Audit Exam Flashcards

Auditor's report
Terms Definitions
QUALIFIED
1. Intro
2. Scope
3. Explanatory
4. Opinion

“except for” in opinion paragraph.-usually because of GAAP violations or scope issues. If it’s a scope issues, mention it in the scope paragraph. If it isn’t, don’t mention it. It has an extra explanatory paragraph from the standard unqualified.
Industry Forces-External Threats(Porter's 5 Forces)
-Competitors-Potential Entrants-Substitutes-Suppliers-Customers
Root
Administrative or superuser account within UNIX-based operating systems
CPA examination
covers accounting and reporting, auditing, business environment, regulations, and professional responsibilities
Analytical Procedures
Evaluatioins of Financial information made by a study of plausible relationships among both financial and non-financial data
 
3 methods of variables sampling
1-mean-per-unit estimation2-controlling sample risk3-determination of sampling risk
Sacn
A less-detailed examination of a document or record to determine whether there is comething unusual warranting further investigation
Complementary controls
controls Controls that function together to achieve the same control objective.
Qualified Audit Report
Financial statements - good
Material Portion - not good
Add "except for" in opinion paragraph + discuss problem
MATERIAL WEAKNESS
DEFICIENCY IN INTERNAL CONTROLS SO THERE IS POSSIBILITY OF MMS NOT BEING PREVENTED
Malware
Short for "malicious software." A catchall term for any software that causes intentional damage to computer systems.
haphazard selection
-physical random selection -can't be used with statistical plans
7 Tools of Evidence
1. Physical Exam/Inspection2. Confirmation3. Inspection of Documents4. Obeservation5. Recalulation6. Analytical Evidence7. Client Inquiry
Compare
A comparison of information in two different locations. The instruction should state which information is being compared in as m uch detail as practical
Which of the following parties is responsible for establishing an entity’s internal controls?
Management.
Preventive controls
Controls that deter control problems before they occur.
inner ear
the innermost part of the ear, containing the cochlea, semicircular canals, and vestibular sacs
Factors of Competency
1) Independence of the Provider
2) Knowledge of the Provider
3) Direct Knowledge of the Auditor
4) Effectiveness of Internal Control
5) Objectivity of Measurement Instrument
reporting
the end product of the auditor's work, indicating the auditing standards followed, and expressing an opinion as to whether an entity's financial statements are fairly presented in accordance with agreed-upon criteria (e.g., GAAP)
Plaintext
A text is humanly readable form. Refers to the original message that is enrypted for secrure transmission or storage. Also called clear-text.
modified all-inclusive concept
companies record most items, including irregular ones, as part of net income and highlight irregular items in the financial statements
tests of controls
designed to test the operating effectiveness of controls in preventing or detecting material misstatement
conservatism
when in doubt, chose the solution that will be least likely to overstate assets and income
Three magnitudes of Internal Control Deficiency
Material Weakness
Significant Defiiciency
Control Deficiency
Transaction related audit objectives-Occurance
Whether recorded transactions have acutally occured.

Violation: Inclusion of a sale in the slaes
What is earning management
purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.
Achieved upper deviation rate
Sample deviation rate (# of deviations/ sample size) + Allowance for sampling risk
Substantive Strategy
Auditor has decided NOT to rely on controls, and use substantive procedures to test numbers
8 elements of an unqualified audit report

Report title
the addressee
introductory paragraph
scope paragraph
opinion paragraph
explanatory paragraph referring to the audit of internal control
name of auditor
date of report
Steps in Applying Materiality
1) Set preliminary judgment about materiality
2) Allocate preliminary judgment about materiality to segments
3) Estimate total misstatement in segment
4) Estimate the combined misstatement
5) Compare combined estimate with preliminary or revised judgment about materiality
 
Steps 1-2 = Planning extent of tests
Steps 3-5 = Evaluating Results
Negative Confirmations
request a reply only if the confirmed balance is incorrect.
Quantitative Materiality
The magnitude of an error that would make the financial statements materially misstated
Examine a sample of shipping documents to determine whether each has a sales invoice number included on it.
(analytical procedure, test of control, substantive test of transactions, or test of detail account balances.....2. general audit or control object
Test of control

completeness
comparative negligence
A concept used by certain courts to allocate damages between negligent parties based on the degree to which each party is at fault. the allocation of damages is referred to as proprtionate liability.
Standard Unqualified Report
A report when all auditing conditions have been met. (The best opinion)
Consideration of internal auditor's work
External auditors must obtain an understanding first about the work of the internal auditors in order to determine its relevance to the audit. Then they must consider the competence (education and certifications) and objectivity (internal auditors' reporting requirements to board of directors) of the internal auditors before relying on their help in the planning and conducting of an audit. If the internal auditors are considered competent and objective then they may assist the external auditor in understanding internal controls, assessing risk, preparing workpapers, and performing certain audit procedures (270). Ultimately, however, the internal auditor's judgement should not be relied on in assessing inherent and control risks, materiality, sufficiency of tests performed, accounting estimates and other matters affecting the auditor's opinion (271).
SOX 404 says that MGMT's responsibilities are...
1) accept responsibility for effectiveness of ICFR
2) Evaluate effectiveness using control criteria
3) Support evaluation with evidence and documentation
4) Present written assessment at end year
Business process risk
An internal risk of mismanagement of a critical process
Factors to consider before accepting audit client
Financial stability
Reason for leaving previous auditor
Standing in the business community
Major Phases of an Audit
Client acceptance / continuance and establishing engagement termsPreplanningEstablish materiality and assess risksPlan the auditConsider and audit internal controlAudit business processes and related accountsComplete the auditEvaluate results and issue audit report
Which of the following is not typically included in initial audit planning?
Perform preliminary analytical procedures.
What Does Processing and Recording Cash Receipts Involve, and Why Must Cash Receipts Be Deposited and Recorded On a Timely Basis?
Includes receiving, depositing, and recording cash.

To Prevent Theft.
[Types of Audit Procedures]
Analytical Procedures - Define
are evaluations of finanicla data made by a study of plausible relationships among both financial and nonfinancial data. (Ex. Expected vs. actual, on F/S)
Positive vs. Negative Confirmations
Negative return IF and ONLY if there is an error.
Positive is a stronger audit test b/c you receive the answer regardless.
account form of balance sheet
assets on left, liabilities and o.e. on right
6 Elements of AICPA's Quality Control Standards
1. Leadership2. Relevant Ethical Requirments3. Acceptances/Continuatance of clients4. Human Resouces5. Engagement Performance6. Monitoring
The auditor is likely to accumulate more evidence when the audit is for a company
All three of the above.
What is a sig def?
Matters representing sig def in the design and/or operation of an entity's ICS that could adversley affect the entity's ability to support its f/s assertions. Should be communicated to audit committee.
determinants of sample size (confidence level, tolerable error, est. error, population size)
confidence lvl - desired level of assurance
tolerable error - acceptable defect rate
estimated error - historical defect rate
population size - minimal effect
(4-15) What is the purpose of the AICPA's Code of Professional Conduct restriction on commissions as stated in Rule 503?
Prohibiting paying commissions to obtain clients who receive attestation services in Rule 503 is intended to discourage overly aggressive obtaining of clients by giving "finders fees" to banks and others in a position to give business rather than on the basis of competitive and other qualifications. Prohibiting receiving commissions for referrals to other CPAs or other providers of services where attestation services are provided is inteded to discourage referrals to others on the basis of a "sales commision" rather than the competition of those offering services. Commisions when attestations services are not provided are permitted to encourage competition for these types of services.
The degree to which external users rely on the statements
When external users place heavy reliance on the F/S it is appropriate to decrease acceptable audit risk
 
Indicators of F/S reliance:
-Client's size
-Distribution of ownership
-Nature and amount of liabilities
What type of head movement is sensed by hair cells in the utricle? By those in the saccule?
*utricle: side to side movement*saccule: up and down movement
The SEC prohibits U.S. stock exchanges from listing securities if a company’s audit committee is
All of the above are correct.
6-6) Why must the auditor obtain an understanding of internal control?
The auditor should obtain an understanding of each of the five components of internal control in order to plan the audit. This understanding includes knowledge about the design of relevant controls and whether they have been placed in operation by the entity. The auditor uses this knowledge to
o Identify the types of potential misstatement
o Pinpoint the factors that affect the risk of material misstatement
o Design tests of controls and substantive procedures
Timeline of detecting fraud in audits
Before 2002 - the AICPA's position was that auditors should follow up when they suspect fraud BUT that otherwise did not need to be designed to detect fraud. 2002 - AICPA SAS 99 set forth standards requiring auditors to provide reasonable assurance that material fraud WILL be detected.Since then - SOX and PCAOB have reinforced this responsibilitymovement towards auditors being more proactive
Which of the following is not correct regarding the communications between successor and predecessor auditors?
The burden of initiating the communication rests with the predecessor auditor.
Balance Related Audit Objectives Rights and Obligations
most assets must be owned before it si accpetable to include on the financial statements..
IFAC Code of Ethics for Professional Accountants
The IESBA, a standard setting board of the IFAC, established the IFAC Code of Ethics.
Which of the following might not be a signal of a lack of integrity in management?
Prior criminal conviction of an assembly line foreman.
Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?
a. Investigation of reductions in insurance coverage.
b. Review of property tax bills.
c. Examination of retirement work orders prepar
d. Vouching retirements of plant and equipment.
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