Cumulative Section

Question 1

What is the purpose of an audit?

Answer 1

To provide reasonable assurance about whether financial statements are free of material misstatements, whether caused by error of fraud

Question 2

Give at least two reasons why audits are useful to investors.

Answer 2

1. reduce information risks
2. constrain agency costs

Question 3

What are the parts of the audit risk model, and what do they mean?

Answer 3

audit risk = inherent risk * control risk * detection risk

inherent risk: chance there would be a material misstatement in the first place

control risk: chance that internal controls wouldn’t catch and fix a material misstatement

detection risk: chance that the auditor would not catch and fix a material misstatement

Question 4

What part(s) of audit risk does the auditor directly influence?

Answer 4

detection risk

Question 5

There are 6 pieces of information in the standard clean audit report. Name 4 of them.

Answer 5

1. what the auditor did
2. the auditor’s responsibilities
3. management’s responsibilities
4. standards used for the audit
5. financial statement opinion
6. something about internal controls

Question 6

There are two key differences between the report for a public/private audit client. Name one of them.

Answer 6

1. public client uses PCAOB standards, private client uses AICPA standards
2. public report has an opinion on internal controls, private report has explicitly no opinion on internal controls

Question 7

What is the difference between tracing and vouching?

Answer 7

tracing is taking a source document and tying it to its financial statement item

vouching is going the opposite direction, taking a financial statement item and tying it to its source document

Question 8

Why is the difference between tracing and vouching important?

Answer 8

because they test different assertions

tracing- completeness understatements

vouching - existence overstatements

Question 9

When would each one be used (give an example balance sheet account)?

Answer 9

trace liabilities like AP

vouch assets like AR

Question 10

What is the difference between positive and negative confirmations?

Answer 10

positive letter requests a response whether the amount is correct or incorrect

negative letter requests a response only if the amount is incorrect

Question 11

Which letter is costlier/more time consuming and why?

Answer 11

positive confirmation letter because nonresponses require additional follow up work

Question 12

All else equal, which letter is preferred?

Answer 12

positive confirmation letter

Question 13

What are bank recs designed to detect?

Answer 13

detect items that are treated differently between the books and the bank

Question 14

How often are bank recs prepared?

Answer 14

prepared monthly

Question 15

What sign (positive or negative) would the following items (outstanding checks & deposits in transit) typically have?

Answer 15

outstanding checks (-)

deposits in transit (+)