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Audit Midterm Exam
Chapters 1, 2 (p. 56-65), 4, 5, 6, 7, 15
Terms in this set (49)
The primary objective of an audit is to provide assurance to the....
Investors of the company
SEC or Securities and Exchange Commission
regulate the commerce in stocks, bond and other securities
Three generally accepted auditing standards classified as standards of field work
The criteria for audit planning and evidence-gathering
PCAOB Public Company Accounting Oversight Board
Was established as a result of the creation of the Sarbanes-Oxley Act of 2002. The board's aim is to protect investors and other stakeholders of public companies by ensuring that the auditor of a company's financial statements has followed a set of strict guidelines.
How to Address fraud in the planning stages
Auditor must consider the likelihood of fraud existing in the company in the planning stages.. ..make a plan and decide on what the major risk factors are and find the most effective way to test for fraudulent behavior or transactions.
Provider of thought leadership and guidance on internal control, enterprise risk management, and fraud deterrence. Provides the internal control framework used in virtually all audits (called the COSO framework)
International Auditing and Assurance Standards Board
State Board of Accountancy
Administer CPA exam and provide licensing
Performing an audit in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.
Primary drivers of audit quality
Included in Audit Quality Framework developed by Financial Reporting Council (FRC)
According to the PCAOB, if it is not documented...
it is not done!
Public company accounting oversight board
4 primary functions of PCAOB
1. Register all audit firms
2. Periodically inspect audit firms
3. Make standard guidelines for these firms to follow.
4. Investigate and discipline registered audit firms for violating the laws or professional standards.
T-I-P use in General Standards PCAOB
Train and proficiency
Due Professional Care
P-I-E use in Fieldwork Standards PCAOB
Planned and Supervised
Understand Internal Control
Evidence -Collect it
GCDO Use in Reporting standards PCAOB
GAAP and IFRS
services outside the scope of practice - cannot do anything for the client outside of auditing like bookkeeping, system design, internal auditing etc.
Pre-approval requirements - all audit and non-audit services by a firm needs to be pre-approved by the audit committee.
audit partner rotation - lead auditor and review auditor need to be rotated every 5 years
auditors report to the audit committee - registered accounting firms must report to the audit committee concerning critical accounting procedures and practices.
conflict of interest - a firm cannot audit a company who has a key officer that use to work for the firm under a year ago
AICPA Code of conduct
-Integrity and objectivity
-general standards of GAAP
-compliance with standards
- accounting principles
-confidence but not privileged, client information
-contingent audit fees
-adverse and other forms of solicitation
-commission and referral fees
Control environment - auditors must analyze the code of ethics, tone at the top, operational issues, and whistleblowing procedures.
What is an inherent limitation of internal controls?
Collusion - secretive and criminal-like activity amongst the firm. This cannot be changed if it is happening so it is unknown risk.
A type of audit that combines financial records review with an assessment of internal IS controls.
If the statements are so batd that they are not presented fairly or are materially nonconforming with accounting standards. Weak Internal Controls
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 or the financial data indicated a failure to follow GAAP
Responsibility, public interest, integrity, objectivity and independence, due care, scope and nature of service
is given when something needs to be modified and it is out of the scope of limitations for the auditor to perform. There is no opinion given in this paragraph.
Examples of using disclaimer
A substantial doubt against the client staying in business. a justified departure from GAAP. Reference to other auditors. Inconsistent application of GAAP.
relationship between audit risk and detection risk?
Immaterial - Material - Highly Material
Immaterial is where the users decisions are unlikely to be affected. Material is where it is likely the users will be affected. Highly Material is where there is a strong chance the users will be affected by using the FS.
Existence and observation
Valuation and Allocation
Rights and Obligations
Presentation and Disclosure
Relationship between Acceptable audit risk and Inherent risk
Relationship between Acceptable audit risk and Planned detection risk
Relationship between Acceptable audit risk and Planned audit risk
Relationship between Control risk and Inherent risk
Relationship between Control risk and Planned detection risk
Relationship between Control risk and Planned Audit Risk
Relationship between Inherent risk and planned detection risk
Relationship between planned detection risk and planned audit evidence
Relationship between Inherent risk and planned audit evidence
working backward checking the ledger to the source document
Working forwards tracing from the ledger to the source document
An auditor most likely would analyze inventory turnover rates to obtain evidence about:
the primary purpose of procedures performed to obtain an understanding of internal control in a financial statement audit is to provide an auditor with
knowledge necessary to plan an audit
with a non-issuer, an auditor does not need to do what during understanding of internal controls planning?
obtain knowledge about the operating effectiveness of internal controls.
Inquiry and inspection of records is to
ask questions to the managers about how thins are ran to get a better idea of how things work and the internal controls
what has the most effect on the reliability of financial statements
clients internal control structure
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