Chapter 3 Flashcards
(7 cards)
Q: 🔹 What are the three phases of the audit, and what happens in each?
A:
🔸 1. Risk Assessment (Planning):
* Understand the entity and environment
* Identify risks of material misstatement
* Set materiality
* Develop audit strategy
🔸 2. Risk Response (Execution):
* Perform tests of controls and substantive procedures
* Focus on high-risk assertions and balances
🔸 3. Reporting:
* Evaluate evidence and findings
* Form and issue audit opinion
* Communicate with governance
Q: 🔹 What is the fraud risk triangle, and what are some examples?
A:
🔸 🔺 Fraud Triangle:
* Incentives/Pressures (e.g., bonuses, debt, poor results)
* Opportunities (e.g., weak controls, override, estimates)
* Attitudes/Rationalization (e.g., poor tone at top, justifications)
Q: 🔹 What does the auditor do to assess the adequacy of closing procedures? What if the client’s procedures are weak?
A:
🔸 Assessment:
* Auditor reviews the client’s year-end closing process, including:
– Timing and accuracy of journal entries
– Reconciliations and review of accounts
– Management’s process for identifying cut-off and accruals
* Auditor checks if final numbers are reviewed and approved internally
🔸 If closing procedures are weak:
* Auditor may delay audit fieldwork to wait for reliable numbers
* Perform more detailed year-end testing instead of relying on interim results
* Increase sample sizes or extend procedures into subsequent periods
* Place less reliance on internal controls, leading to more substantive work
* May raise risk of material misstatements or missed adjustments
Q: 🔹 Why and how do auditors develop an understanding of the entity?
A:
🔸 Purpose: identify risks of material misstatement and tailor the audit
🔸 Key areas to understand:
* Governance and ownership
* Nature of operations and locations
* Financing, capital structure, internal controls
* Major customers, suppliers, and transactions
🔸 Methods:
* Inquire with management
* Review prior FS, internal docs, and audit files
* Observe business processes
Q: 🔹 Why and how do auditors understand the industry the entity operates in?
A:
🔸 Purpose:
* Identify inherent risks and complex accounting issues
* Benchmark client results against industry norms
🔸 Key areas:
* Competitive landscape, pricing pressures
* Regulation, seasonality, tech disruption
* Common estimates and disclosures
🔸 Methods:
* Industry reports, regulatory filings, economic forecasts
* Compare margins, growth, ratios
Q: 🔹 What are the risks and audit procedures related to related party transactions?
A:
🔸 Risks:
* May not be at arm’s length
* Used to manipulate earnings or shift liabilities
* Undisclosed related parties may exist
* Inadequate or misleading disclosures in FS
🔸 Fraud risk:
* Can conceal fraudulent revenue or round-trip transactions
* Often involve management override
* CAS 550 flags them as areas of elevated fraud risk
🔸 Audit procedures:
* Inquire about known related parties and internal controls
* Review board minutes, contracts, and unusual transactions
* Inspect records for undisclosed relationships
* Assess business purpose
* Confirm complete and accurate disclosure in FS
Q: 🔹 What is the going concern assumption, and what procedures must the auditor perform?
A:
🔸 Going concern assumption:
* The entity is expected to continue operating for at least 12 months from the FS date
* Used to prepare FS under normal course of business (no liquidation)
🔸 Auditor responsibilities:
* Evaluate whether the going concern assumption is appropriate
* Identify indicators of doubt (e.g., recurring losses, liquidity issues, loan defaults)
* Review management’s assessment, forecasts, and plans
* Assess mitigating factors (e.g., refinancing, asset sales)
* Determine if disclosures are adequate
🔸 If doubt exists and disclosures are inadequate:
* Issue a modified audit opinion (e.g., qualified or adverse)
