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Audit > Final > Flashcards

Final Flashcards

1
Q

5 significant impacts of the Sarbanes-Oxley Act of 2002.

A
  1. Creating of the PCAOB, ending the self-regulation for the auditing profession
  2. Enhancing the role and importance of the audit committee
  3. Requiring reporting on internal control over financial reporting
  4. Increasing auditor independence requirements
  5. Increasing corporate responsibility, CEO & CFO signing officers
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2
Q

The fraud triangle

A
  1. Incentive
  2. Opportunity
  3. Rationalization
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3
Q

6 Failures in Enron’s fraud

A
  1. Management Accountability - no accountability
  2. Corporate Governance - board members no independence
  3. Accounting Rules - complex, obscure pronouncements
  4. Financial Analysts - relied too heavily on earnings
  5. Investment Banking - rewarded with large fees
  6. External Auditors - Arthur Andersen consulted internally as well as audited externally
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4
Q

How many times did the Board of Directors for Aaple meet during 2017?

A

4

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5
Q

How many times did the Audit Committee for Aaple meet during 2017?

A

8

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6
Q

5 Types of Controls

A
  1. Entity-wide controls - Monitoring
  2. Transaction controls - Segregation of duties
  3. Physical controls - Asset protection
  4. Preventive controls - Prevent misstatements
  5. Detective controls - Discover processing errors
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7
Q

5 Management assertions in financial statements

A
  1. Existence or Occurrence
  2. Completeness
  3. Valuation or Allocation
  4. Rights and Obligations
  5. Presentation and Disclosure
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8
Q

Audit Risk =

A

Inherent Risk x Control Risk x Detection Risk

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9
Q

Detection Risk =

A

Audit Risk / (Inherent Risk * Control Risk)

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10
Q

PCAOB Auditing Standard Categories

A
  1. General Standards (selecting and training auditors)
  2. Fieldwork Standards (conducting the audit)
  3. Reporting Standards (communicating auditor’s opinion)
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11
Q

PCAOB Auditing Standards

A
  1. Auditors have adequate technical training and proficiency
  2. Auditors to be independent (in fact and in appearance)
  3. Audit to be conducted with professional care expected of a prudent auditor
  4. Properly plan and supervise the audit
  5. Develop an understanding of client’s controls
  6. Obtain audit evidence by performing audit procedures
  7. State whether financial statements are presented in accordance with the applicable financial reporting framework (i.e., GAAP or IFRS)
  8. Identify conditions where accounting principles are not consistently observed
  9. Review disclosures for adequacy and state in the report if not reasonably adequate
  10. Express an opinion on financial statements as a whole or state an opinion cannot be expressed
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12
Q

Audit Procedure Categories

A
  1. Risk assessment
  2. Tests of controls
  3. Substantive procedures
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13
Q

Audit Procedures

A
  1. Inspection of documentation
  2. Inspection of assets
  3. Observation
  4. External confirmation
  5. Recalculation
  6. Reperformance
  7. Analytical procedures
  8. Scanning
  9. Inquiry
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14
Q

AICPA Independence Requirements

A
  1. Self-review threat
  2. Advocacy threat
  3. Adverse interest threat
  4. Familiarity threat
  5. Undue influence threat
  6. Financial self-interest threat
  7. Management participation threat
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15
Q

Example of Existence or Occurrence

A
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16
Q

Example of Completeness

A
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17
Q

Example of Valuation or Allocation​

A
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18
Q

Example of Rights and Obligations

A
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19
Q

Example of Presentation and Disclosure

A
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20
Q

(True/False) Audit quality is driven, in part, by the external audit firm’s culture.

A

True

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21
Q

(True/False) Internal controls are the responsibility of management.

A

True

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22
Q

(True/False) The detection of material fraud is a reasonable expectation of users of audited financial statements.

A

True

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23
Q

(True/False) An example of fraudulent financial reporting is the Treasurer’s diversion of hundreds of thousands of dollars into a personal money market account.

A

False

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24
Q

(True/False) The three elements of the “fraud triangle” are incentive, opportunity, and capability.

A

False

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25
Q

(True/False) An organization’s audit committee must be composed of outsiders such as its attorney.

A

False

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26
Q

(True/False) External auditors are required to inform the audit committee of any significant audit adjustments discovered during the engagement.

A

True

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27
Q

(True/False) A company’s internal auditing function should not be considered when assessing the effectiveness of internal controls.

A

False

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28
Q

(True/False) One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls.

A

Flase

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29
Q

(True/False) Segregation of duties is a control activity that is designed to protect against the risk that an individual can both perpetrate and cover up a fraud.

A

True

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30
Q

(True/False) A control deficiency should be classified as a material weakness only if there has been a misstatement in the financial statements.

A

False

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31
Q

(True/False) A material weakness in internal control is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

A

True

32
Q

(True/False) Walkthroughs and inquiries are often used to obtain an understanding of internal controls.

A

True

33
Q

(True/False) Gross negligence is a failure to use even minimal professional care or evidence of showing a reckless disregard for the truth.

A

True

34
Q

(True/False) Major threats to the independence of external auditors include financial self-interest, familiarity with the client, and undue pressure to reduce work/audit fees.

A

True

35
Q

(True/False) External auditors are permitted to perform an audit of financial statements for a contingent fee if the audit committee approves the agreement in advance.

A

False

36
Q

(True/False) The confidentiality between an external auditor and client is legally equivalent to the confidentiality between an attorney and client.

A

False

37
Q

(True/False) The PCAOB’s fieldwork standards require external auditors to develop an understanding of the client’s controls as an important prerequisite to developing specific audit tests.

A

True

38
Q

(True/False) An external auditor must be independent in fact and in appearance.

A

True

39
Q

(True/False) Audit procedures can be classified as risk assessment, test of controls, or substantive tests.

A

True

40
Q

(True/False) Under common law, external auditor liability concepts are developed through court decisions based on negligence, gross negligence, or fraud.

A

True

41
Q

(True/False) One of the provisions of the Sarbanes-Oxley Act requires the lead partner and reviewing partner in the external audit firm to rotate off the audit of any publicly traded client at least every ten years.

A

False

42
Q

(True/False) For initial audits of publically traded companies, U.S. auditing standards require communications with the predecessor external auditors.

A

True

43
Q

(True/False) Vouching involves taking a sample of recorded transactions and tracing the items back to the source documents to ensure the transactions occurred.

A

True

44
Q

(True/False) The fraud scheme involving Rita Crundwell and the City of Dixon, IL is the largest municipal fraud in U.S. history (almost $54 million was stolen), lasted over 20 years and exemplifies why “trust is not an internal control”.

A

True

45
Q

(True/False) Analytical procedures are a type of substantive evidence.

A

True

46
Q

(True/False) Appropriateness deals with the quantity of evidence the auditor collects, whereas sufficiency deals with the quality of evidence the auditor collects.

A

False

47
Q

(True/False) Baker & Jones, CPAs, are performing an audit on McArnee, Inc. Baker selects a sample from certain source documents and traces them forward to the accounts payable sub-ledger. The purpose of this test is to determine the possibility of overstated liabilities.

A

False

48
Q

(True/False) Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised.

A

False

49
Q

(True/False) Tolerable misstatement is the amount of misstatement in an account balance that the auditor could consider and still judge the underlying account balance as fairly stated.

A

True

50
Q

(True/False) Control risk refers to both design of controls and operation of controls.

A

True

51
Q

(True/False) Internal controls that the auditor expects to rely on to reduce substantive testing may change.

A

True

52
Q

(True/False) High risk of material misstatement causes the auditor to perform audit procedures.

A

True

53
Q

(True/False) Assets and revenues are most often tested for understatement.

A

False

54
Q

Which concept is referred to as the cornerstone of auditing?

A

Independence

55
Q

What is the primary determinate between fraud and errors in financial statements?

A

The intent to deceive

56
Q

An Integrated Audit Report provides an opinion(s) on what?

A

Both financial statements and internal control over financial reporting (ICFR)

57
Q

What is the most common type of fraud in an organization?

A

Misappropriation of assets

58
Q

What is the most common method of detecting fraud in an organization?

A

Tips from employees, vendors, etc.

59
Q

(True/False) The typical organization loses 5% of its revenues to fraud each year.

A

True

60
Q

What creates an opportunity for fraud to be committed in an organization?

A

Poor internal controls

61
Q

What component of Internal Control over Financial Reporting sets the tone across the organization?

A

Control Environment

62
Q

What is an example of a preventive control?

A

Requiring two persons to open mail containing payments.

63
Q

What is an example of a detective control?

A

Reconciliations

64
Q

What is the purpose of understanding a company’s internal controls?

A

Determining whether the internal controls can be relied upon.

65
Q

What is an example of a test of controls?

A

Review Management’s monthly bank reconciliations.

66
Q

What is an example of an entity-wide control?

A

Controls over management override

67
Q

What engagements are Integrity and objectivity required of AICPA members?

A
  1. Tax Perparation
  2. Financial statement reviews
  3. Financial statement audits
68
Q

Independence is required by CPAs for what type of service?

A

Audit work

69
Q

An out-of-town client takes the audit engagement team to dinner at a renowned local restaurant. Would this situation impair objectivity, integrity or independence with respect to the audit client?

A

no

70
Q

What is an example of when an external auditor is not permitted to divulge confidential information concerning a client?

A

To respond to the information request of a shareholder

71
Q

In ethical decision making, what does utilitarian theory hold?

A

The ethical decision achieves the greatest good for the greatest number of people.

72
Q

What is a cause of action against the external auditor for breach of contract?

A

Violating client confidentiality

73
Q

What are 3 responsibilities of an audit committee?

A
  1. Provide oversight of reporting outside the organization.
  2. Provide oversight of the internal auditing function.
  3. Provide oversight of the external audit.
74
Q

(True/False) Significant deficiencies and material weaknesses should be communicated in writing to management and the audit committee.

A

True

75
Q

Which auditing standards category covers the following: Competence, independence, and due professional care.

A

General Standards

76
Q

What PCAOB auditing standard is related to reporting?

A

Consistent application of accounting principles

77
Q
A

Audit (3 decks)

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