Chapters 1- 4 Flashcards Preview

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Flashcards in Chapters 1- 4 Deck (152):
1

The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria.

Auditing

2

To do an audit, there must be information in a _______________ and some standards (_________) by which the auditor can evaluate the information.

Verifiable form; criteria

3

Any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.

Evidence

4

Forms of evidence

- Electronic and documentary data about transactions
- Written and electronic communication with outsiders
- Observations by the auditor
- Oral testimony of the auditee (client)

5

The auditor must be qualified to understand the criteria used and must be _____________ to know the types and amount of evidence to accumulate in order to reach the proper conclusion after examining the evidence.

Competent

6

The auditor must also have an ___________________________________.

Independent mental attitude

7

Auditors reporting on company financial statements

Independent auditors

8

The final stage in the auditing process is preparing the _________________, which communicates the auditor's findings to users.

Audit report

9

The recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making.

Accounting

10

If the bank makes a loan, it will charge a rate of interest determined primarily by three factors:

1) Risk-free interest rate
2) Business risk for the customer
3) Information risk

11

Approximately the rate the bank could earn by investing in US treasury notes for the same length of time as the business loan

Risk-free interest rate

12

Reflects the possibility that the business will not be able to repay its loan because of economic or business conditions, such as a recession, poor management decisions, or unexpected competition in the industry

Business risk for the customer

13

Reflects the possibility that the information upon which the business risk decision was made was inaccurate

Information risk

14

Auditing has no effect on either the __________________ or ________________, but it can have a significant effect on ___________________.

Risk-free interest rate; business risk; information risk

15

Reasons for unreliable information

Remoteness of information
Biases and motives of the provider
Voluminous data
Complex exchange transactions

16

Reasons behind biases and motives of the provider

Honest optimism about future events
Intentional emphasis designed to influence users

17

Main ways to incur costs to reduce information risk

User verifies information
User shares information risk with management
Audited financial statements are provided

18

The most common way for users to obtain reliable information is to

Have an independent audit

19

An independent professional service that improves the quality of information for decision makers

Assurance service

20

Individuals who are responsible for making business decisions seek assurance services to help improve the __________ and ___________ of the information used as the basis for their decisions.

Reliability; relevance

21

True or false

Assurance services can be done by CPAs or a variety of other professionals.

True

22

A type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is made by another party.

Attestation service

23

Five categories of attestation services

1) Audit of historical financial statements
2) Audit of internal control over financial reporting
3) Review of historical financial statements
4) Attestation services on information technology
5) Other attestation services that may be applied to a broad range of subject matter

24

In a(n) ____________________________________, management asserts that the statements are fairly stated in accordance with applicable US or international accounting standards.

Audit of historical financial statements

25

The most common assurance service provided by CPA firms

Audit of historical financial statements

26

For a(n) __________________________________, management asserts that internal controls have been developed and implemented following well established criteria.

Audit of internal controls over financial reporting

27

For a(n) __________________________________, management asserts that the statements are fairly stated in accordance with accounting standards, the same as for audits.

Review of historical financial statements

28

Which attestation service requires a higher level of assurance? Reviews of financial statements or audits?

Audits

29

For ______________________________________, management makes various assertions about the reliability and security of electronic information.

Attestations on information technology

30

Examples of attestation services developed to address the assurance needs of transactions and information shared online and in real time:

WebTrust services
SysTrust services

31

This seal assures the user that the Web site owner has met established criteria related to business practices, transaction integrity, and information processes

WebTrust seal

32

The AICPA and CICA jointly created the _________ attestation service to evaluate and test system reliability in areas such as security and data integrity.

SysTrust

33

Other Attestation Services

Written assurance about the reliability of an assertion made by management

34

Other Assurance Services

Focuses on improving the quality of information for decision makers
Not required to issue a written report
Assurance does not have to be about the reliability of another party's assertion about compliance with specified criteria

35

CPA firms perform numerous other services that generally fall outside the scope of assurance services. Three specific examples are:

1) Accounting and bookkeeping services
2) Tax services
3) Management consulting services

36

CPAs perform three primary types of audits:

1) Operational audit
2) Compliance audit
3) Financial statement audit

37

A(n) __________ audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods.

Operational

38

In operational auditing, the reviews are _____________________________

Not limited to accounting

39

A(n) __________ audit is conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority.

Compliance

40

A(n) __________ audit is conducted to determine whether the financial statements (the information being verified) are stated in accordance with specified criteria.

Financial statement

41

An auditor working for the US Government Accountability Office (GAO), a nonpartisan agency in the legislative branch of the federal government

Government accountability office auditor

42

The GAO's primary responsibility is to:

Perform the audit function for Congress

43

IRS audits are solely ___________ audits.

Compliance

44

To maintain independence from other business function, the internal audit group typically reports to:

The president, another high executive officer, or the audit committee of the board of directors.

45

The major difference between internal auditors and CPA firms:

Lack of independence from the company by internal auditors

46

Three requirements for becoming a CPA

Education requirement
Uniform CPA examination requirement
Experience requirement

47

Who are the Big Four international firms?

Deloitte
KPMG
Ernst & Young
PricewaterhouseCoopers

48

Who audits nearly all of the largest companies both in the US and worldwide?

The Big Four firms

49

National firms have offices where?

In most major cities

50

Regional and large local firms fit what requirements?

Staff of more than 100 people

51

Small local firms fit what requirements?

Fewer than 25 professionals in a single-office firm

52

Three main factors influence the organizational structure of all CPA firms:

1) The need for independence from clients
2) The importance of a structure to encourage competence
3) The increased litigation risk faced by auditors

53

Six organizational structures available to CPA firms

Proprietorship
General Partnership
General Corporation
Professional Corporation
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)

54

The Big Four firms are set up as what type of organizational structure?

LLP

55

The organizational hierarchy in a typical CPA firm includes:

Partners or shareholders
Managers
Supervisors
Seniors or in-charge auditors
Assistants

56

Performs most of the detailed audit work

Staff Assistant

57

Coordinates and is responsible for the audit field work, including supervising and reviewing staff work

Senior or in-charge auditor

58

Helps the in-charge plan and manage the audit, reviews the in-charge's work, and manages relations with the client.

Manager

59

Reviews the overall audit work and is involved in significant decisions. An owner of the firm and therefore has the ultimate responsibility for conducting the audit and serving the client

Partner

60

The Sarbanes-Oxley Act established the ___________________________, appointed and overseen by the SEC.

Public Company Accounting Oversight Board (PCAOB)

61

Provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits, and performs inspections of the quality controls at audit firms performing those audits.

PCAOB

62

Conducts inspections of registered accounting firms to assess their compliance with the rules of the SEC, professional standards, and each firm's own quality control policies.

PCAOB

63

Requires annual inspections of accounting firms that audit more than 100 issuers and inspections of other registered firms at least once every three years.

PCAOB

64

An agency of the federal government that assists in providing investors with reliable information upon which to make investment decisions.

Securities and Exchange Commission (SEC)

65

Special interest reports

Form S-1
Form 8-K
Form 10-K
Form 10-Q

66

Form S-1

Must be completed and registered with the SEC when a company plans to issue new securities to the public

67

Form 8-K

Filed to report significant events that are of interest to public investors

68

Form 10-K

Must be filed annually within 60 to 90 days after the close of each fiscal year

69

Form 10-Q

Must be filed quarterly for all publicly held companies

70

Membership in the ___________________ is restricted to CPAs, but not all members are practicing as independent auditors.

American Institute of Certified Public Accountants (AICPA)

71

Sets professional requirements for CPAs, conducts research, and publishes materials on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes.

AICPA

72

Four major areas in which the AICPA has authority to set standards and make rules are as follows:

1) Auditing standards
2) Compilation and review standards
3) Other attestation standards
4) Code of Professional Conduct

73

Three main sets of auditing standards:

1) International Standards on Auditing
2) US Generally Accepted Auditing Standards
3) PCAOB Auditing Standards

74

Issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC)

International Standards on Auditing (ISAs)

75

True or False

ISAs do override a country's regulations governing the audit of financial or other information

False

76

Auditing standards for private companies and other entities in the US are established by the:

Auditing Standards Board (ASB) of the AICPA

77

Auditing standards for public companies in the US are established by the:

PCAOB

78

Historically, auditing standards have been organized along 10 generally accepted auditing standards (GAAS) that fall into three categories:

General standards
Standards of field work
Reporting standards

79

As part of its Clarity Project, the ASB issued a new Preface to the Codification of Auditing Standards which contains the:

"Principles Underlying an Audit in Accordance with Generally Accepted Auditing Standards" (AKA the principles)

80

The principles provide a framework to help auditors fulfill the following two objectives when consulting an audit of financial statements:

1) Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and
2) Report on the financial statements, and communicate as required by GAAS, in accordance with the auditor's findings

81

The structure of the Codification is organized around the following principles:

Purpose of an audit (Purpose)
Personal responsibilities of the auditor (Responsibilities)
Auditor actions in performing the audit (Performance)
Reporting (Reporting)

82

General Standards

1) Technical training and proficiency of auditor
2) Independence in fact and in appearance
3) Professional care in performing the audit

83

Standards of field work

1) Supervision of assistants and planning of the engagement
2) Assess risk of material misstatement
3) Sufficient appropriate evidence

84

Standards of reporting

1) According to GAAP
2) Consistency
3) Disclosures adequate
4) Opinion expressed

85

These standards address the emotional, ethical, and personal characteristics that all auditors should possess in order to properly discharge their professional responsibilities

General Standards

86

These standards are concerned with planning, risk assessment, and audit evidence. They apply to subjects such as the supervision of personnel, the planning of audit work, assessment of risks that the financial statements will be materially misstated, and the nature, timing, and extent of audit procedures.

Standards of Fieldwork

87

These standards concerns the nature and required content of the auditor's report.

Reporting Standards

88

What is the purpose of an audit?

To provide financial statement users with an opinion issued by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

89

Personal responsibilities that an auditor should possess

Appropriate competence and capabilities
Comply with relevant ethical requirements
Maintain professional skepticism and exercise professional judgment

90

Performance responsibilities that an auditor should possess

Adequate planning and supervision
Determine and apply materiality levels
Assess risks of material misstatement
Sufficient appropriate evidence

91

For a CPA firm, ________________ comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others.

Quality control

92

Quality controls are established for the __________, whereas auditing standards are applicable to ____________________.

Entire CPA firm; individual engagements

93

The review, by CPAs, of another CPA firm's compliance with its quality control system

Peer review

94

Purpose of a peer review

To determine and report whether the CPA firm being reviewed has developed adequate quality control policies and procedures and follows them in practice.

95

An autonomous public policy organization affiliated with the AICPA serving investors, public company auditors, and the capital markets.

Center for Audit Quality (CAQ)

96

Eight distinct parts of the standard unqualified audit report

Report title
Audit report address
Introductory paragraph
Management's responsibility
Auditor's responsibility
Opinion paragraph
Name and address of CPA firm
Audit report date

97

Auditing standards require that the report be titled and that the title include the word:

Independent

98

The audit report is usually addressed to:

The company, its stockholders, or the board of directors

99

Contents of the introductory paragraph in a standard unqualified audit report

Indication that the CPA firm has performed an audit
List of the financial statements that were audited, including the notes as well as balance sheet dates and the accounting periods

100

The auditor's responsibility section of a standard unqualified report must include:

A statement that the audit was conducted in accordance with GAAS
A statement that the audit is designed to obtain reasonable assurance about whether the financial statements are free of material misstatement
The scope of the audit and the evidence accumulated

101

What is a controversial part of the auditor's report?

The meaning of the term present fairly

102

What date is considered the audit report date?

The date on which the auditor completed the auditing procedures in the field.

103

The standard unqualified audit report is issued when the following conditions have been met:

1) All statements - balance sheet , income statement, statement of changes in stockholders' equity, and statement of cash flows - are included in the financial statement
2) Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with auditing standards
3) The financial statements are presented in accordance with US GAAP or other appropriate accounting framework.
4) There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

104

This report is issued when a complete audit took place with satisfactory results and financial statements that are fairly presented, but the auditor believes that it is important or is required to provide additional information

Unqualified with Emphasis-of-matter Explanatory Paragraph or Modified Wording

105

This report is issued when the auditor concludes that the overall financial statements are fairly presented, but the scope of the audit has been materially restricted or applicable accounting standards were not followed in preparing the financial statements

Qualified Report

106

This report is issued when the auditor concludes that the financial statements are not fairly presented, he or she is unable to form an opinion as to whether the financial statements are fairly presented, or he or she is not independent

Adverse or disclaimer

107

Three paragraphs in the standard unqualified audit report for public companies

Introductory paragraph
Scope paragraph
Opinion paragraph

108

The ________ paragraph notes that auditing is done on a test basis.

Scope

109

The most important causes of the addition of an explanatory paragraph or a modification in the wording of the standard unqualified report under both AICPA and PCAOB audit standards:

Lack of consistent application of GAAP
Substantial doubt about going concern
Auditor agrees with a departure from promulgated accounting principles
Emphasis of other matters
Reports involving other auditors

110

Only ____________________________ use modified wording

Reports involving other auditors

111

An explanatory paragraph is required for both ___________ changes and ____________ changes due to a new accounting pronouncement.

Voluntary; required

112

The following are examples of changes that affect consistency and therefore require an explanatory paragraph if they are material:

1) Changes in accounting principles, such as a change from FIFO to LIFO inventory valuation
2) Changes in reporting entities, such as the inclusion of an additional company in combined financial statements
3) Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error.

113

Changes that affect comparability but not consistency and therefore need not be included in the audit report include the following:

1) Changes in an estimate, such as a decrease in the life of an asset for depreciation purposes
2) Error corrections not involving principles, such as a previous year's mathematical error
3) Variations in format and presentation of financial information
4) Changes because of substantially different transactions or events, such as new endeavors in research and development or the sale of a subsidiary

114

The existence of one or more of the following factors causes uncertainty about the ability of a company to continue as a going concern:

1) Significant recurring operating losses or working capital deficiencies
2) Inability of the company to pay its obligations as they come due
3) Loss of major customers, the occurrence of uninsured catastrophes such as an earthquake or flood, or unusual labor difficulties
4) Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity's ability to operate

115

Examples of explanatory information the auditor may report as an emphasis of a matter include the following:

The existence of material related party transactions
Important events occurring subsequent to the balance sheet date
The description of accounting matters affecting the comparability of the financial statements with those of the preceding year
Material uncertainties disclosed in the footnotes

116

When a CPA relies on a different CPA firm to perform part of the audit, the principal CPA firm has three alternatives:

Make no reference in the audit report
Make reference in the report (modified wording report)
Qualify the opinion

117

Departures from an unqualified audit report

The scope of the audit has been restricted (scope limitation)
The financial statements have not been prepared in accordance with GAAP (GAAP departure)
The auditor is not indpendent

118

Three main types of audit reports are issued under the departures from an unqualified audit report:

Qualified opinion
Adverse opinion
Disclaimer opinion

119

A(n) _____________ report can result from a limitation on the scope of the audit or failure to follow GAAP.

Qualified opinion

120

A qualified opinion report can be used:

Only when the auditor concludes that the overall financial statements are fairly stated

121

A qualified report can take the form of a ___________________ or of the ______________.

Qualification of both the scope and the opinion; opinion alone

122

When an auditor issues a qualified report, he or she must use the term _________________ in the opinion paragraph.

Except for

123

A(n) _____________________ is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

Adverse opinion

124

The adverse opinion report can arise only when:

The auditor has knowledge, after an adequate investigation, of the absence of conformity

125

A(n) ______________________ is issued when the auditor has been unable to satisfy himself or herself that the overall financial statements are fairly presented.

Disclaimer of opinion

126

The necessity for disclaiming an opinion may arise because of a _____________ of the audit or a ______________ under the Code of Professional Conduct between the auditor and the client.

Severe limitation on the scope; nonindependent relationship

127

The disclaimer is distinguished from an adverse opinion in that it can arise:

Only from a lack of knowledge by the auditor

128

_____________ is an essential consideration in determining the appropriate type of report for a given set of circumstances.

Materiality

129

A misstatement in the financial statements can be considered material if:

Knowledge of the misstatement will affect a decision of a reasonable user of the statements

130

Three levels of materiality

Amounts are immaterial
Amounts are material but do not overshadow the financial statements as a whole
Amounts are so material or so pervasive that overall fairness of the statements is in question

131

Misstatement unlikely to affect the decisions of a reasonable user

Immaterial - requires an unqualified opinion

132

Misstatement would affect a user's decision, but the overall statements are still fairly stated and therefore useful

Material - requires a qualified opinion

133

Users are likely to make incorrect decisions if they rely on the overall financial statements

Highly material - requires a disclaimer or an adverse opinion

134

Two major categories of scope restrictions:

Those caused by a client
Those caused by conditions beyond the control of either the client or the auditor

135

The lack of independence overrides any other scope limitation. Therefore, _______ opinion is issued.

No

136

A set of moral principles or values

Ethics

137

There are two primary reasons why people act unethically:

The person's standards are different from those of society as a whole
The person chooses to act selfishly

138

A situation a person faces in which a decision must be made about the appropriate behavior

Ethical dilemma

139

The following are rationalization methods commonly employed that can easily result in unethical conduct:

Everybody does it
If it's legal, it's ethical
Likelihood of discovery and consequences

140

The six-step approach to resolving ethical dilemmas:

Obtain the relevant facts
Identify the ethical issues from the facts
Determine who is affected by the outcome of the dilemma and how each person or group is affected
Identify the alternatives available to the person who must resolve the dilemma
Identify the likely consequence of each alternative
Decide the appropriate action

141

Reasons for an expectation of a high level of professional conduct by any profession:

The need for public confidence in the quality of service
The complexity of the service

142

Why is it essential that users regard CPA firms as competent and unbiased?

If users believe that CPA firms do not perform a valuable service, the value of CPA firms' audit and other attestation reports is reduced and the demand for these services will thereby also be reduced.

143

Idea standards of ethical conduct stated in philosophical terms; not enforceable

Principles

144

Minimum standards of ethical conduct stated as specific rules; enforceable

Rules of conduct

145

Interpretations of the rules of conduct by the AICPA Division of Professional Ethics; not enforceable, but a practitioner must justify departure

Interpretations of the rules of conduct

146

Published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and other interested in ethical requirements; not enforceable, but a practitioner must justify departure

Ethical rulings

147

Six ethical principles

Responsibilities
The public interest
Integrity
Objectivity and independence
Due care
Scope and nature of services

148

TIP - General Standards

Technical training and proficiency
Independence in fact and in appearance
Professional care in performing the audit

149

SAS - Fieldwork Standards

Supervision of assistants and planning
Assess risk of material misstatement
Sufficient appropriate evidence

150

ACDO - Reporting Standards

According to GAAP
Consistency
Disclosures adequate
Opinion expressed

151

Emphasis of other matters

The existence of material related party transactions
Important events occurring subsequent to the balance sheet date
The description of accounting matters affecting the comparability of the financial statements with those of the preceding year
Material uncertainties disclosed in the footnotes

152

Factors that cause uncertainty about the ability of a company to continue as a going concern:

Significant recurring operating losses or working capital deficiencies
Inability of the company to pay its obligations as they come due
Loss of major customers, the occurrence of uninsured catastrophes such as an earthquake or flood, or unusual labor difficulties
Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity's ability to operate