cramming Flashcards
(16 cards)
- Q: What are the legal defenses available to auditors against third-party lawsuits?
Lack of Duty of Care – Auditor argues no legal obligation existed toward the suing party (e.g., no relationship or engagement)
Absence of Misstatement – The financial statements were fairly presented; no material errors existed
Non-negligent Performance – Audit was conducted in accordance with GAAS and with due care
Absence of Causal Connection – Loss suffered wasn’t caused by the audit; it happened for other reasons (e.g., economic downturn)
No Damages – Even if an error occurred, the plaintiff didn’t suffer an actual loss
- Q: What is the role of the audit committee in auditor independence?
- A: Acts on behalf of the board in financial reporting and audit matters, reviews scope and cost of audit, liaises with auditors, and selects the external auditor for shareholder approval.
- Q: What are the three main stages of an audit?
- Risk Assessment
- Risk Response
- Reporting
- Q: What are the two main types of fraud and examples?
- Financial Reporting Fraud (e.g., misstating revenues)
- Misappropriation of Assets (e.g., theft, misuse of company funds)
- Q: What are the components of the fraud triangle?
- A: 1. Incentives/Pressures
- Opportunities
- Attitudes/Rationalization
- Q: What are the four components of the Audit Risk Model?
Inherent Risk (IR) – Risk of misstatement due to the nature of the business/account, before considering controls (e.g., estimates, cash theft risk)
Control Risk (CR) – Risk that internal controls won’t detect or prevent a misstatement
Acceptable Audit Risk (AAR) – Auditor’s tolerance for issuing the wrong opinion; lower AAR = more work
Planned Detection Risk (PDR) – Risk that audit procedures won’t catch a material misstatement; lower PDR = more testing required
What are analytical procedures used for in an audit?
- Planning – Identify risk areas
- Execution – Estimate account balances
- Reporting – Final review
- Q: What are the five key components of auditing?
- Quantifiable Information
- Criteria (e.g., GAAP)
- Evidence Gathering
- Independent Competent Auditor
- Audit Report
- Q: What are the three theories explaining demand for audits?
Agency Theory – Audits help resolve conflicts between owners (shareholders) and managers, who may have different incentives. Audits provide independent verification of management’s claims.
Information Hypothesis – Users value audited financial info because it’s more reliable for decision-making.
Insurance Hypothesis – Audits provide investors with a form of protection, as they may seek compensation from auditors if things go wrong.
- Q: What are the differences between audit, review, and compilation engagements?
Audit Engagement
* Level of Assurance: Reasonable
* Procedures: Full audit procedures – risk assessment, control evaluation, substantive testing (e.g., confirmations, recalculations)
* Report: Positive opinion (e.g., “fairly presented in all material respects”)
* Use Case: Required for publicly traded companies, often used by lenders and investors
Review Engagement
* Level of Assurance: Limited
* Procedures: Primarily inquiry and analytical procedures – no control testing or substantive detail testing
* Report: Negative assurance (e.g., “nothing has come to our attention…”)
* Use Case: Suitable for private companies where a full audit is not required
Compilation Engagement
* Level of Assurance: None
* Procedures: Merely compiles data provided by client into financial statements; checks for math accuracy only
* Report: “Notice to Reader” – no assurance or opinion is given
* Use Case: Internal use, small businesses, year-end tax filings
Q: What are examples of how auditors can violate ethical principles?
Integrity & Due Care – skipping procedures, sloppy documentation
Objectivity – bias from relationships or financial interest
Professional Competence – accepting work outside area of expertise
Confidentiality – disclosing client information inappropriately
Professional Behaviour – disparaging peers, dishonest advertising
Q: What is a Substantive Audit Strategy?
A:
Used when control risk is high or when the auditor chooses not to rely on internal controls.
Auditor relies heavily on substantive testing — including tests of details and analytical procedures — without testing controls.
Q: What is a Combined Audit Strategy?
A:
Used when control risk is assessed as low and controls are cost-effective to test.
Auditor performs extensive control testing and reduces the extent of substantive procedures accordingly.
🔹 Specific Rule Violations in the CPA Code
False or Misleading Info – associating with documents known to be false
False or Misleading Information (Rule 205) – Signing or associating with knowingly false financials
(Violates: Integrity and Due Care)
Contingent Fees (Rule 215) – Charging based on outcome (e.g., bonus for clean audit opinion)
(Violates: Objectivity & Professional Behaviour)
Commissions (Rule 216) – Accepting money for client referrals
(Violates: Objectivity)
Solicitation (Rule 217.2) – Poaching a client with undercut pricing or misleading claims
(Violates: Professional Behaviour & Integrity)
Advertising (Rule 217) – Claiming superiority without proof (e.g., “Best CPA in BC”)
(Violates: Professional Behaviour)
Failure to Communicate with Predecessor Auditor (Rule 302) – Accepting an engagement without checking for red flags
(Violates: Professional Competence and Due Care)
- Q: What are the five main threats to auditor independence?
Self-interest threat – Auditor has a financial interest in the client (e.g., shares, loans, heavy reliance on client fees)
Self-review threat – Auditor is reviewing their own work or the work of their firm (e.g., helped prepare the statements)
Advocacy threat – Auditor appears to promote or defend the client’s interests (e.g., representing them in court)
Familiarity threat – Auditor is too close to the client (e.g., long relationship, family member at the company)
Intimidation threat – Auditor feels pressured or threatened by the client (e.g., fear of being fired or replaced)
Q: What are the four main types of audit opinions and when are they issued?
A:
Unmodified (Clean) Opinion – Financial statements are fairly presented in all material respects (no material misstatements)
Qualified Opinion – There is a material misstatement or scope limitation, but it’s not pervasive (e.g., “except for inventory valuation…”)
Adverse Opinion – Financial statements are materially and pervasively misstated (not fairly presented overall)
Disclaimer of Opinion – Auditor cannot obtain sufficient evidence due to a pervasive scope limitation (e.g., records destroyed, access denied)
