

Which of the following procedures would provide the most reliable audit evidence?
a) Inquiries of the client’s internal audit staff
b) Inspection of prenumbered client purchase orders filed in the vouchers payable department
c) Inspection of vendor sales invoices received from client personnel
d) Inspection of bank statements obtained directly from the client’s financial institution

A

D.

34
Q

Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
a) Independence
b) Adequate competence and capabilities
c) Adequate planning and supervision
d)Gathering sufficient appropriate evidence

A

C.

35
Q

Reporting Principle

A
  1. Express an opinion
  2. Assess financdial statements against financial reporting framework (GAAP, IFRS)
36
Q

Report of Independent Registered Public Accounting Firm

A
  1. Opinion on the financial statements
  2. Basis for opinion
  3. Critical audit matter
37
Q

The auditor is working on behalf of the….

A

shareholders

38
Q

Critical Audit Matters

A

Tell shareholders what the hardest areas to audit were
(Where was the most subjectivity used?)

39
Q

Unmodified (unqualified) opinion

A

“clean” financial statements are in conformity with GAAP

40
Q

Qualified opinion

A

Except for limited items, financial statements are in conformity with GAAP

41
Q

Adverse opinion

A

Financial statements are not in conformity with GAAP

42
Q

Disclaimer

A

Auditors do not express an opinion

ACCT 407 (11 decks)

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