Audition I Flashcards

balance sheet date
Terms Definitions
During substantive analytical procedures, auditors may find that differences between the expectation and the recorded amount exist.  When greater than the tolerable difference, the auditor should quantify the portion of the difference that can be explained
Adverse Opinion
Very material GAAP Problem
An unintentional misstatement of financial stements or omission of an amount or a disclosure.
Assurance Services
Independent professional services that improve the quality of information, or its context, for decision maker.  Encompasses attest services and financial statement audits
extraordinary items
nonrecurring material items that differ significantly from typical business activities-net of taxes/below the line
revenue recognition
recognized when realized and earned
What is a cancelled check?
A document.
Required Confirmations
• Accounts Receivables
• Bank Accounts
material weakness
a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis
Distributed trust model
More like several independent hierarchies, each with its own root CA, often called a peer CA. Because entities that communicate may belong to separate hierarchies under different root CAs, peer CAs must coordinate the certification process across these hierarchies
financing activities
liability and owners' equity items like...
-issuance of equity securities
-payment of dividends
-issuance of debt (bonds and notes)
-redemption of debt
-reacquisition of dividends
control activities
made up of performance reviews, information processing, physical controls, and segregation of duties
Hardware Controls
Controls built into the computer equipment by the manufacturer to detect and report equipment failure
When a company changes auditors, SAS No. 84 requires communication between the predecessor and successor auditors. The burden of initiating the communication rests with the
a person or firm possessing special skill or knowledge in a field other than accounting or auditing, such as an actuary.
to think carefully about, esp. in order to make a decision; contemplate; reflect on:
Sampling Risk
the probability that a properly drawn sample may not be representative of the population. The conclusions from the sample may differ from those made if all the items in the population are examined. Sampling risk is RISK THAT THE SAMPLE IS NOT REPRESENTATIVE OF THE POPULATION BEING TESTED.
8 Parts of a standard unqualified report
Introductory paragraph
Scope paragraph
Opinion paragraph
Explanatory paragraph referring to the audit of internal control
Name of auditor
Date of report
Risk avoidance
Risk avoidance is a deliberate attempt to keep the target system away from a specific risk
Adverse Auditor's Report
Issued when auditor concludes the financial statement assertions are largely incorrect or misleading.
Common Financial Ratios
1. Short-term debt-paying ability, 2. Liquidity activity ratios, 3. Ability to meet long-term debt obligations, 4. Profitability ratios
introductory paragraph
-the client company is responsible for the financial statements-auditors render a report of financial records not on the accounting records
Risk Assessment
Mgmt's ID and analysis of risks relevant to the preparation of financial statements in accordance w/GAAP
Compilation of financial statements
The preparations of financial statements by CPAs based on representations of management, with the expression of no assurance concerning the statements' compliance with generally accepted accounting principles.
Management letter
A report to management containing the auditors' recommendations for correcting any deficiencies disclosed by the auditors' consideration of internal control. In addition to providing management with useful information, a management letter may also help limit the auditors' liability in the event a control weakness subsequently results in a loss by the client.
Attest Engagement
An engagement in which CPAs issue an examination, a review, or an agreed upon procedures report on subject matter or an assertion about subject matter that is responsibility of another party (mgmt)
GAAS - The Standards of Reporting - Accounting=GAAP
Assertions about presentation and disclosure (4)

Occurrence and rights and obligations
Classification and understandability
Accuracy and valuation
Operating system (OS)
The sytem software that controls and manages hardware and basic system operations of a computer. Additionally, it provides a foundation on which application software such as word processing programs and Web browswers run.
3 characteristics of attributes sampling
1-answer in occurence rate2-allows auditors to estimate deviation rate of the population3-frequent in test of controls
5 components of internal control
1- environment2- risk assessment process3- control activities4- accounting information system5- monitoring of controls
Corporate Minutes
Official record of the meetings of a corporation's BOD and stockholders, in which corporate issues, such as the dec. of dividends + app. of contracts
Internal controls normally include procedures designed to provide reasonable assurance that
transactions are executed in accordance with management’s general or specific authorization.
Permanent Files
Files intended to contain data of a historical or continuing nature pertinent to the current audit.
Five dimensions of understanding client
Nature of the client; industry, regulatory, and other external factors; objectives and strategies and related business risks; methods of measuring and reviewing performance; internal control
Benefit of a Sophisticated Cash Receipts System
Ensures proper segregation of duties
3 conditions under which the auditor would depart from a "clean" opinion

Scope limitation
Departure from GAAP
Lack of independence of the auditor
2 types of Fraud
1) F.S. (reporting) Fraud - when financial or other performance-related assertions are knowingly misstated. Attempt to mislead the public.2. Embezzlement (defalcation) - misappropriation of assets - categorization -
Internal verification that check amount agrees with invoice amt
Examine sample of payments for evidence of verification (or reperform)
Transaction Assertion: Completeness Substantive Test
Trace sample of shipping document to the details of the sales invoices and to sales jounral and customers accounts receivable subsidiary ledger
Balance Related Audit Objectives-Accuracy
Amounts being included at the correct arithmetic amounts.

Violation: the number of units could be mistated
Industry, regulatory, and other external factors
Helps the auditor determine if the client may be subject to specialized risks that will affect the audit.
Difference Between Compilation and Review
It differs from a financial statement review in that the accountant does not provide any assurance (735).
Hierarchic trust model
The top node is called the root CA, who certifies at a level immediately below the root. IN turn, these CAs certify CAs below their level and so on. Ultimately, the final level of CAs certifies the end entitites that are not CAs
3 purposes of representation letter
1- remind client officers of their primary and personal responsibility for the financial statements 2- document in the audit working papers the client's responses to the significant questions asked by the auditors during the engagement 3- represents managements future transactions
Presentation and Disclosure Assertions:
Classification and Understandability
Substantive Test
1. Review of aged trial balance for material credits, long term receivables, and notrade receivables. Deterine whether such items require separate disclosure on the balance sheet
2. Read footnotes to ensure that required disclosures are understandable
Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of internal control?
Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
4 Phases of the Audit Plan
Plan and Design and Audit Approach

Perform tests of controls and substantive tests of transactions.

Perform analytical procedures and tests of details of balances

Complete the audit and issue an audit report.
6-5) What are the major differences between a substantive strategy and a reliance strategy when the auditor considers when the auditor considers internal control in planning an audit?
Substantive strategy- the auditor has decided not to rely on the entity's controls and instead use substantive procedures as the main source of evidence about the assertions in the financial statements.
Reliance Strategy- the auditor intends to rely on the entity's controls. If a reliance strategy is followed, the auditor may need a more detailed understanding of internal control to develop a preliminary or "planned" assessment of control risk.
To set control risk below the maximum, the auditor must:

Identify specific controls that will be relied upon
Perform tests of controls
Conclude on the achieved level of control risk
4 steps in further audit procedure process for internal controls
1- planned assessment of control risk2- test controls3- revise assessment of risk4- substantive procedures
When discussing inherent risk (IR) and the audit risk model, which of the following is not true?
IR is inversely related to evidence.
Top-down approach to tests of controls
The goal of the top-down approach is to focus the auditor's focus on testing those controls that are the most important for the auditor's conclusion on internal controls, while avoiding those that are not (275). PCAOB AS 5 outlines the need to test key controls to make sure that they are effective.
Most of the audit work on accounts payable is typically performed:
a. Before the balance sheet date.
b. At the balance sheet date in conjunction with inventory cutoff tests.
c. After the balance sheet date.
d. Simultaneously with the audit of accrued
c. After the balance sheet date.
if you dont accept another firms work, what kind of opinion?
probably a disclaimer or qualified because of a lack of evidence
What are some substantive tests that can be performed prior to the BS date?
1. Additions and disposals to PPE
2. Increases and reductions in other assets, debt & equity accts.
3. Analytic review of inc & exp accts.
Lockbox Cash Receipts System and 2 Benefits
A lockbox is a post office box controlled by the company's bank so that the bank can pick up the mail and credit the company's checking account for cash received and send a remittance advice to the company. A benefit of the lockbox is that it reduces the risk of collusion because the cash is handled by a third-party. The other benefit is that it hastens the depositing of cash receipts (380).
Going Concern.

How long is a resonable amount of time?
at least a year from the B/S date
audit risk model AR=IR x CR x DR
inherent risk - susceptibility of an assertion to a material misstatement, assuming there were no related internal controls
control risk - risk that a material misstatement could occur and not be prevented or detected by the internal controls
detection risk - risk that the auditor will not detect a material misstatement in an assertion
What Type Of Document Is A Bill of Lading, and What Is It?
One type of shipping document which is a written contract between the carrier and seller of the receipt and shipment of goods. Often includes only number of boxes or pounds shipped rather than complete details fo quantity and description.
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