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Audit Midterm 3
Terms in this set (32)
Before accepting a new client, what is the single most important characteristic about the client we need to evaluate
Integrity of senior management
The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.
What four points do auditing standards require the successor auditor to discuss with the predecessor auditor?
1) Matters concerning the integrity of the client's senior management
2) Disputes with the client over accounting principles, 3) audit procedures, 4) fees
Describe Related Parties
Related parties are an affiliated company, a principal owner of the client company, or any other party
with which the client deals, where one of the parties can influence the management or operating
policies of the other.
Why are auditors required to perform analytical procedures in the planning stages of the audit?
1) Understand the client's business and industry
2) Indicate possible misstatements (or attention directing)
Briefly describe or define analytical procedures
Analytical procedures are reasonableness tests which compare the auditor's estimate of account balances with those recorded by management.
Define Audit Risk
The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.
Define Control Risk
The risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected and corrected, on a timely basis by the entity's internal control.
Define detection risk
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
How does COSO define internal control?
A process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following three areas:
1) reliability of financial reporting
2) effectiveness and efficiency of operations
3) compliance with applicable laws and regulations
SOX, 3 reporting requirements for management re: Internal Controls
1) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
2) an assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company's fiscal year
3) management must also identify the framework used to evaluate the effectiveness of internal control
What's the second opinion auditors must issue in addition to their opinion on the financial statements?
Section 404(b) of SOX requires the auditor to report on the effectiveness of internal controls over financial reporting
List five components of internal control
1) Control environment
2) Risk assessment
3) Control Activities
4) Information and communication
With regard to segregation of duties, what four functional responsibilities need to be performed by different people?
1) Separation of the custody of assets from accounting
2) Separation of the authorization of transactions from the custody of related assets
3) Separation of operational responsibility from record-keeping
4) Separation of IT duties from user departments
Key components to understand about a significant class of transactions
- Processed through the accounting system
- the nature and details of the financial reporting process including disclosures
List a Class of Significant Transactions
Sales and Collection
- Credit Sales
- Cash Receipts
What are three types of documentation typically used to document our understanding of the internal controls?
What is the definition of a material weakness?
A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.
If an auditor of a public company
becomes aware of either a significant deficiency of a material weakness, to whom must it be reported.
The Audit Committee and Senior Management
During the audit, you observe an entry in the sales
journal for which there is no underlying shipping document or sales order. To which financial statement assertion does this condition relate?
Occurrence. There is no evidence that this transaction occurred.
As you reviewed invoices for sales transactions you
observe several invoices where the price on the invoice is higher than the price on the official price list. To which financial statement assertion does this condition relate?
Accuracy Although the sale did occur it is not recorded at the proper value.
You observe a customer order and a shipping
document indicating the goods were shipped to the customer but the transaction was not recorded in the sales journal. To which financial statement assertion does this condition relate?
Completeness. The sales journal is not complete.
While auditing accounts receivable, you become
concerned that the client's footnotes do not include the required disclosures concerning the concentration of risks. Although the risks are significant and the amounts are material the client does not have a footnote discussing these matters as required by ASC 275. To which financial statement assertion does this condition relate?
Completeness. The footnotes are not complete.
If we want to assess control risk as high what does that imply
about the effectiveness of the audit client's internal controls?
We do not believe their controls are effective.
The magnitude of an omission or misstatement of accounting information that, in the light of
surrounding circumstances, makes it probable that the judgment of a reasonable person
relying on the information would have been changed or influenced by the omission or
Which element(s) of audit risk are auditors able to reduce with audit
procedures and which element(s) of audit risk are auditors unable to reduce with audit
procedures. Please do not abbreviate the names of the elements.
Auditors can reduce detection risk with substantive procedures.
Audit procedures do not reduce inherent risk or control risk. (Test of controls improve the auditor's
assessment of control risk.)
Define planned detection risk.
A measure of the risk that audit evidence will fail to detect misstatements exceeding a tolerable
amount, should such misstatements exist.
In addition to discussing internal controls, the second
paragraph of the Auditor's Responsibility Section of the Audit Report, includes five elements that
are covered by an audit. Please list these five elements ...
An audit includes examining, on a test basis, evidence supporting the:
- Amounts in the financial statements
- Disclosures in the financial statements
An audit also includes:
- assessing the accounting principles used
- significant estimates made by management
- as well as evaluating the overall financial statement presentation
An attitude that includes a questioning mind,
being alert to conditions that may indicate possible misstatement due to fraud or error,
and a critical assessment of audit evidence.
Professional skepticism is an attitude that
List the financial statement assertions to which you would refer when
creating audit objectives related to transactions.
Define tolerable misstatement.
the amount(s) set by the auditor as less than materiality for the financial
statements as whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole.
The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion
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