Auditing exam 1

CPAs have a traditional reputation of ______.

objectivity independence competence

An auditor performs a vouching test on accounts receivable by looking through the general ledger, identifying sample accounts, and finding original supporting documentation for those balances. This test deals with which of the following management assertions?

existance

Financing Process

Business obtains capital through borrowing or soliciting investment from owners.

The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with:

D) complying with ethical requirement, appropriate competence and maintaining professional skepticism.

manager

Ensure that the audit is properly planned, including scheduling of team members. • Supervise the preparation of and approve the audit program. • Review the working papers, financial statements, and audit report. • Recommend key audit judgments to partner, oversee the work of seniors and staff. • Deal with invoicing and ensure collection of payment for services. • Inform the partner about any auditing or accounting problems encountered.

Audit Evidence:

Evidence that assists the auditor in evaluating management's financial statement assertions consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.

Business organizations hire personnel to perform various functions in accordance with the enterprise's mission and strategy in the ______ process.

HR

benchmarks used for establishing overall materiality

Income (loss) before income taxes, · Total assets, · Total revenues, · Net assets, · Total equity.

Assurance Services

Independent professional services that improve the quality of information, or its context, for decision makers.

Sampling

Inferences Based on Limited Observations

Three fundamental concepts relating to the financial statement's assertions.

MATERIALITY, AUDIT RISK, and EVIDENCE

Deal with invoicing and ensure collection of payment for services.

Manager

Ensure that the audit is properly planned, including scheduling of team members

Manager

Inform the partner about any auditing or accounting problems encountered.

Manager

Recommend key audit judgments to partner, oversee the work of seniors and staff.

Manager

Review the working papers, financial statements, and audit report.

Manager

Supervise the preparation of and approve the audit program.

Manager

dual-purpose test means.

Often it makes sense to design audit procedures to conduct both a test of controls and a substantive test of transactions simultaneously on the same document.

Human Resource Management Process

Organizations hire personnel to perform various functions in accordance with the enterprises mission and strategy.

Planning materiality:

Overall materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

The Sarbanes Oxley-Act effectively transferred authority to set and enforce auditing standards for public company audits to the ______.

Public Company Accounting Oversight Board

SEC - Securities and Exchange Commission (SEC)

REGULATES DISCLOSURE OF MATERIAL INFORMATION IN A REGISTRATION STATEMENT FOR AN INITIAL PUBLIC OFFERING OF SECURITIES.

3 audit tests

Risk assessment procedures, tests of controls, substantive procedures

Which act regulates ongoing reporting by companies whose companies securities are listed and traded on a stock exchange or that possess assets greater than $10 million and its equity securities are held by 500 or more persons?

Securities Exchange Act of 1934

Purchasing Process

acquire goods and services to support their operations.

Financial statements for publicly traded and private companies, partnerships, municipalities, individuals and other types of entities are audited by

external, independent

True or false: Before accepting a new audit client, the auditor is required to conduct a background check on top management.

false

The body of an audit report begins with a section that indicates the ______

financial statement covered by the report name of the company being audited auditor's opinion regarding the fairness of the financial statements

the five-business process components.

financing procss, purchasing process, Human resource management process , inventory management process, revenue process

Reconstructing incomplete or damaged accounting records and probing money-laundering activities are examples of situations that often involve___________ auditors

forensic

The auditor has a responsibility to plan and perform the audit to obtain _____ about whether the financial statements are free of material misstatement, whether caused by error, fraud, or illegal acts.

reasonable assurance

• Auditing standards make it clear that the audit provides only _____ that the financial statements do not contain material misstatements

reasonable assurance

Auditing standards make it clear that the audit provides only

reasonable assurance that the financial statements do not contain material misstatements.

accounting professionals perform various services that provide assurance about the

reliability and relevance of information given by one party to another.

Accounting professionals perform various services that provide assurance about the______ and _________of information given by one party to another.

reliability, relevance

tolerable misstatement is generally greater than planning materiality because:

-Not all accounts will be misstated by their full tolerable misstatement allocation. · Audits of individual accounts are conducted simultaneously. · Materiality is often a small fraction of the account being audited and planned procedures will be sufficiently precise to identify significant misstatements. · When errors are identified, additional testing is typically performed in that account and related accounts. ·Overall materiality serves as a "safety net."

Which act prohibits external auditors from providing many forms of nonaudit services and consulting work to public companies for which the auditor also provides a financial statement audit?

The Sarbanes-Oxley Act of 2002

client acceptance and continuance

The firm has to consider the following before accepting a new client -has the capabilities to perform the engagement; -complies with legal and relevant ethical requirements -has considered the integrity of the client They have to consider new engagements as they are the eyes and the ears for stakeholders evaluate periodically whether to continue their relationship with current clients

An audit team generally includes ______.

a partner a manager staff members one or two seniors

Auditors use a sampling approach to examine

a subset of the transactions based on previous audits, an understanding of the company's internal control system, or knowledge of the company's industry.

attest services

occur when a practitioner is engaged to issue... a report on subject matter, or an assertion about subject matter, that is the responsibility of another party

Inquiries of appropriate management, supervisory, and staff personnel ·

test of controls example

The United States Supreme Court interpretation of materiality is that a fact is material if there is

"a substantial likelihood that the...fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."

Materiality

- amount by which a set of financial statements could be misstated without affecting the judgement of a reasonable person. A common rule of thumb is that total misstatements of more than about 5 percent of income before tax would cause the financial statements to be materially misstated. 5%x income before tax < misstatements = materially misstated.

1 Tests of controls

-audit procedures performed to test the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the relevant assertion level.

The 7 phases of an audit are

-client acceptance and continuance -preliminary engagement activities -plan de audit -consider an audit internal control •Audit business processes and related accounts (e.g. revenue generation) •Complete the audit •Evaluate results and issue audit report

Public companies, firms typically use

3-5 percent of income before taxes.

A common rule of thumb in practice is to use

5% of income before taxes.

In practice, auditors commonly set tolerable misstatements for each account at between

50 and 75 percent of overall materiality

AUDIT COMMITEE

A committee consisting of members of the board of directors, charged with overseeing the entity's system of internal control over financial reporting, internal and external auditors, and the financial reporting process. Members typically must be independent of management.

PCAOB - Public Company Accounting Oversight Board (PCAOB)

A non profit corporation established by Congress to oversee the audits of public companies in order to protect the interest of investors and further the further the publics interest in the preparation of informative, accurate and independent audit reports.

Reasonable assurance

A term that implies some risk that a material misstatement could be present in the financial statements without the auditor detecting it, even when the auditor has exercised due care.

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that:

A.Any disputes over significant accounting issues have been settled to the auditor's satisfaction.

Why do auditors generally use a sampling approach to evidence gathering?

A.Auditors must balance the cost of the audit with the need for precision.

Which of the following best describes the concept of audit risk?

A.The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.

Inventory Management Process

Although transactions to purchase finished goods or raw materials inventories are included in the purchasing process, the inventory management process for a manufacturer includes such transactions as accumulating and allocating costs to inventory and adjusting record inventory at lower of cost or market.

The study of auditing is different from other accounting courses that you have taken in college because

Analytical and logical skills Much more conceptual in nature

Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS?

Auditors' responsibilities in performing an effective audit.

tolerable misstatement is the amount of planning materiality

allocated to an account or class of transactions.

The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS requires that the report, "states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework." This passage requires:

an opinion by the auditor

In order to reach and justify a conclusion on the fairness of the financial statements, an auditor must obtain evidence that is ______.

appropriate sufficient

in order to reach and justify a conclusion on the fairness of the financial statements, an auditor must obtain evidence that is ______.

appropriate sufficient

Tolerable misstatements

are also referred to as performance materiality.

Learning auditing essentially helps to understand how to gather and assess evidence so you can evaluate______(or claims) made by others

assertions

Auditing and attestation are specialized forms of the general category of_____________ services

assurance

Conflict of interest may arise. The manager or agent could look after his best interest instead of the corporation. The agent would have more information about the corporation and therefore create

asymmetry of information.

The body that oversees the internal and external auditing work done for the organization is the ______.

audit committee

The end product of an auditor's work is the ______. Multiple choice question.

audit opinion

Which of the following is a type of attest service?

auditing

an auditor might confirm the ending balance of the cash account by contacting the client's bank ,or the auditor might confirm the ending balance of the inventory account by physically examine individual inventory items that make up the ending balance

direct information

When planning an audit, the audit team must determine materiality and make a preliminary analysis of the entity's ______ to determine the risk of material misstatement (RMM).

business risks

The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS states that auditors are responsible for having appropriate competence and

capabilities to perform the audit.

first phase of an audit

client acceptance and continuance

Auditors are generally hired by ______ stocks and bonds.

companies that are selling

The audit committee

consisting of a subset of independent board members, oversees the internal and external auditing work done for the organization.

A lawsuit in progress against a company is an example of a(n______that needs to be considered when completing an audit.

contingent liability

CPAs add ______ to information produced and reported by management to outside parties.

credibility

2 substantive test

designed to detect material misstatements in a class of transaction , account balance and disclosure component of the financial statements. Two categories; test of details and substantive analytical procedure

There is a _____ relation between sample size and desired level of assurance.

direct

The Responsibilities section of Principles Underlying an Audit Conducted in Accordance with GAAS recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper:

education and experience in auditing.

Government Auditors

employed by federal, state, and local agencies.

Forensic Auditors

employee by corporations, government agencies, public accounting firms, and specialized consulting and investigative series firms. They are specially trained in detecting, investigating, and deterring fraud and white-collar crime

The auditor's responsibility is to provide reasonable assurance with respect to

errors, fraud, and illegal acts clearly shapes the auditor's environment and the work that he or she performs.

Auditors use a sampling approach to

examine a subset of the transactions based on previous audits, an understanding of the company's internal control system, or knowledge of the company's industry.

Revenue Process

generate revenue through sales of goods or services to customers. They collect the proceeds of those sales in cash, either immediately or through collections on receivables.

SEC is a federal

government agency that administers the Securities Act of 1933, Sec. Act of 1934 and SOX of 2002 among others.

A company system of internal control is put in place by the company board of directors and management to

help the company achieve reliable financial reporting,effective and efficient operations,and consistent compliance with applicable laws and regulations.

Auditing ______.

helps one understand how to evaluate assertions is more conceptual in nature than financial accounting focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of financial information

• Reasonable assurance

implies some risk that a material misstatement could be present in the financial statements and the competent auditor will fail to detect it.

SEC impose strict

independence rules, prohibiting auditors from providing many types of nonaudit services to public company auditees.

External Auditors

independent auditors. Audit financial statements for publicly traded and private companies, partnerships, universities and government entities.

Designing procedures to test whether an entity's internal control over financial transactions is effective allows the auditor to obtain ______ information regarding whether account balances are fairly stated.

indirect

Designing procedures to test whether transactions were captured and properly handled allows the auditor to obtain ______ information about whether an ending account balance is likely to be fairly stated.

indirect

An independent, objective assurance and consulting activity designed to add value and improve an organization's operations is the definition of ______ auditing.

internal

An independent, objective assurance and consulting activity designed to add value and improve an organization's operations is the definition of_________

internal audit

Organizations design and implement a system of ______ to ensure that the transactions are handled and recorded appropriately and that its resources are protected.

internal control

The SOX Act of 2002 required public companies to engage an external auditor to provide an opinion on the effectiveness of_______

internal controls

There is an _______________ relationship between sample size and materiality

inverse

There is a(n) ______ relation between sample size and materiality, and a(n) ______ relation between sample size and desired level of assurance.

inverse, direct

The financing process includes ____

investing in long-term assets borrowing and repaying funds providing a return on owners' investments

auditing

is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Planning materiality

is an important part of audit planning.Planning Materiality determines overall materiality for the financial statements.

· If the audit is not properly planned, the auditor may

issue an incorrect audit report or conduct an inefficient audit.

Asymmetry

lack of quality or equivalence between parts or aspects of something. For example, buying a home. Information asymmetry is usually present because the seller typically has more information about the house than the buyer.

management is primarily responsible for

maintaining effective internal control and for ensuring the fairness of the company's financial statements.

SOX Sec. 303 audit committee

makes it unlawful for an officer or director to take any action to fraudulently influence, coerce, or manipulate the work or conclusions of the auditor.

The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the:

management of the company

SOX Sec. 301 audit committee

mandates the entity's audit committee be directly responsible for the appointment, compensation, and oversight of the work of the auditor instead of management.

The auditor's assessments of___________ and ______________ influence the nature, timing, and extent of the audit evidence to be gathered.

materiality , audit risk

Who makes up the Audit Committee?

members of a company's board of directors

Audit risk is the risk that the auditor

mistakenly expresses a "clean" audit opinion when the financial statements are materially misstated.

third phase of an audit

plan de audit

Auditing is demanded because it ______.

plays a valuable role in monitoring contractual relationships

second phase of an audit

preliminary engagement activities

Materiality is a relative, not an absolute, concept and it is not a black or white issue! The determination of materiality requires

professional judgment.

To ensure the audit is conducted effectively and efficiently, it is important to ______.

properly plan the audit

For a company, the impacts of purchasing the assurance provided by an audit include ______.

providing assurance to thousands of potential investors lower interest rates the ability to sell stocks and bonds at more favorable prices

Assurance service engagement can improve

quality through increasing confidence in the information's reliability and relevance

The Basis for Opinion section of the audit report emphasizes the fact that the audit provides only_____________ that the financial statements contain no material misstatements, whether due to error or fraud.

reasonable assurance

The Sarbanes-Oxley Act ______.

requires public companies to obtain an integrated audit impacts the duties and practices of public companies

Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants?

responsibilities

in order to develop and support an audit opinion, the auditor must obtain an understanding of the client's ______.

risks business and industry information systems

Tests of control

s are audit procedures performed to test the operating effectiveness of controls in preventing, or detecting and correcting,material misstatements at the relevant assertion level.

he purpose of setting tolerable misstatement is to establish a

scope for the audit procedures for the individual account balance or disclosures.

Businesses obtain capital through ______.

soliciting investments borrowing

Reasonable assurance implies

some risk that a material misstatement could be present in the financial statements and the competent auditor will fail to detect it.

Know why there is a demand for an independent auditor to report on financial statements.

the value of independent auditor's opinion is that i t can reduce information risk and thereby "enhance the degree of confidence that intended user can place in the financial statements"

Auditing is a

systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users

Inspection of documents, reports, and electronic files ·

test of controls example

Observation of the application of specific controls

test of controls example

· Reperformance of the application of the control by the auditor

test of controls example

· Walkthroughs, which involve tracing a transaction from its origination to its inclusion in the financial statements through a combination of audit procedures, including inquiry, observation, and inspection.

test of controls example

Audit risk:

the risk that the auditor mistakenly expresses a clean audit opinion when the financial statements are materially misstated. .

True or false: If an auditor fails to exercise due professional care, he or she can be held liable for civil damages or even criminal penalties.

true

True or false: The auditor's report, also known as the audit opinion, is the main product or output of the audit.

true

True or false: The context provided by the entity's business is a primary aspect of the environment in which financial statement auditing is conducted.

true

When the financial statements are free of material misstatement and the auditor does not find it necessary to specify any exceptions to a "clean" audit opinion, the audit report issued is

unqualified

Risk assessment procedures

used to obtain understanding of the entity and its environment including its internal control. I

systematic process

well-planned and through approach for conducting an audit

Professional standards require that public accounting firms establish policies and procedures for deciding ______.

whether to accept new clients if current clients should be retained

Internal Auditors

who are employees of individual companies, government agencies, and other entities.

ICPA - American Institute of Certified Public Accountants (AICPA)

· The most important of the AICPA functions is the promulgation of rules and standards that guide audit and related services provided to nonpublic companies; governmental entities such as states, counties, municipalities and school districts; other entities such as universities and charities.