Audit Quiz Flashcards

Terms Definitions
External Risk
-Political-Economic-Social-Technological Pressures
Accounts Assertions
-Existence-Rights and obligation-Completeness-Valuation and Allocation
tolerable misstatement
estimate of maximummonetary misstatement that may exist that will not cause the financial statements to bemisstated
Best type of confirmation
• Blank Forms
Security
Security measures, refers to specific types of controls designed to protect information assets
detective controls
aimed at discovering misstatements after they have occurred
Internal Control
Process designed to provide reasonable assurance regarding the achievmt. of mgmt's objs of: reliab. of fin. reporting; eff+eff of ops; abiding by laws
assert
to state with assurance, confidence, or force; state strongly or positively; affirm; aver:
Revenue Recognition
Recording revenues in the general ledger. This is often done fraudulently by schemes such as bill and hold.
Application controls
Programmed checks or other controls pertinent to end-user applications
Parts of Engagement Letter
-Addressee-Identification of services to be rendered-Specification of the respective responsibilities-Constraints of the audit firm-Deadlines-Description of any assistance-Interactions with Specialists-Disclaimer-Fees-Ownership and accessibility
Who are related entities?
Any individual, partnership, corporation or other organization that is personally or prefessionally related to a company or its executives, employees, directors or owners.
Check Digits
    involve embedding special code digits that represent a mathematical combination of the other digits in an identification number
Control Environment
The actions, policies, and procedures that reflect the overall attitude of top mgmt., directors, and owners of an entity about IC + importance
engagment letter
a written contract summarizing the contractual relationship between the CPAs and the client. The engagement letter typically specifies the scope of professional services to be rendered, expected completion dates, and the basis for determination of the CPAs' fee. Engagement letters are discussed more fully in Chapter 6.
Info Risk
info used by investors, creditors, and others to assess business risk is not accurate
Auditor's Responsibility for Collecting Evidence
The auditor's responsibility for collecting evidence on subsequent events generally ceases at the date of the audit report, but they are still responsible for evaluating events that come to their attention after this date as well (635).
Risk Factors in Assessing Inherent Risk


Nature of industry/business
Character or integrity of key personnel
Results of prior audits
Amount and types of related party relationships and transactions
Client motivation and incentives
Complexity and routineness of transactions
Level of subjective judgment required by account standards
Degree to which assets are susceptible to theft
Ciphertext
A text that is "garbled" and therefore needs to be decoded into original (plaintext) from before use
joint control
neither of two custodians has access without the other
preventive controls
aimed at avoiding the occurrence of misstatements in the financial statements
verifiability
you can back up information in another way
Presentation and Disclosure Assertions:
Completeness
Substantive Test
Complete financial reporting checklist to ensure that all financial statement disclosures related to AR and related accounts have been disclosed
substantive procedures (test)
Procedures performed byt the auditor to detect material misstatements in account balances, classes of transactions, and disclosures.
what is fraud
intentional or deliberate act to deprive another of property, money, or the gaining of advantage by false suggestions, suppression of the truth, or inappropriate action
Concept of allocating materiality
The concept of allocating materiality is meant to establish the scope of substantive procedures when audit sampling is used for one or more accounts. This is essentially done by determining the tolerable misstatement of an account (199). For example, cash should not be allocated anything, but inventory and A/R should be allocated more because of obsolescence and allowance for bad debts.
The audit function adds credibility.....
Attest function. The independent auditor comes in and looks over the accounting and the financial to say "Yes those are fair presentations."
Type I Error
Risk of incorrect rejection - relates to the efficiency of the audit
General Auditing Standards
-Audit must be performed by persons having adequate training and proficiency-Auditors must maintain independence in mental attitude-Auditors must exercise due professional care
Confirmations of A/R
SAS 67 (AU 330) generally requires confirmations unless one of the following is true:-A/R is immaterial-Confirmation would be ineffective because of low response rate or unreliable responses-Combined IR and CR is low and substantive evidence can be collected that is sufficient
Object of an Audit
The auditor's report (audit opinion) is the main product or output of the audit
Balance Assertsion:
Completeness
Substantive Test
1. Obtaining of aged trial balance of ar and agreeing total to general ledger control accounts
2. Review results of testing the completeness asertion for sassessing control risk; tracing of shipping documents into sales journal and to AR Subsidiary ledger if such teting was not performed as a test of controls
Balance Related Audit Objectives-Existence
amounts in the financial statements should actually be included.
Violation: including an accounts recievable from a customer in the trial balance when there was no recievable
Inherent risk
The risk of material misstatement of a financial statement assertion, assuming there are no related controls.
[Internal Control Element]
Monitoring - Define
is the process that assesses the quality of internal control performance overtime.
Modified Unqualified: justified and necessary departure from GAAP
CPA agrees with departure, explanatory para. have description of departure its effects, and why this would have misled FS if kept at original principle, doesnt agree it is an adverse or qualified, if CPA disagrees there is a GAAP problem
Public key cryptography (PKC)
An approach to cryptography that uses a pair of related keys, a public and a private key.
What is the next decision after "the auditor obtains an understanding of IC sufficient to plan an audit of the entity's FS"?
Assess control risk
1.audit riska)account balance b) audit risk
Assess Risks and Establish Materiality1. Use ____ _____ modela) Restrict risk at a____ _________levelb) Achieve acceptable level of _____ ____
When the auditor is attempting to determine the extent to which external users rely on a client’s financial statements, they may consider several factors including
all of the above.
Acceptable Audit Risk
How willing the auditor is to accept that the financial statements are materially misstated after the audit is completed and an unqualified opinion has been issues.
6-17) Regardless of the assessed level of control risk, an auditor would perform some
Substantive procedures to restrict detection risk for significant transaction classes.
PCAOB Standards: Audits of Non-issuers
Auditor may but isnt required to conduct the audit of a nonissuer with GAAS and auditing standards of PCAOB.
5 techniches for selecting a random sample
1-random # tables2-Random # generator3-systematic selection4-haphazard5-block system
10 GAAS (General)
The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.
Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.
Internal Control Objective test for Validity tests
whether transactions did exist or actually did occur
Reliability of Evidence- Qualifications of the individual providing the information
The evidence you get is not reliable if the individual is not qualified to provide the evidence.

Its not a question of being independent. Its saying that you shouldnt ask anybody except a bank about bank information.
M of A Schemes - Kiting
covering a cash shortage by transferring money from one bank acct to another and recording the transaction improperly
Purpose of Analyzing Repair and Maintenance Expense
The auditor's purpose is to discover items that should have been capitalized (542). This is the only time in which auditors would look for expenses that need to be capitalized.
3 things that the statement of cash flows reports
1-cash effects of operations 2-investing transactions3-financing transactions4-net change in cash
In an unqua with modified wording, what are th requiremnts? (shared responsibility)
1-modified wording in all three paragraphs
2-do not have to mention cpa name
3-provide some sort of indication of what was audited by the other guy
The Assertions about classes of transactions and events- OCCURANCE
Transactions and events that have been recorded have occurred and pertain to the entity
6-9) What are the requirements under auditing standards for documenting the assessed level of control risk?
The auditor's assessment of the level of control risk can be documented using
o Structured working paper
o Internal control questionnaire
o A memorandum
Example of abuse - Enron and Fastow's special purpose entities
Enron created special purpose entities - didn't make apprpriate disclosures. Sold obsolete inventory to related parties for a gain. Booked gain and used it as a basis to value the rest of inventory
An auditor should examine minutes of the board of directors’ meetings
through the date of the audit report.
What Is The Accounts Receivable Master File?
A computer file used to record individual sales, cash receipts, and sales returns and allowances for each customer and to maintain customer account balances. It's updated from the sales, sales returns and allowances, and cash receipts computer transaction files.

Shows by customer the beginning balance in A/R, each sales transaction, sales returns and allowances, cash receipts, and ending balance.
purposes of tests of controls in the audit of (1) financial statements and (2) ICFR


(1) to assess control risk, which in turn affects the nature, timing, and extent of the substantive tests
(2) provide evidence on the effectiveness of the entity's controls over financial reporting as of the end of the period
The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second
those errors that occur will not be detected in the auditor’s examination.
When both the Book and the Bank date of receipt comes AFTER both the Book and the Bank date of disbursement, it may possibly be...
...an example of kiting aimed at overstating the cash position at the year-end
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