Audit Chapter 5
Define _____ data that are extracted from extremely large traditional company databases as well as data from other sources.
"big data":
Define ______: is being used by management to get insights into how to improve the effectiveness and efficiency of operations. It is also used as a part of the management review to monitor the performance of other internal controls
"data analytics"
- Define _______: are set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount.
"lead schedule"
- Here is the term professional skepticism again; note the book's definition. In class, we mention it as "_________"
"trust, but verify."
- Define _____: that lists the balances of accounts in the general ledger for the current and the previous year and also provides columns for the auditors' adjustments and reclassifications and for the final amounts that will appear in the financial statements.
"working trial balance"
Substantive procedures o ________ procedures o Tests of details: tests of account balances, tests of classes of transactions, tests of disclosures o One may change the scope of audit procedures by changing the ________
Analytical Nature, Timing, and Extent
_______: Involve the comparison of relationship among financial statements and, sometimes, nonfinancial data. o Timing o Steps involved o Developing an expectation
Analytical Procedures
o _______ relates to the assertion being addressed. o ______- of evidence is affected by factors such as its accuracy, completeness, authenticity, and susceptivity to management bias.
Relevance Reliability
- What is an inquiry resulting in a lawyer's letter? The auditors ask the client to request their ____ to furnish directly to the auditors their assessment or concurrence with managements assessment of any litigation being handed for the client.
attorneys
The term ________ refers to the possibility that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
audit risk
- What are the two primary objectives of audit documentation? 1. Primary functions o Support the _____ with auditing standards o Support the ______
auditor's compliance auditor's opinion
What does it mean to common-size financial statements? A common size financial statement displays______, total sales revenue, for example.
items as a percentage of a common base figure
_____ is the risk that the auditors' procedures will lead them to conclude that a financial statement assertion is not materially misstated when in fact such misstatement does exist. In this risk, ____ have the right
- Detection risk auditors
_______is the possibility of material misstatement of a financial statement assertion before considering any related controls. Observe the characteristics of such accounts and transactions.
- Inherent risk
________ Independently determining that client-provided documents sum and cross-sum correctly. _______ Independently performing procedures or activities that were originally performed by the client.
- Recalculation of mathematical accuracy: - Reperformance of procedures:
_____ are made by management when financial -statement monetary amounts cannot be directly observed.
Accounting estimates
_____ is the risk that a material misstatement could occur in a financial statement assertion and not be prevented, detected, or corrected, on a timely basis by internal control.
Control risk
In Related Party Transactions o _____ requirements must be met o Primary challenge is identifying ______ o Determine _______: inquiries of management, review SEC filling o Be alert for transactions
Disclosure undisclosed related party transactions related parties
Which of the following is NOT a financial statement assertion made by management? (1)Existence of recorded assets and liabilities. (2)Completeness of recorded assets and liabilities. (3)Valuation of assets and liabilities. (4)Effectiveness of internal control.
Effectiveness of internal control
Assertions about Accounts _________: assets liabilities, and equity interests exist __________: the entity holds or controls the rights to assets and liabilities are the obligations of the entity __________ All assets, liabilities, and equity interests that should have been recorded have been recoded, and all related disclosures that should been included in the financial statements have been included. _______: Assets, liabilities and equity interests have been included in the financial statements at appropriate amounts, and nay relating valuation are have been appropriately recorded, and related disclosures have been appropriately measured and described.
Existence Rights and Obligations Completeness: Valuation and allocation
Audit Risk Formula: AR = IR X CR X DR Audit Risk = ______ Risk X _____ Risk X _____ Risk
Inherent Control Detection
_______: Used in the audit of a number of accounts, including cash, accounts and notes receivable, debt accounts, and capital stock.
External confirmation
- True or False: The AICPA Code of Professional Conduct allows an auditor in public practice to disclose freely confidential client information. - Audit working papers are the property of whom? ______
FALSE Auditors
______ = HIGH INHERENT X HIGH CONTROL X HIGH DETECTION ______ = HIGH INHERENT X HIGH CONTROL X LOW DETECTION ______ = LOW INHERENT X HIGH CONTROL X LOW DETECTION
HIGH RISK MEDIUM RISK LOW RISK
- Under analytical procedures, o _____: review ratios over time o ______: analyze ratios of similar firms at a point of time o _______: analyze relationships withing a period and "common size" statements prepared. o ______ regression analysis, reasonableness test
Horizontal Cross-sectional Vertical analyses Other methods:
What are the three levels for "Fair Value Measurements"? - Level 1: Inputs of observable quoted prices in ________ Ex. a closing stock price in WSJ Level 2: Inputs of observable quoted prices, generally for ______ Ex. company discounts future cash flows on its not publicly traded debt securities at rate used by market for publicly traded debt securities Level 3: Inputs that are __________
active markets for identical assets or liabilities similar assets or liabilities in active members unobservable for the assets or liability
- Why do auditors use data analytical procedures? Performed by auditors may be viewed as a ______
basic form of data analytics.
In inherent risk, it is because of the _____, it causes more risk. High risk would be ____ assets, moderate risk would be insurance or prepaid, low risk would be _____
nature intangible land
Auditors consider the _____, _____, and extent of the audit procedure
nature timing
- What is a representation letter? A single letter or separate letters prepared by ______ at the auditor's request setting forth certain representations about the company's financial position or operations.
officers of the client company
Secondary functions of audit documentation? o Assists continuing and new audit teams' members in ______ the audit o Serves as a _____ of continuing audit interest o Assist in _____ and review of the audit o Demonstrate the ______ of team members o Assists internal reviewers, external peer reviews, PCAOB inspectors, and successor auditors in performing their roles
planning and performing record of matters supervision accountability
Inspections of _____: Audit evidence in paper or electronic form that is obtained through inspection Documentary of knowledge persons _____ the entity: Audit evidence obtained from company personnel and outside parties. May be written or oral.
records and documents: within and outside
- Define "permanent file": serves three purposes 1. To ______ on items applicable over a period of many years 2. To provide new staff members with a _____ of the policies and organization of the client 3. To preserve______ on items that show relatively few or no changes, thus eliminating the necessity for their preparation year after year.
refresh the auditor's memories quick summary working papers
What constitutes sufficient appropriate audit evidence? Appropriateness relates to the quality of the audit evidence, and its ______. Sufficiency relates to the quality of appropriate audit evidence required to appropriately restrict audit risk
relevance and reliability
Audit risk for an account or assertion is at an appropriately low level when the auditors have obtained ____ audit evidence
sufficient appropriate
- Audit documentation should be sufficient to enable an experienced auditor to _____ and the significant conclusions reached Audit documentation should include all significant _____ and the actions taken to address them
understand the work performed audit findings
Which of the following is not a function of audit working papers? (1)Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. (2)Assist audit team members responsible for supervision in reviewing the work. (3)Assist auditors in planning future engagements. (4)Assist peer reviewers and inspectors in performing their roles.
(1)Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? (1)To increase the efficiency of the audit by eliminating the need for other audit procedures. (2)To remind the client's management of its primary responsibility for the financial statements. (3)To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. (4)To provide evidence in those areas dependent upon management's future intentions.
(1)To increase the efficiency of the audit by eliminating the need for other audit procedures.
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: (1)Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. (2)Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. (3)Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. (4)Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.
(2)Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.
In what section of the audit working papers would a long-term lease agreement be filed? (1)Current working paper file. (2)Permanent working paper file. (3)Lead schedule file. (4)Corroborating documents file.
(2)Permanent working paper file.
Which of the following statements best describes why auditors investigate related party transactions? (1)Related party transactions generally are illegal acts. (2)The substance of related party transactions may differ from their form. (3)All related party transactions must be eliminated as a step in preparing consolidated financial statements. (4)Related party transactions are a form of management fraud.
(2)The substance of related party transactions may differ from their form.
Analytical procedures are most likely to detect: (1)Weaknesses of a material nature in internal control. (2)Unusual transactions. (3)Noncompliance with prescribed control activities. (4)Improper separation of accounting and other financial duties.
(2)Unusual transactions.
Which of the following is not a primary approach to auditing an accounting estimate? (1)Review and test management's process for developing the estimate. (2)Review subsequent transactions. (3)Confirm the amounts .(4)Develop an independent estimate.
(3)Confirm the amounts
Of the following, which is the least reliable type of audit evidence? (1)Confirmations mailed by outsiders to the auditors. (2)Correspondence between the auditors and suppliers. (3)Copies of sales invoices inspected by the auditors .(4)Canceled checks returned in the year-end bank statement directly to the client.
(3)Copies of sales invoices inspected by the auditors
Which of the following business characteristics is not indicative of high inherent risk? (1)Operating results that are highly sensitive to economic factors. (2)Large likely misstatements detected in prior audits. (3)Substantial turnover of management. (4)A large amount of assets.
(4)A large amount of assets.
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: (1)Remain silent on the matter since it is an internal matter of the auditing firm. (2)Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. (3)Document the additional work required, since all disagreements of this type will require expanded substantive procedures. (4)Document the assistant auditor's position and how the difference of opinion was resolved.
(4)Document the assistant auditor's position and how the difference of opinion was resolved.
A primary purpose of the audit working papers is to: (1)Aid the auditors by providing a list of required procedures. (2)Provide a point of reference for future audit engagements. (3)Support the underlying concepts included in the preparation of the basic financial statements. (4)Support the auditors' opinion.
(4)Support the auditors' opinion.
In control risk, ____ controls (means auditors cannot control but only test) o High risk would be having ______ o Low risk would be having _______
Client no internal control good internal control
______: Provides direct evidence of the existence of the assets. _______: Observing or watching a process or procedure performed by others (i.e., a clerk performing a reconciliation of the inventory counts.
Inspection of Tangible assets Observation of processes or procedures Being Performed by others
Assertions about Transactions and Disclosures ______: Transactions and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity. _________: All transactions and events that should have been recorded have been recorded. And all related disclosures that should have been included in the financial statements have been included. ______: Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described. _______: Transactions and events have been recorded in the correct accounting period. _______: Transactions and events have been recorded in the proper accounts.
Occurrence Completeness Accuracy Cutoff Classification
______ are individuals or entities who may have dealings with a client in which one party is significantly influenced by the other such that it may not pursue its separate interests.
Related Party Transactions
- When evaluating the reasonableness of accounting estimates, three basic approaches are available: 1. ______ process for developing the estimates. 2______ an estimate of the amount to compare to management's estimates. 3. ______ on relevant events or transactions occurring up to the date of the audit report.
Review and test management's . Independently develop Obtain evidence
______ procedures: procedures performed by the auditor to obtain an understanding of the entity and its environment, including its internal control. _______ procedures performed by the auditor to test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level. _______: audit procedures designed to detect material misstatements. Substantive procedures include tests of details (account balances, transactions, and disclosures) and substantive analytical procedures.
Risk assessment Tests of Controls: Substantive procedures