Midterm 1 Flashcards
Get a 90 (48 cards)
1
Q
What are the advantages and reasons for an audit?
A
Advantages:
- Reduces information risk
- Efficiency
Reasons:
- Increases the credibility of financial statements for external user
- Gives a reasonable assurance on the quality of the info, examined by independent third party
2
Q
Give examples of assurance and non assurance services and what they entail.
A
Assurance:
-Review Engagement: opinion of limited assurance (plausibility), information requests, analytical procedures, discussions with management, use accounting standards
-Audit: opinion of reasonable assurance (reliability), inspection, observation, information requests, third party confirmations, use accounting standards
Non-Assurance:
- Notice to reader (compilation): no opinion, prepare FS from clients records, no accounting standards
- Tax services
- Bookeeping
3
Q
What are the 5 different types of auditors?
A
- Public accountants: AKA external or independent auditors, report to FS users. FS audit and other non assurance services
- Government auditors: optimization of resources, compliance with regulations. Compliance audit, FS audit and operational audit.
- Revenue agency auditors: Audit taxpayers to ensure compliance with tax laws. Compliance audit.
- Internal auditors: work in companies, report to audit committee and senior management. Operational audit.
- Forensic and Fraud auditors: Forensic investigate fraud, fraud focus on prevention and detection
4
Q
Identify the components of each section of the Financial Statement Audit: Purpose, Auditor’s responsibilities, Comprehensive performance, Reporting
A
Purpose: Provide users with an opinion on whether the FS are presented fairly, in accordance with applicable financial reporting framework.
Auditors responsibilities: Professional competence and due care, Compliance with ethical and independent requirements, Professional skepticism and judgement.
Comprehensive Performance: Planning and adequate supervision, Determining and applying materiality levels, Assessing risks of material misstatement.
Reporting: Standard unqualified independent auditor’s report, Qualified opinion, Adverse opinion
5
Q
What are the 5 threats to an auditor’s independence?
A
- Self interest
- Self review
- Advocacy
- Familiarity
- Intimidation
6
Q
What are management’s responsibilities during a FS audit?
A
- Adopt sound and appropriate accounting policies
- Implement and maintain adequate internal controls
- Provide fair representations in the FS
- Access to information and persons
7
Q
What are the responsibilities of those charged with governance (BOD, Audit committee) during a FS audit?
A
BOD: Oversight of management and the FS audit, Approval of the audited FS.
Audit Committee: Oversight of management in relation to FS preparation and internal controls, External auditor appointed
8
Q
What are the responsibilities (5 commandments) of the auditor during a FS audit? What are their other responsibilities?
A
- Comply with relevant ethical requirements
- Plan and perform an audit with professional skepticism
- Exercise professional judgment in planning and performing the audit
- Obtain reasonable assurance
- Conduct the audit in accordance with CAS
Consider laws and regulations
Evaluate going concern
9
Q
What are the 4 potential judgment traps and biases? Explain them.
A
- Confirmation Bias: seeing only the info that backs initial conclusion
- Overconfidence bias: being sure you are right, therefore not seeing differing pov or contradicting evidence
- Anchoring: Doing the same work/procedures as in the past
- Availability: Estimating the likelihood of an event based on past experiences
10
Q
What are the 5 assertions about classes of transactions and events for the period under audit?
A
- Occurrence: event/transaction actually happened
- Completeness: all transactions/events that should have been recorded are recorded
- Accuracy: correct amounts have been recorded
- Cutoff: recorded in correct accounting period
- Classification: recorded in proper accounts
11
Q
What are the 4 assertions about account balances?
A
- Existence: Assets, liabilities, equity interests exist
- Completeness: assets, liabilities and equity interests that should have been recorded have been
- Valuation and allocation: appropriately recorded in FS
- Rights and obligations: entity holds or controls the rights to assets, and liabilities are the obligation of the entity
12
Q
What are the 4 assertions about presentations and disclosures?
A
- Occurrence and rights and obligations: disclosed events/transactions have occurred and pertain to entity
- Completeness: disclosures that should have been included in FS have been
- Accuracy and valuation: Financial info disclosed appropriately and at proper amounts
- Classification and understandability: info is appropriately presented and described
13
Q
What are the steps in the audit process?
A
A. Risk Assessment
- Client Acceptance
- Audit Planning: auditor obtains knowledge of client’s industry, business and control environment
- Assess risk of material misstatement: auditor determines audit risk and sets preliminary audit levels
B. Risk Response
- Develop Risk Response(overall audit plan): auditor considers different types of tests and type of sampling to be used
- Perform Risk Responses: audit tests designed to respond to the risks of material misstatement at the assertion level. Include tests of control, substantive tests of details and substantive analytical procedures
- Conclusion: info obtained throughout the audit is combined to reach overall conclusion
C.Reporting
7. Issue auditor’s report
14
Q
What are the 4 factors of persuasiveness of audit evidence?
A
- Appropriateness: measure of the quality of audit evidence
- Timeliness: covering the appropriate period
- Relevance: pertinence of the evidence to the assertion or control being tested
- Sufficiency: measure of the quantity of audit evidence
15
Q
What are some audit procedures to obtain audit evidence?
A
BIG 3
- Risk Assessment procedures
- Tests of controls
- Substantive procedures ( tests of details & analytical procedures)
- Inspection
- Observation
- External Confirmation
- Recalculation
- Reperformance
- Analytical Procedures
16
Q
What are the purpose of working papers?
A
- Basis for planning audit
- Record of the evidence accumulated and the results of the tests
- Data for determining the proper type of auditor’s report
- Basis for review
17
Q
What are the benefits of having a good audit plan? 5 from slides, 3 from textbook.
A
- Devote attention to appropriate areas
- Identify and resolve potential problems
- Organize and manage the audit engagement, effectively and efficiently
- Selection of engagement team members
- Direction and supervision of engagement team members
- To enable the auditor to obtain sufficient appropriate audit evidence
- To help keep audit costs reasonable and
- To avoid misunderstandings with the client
18
Q
What does an engagement letter include?
A
- Engagement objectives
- Responsibilities of the auditor + management
- Identification of the financial reporting framework used by management
- Reference to expected form and content of the audit report
- Engagements limitations
19
Q
What are the elements of the client risk profile?
A
- Understanding the entity and its environment (internal and external)
- Understanding the entity’s internal controls
- The entity’s risk assessment process
- The information system relevant to financial reporting and communication
- Identifying and assessing the risks of material misstatement at the FS level and at the assertion level
20
Q
What are the four elements of the framework for professional judgment?
A
Identify and define the issue
Gather the facts and information
Perform analysis and evaluate alternatives
Reach and document conclusions
21
Q
What are the 6 aspects of professional skepticism?
A
Questioning mind: tendency to inquire, with some sense of doubt
Suspension of judgement: withholding judgement until have appropriate evidence
Search for knowledge: a desire to investigate beyond the obvious
Interpersonal understanding: recognition that people’s motivations and perceptions can lead to biased decisions
Autonomy: conviction to decide on your own rather than being influenced by others
Self-esteem: self-confidence to resist persuasion and to challenge assumptions
22
Q
What are some risk assessment procedures? (Client Risk Profile)
A
- Identifying and assessing risks of material misstatement
- Procedures include:
- inquiries of management
- analytical procedures
- observation and inspection
23
Q
What must the auditor grasp to understand the client and its environment? (Client Risk Profile)
A
- Industry and business environment
- Business (operations, ownership, governance structures, type of investments, etc_
- Application of accounting policies
- Objectives and strategies
24
Q
What is included in the information system? The auditor shall obtain an understanding of: (Client Risk Profile)
A
- Classes of transactions
- Procedures
- Accounting records
- How the information system captures events and conditions
- Financial reporting process
- Controls surrounding journal entries
25
What are the 3 elements in the documentation when planning the audit?
1. The overall audit strategy
2. The audit plan
3. Any significant changes made during the audit engagement to the overall audit strategy or audit plan
26
Provide examples of audit evidence for each of the following steps in developing the client risk profile.
Understanding client's business and industry:
a)Industry and external environment
b) Business operations and processes
c) Management and governance
d) Objectives and strategy
e) Measurement and performance
Assess client business risk:
f) Evaluate management controls affecting business risk
g) Perform preliminary analytical review
a) - meet client externally
b) - internal controls are implemented and implemented correctly
c) - risk?
- "minutes" book from BOD
d) - set direction of audit
- where to focus
- future objectives
e) - if they get bonus on specific KPI, creates bias
f) - manager hands on?
- binder of procedures for all internal controls
- what can affect these risks
g) - compare ratios and how they effect FS
27
What does it mean if a misstatement is material?
It means that the misstatement would influence the economic decisions of the users of the financial statements
28
The auditor assumes that users have:
- reasonable knowledge of business and economic activities
- understand that FS are prepared, presented and audited to levels of materiality
- Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events
- Make reasonable economic decisions on the basis of the info in the FS.
29
What are some common bases of materiality? And what are some factors that effect the selection of the benchmark?
- 3 to 7% of N.I before taxes
- 3 to 5% of shareholders equity
- 1 to 3% of revenue
- 1 to 3% of expenses or revenue (non profit)
Elements of F/S
Whether there are items on which the users tend to focus
Past history with audits
Nature of the entity and the industry
Entity’s ownership structure and the way it is financed
Relative volatility of the benchmark
30
What are the 6 steps in applying materiality?
1. Set materiality (affected by audit risk, use professional judgment)
2. Establish performance materiality
3. Allocate materiality to segments (optional)
4. Estimate total misstatement in segment (extrapolate misstatement)
5. Estimate the combined misstatement ( summary of misstatements)
6. Compare combined estimate with materiality
31
What are some factors of documentation in the client risk profile?
- Discussion among the engagement team and significant decisions reached
- Key elements: entity and its environment and internal controls components
- Identified and assessed risks of material misstatement (FS and assertion level)
- Risks identified and related controls about which the auditor has obtained an understanding
32
What are some planning activities done by the auditor?
- Establish an overall audit strategy(scope, timing and direction)
- Develop an audit plan (nature, timing and extent of procedures)
- Update and change overall audit strategy and plan as necessary during the course of the audit
- Plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work.
33
What are some qualitative factors in determining the performance materiality or safety buffer?
- High risk industries, high market risk, first year of operations or new client
- Deficient control environment, fraud risks, high turnover of key personnel
- Multiple locations, intention to sell or IPO
34
For what do we assess the risk of material misstatement?
```
At the FS level
-relate to FS as a whole
-deficiencies in management integrity
-weak entity level controls
inadequate accounting systems/records
```
Assertion Level
- Classes of transactions, account balances and presentation and disclosure
- In order to determine nature, timing and extent of audit procedures
- Inherent and control risk
35
What are the 3 types of audit risk? Explain them.
- Inherent risk: risk of misstatement present inherently in the nature of the business structure, industry or economy
- Control risk: risk that the internal control systems don't catch the misstatement
- Detection risk: risk that the auditor won't detect the misstatement
36
Identification of significant risks. The auditor is required to consider:
- risk of fraud
- risk related to recent significant economic, accounting or other developments
- complexity of transactions
- significant transactions with related parties
- degree of subjectivity in the measurement of financial information
- non routine transactions
37
What is fraud?
a false statement about a material fact, knowledge that the statement was false, a victim relies on the statement and suffers injury or loss
38
What are 4 common misconceptions about occupational fraud?
- Technology reduces the "paper trail" that could uncover fraud
- The only enemy is the fraudster
- Trust is an internal control
- Employees who are rich do not commit fraud
39
What are the 3 elements of the fraud triangle?
top: incentives/pressure
right: attitudes/rationalization
left: opportunities
40
What does "tone at the top" mean?
- the message, attitude and image that senior management conveys
- it is essential as it sets the mood or tone for the rest of the company
- how management communicates principles, values and ethics
- walk the talk
41
What are some fraud risk factors (red flags)?
- threats to financial stability or profitability
- excessive pressure from management
- ineffective BOD
- high turnover of key staff members
42
What are the auditor's responsibilities in relation to fraud?
1. Professional skepticism
2. Discussion among the engagement team
3. Risk assessment procedures and related activities
a) inquiries of management
b) how governance exercises oversight
c) evaluation of any unusual or unexpected relationships
d) evaluation of fraud risk factors
4. Identification and assessment of the risks of material misstatement
5. Responses to the assessed risks (audit procedures)
6. Evaluation of audit evidence, communications to management
7. Documentation
43
What are the 4 objectives of internal control?
1. Strategic, high level goals that support the mission of the entity
2. Reliability of financial reporting
3. Efficiency and effectiveness of operations
4. Compliance with laws and regulations
44
What are management's 4 objectives of internal controls?
1. Safeguarding assets
2. Optimizing the use of resources
3. Preventing and detecting error and fraud
4. Maintaining reliable control systems
45
What are the 5 groups of control activities?
A. Adequate segregation of duties
-No single employee should be in a position to commit and conceal fraud
B. Proper authorization of transactions and activities
-Two levels of authorizations: general (routine transactions without special approval), specific (management's review and approval is required)
C. Adequate documents and records
-Helps ensure accurate and complete recording of data
-Should be kept as simple as possible
-Documents should be sequentially pre-numbered
D. Physical and logical control over assets and records
E. Independent checks of performance and recorded data
-Internal checks to ensure that transactions are processed accurately are an important control element
-These checks should be performed by someone independent of the party responsible for the activities.
46
List some suggested procedures to be performed in the process of understanding the business and operations
- Perform analytical procedures and analyze financial ratios
- Inspect operations, the ownership and governance structures, the application of the accounting policies, what regulations apply to the industry.
- Meet with management, observe and inspect documents and internal controls.
- Inspect the financial information system used for financial reporting and communication.
- Understand the different classes of transactions and controls surrounding journal entries.
47
What is a qualified opinion?
auditor believes FS are presented fairly but either there is
a) a material but not pervasive, limitation in the scope of the audit
b) there was a failure to follow the accounting principles that resulted in a material, but not pervasive, misstatement in the FS
48
What are the 5 components of internal control?
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and communication
5. Monitoring
