Audit 7 Flashcards

Terms Definitions
Accounts Assertions
-Completeness-Existence-Rights and Obligations-Valuation and Allocation
OCBOA
"other comprehensive basis of accounting" (that is, other than GAAP)
overstate
to state too strongly; exaggerate:
Engagement letter
outlines responsibilities of both auditor and client
statistical sampling
better than non-statistical but doesn't completely eliminate professional judgement
What fluid bathes the basolateral surface of hair cells in the cochlea?
Perilymph
Material weakness
A significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
General Standards
1) Adequate technical training + Proficiency
2) Independence - mental attitude
3) Professional care
Audit Committee
subcommittee of BOD that is responsible for financial reporting and disclusure process
Shadow file
A file, readable only by administrators, htat contains the password hashes on UNIX systems. The file is typically sored in /etc folder.
kiting
money between banks so recognized in both
Adverse
issued when there is departure from GAAP or lack of information provided by client
Compute
A calculation done by the auditor independent of the client
When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to in SAS No. 39 as
tolerable misstatement
Material Misstatement
a misstatement in the financial statements, knowledge of which would affect a decision of a reasonable user of the statements
frequency
the number of complete waves that pass a given point in a certain amount of time; in audition it determines pitch
Control deficiency
exists in internal controls when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis
Threat
The probability of an attack on the information asset
comprehensive income
includes all changes in equity during a period except those resulting from investments by owners and distributions to owners
presentation and disclosure
accounts are described and classified in accordance with GAAP and financial statement disclosures are complete, appropriate, and clearly expressed
general audit
should detect illegal acts having a material direct effect, or any indirect effect on financial statements
Observe whether the controller makes an independent comparison of the total in the general ledger with the trial balance of accounts receivable.


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

Accuracy
Internal document
prepared and used within the clients organization and is retained without ever going to an outside party.
purpose of analytics
helps auditor understand clients in general
helps evaluation of client as a going-concern
helps identify areas for audit work
can reduce detail testing
When difference estimation is preferred
Difference estimation is most appropriate when the size of misstatements does not vary significantly in comparison to book value (such as random errors).
MGMT's responsibility for F/S
They have the ultimate responsibility, led by the CEO and CFO
design deficiency
exists when (1) a control necessary to meet the relevant control objective is missing; or (2) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met
Management's responsibilities for internal controls
-for establishing and maintaining the entity's internal controls.
 
-to publicly report on the operating effectiveness of those controls
 
 
Non-verbal cues of deception:
1. Pauses2. Grooming and scratching gestures3. Using hands to cover mouth or face4. Backward movements5. Clearing throat/swallowing/coughing6. Excessive emotion/passionate responses - if innocent, may become increasingly forceful though
Qualified
is still a clean opinion but "for the except".... there's exceptions to the report
GASS Standards of Field Work
Plan, Understand, have evidence

1) adequately plan the work and must properly supervise any assistans.

2) must obtain a sufficient understanding of the entity and its environment, including its internal control, to asses the risk of material misstatement of the f.s. whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.
3) obtain sufficient evidence by perf. aud. proc. to afford a reasonable basis for an opinion regarding the F.S. under the audit.
Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every
material financial statement account.
Forseeable Users
An unlimited class of users that the auditor should have reasonably been able to foresee as being likely users of financial statements.
General approach to risk assessment
The general approach to risk assessment is to identify and assess risks of material misstatements for account balances, classes of transactions, and disclosures (202).
GAAS - The Standards of Reporting - Consistency
SILENCE IS OK.
CONTROL RISK
RISK THAT MMS COULD OCCUR WILL NOT BE PREVENTED, OR DETECTED BY INTERNAL CONTROLS
2 approaches for accounting for RP transactions
1) consolidated affiliate (parent-subsidy) or subsidiary-sub, it bust be ELIMINATED from the consolidated statements. 2) If the transaction is with a related entity that is not part of the consolidated reporting group, it need not be eliminated., but must be approved by the BOD, scrutinized by the auditor for reasonableness, and FULLY DISCLOSED in the notes to the f.s.
Where auditing standards come from
Auditing standards serve as guidelines for and measures of the quality of the auditor's performance.
For public companies the standards come from the PCAOB
For nonpublic companies the standards come from the Auditing Standards Board
A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the
acceptable audit risk.
Presentation and disclosure related audit objectives
Relates to the presentation and disclosure. Fore example, there are specific presentation disclosure related audit objectives for accounts receivable and notes payable.
Internal Control Elements - CRIME
- CONTROL ACTIVITIES - are the policies and procedures that help ensure that management directives are carried out.
- RISK ASSESSMENT is the entity's identification and analysis of relevant risks as a basis for their management.
- INFORMATION AND COMMUNICATION SYSTEMS - support the identification, capture, and exchange of information in a form and time frame that enable people to carryout their responsibilities.
- MONITORING - is the process that assesses the quality of internal control performance overtime.
- CONTROL ENVIRONMENT- sets the tone of an organization, influencing the control consciousness of its people.
How is the sample size determined?
First the confidence level is established, then by noticing how much tolerable error exceeds the expected error
Denial of Opinion (Disclaimer)
Auditor states that no opinion can be expressed.Causes: Scope Limitation, Conflict of interest, etc.
Which of the following statements is not correct with respect to analytical procedures?
Analytical procedures should be performed in every phase of the audit.
Breach of Contract
Failure of one or both parties to a contract to perform in accourdance with the contrat's provisions. A pulic accounting firm might be sued for brach of contract. Negligence on the part of the CPAs also constitutes breach of contract.
understanding internal controls
- formality of ICs will vary by entity size
- Documentation must be included in workpapers
- assessment of control risk and the basis for the achieved level can be documented using:
- procedure manuals and org. charts
- narrative descriptions/memo
- flowcharts
- IC questionnaires
6-20) Audit evidence concerning proper segregation of duties ordinarily is best obtained by
Inspection of documents prepared by a third party, but which contain the initials of those applying client controls
Data encryption standard (DES)
A cipher that encrypts a block of bits in the plaintext at a time, using several substitutions and permutations in multiple iterations
What are two categories of hereditary deafness?
Syndromic (i.e. part of a constellation of symptoms) or non-syndromic (i.e. a singular deficit).
Which of the following is not one of the subcomponents of the control environment?
Adequate separation of duties.
6-15) In which of the following situations would an auditor most likely use a reliance strategy?
A client receives sales orders, bills customers, and receives payment based only on information generated from its IT system- no paper trail is generated
Relationship of risk and materiality to audit evidence
The concept of materiality and risk in auditing are closely related and inseparable.  Risk is a measure of uncertainty and materiality is a measure of magnitude or size.  Taken together they measure the uncertainty of amounts of a given magnitude.
A CPA is conducting the first examination of a non-public company’s financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor’s audit files. This procedure is
acceptable if the client and the predecessor auditor agree to it.
what is the most sufficient itmes to sample?
• samples containing large dollar value items, items with high likelihood of misstatement, and items that are representative of the population are usually more sufficient.
In audit procedures, what happens with UNUSED OR INAPPLICABLE DOCUMENTS?
Item is not a deviation and the auditor would simply replace the item with another
May use Negative Confirmation is ALL what are true?
1-Combined assessment of IR and CR is low
2-Large number of small balances
3-Receipts expected to give confirmations adequate attention
GAAS - The Standards of Reporting
1. A - Accounting = GAAP. 2. C - Consistency. 3. D - Disclosure. 4. O - Express Opinion
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