Chapter 4

Question 1

How prepares FS

Answer 1

Management

Question 2

Auditor clarification

Answer 2

As long as management understand and approve

Question 3

Going concern (2)

Answer 3

• Assumption that the entity will continue operating in the following period
• Management required to assess entity going concern, unless they intend the opposite

Question 4

Maintain Adequate System of Internal Control

Answer 4

Provide reasonable assurance that the entity will achieve its objectives

Question 5

Unrestricted Access to Relevant Information and People to auditor (3)

Answer 5

• Access to all info relevant info to prep FS (records, doc,)
• Any additional information that auditor may request
• Unrestricted access to persons in entity to obtain audit evidence

Question 6

Responsibilities of Those Charged with Governance (5)

Answer 6

• Direct and controls rules and practices
• Balance the interest of stakeholders
• Often the BOD
• High strategic view of org and resources
• Approve and understand audited FS

Question 7

Role of Audit Committee (3)

Answer 7

• Safeguard for auditor independence
• Oversee financial reporting process and external auditor
• Required for public accountable entities

Question 8

Governance vs. Management

Answer 8

Governance: Oversee management and FRP
Management: Prep FS and internal control

Question 9

BOD responsibilities (3)

Answer 9

• Reviewing auditor independence & qualification
• Appointing the external auditor
• Preapproving audit and audit-related fees and expense

Question 10

Auditor’s Responsibilities (2)

Answer 10

• Reasonable assurance
• Reasonably certain that FS are free from material errors

Question 11

Inherent Limitation of the Audit (5)

Answer 11

• Subjectivity
• Concealed fraud
• Can’t predict future
• Persuasive evidence (and not conclusive)
• Can’t detect all misstatement

Question 12

Material Frauds (2)

Answer 12

• Misappropriation of asset (theft)
• Fraudulent financial reporting (Manipulation of FS)

Question 13

Auditor’s limitation to detect material misstatements (3)

Answer 13

• Related-party Relationship and Transaction
• Non-Compliance with Laws and Regulations
• Future Events and Going Concern

Question 14

Direct LAR

Answer 14

Determine reported amount and disclosure in FS

Question 15

Indirect LAR

Answer 15

Set provisions under which the entity is allowed to conduct its business

Question 16

Component of professional judgement (3)

Answer 16

• Objective
• Gather good evidence
• Consider impact on FS users

Question 17

Auditor Mindset (5)

Answer 17

• Identify and define issues
• Gather the facts and info
• Perform analysis and evaluate alt
• Reach conclusions
• Review and complete documentation and rationale for conclusions

Question 18

Professional Skepticism

Answer 18

Ability to obtain and critically analyze info from client and 3rd parties

Question 19

Professional Skepticism components (2)

Answer 19

• Questioning mind (“trust by verify”)
• Critical assessment of the audit evidence (asking question and paying attention to inconsistencies)

Question 20

Business Acumen

Answer 20

Deep knowledge of client business model and their environment and competencies

Question 21

Biases and Judgement Traps (6)

Answer 21

• Conformation bias
• Overconfidence bias
• Anchoring
• Availability
• Automation
• Groupthink

Question 22

Conformation bias

Answer 22

Only looking at info that confirms what I know, ignore what I don’t know

Question 23

Overconfidence bias

Answer 23

I know everything and wont ask for help from anyone

Question 24

Anchoring

Answer 24

Assume that nothing changes and you do the same thing again (follow things done before blindly)

Question 25

Availability

Answer 25

Only look at what the client gives you

Question 26

Automation

Answer 26

Assume the anything that is automated (system) is good

Question 27

Groupthink

Answer 27

Don't question the opinion of your team, assume that since the majority of your team think in a way, then that way is right

Question 28

Element that can affect professional skepticism

Answer 28

Time pressure

Question 29

Purpose of cycle approach (3)

Answer 29

- Help with flow of transaction - Identify point of RMM to mitigate them - Help determine audit procedure to use

Question 30

Role of assertions (2)

Answer 30

- Ensure that financial records and disclosures are correct and appropriate - "Scoping tool" to help auditors decide where to focus their attention

Question 31

Relevant assertions

Answer 31

Factors that increase the possibility of misstatement (Management bias, risk of fraud, change in econ condition)

Question 32

Transaction Assertions (6)

Answer 32

- Occurrence (start from the book) - Completeness (start with the support) - Accuracy (books to books) - Cut-off (date, time) - Classification - Presentation (correctly described and understandable)

Question 33

Assertion Balance (6)

Answer 33

- Existence (start from the book) - Right and Obligation (legal title, consignment, item billed to customer) - Completeness - Accuracy, Valuation, Allocation - Classification - Presentation