ACC 450 Chapter 6
Planning materiality
Largely quantitative; helps determine sample sizes
What is the Internal Control Structure organized around?
Major transaction cycles
Who should all material fraud be communicated to?
Management and the audit committee
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
Materiality and audit risk
The audit committee of a company must be made up of:
Members of the board of directors who are not officers and employees
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AR=.05, Materiality=50,000, Effort= AR=.10 Materiality=50,000, Effort=
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Should material thresholds be disclosed in the audit report?
No
Should fixed assets of a large dollar amount and surpass materiality be audited for a long period of time?
No, because of the nature of fixed assets, auditors should not spend a significant amount of time on them
What are Substantive Tests organized around?
Organized around balance sheet accounts, balance sheet accounts relationship to income statement accounts
What are the uses of materiality?
Planning and evaluation
As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:
Recorded sales have been properly posted to customer accounts
Which portion of an audit is least likely to be completed before the balance sheet date?
Substantive procedures
What influences the amount of substantive testing that gets done?
Tests of controls
Engagement risk
The overall risk to the CPA firm of association with a particular client
Engagement letter
The purpose of this document is to avoid misunderstandings between the auditors and the client
Materiality
The relative importance of a F/S term to fair presentation
Inherent risk
The risk of material misstatement of an assertion about an account without considering internal control
Evaluation of materiality
To help determine whether identified misstatements matter; used for determining opinion at end of audit
What is most likely to be an overall response to fraud risks identified in an audit?
Use less predictable audit procedures
What is management responsible for?
financial statements, effective internal control over financial reporting, compliance with laws and regulations, providing representation letter to auditor at conclusion of audit, adjusting financial statements for material misstatements
What is included in an engagement letter?
timing/client assistance, assurance per GAAS, arrangements with predecessor auditor, fees and billing arrangements, specialists to be used, limitations of liability, other services
Brainstorming
A group designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud In the organization
Audit plan
A description of the nature, timing, and extent of the audit procedures to be performed. It is often documented with an audit program.
Audit program
A detailed listing of the specified audit procedures to be performed in the course of an audit engagement
Engagement letter
A letter regarding the terms of an audit engagement, which auditors establish an understanding of with their clients
Which of the following should not normally be included in the engagement letter for an audit?
A listing of the client's branch offices selected for testing
Business risk
A risk that threatens management's ability to achieve the organization's objectives
Professional skepticism
A state of mind that is characterized by appropriate questioning and critical assessment of audit evidence
Who should fraud be communicated to?
All fraud should be reported to an appropriate level of management
What does obtaining understanding of internal controls do for an audit?
Allows for the auditor to plan the audit and determine the nature, timing, and extent of procedures to be performed
Time budget
An estimate of the time required to perform each step in the audit
Significant risk
An identified risk that requires special audit consideration
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets?
An unreliable accounting system
Audit risk
At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated
Who should management fraud be communicated to?
Audit committee
Representation letter
Auditors let clients know upfront their responsibility to sign the letter
What is required before accepting a client?
Communication with predecessor auditor
The primary objective of tests of details of transactions performed as substantive procedures is to:
Detect material misstatements in the financial statements
The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as:
Detection risk
Strategic Lens Model
Developed by KPMG to help understand the client
What direction is used when proper original valuation of recorded transactions is the issue?
Either direction
Which of the following best describes what is meant by the term "fraud risk factor"?
Factors often observed in circumstances where frauds have occurred
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?
Facts that might bear on the integrity of management
Vouching process
From recorded entry during period (ledger or journals) to source document; existence (overstatements)
Tracing process
From source document to recorded entry (ledger or journals); completeness (understatements)
Three conditions generally present when fraud occurs:
Incentive/Pressure, Opportunity, Attitude