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Audit > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Evaluation of financial information through analysis of plausible relationships among both financial and non-financial data

A

Analytical Procedures

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2
Q

Risk Assessment Procedures (Planning Analytical Procedures) Purpose:

A

Better understand the business and identify unusual trends or large fluctuations in accounts to assist in determining the nature, timing, and extent (i.e.the scope) of audit procedures

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3
Q

Risk Assessment Procedures (Planning Analytical Procedures) Example:

A

Comparing current-year financial information with comparable prior period(s); comparing financial ratios to prior periods or industry competitors

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4
Q

Substantive Analytical Procedures Purpose:

A

Obtain evidential matter about particular assertions related to account balances or classes of transactions to detect material misstatements

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5
Q

Substantive Analytical Procedures Example:

A

Testing the reasonableness of interest expense by computing a model (e.g., using prevailing interest rates and the book value of the debt) and comparing the amount to the company’s recorded expense amount

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6
Q

Final Analytical Procedures Purpose:

A

Overall review of the financial information during audit completion.

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7
Q

Final Analytical Procedures Example:

A

Often include (re)comparing the current year audited balances with the audited balances from the prior year. Any material differences should be explained by audit procedures performed and documented in the working papers

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8
Q

Current Ratio

A

Current Assets/Current Liabilities
- 2:1
- ex. How quickly a client can pay back current obligations

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9
Q

Quick Ratio

A

Liquid Assets/Current Liabilities
- Acid test, around 1

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10
Q

Receivables Turnover

A

Credit Sales/Receivables
- Tells us how many times the receivables were paid off during the year

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11
Q

Inventory Turnover

A

COGS/Inventory
- Number of times inventory was sold throughout the year

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12
Q

Days Outstanding

A

365 Days/Turnover Ratio
- How long on average it takes customers to pay off their receivables
- Credit terms = 30
- How many days the company could sell goods if it was shutdown/how many says they have on hand

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13
Q

Gross Profit %

A

Gross Profit/Net Sales
- Understand if there are misstatements on income statement

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14
Q

Return on Assets

A

Net Income/Total Assets
- Tells us how well the assets that were obtained are being utilized to obtain profit
- More return, more productive

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15
Q

Debt to Equity

A

(ST Debt + LT Debt)/Stockholder’s Equity
- Leverage ratio (higher ratio)
- More pressure on company if high

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16
Q

Times Interest Earned

A

(Net Income + interest Expense)/Interest Expense
- How well company is able to meet interest obligation
- Want to be higher (Cover cost of borrowing money)

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17
Q

____ has the responsibility to maintain a system of internal controls that provide _______ that assets and records are properly safeguarded, and that the entity’s information system generates information that is reliable for decision making.

A

Management, reasonable assurance

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18
Q

Internal Control Overview Definition

A

The policies and procedures put in place by management and the board of directors to provide reasonable assurance about the achievement of the entity’s objectives

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19
Q

Internal Control Overview Objectives:

A
  1. Reliability of financial reporting
  2. Effectiveness and efficiency of operations
  3. Compliance with laws and regulations
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20
Q

Audit Importance defintiion

A

The auditor’s understanding of the internal control is a major factor in determining the overall audit strategy and audit plan.

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21
Q

Auditors have the responsibility to:

A
  1. Gain an understanding of an entity’s internal
    control
  2. Assess RMM and design an appropriate risk-
    based audit response
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22
Q

There is a(n) _____ relationship between internal control effectiveness (CR) and the amount of substantive evidence (DR) required by the auditor.

A

Inverse

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23
Q

COSO Internal Control Framework definition:

A

A universally adopted framework covering key components of an entire entity’s system of internal control

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24
Q

Control Environment

A

Sets the tone for the organization
- Corporate culture
- management integrity
- independent audit committee and BOD

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25
Q

Entity Risk Assessment

A

Identify relevant business risks that may impact financial reporting
- ex. global (pandemic), credit risk

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26
Q

Control Activities

A

Activities management should put into place to mitigate risk and achieve reporting objectives

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27
Q

SCALP Acronym

A

Separation of duties
Cross checks/comparison
Adequate record keeping
Limited access
Proper approvals and authorizations

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28
Q

Information and Communications

A

Generate and maintain relevant, quality information
- Supports other COSO frameworks
- Reliable, trustworthy accounting info system (AIS)

29
Q

Monitoring

A

Assess the quality of internal control performance over time
- Internal audit function
- Communicate identified deficiencies

30
Q

Limitations of an Entity’s Internal Control

A
  1. Cost/benefit
  2. Management override
  3. Personal errors
  4. Collusion (fraud)
31
Q

Obtain an understanding of I/C

A
  1. Understand the I/C design and implementation
  2. Effectively plan the audit (GAAS)
32
Q

Planning an audit strategy, Substantive Strategy

A

According to the concept of substantive strategy, the auditor does not make decisions on the basis of internal controls of the entity. The accounts related to financial statements are being audited directly instead of taking the assertions of the internal controls of the business. Control risk is set at the maximum when a substantive audit strategy is followed.

33
Q

Planning and audit strategy, Reliance Strategy

A

the auditor relies on the entity’s controls and sets control risk below the maximum. As per the approach of reliance strategy, the internal controls of the entity are used by the auditor. It has been assumed that the internal controls of the business will provide true and fair information about the accounts of financial statements. The evidence related to financial statements are collected by using the internal control.

34
Q

For Reliance Strategy ONLY:

A

Perform tests of controls, conclude an achieved level of control risk (CR), plan the acceptable level of detection risk (DR) and the scope of substantive procedures

35
Q

Performing Tests of Controls
Design Effectiveness

A

whether the control is suitably designed to prevent, or detect and correct, material misstatements

36
Q

Performing Tests of Controls
Operating Effectiveness

A

how well the control is applied, the consistency in which it was applied, and who applied it

37
Q

Common Types of I/C Tests of Operating Effectiveness

A
  • Inquiry
  • Inspection
  • Observation
  • Reperformance
38
Q

Management’s responsibilities under SOX section 404

A
  1. CEO and CFO accept responsibility of IFCR
  2. Evaluate (test) ICFR for operating effectiveness
  3. Document results from ICFR testing
  4. Provide a written report of its ICFR evaluation
39
Q

Auditors responsibility under SOX section 404 and AS No. 2201

A

For public company audits, auditors must perform an integrated audit of ICFR and financial statements.
- provide an opinion

40
Q

Reasonable Assurance in an IFCR context

A

Internal controls related to financial reporting - they are controls designed to achieve timely, reliable, consistent financial reporting

41
Q

Internal audit requirements:

A

Companies with revenue greater than $100M and public shares greater than $75M

42
Q

Performing an audit of ICFR
Reliance strategy

A
  1. Plan the audit of ICFR (plan)
  2. Identify controls to test (Identify)
  3. Evaluate the design and test the operating effectiveness of selected controls (Scope)
43
Q

Performing an audit of ICFR
Additional

A
  1. Evaluate identified control deficiencies (Evaluate)
  2. Form an opinion on the effectiveness of ICFR (Report)
44
Q
  1. Plan the audit of ICFR (plan)
    The role of risk assessment
A

Auditors should devote more attention to areas that have a higher risk of a material misstatement
- What could go wrong?
Look at highly sensitive areas

45
Q
  1. Plan the audit of ICFR (plan)
    Using the work of others
A

Auditors are permitted to use the work performed by, or receive direct assistance from, internal auditors and entity personnel.
- Competency and objectivity

46
Q

Identify controls to test

A
  1. Identify entry level controls
  2. Identify significant accounts and disclosures and their relevant assertions
  3. Understand likely sources of misstatement
  4. Select controls to test
47
Q

Testing operating effectiveness of controls

A
  1. Nature
  2. Timing
  3. Extent
48
Q

Nature

A
  1. Inquiry
  2. Observation
  3. Inspection
  4. Reperformance
49
Q

Timing

A

In many instances, the auditor obtains evidence about the operating effectiveness of controls at an interim date
- Typically in the interim to allow auditors to have time to react/respond

50
Q

Extent

A

Auditors consider the nature of the control (manual vs. automated), the frequency in which the control operates, and the importance of the control when determining the extent (i.e. “how much”) of testing to perform

51
Q

Evaluate identified control deficiencies

A

Magnitude and Likelihood

52
Q

Control Deficiency

A

Report to management
Design or operation of a control does not allow management or employees in the normal course of performance of duties to prevent or detect misstatements on a timely basis

53
Q

Significant Deficiency

A

Report to audit committee and to management
Control deficiency or combination of them is less severe than a material weakness yet important enough to merit attention by those responsible for the financial statements

54
Q

Material Weakness

A

Report externally, to audit committee, and to management
Deficiency or combination of them such that there is a reasonable possibility that a material misstatement of the financial statement will not be prevented to detected in a timely basis

55
Q

Primary purpose of Audit Sampling

A

Draw inferences about the entire population based on the results of testing only a subset of the population

56
Q

Sampling Risk

A

The trade-off between the cost of examining all the data and the cost of making an incorrect decision based on a sample of the data.
- part of detection risk

57
Q

Risk of Incorrect Rejection (Type I)

A
  • Efficiency problem
  • “Rejecting” controls that are, in fact, working properly
  • Unnecessary substantive procedures
58
Q

Risk of Incorrect Acceptance (Type II)

A
  • Conclude that a control is working properly when, in fact, it is not
  • Effectiveness problem
  • MAIN concern when determining sample size
  • Reduce substantive procedures
59
Q

Use of Sampling

A

Use for both internal control testing and substantive procedures
- “See” and “Do”, but not “ask”

60
Q

Use of Sampling procedures

A
  1. Inspection
  2. Reperformance
  3. Confirmation
61
Q

Desired Confidence Level (sampling risk) ex

A

90% confidence = 10% sampling risk
95% confidence = 5% sampling risk

62
Q

Tolerable Deviation Risk (materiality level)

A

The error rate that you will allow to exist in your sample and you still rely on it
- Decision rule
* If the sample deviation rate that you observe is higher than this rate, you won’t rely on the control
- smoke alarm analogy

63
Q

____ at the planning stages of sampling, is the difference between tolerable and expected deviation rate.

A

Precision
- How much “wiggle room” we have in our sample

64
Q

Expected Deviation Rate

A

What you expect to see in a population

65
Q

Allowance for sampling risk

A

The difference between sample deviation rate and the upper deviation rate

66
Q

Sample Deviation

A

Rate that you observe the control failed inside your sample

67
Q

Upper deviation rate

A

the sum of the sample deviation rate and an appropriate allowance for sampling risk.

68
Q

If the tolerable deviation rate is higher than upper deviation rate ____

A

Accept

Audit (1 decks)

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