Audit - Exam 3 Flashcards

Financial audit
Terms Definitions



Name the relationship (Direct/Inverse) between Planned Detection Risk and Planned Audit Evidence
Inverse
Financial Forecast
Financial forecasts present information about the entity's expected financial position (Most likely projection). May be issued for general use
Assertions about Classes of Tranactions and Events for the Period Under Audit
Occurrence
Completeness
Authorization
Accuracy
Cutoff
Classifcation
Sampling Risk
The uncertainty associated with sampling
Substantive Testing
The comparison of quantitative relationship among account balances and other indicators to an auditor's expectations
consistency
same guidelines are consistent over time
Management assertions
implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements.
Transaction cycles
The significance is that the transactions cycles often drive the auditor's consideration of internal control and determining the amount of risk assessed to the various accounts (209). This is because the client's build internal controls around transactions cycles.
Inventory turnover
cost of goods sold / inventory
One-time pad
The cryptographic method of one-time pads uses the Vigenere Tableau discussed earlier. THe only difference is that instead of fixed-length key, the key used is a long as teh message itself. It is unlikely to repeat any patters, unlike a fixed-length key, because the pad (number of characters in the key value) is generated by a random number generator. Both the sender and the receiver of the message have the same copy of the pad.
3 net income subtotals
1-net sales revenue2-gross profit3-income from operations
3 type of inherent risk
 

estimation risk
routine risk
nonroutine risk
independentaccountingaudit non-auditcomplaintsindependent counselemployed
Section 301 of Sarbanes-Oxley Act requires the following for audit committee members of publicly held companies:Member of board of directors and _______.Directly responsible for overseeing work of any registered public __________ firm e_______ by the company.Must pre-approve all a____ and ___-_____ services provided by its auditors.Must establish procedures to follow for ___________.Must have authority to engage ______ _________
Internal Controls
Important to both auditor and management. Management needs reliable info to make good sound business decisions and needs to meet stuartship responsibilities of safegaurding assets

Auditor_ provides assurance the accounting system is reliable
experienced auditor
For purposes of audit documentation, an individual who possesses the competencies and skills enabling himor her to perform an audit and who has a reasonable understanding of the audit processes and of auditing and financial reporting issues relevant ot the industry in which the client operates.
variety
the state of being varied or diversified:
Adverse Opinion
When issuing an adverse opinion, the auditor concludes that the financial statements do not present the entity's financial position, results of operations, and cash flows in conformity with GAAP. This type of opinion is only issued when the financial statements contain very material departures from GAAP.
Examples of tests of controls


Inquiries of appropriate management
Inspection of documents
Observation of the application of specific controls
Walkthroughs
Reperformance of the application of the control by the auditor
Target system
An information asset desired to be protected from all types of risks
Audit Risk
The likelihood or probability that the auditor will conclude that all material assertions made by management are true, when in fact, at least one material assertion is incorrect.
What type of evidence is NOT available when using substantive tests of transactions?
Confirmation
Financial Statement Audit Process (Management)
Implements internal controlsConducts transactionsAccumulates transactions into account balancesPrepares financial statementsIssues financial statements to users
Cutoff Bank Statement
A partial-period bank statement and the related cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the auditor; the auditor uses it to verify reconciling items on the client's year-end bank reconciliation
When management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following?
Correct material misstatements.
Qualified Opinion
a report issued when the auditor believes that the overall financial statements are fairly stated but that either the scope of the audit was limited of the financial data indicated a failure to follow GAAP
auditory canal
part of the outer ear that channels sounds from the outside to the eardrum
Significance of Related Parties
The audit significance of related party transactions are that they need to be adequately disclosed in the financial statements (AU 334.02).
Days outstanding in accounts receivable
365 days / Receivables turnover
Registration authority (RA)
An agent, appointed by a certification authority, for receiving applications and conducting initial review of applications
random number tables (2 methods)
1-without replacemen: ignored # selected twice and move on2-with replacement:put # back into pool after selected so it can be chosen again
engagement risk
risk that reputation of firm will be impaired from having a certain client
Generalized Audit Software (GAS)
Computer programs used by auditors that provide data retrieval, data manipulation, and reporting capab. spec. oriented to auditor's needs
Analytical Procedures Risk (AP)
The risk that analytical procedures would fail to detect material misstatements that are not detected by the IC structure
Inherent risk
The risk of material misstatement of a financial statement assertion, assuming there were no related controls.
Financial Audit
An audit of financial accy info of an org or segment pf the org. This may involved a complete set of financial statement or a portion of a statement
Fraud Risk Factors
Fraud risk factors help the auditor to identify events or conditions that may lead to fraud since fraud is difficult to detect (AU 316.31).
Describe the "Assurance bucket"
The size of the assurance bucket depends on how much assurance is desired for an assertion.  The bucket is filled with evidence that is drawn from the following tests (in order):


Risk assessment procedures
Tests of controls
Substantive analytical procedures
Remaining assurance needed from tests of details
how do auditors detect kiting?
prepare a schedule of bank transactions for a few days before and after the balance sheet date
misappropriation of assets
theft of client assets by an employee or officer of the organization
Elements of the Auditor's Standard Unqualified Report
1. Title
2. Adressee
3. Introductory Paragraph:
4. Scope Paragraph
5. Opinion Paragraph
6. Explanatory Paragraph
7. Name of Auditor
8. Date of Report
Indirect- Effect Ilegal acts
When an illegal act afffects the financial statements indirectly.

Example : Environmental protection laws will only affect the financial statements if there is a fine which means they have to disclose a liability.
what is audit risk
the risk the auditor will incorrectly give an unqualified opinion on f/s that are materially misstated
Audit Report When Client Does Not Issue a Statement of Cash Flows
Qualified Opinion or Adverse Opinion
Benchmarks for assessed importance of a control & tolerable deviation rates
Importance High - Deviation rate 3-5%
Importance Moderate - Deviation rate 6-10%
Business Operations and Processes
1. Major sources of revenue, 2. Key customers and suppliers, 3. Sources of financing, 4. Information about related parties
3 types of reports other than unqualifid and when they are used
Qualified- scope limitation or departure from GAAP Exists but overall the financila statements present fairly in conformity with GAAP

2. Disclaimer- insufficient appropriate evidence to form an opnion

3. Adverse- do not present fairly due to GAAP departure that materially affects the financial statements overall.
The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal accounting control because
the work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
What are the business functions for the sales and collection cycle?

Which ones are for recording sales and which are for one business function?
Sales:
1. Processing customer orders
2. Granting credit
3. Shipping Goods
4. Billing customers and recording sales

Cash Receipts:
5. Processing and recording cash receipts

Sales Returns and Allowances:

6. Processing and recording sales returns and allowances

Write-off uncollectible accounts:

7. Writing off uncollectible accounts receivable

Bad debt expense:

8. Providing for Bad Debts
6-10) What factors should the auditor consider when substantive procedures are to be completed at an interim date? If the auditor conducts substantive procedures at an interim date, what audit procedures would normally be completed for the remaining perio
Factors to consider when substantive procedures are to be completed at an interim date
o The control environment and other relevant controls
o The availability of information at a later date that is necessary for the auditor's procedures
o The objective of the substantive procedure
o The assessed risk of material misstatement
o The nature of the class of transactions or account balance and relevant assertions
o The ability of the auditor to reduce the risk that misstatements existing at the periods end are not detected by performing appropriate substantive procedures or substantive procedures combined with tests of controls to cover the remaining period
Substantive procedures conducted in the remaining period include comparing the year-end account balance with the interim account balance. It might also involve conducting analytical procedures or reviewing related journals and ledgers for large or unusual transactions.
Benchmarks to consider when applying overall materiality


Profit-oriented entity: 3% - 5% of profit before tax from continuing operations, or 0.5% of total revenues
Not-for-profit entity: 0.5% of total expenses or total revenues
Mutual fund industry: 0.5% of net asset value
The control of all funds during the count of cash on hand is meant to primarily prevent...
...any chance of double counting
When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally
reduce acceptable audit risk and increase inherent risk.
What are some factors that affect inherent risk?
mature of client's business, new client, related parties, make up of the population
Which of the following is used to obtain evidence that the client's equipment accounts are not understated?
a. Analyzing repairs and maintenance expense accounts.
b. Vouching purchases of plant and equipment.
c. Recomputing depreciation expense.
d. Ana
a. Analyzing repairs and maintenance expense accounts.
What is the primary symptom of damage to the vestibular system? Specifically, what symptoms are seen with damage to the semicircular canals? To the otolith organs?
*vertigo - a sensation of spinning*canals - a sensation of horizontal rotation*otoliths - a sensation of being pushed down
Which of the following statements is correct with respect to the design and use of business documents?
None of the above statements is correct.
Risk of assessing control risk too high
The risk of assessing control risk too high is a matter of auditing efficiency in which the auditor determines the control risk is higher, when the controls really where operating effectively.
Most states do not allow firms to incorporate so the most widely used form is ..
..the LLP No double tax, some protection, and personal assets at risk only for their own acts, those directly under them, and business obligations of the firm.
What does the receipt of a customer order often result in?
The immediate creation of a sales order.
Which of the following steps would be least likely to occur in assessing a client’s business risk?
All of the above are equally likely to occur.
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