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ACC 4010 - Auditing > Chapter 3 > Flashcards

Chapter 3 Flashcards

(60 cards)

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1
Q

What are the three stages of an audit?

A

Planning (risk assessment), Execution (risk response), Reporting

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2
Q

What happens during the planning stage of an audit?

A

Assess client, plan audit strategy, identify risks, set materiality, prepare audit plan

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3
Q

What is audit risk?

A

Risk of giving a clean opinion on FS that have a material misstatement

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4
Q

How does the auditor gain understanding of the client?

A

Through inquiries, analytics, observation, inspection

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5
Q

Why do auditors assess related parties?

A

To detect risks of fraud or error in transactions not at arm’s length

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6
Q

Examples of related parties?

A

Parent companies, subsidiaries, joint ventures, directors, family of key staff

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7
Q

How do auditors assess fraud risk from related parties?

A

Discussion, management inquiry, document inspection, review unusual transactions

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8
Q

What are the two types of fraud?

A

Fraudulent financial reporting and misappropriation of assets

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9
Q

What is the fraud risk triangle?

A

Incentives/Pressures, Opportunities, Attitudes/Rationalization

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10
Q

What are examples of fraud incentives?

A

Bonuses tied to earnings, high competition, ongoing losses, going public

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11
Q

What are examples of fraud opportunities?

A

Weak controls, poor governance, complex transactions, related parties

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12
Q

What are examples of fraud rationalization?

A

Poor tone at the top, focus on profit, aggressive accounting

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13
Q

What should auditors do if fraud is suspected?

A

Seek legal advice, report to management/governance, consider withdrawal

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14
Q

What is the going concern assumption?

A

Belief that a company will stay in business for the foreseeable future

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15
Q

Red flags for going concern issues?

A

High debt, negative cash flow, ongoing losses, key customer loss, legal issues

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16
Q

Mitigating factors for going concern?

A

Parent guarantee, asset sale, raise capital

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17
Q

What makes accounting estimates risky?

A

Complexity, subjectivity, uncertainty

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18
Q

What is corporate governance?

A

Systems and rules that guide and control an entity

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19
Q

Why is corporate governance important for auditors?

A

Weak governance increases misstatement risk

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20
Q

What are IT general controls?

A

Policies for IT system operation, security, maintenance

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21
Q

What are IT application controls?

A

Controls over transaction processing in individual IT apps

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22
Q

How do auditors respond to strong vs. weak IT controls?

A

Strong = rely on controls; Weak = use more substantive testing

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23
Q

What are closing procedures?

A

Client activities to ensure transactions are recorded in correct period

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24
Q

Why are closing procedures important?

A

To prevent misstatements from period cutoff issues

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25
What is the definition of an audit risk?
it is the risk auditors will make a unmodified (clean) opinion on FS that actually contain material misstatement (this risk is always here, there is never a 0% chance)
26
What does the execution stage involve?
Test internal controls Detailed checks on financial date In order to gather enough reliabile evidence to see if the FS are presented fairly or not
27
What does the reporting stage involve?
Evaluate any evidence of misstatements that were found Perform any final analytical procedures Form an opinion on fair presentation of FS Prepare audit report and management letter
28
What must the auditors gain an understanding of in terms of the clients
Auditors must understand their clients operations, industry, operating/regulatory environment They must also learn the internal controls
29
What are some ways an auditor can gain an understanding of the client?
Perform analytical procedures Perform observation and inspection procedures Review the annual report, read meeting minutes, tour the premises
30
What are some areas that auditors should document their knowledge of the client in (stages of an audit)
Operations, industry, customers & suppliers Ownership, governance structure, regulatory environment Investments & financial arrangements Internal controls Accounting policies & financial reporting framework
31
What do related parties include?
Parent companies, subsidiaries, joint ventures, associates, directors, managers, and close family members of key staff
32
What does an auditor do relating to the related parties in an audit?
Make sure that they are identified, and that the transactions between them are appropriately disclosed in the FS
33
What if there is a lack of independence between related parties in an audit?
Then transactions may not be in the normal couse of operations which increases the risk of fraud & error, potentially impacting the operating results of the company
34
What are some examples of how an auditor would assess the risk of related parties?
Asking management to identify all related parties & transactions (nature, type, and purpose) Be alert when inspecting documents for undisclosed related parties Understand companies internal controls for identifying related parties Discuss how likely it is that the FS could be misstated because of relationships/transactions with related parties
35
What are the two types of fraud?
Fraudulent financial reporting Fraud through misappropriateion of assets (theft)
36
Explain fraudulent financial reporting?
Occurs at management level Manipulating operating results or omitting information to deceive others Because bonuses, stock options, pressure to meet targets...
37
Explain fraud through misappropriation of assets (theft)
Occurs at the employee level, typically involves smaller amounts
38
Which fraud typically takes place at the management level?
Fraudulent financial reporting
39
Which fraud typically takes place at the employee level?
Fraud through misappropriation of assets (theft)
40
What are the three factors auditors consider when assessing the risk of fraud?
Incentives and pressures to commit fraud Opportunities to commit fraud Attitudes and rationalization to justify fraud
41
What are examples of incentives and pressures to commit fraud?
Bonuses or stock options that are tied to earnings High competition or pressure to perform Rapid business growth Plans to go public
42
What are examples of opportunities to commit fraud?
Poor internal controls Weak corporate governance Complex business model and transactions Significant management estimates Related third party transactions
43
What are examples of attitudes and rationalization to justify fraud?
poor tone at the top effective internal controls not being a priotity excessive focus on profit maximization aggressive attitutde towards accounting policies and compliance with regulations
44
How many factors need to be present to be considered a fraud risk?
Only one
45
How many factors need to be present for fraud to occur
More than one
46
If an auditor finds fraud (or suspects fraudulent activity), what should they do?
Seek legal advice to determine reporting responsibilities Report fraud to the appropriate level of management & those charged with governance Consider withdrawing from the audit (minimize risk of association)
47
What is going concern?
The assumption that a company will continue to operate in the foreseeable future - meaning that it wont go bankrupt, shut down, or be foreced to liquidate assets
48
How do auditors assess going concern risk?
Check whether any events or conditions cause doubt on the companies ability to continue Continue to be on the lookout for such events Checking the management's assessment and obtaining sufficient appropriate evidence to say that there are no doubt in the companies ability to continue as going concern.
49
What are examples of things that are red flags that indicate going concern may be at risk?
Significant debt-to-equity ratio Inability to pay debts (obtain refinancing) Ongoing losses, negative cash flows, weak profit margins Over-reliance on few customers or suppliers Loss of key personnel Major litigation
50
What are ways to mitigate going concern factors?
Letter of guarantee from the parent company Ability to sell assets or business segment to raise cash Ability to raise funds through share issue or borrowings
51
The higher the risk associated with the accounting estimate, the greater...
the greater the amount of audit effort required to assess the reasonableness of the estimate
52
What is corporate governance?
The rules, systems, and processes used to guide and control entities and enhance accountability to shareholders.
53
Do companies have to disclose corporate governance?
Yes, public companies must disclose their corporate governance practices and say why they believe these practices are appropriate
54
Does the auditor need to understand the IT?
Yes, the auditor must gain an understanding of the clients IT system and the associated risks
55
What are the 3 IT risks?
Unauthorized access to computers, software and data Error in programs Lack of backup and loss of data
56
What are the two categories of IT controls?
General controls Application controls
57
What are general controls?
policies and procedures that apply to the IT systems as a whole Includes policies, procedures for purchases, maintenance, and daily operations of IT system, security, and staff training
58
What are application controls for IT controls?
manual or automated controls that operate at the business level and applied to processing of transactions by individual IT applications
59
What should an auditor do if they believe that the IT controls are strong?
They should continue the audit strategy as normal and test / rely on the IT controls, and reduce reliance on substantivie procedures.
60
What should an auditor do if they believe that the IT co ntrols are inadequate?
The audit strategy will pivot to rely more heavily on substantive procedures (procedures that are used to detect material misstatements in FS)

ACC 4010 - Auditing (8 decks)

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