Audit 5 Flashcards

Terms Definitions

Name the relationship (Direct/Inverse) between Acceptable Audit Risk and Planned Audit Evidence
Uncertainty-Unqualified Opinion
Probable & Reasonably Estimatable(Record)/ Probable and cannot estimate( disclose)--Examples are intangibles, lawsuits, impairments, warranties--Auditors responsibility: mgt analysis properly disclosed/reported, issue unqualified w/ no reference to uncertainty, unable to obtain sufficient evidence involving an uncertainty issue a qualified(GAAS) opinion or disclaim, FS materially misstated due to departure from GAAP related to an uncertainty, issue an adverse or Qualified(GAAP)
PCAOB requires how many walkthroughs?
Five components of business processes

Human resource management
Inventory management
Key Attributes that Influence the Effectiveness of a Control Mechanism
adverse opinion
-"not fairly represented financial statements"-of little use to company
Combined Effect
•We consider both the appropriateness of evidence and sufficiency of evidence together.

You can have a large sample size that is very representative, but if it is not objective it doesn't matter.
Process of Confirmations
• Selecting items for confirmation
• Designing the Request
• Communication the request to the appropriate third party
• Obtaining the response
• Evaluating the information or lack of it provided by the third party about the audit objectives including its reliability.
• Alternative procedures for non response (PRN)
significant deficiency
a control deficiency, or combination of control deficiencies, in ICFR that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting
A fourth purpose of cryptography is nonrepudiation, the assurance that the sender will not be able to deny transfer of the message.
treasury stock
buying back of own issued stock
adjusting journal entries
designed to correct misstatements found in a client's records
Input Controls
Controls designed by an organization to ensure that the information to be processed by the computer is autorized, accurate, and complete
Types of Audit Tests

Risk Assessment Procedures
Tests of controls
Substantive Procedures
Audit evidence
Any information that coorboates or refutes that auditors' premixe that the financial statements present fairly the client's fianncial position and operating results.
a decline in amount, degree, quality, value, etc.:
[Internal Control Element]
Information and Communication Systems - Define
support the identification, capture, and exchange of information in a form and time frame that enable people to carryout their responsibilities.
application controls
apply to the processing of specific computer applications and are part of the computer programs used in the accounting system
Risk exposure
Risk exposure represents all kinds of possibilities of harm to an entity without regard to its likelihood
5 Primary Processes of a Value Chain
-Inbound Logistics-Operations-Marketing and Sales-Outbound Logistics-Service
Identify the COSO Component of IC by the descriptive activity:
Management is alert to complaints received from customers about billing errors
Audit Risk
The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially mistated
Tests of Controls
Audit procedures to test the operating effectiveness of controls in support of reduced assessed control risk
An auditor’s primary emphasis is internal controls over
classes of transactions
Compliance Audit
An audit to measure the compliance of the organization with some established criteria (laws & regulations, or internal control policies and procedures)
Components of Likely Misstatements
Likely misstatements are comprised of extrapolation differences (sampling) and accounting estimate differences (637).
Control procedures related to authorization (1)

General and specific authorization of transactions at important control points
Digital signature
An encryption of the message, or any part thereof, by sender using the sender's private key
sequential (stop-or-go) sampling
sampling plan in which sample is selected in stages, with the need for each subsequent stage being conditional on the results of the previous stage
engagement letter
written by CPA before the audit. includes procedures to be informed, objectives of engagement, management's responsibilities and limitations, timing, and fees
Addition of a column of number s to determine whether the total is the same as the client's
If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2,
Cycle Approach
A method of dividing an audit by keeping closely related types of transactions and account balances in the same segment.
Audit program
An audit program is a detailed list of the audit procedures to be performed in the course of the audit. This differs from client to client because it is based on the auditor's risk assessments and test of controls which vary between clients (191). Auditing standards are almost silent on procedures, except for observing inventory.
Assertions When Vouching Balances Payable
The existence, rights and obligations, and valuation assertions are in play (568).
3 control environment assessments that an auditor should make

Whether . . .
Management's philosophy and operating style promote effective ICFR
Sound integrity and ethical values, particularly of top management, are developed and understood
The Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control
4 steps to evaluating results of sample
1-determine deviation rate2-consider achieved upper deviation rate3-consider qualitative aspects4-reach an overall conclusion
Goods are counted and inspected upon arrival

Observe/Inquire receiving procedures on surprise basis and trace sample of vouchers to RR looking for indication of count and inspection.
Compare the date on a sample of shipping documents throughout the year with related duplicate sales invoices and the accounts receivable master file

(1.Type of audit procedure: analytical procedure, test of control, substantive test of transactions, or t
Test of Transactions

Balance Related Audit Objectives-Completeness
Whether all amounts that should be included have actually been included.

Violation: Failure to include a receivable on the trial balance when a receivable exists.
Business Risk (of the client)
The risk assumed by investors or creditors that is associated with the company's survival and profitability
Difference Between Opinion and Negative Assurance
Meanwhile an opinion by an auditor means that they have taken a full scope look at the audit evidence. Negative assurance is much more limited in scope.
3 circumstances in which the auditor can omit confirming accounts receivable

The accounts receivable are immaterial to the financial statements
The use of confirmations would not be effective as an audit procedure
The auditor's assessment of inherent risk and control risk is low, and evidence gathered from other substantive tests is sufficient to reduce audit risk to an acceptably low level
manager and partner review of wp's
determine whether the audit was performed in accordance with GAAS and support the report
Shipping should be segregated from what? Why?
Billing....if one is responsible for shipping and billing it is possible for unathorized shipment to be made and for usual billing procedures to be circumvented. This can result in unrecorded sales transaction and theft.
Management must disclose material weaknesses in internal control
even if just one weakness is found.
What Does Converting From A Design Format Audit Program to A Performance Format Audit Program Accomplish?
*Procedures Are Combined Which Achieves The Following:

1. Eliminates duplicate procedures.
2. Ensures when given document is examined, all procedures to be performed on that document are done at that time.
3. Enables the auditor to do the procedures in the most effective order.
Chapter 6: Internal Control in a Financial Statement
6-1) What are management's incentives for establishing and maintaining strong internal control? What are the auditor's main concerns with internal control?
Strong internal controls ensure that assets and records are properly safeguarded. Management also needs a control system that generates reliable information for decision making. If the information system does not generate reliable information, management may be unable to make informed decisions about issues such as product pricing, cost of production, and profit information.
The auditor uses the understanding of the entities internal control to identify the types of potential misstatements, ascertain factors that affect the risk of material misstatement, and design tests of controls and substantive procedures. The auditors understanding of internal control is a major factor in determining the overall audit strategy.
The Audit Risk Model Equation
(Expanded): AR = (IR X CR) X DR
Solve for appropriate level of detection risk:
Assess Client Business Risk
the risk that the client will fail to achieve its objectives
The opinion paragraph in auditors’ reports includes two important phrases that are directly related to materiality and risk. The phrases are
“in our opinion” and “in all material respects.”
How an auditor identifies risks of material misstatement
An auditor identifies risks at the relevant assertion level by considering both the design of the control and its implementation (265).
Which statement is correct with respect to accounts payable confirmations?
a. The negative form is used in most circumstances
b. Accounts with new suppliers are always confirmed
c. They are a required auditing procedure
d. They are more frequently use
d. They are more frequently used in situations in which some vendors don't send monthly statements.
What kind of report if you accept work of another firm with shared responsibility?
Standard unqualified with modified wording.
Which of the following statements is correct with respect to separation of duties?
It is desirable to prevent employees who authorize transactions from having custody of related assets.
Which of the following parts of the definition of materiality is incorrect?
a.The magnitude of an omission or misstatement of accounting information...
b....that, in the light of surrounding circumstances, makes it probable...
c....that the judgment of
c....that the judgment of a reasonable auditor examining the financial statements...
How do you decide between a qualified and an adverse when there are GAAP Violations?
If materiality does not cause the overall statements to be misleading or unfair, then you can Qualify it. If they are misleading or unfair then you give it an ADVERSE opinion.
What Is A Sales Returns and Allowances Journal?
Journal used to record sales returns and allowances for reconciling adjustments for uncollectible accounts.
Which of the following is not one of the three primary objectives of effective internal control?
Each of the above is a primary objective of effective internal control.
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