ACCT 489 Auditing 1

close relative

A parent, sibling, or nondependent child.

Code of Professional Conduct

A set of principles, rules, and interpretations that establish guidance for acceptable behavior for accountants and auditors.

management responsibility

-financial statements -adoption of sound accounting policies -est. and maintain internal control system

monitoring of controls

A process that assesses the quality of internal control performance over time.

larger accounting firms in the U.S. that audit both nonpublic and public companies must ensure that they follow which standards?

ASB standards PCAOB standards

computer-assisted audit techniques (CAATs)

Computer programs that allow auditors to test computer files and databases.

When planning an audit, an auditor should

Determine overall materiality for audit purposes

Which of the following types of audit evidence is the least reliable? a) Test counts of inventory performed by the auditor. b) Prenumbered purchase order forms prepared by the entity. c) Correspondence from the entity's attorney about litigation. d) Bank statements obtained from the entity.

Prenumbered purchase order forms prepared by the entity.

control deficiency

Report to management

audit procedures

Specific acts performed by the auditor in gathering evidence to determine if specific assertions are being met.

The most favorable type of audit opinion for an entity to receive is A) Qualified. B) Unqualified. C) Full assurance. D) Exceptional

Unqualified

illegal acts

Violations of laws or government regulations

there is __________ relationship between sample size and expected misstatement

a direct

there is a ________ relationship between confidence level and sample size

a direct

materiality is assessed in terms of potential effect of a misstatement on decisions made by _________

a reasonable user of financial statements

Type 1 subsequent events require the financial statements to be _______ if needed.

adjusted

fraud

an intentional act by one or more among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements

pervasive effects on the financial statements are those that __________ of the financial statements

are not confined to specific elements, accounts or items of the financials if so confined, represent or could represent a substantial proportion of the financials with regard to disclosures, are fundamental to users understanding of the financials

the most common use of ______ sampling is for tests of controls

attribute

the SEC and PCAOB rules require that a public companys audit committee approve all ___________ and _________ services provided to the company

audit nonaudit

PCAOB requires that audit documentation be retained for 7 years from the date of the _____________

auditor's report

dual-purposes tests

can improveaudit efficiency

the risk of material misstatements is also referred to as a ____ risk because it stems from decisions made by the entity

client

the first phase of the audit process that relates to audit planning is ___________

client acceptance and continuance

in deciding on the nature and extent of the understanding of internal control needed for the audit, the auditor should consider the entitys operations and systems ______________

complexity sophistication

the converse of sampling risk is ______ _______

confidence level

___________ controls come into pay when a misstatement is found

corrective

a financial interest that is under the control of an individual or entity is considered a(n) ________ financial interest

direct

population size is _______ related to sample size

directly

the auditor assesses the entitys ability to continue as a going concern

during the planning of the engagement near the end of the engagement

knowledge of the information system is important to understand the related accounting records when they are __________

electronic or manual

Under ASB standards, when an auditor makes reference in the audit report to an issue that has been appropriately presented or disclosed in the financial statements, the auditor is using a(n) _________ of __________ paragraph

emphasis-of-matter

when there is significant doubt as to the ability to continue as going concern, a(n) _______ paragraph may be added

emphasis-of-matter

serving as a contract, the ___________ ____________ outlines responsibilities and prevents misunderstandings between the auditor and the client

engagement letter

If a threat to independence exists, a CPA must ____________

evaluate the threat and determine if it can be mitigated or eliminated

accepting some uncertainty is the trade off between the cost of ________

examining all the data and the cost of making an incorrect decision based on a sample of the data

inspection

examining internal and external records or documents that are in paper form,electronic form or other media

inbound receipt of relevant information and providing internal control related information to parties outside the organization in response to requirements and expectation is enabled by ____________ communication

external

from the auditors perspective, a(n) ___________ is a diagrammatic representation of the entitys accounting system

flowchart

the auditors understanding of an entitys internal control over financial reporting are documented using diagrammatic representation known as a(n) _________

flowchart

account analysis working papers

generally include the activity in a particular account for the period

a very small difference that is unlikely to affect an investors decisions in a significant manner is deemed to be ______________

immaterial

assurance

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

______ risk is the risk of material misstatement of an assertion without considering internal control 1) business 2) substantive 3) control 4) inherent 5) audit

inherent

At the Assertion Level, Audit Risk consists of...

inherent risk control risk detection risk

risk assessment procedures include _________

inquiries of management and others preliminary analytical procedures observation and inspection

duplicate copies of invoices and shipping remittances are examples of ___________ documents

internal

all material respects means that the entitys ICFR

is free of any material weakness

all else being equal, the larger the expected population deviation rate, the ________ the same size

larger

corrective control

maintaining backups of data

evidence obtained from an independent source from outside the entity is generally viewed as _____ reliable when compared to evidence obtained solely within the entity

more

to perform an audit of entitys financial statements a CPA _________ be independent

must

tick marks

notations made next to work paper items indicating auditor/reviewer actions

how authority and responsibility are delegated and monitored and the framework within which the entitys activities for achieving entity wide objectives are planned, executed, controlled and reviewed are defined by the entitys __________ __________

organizational structure

to be effective, most controls do not need to operate 100 percent of the time so long as the ___________

person performing the control investigates processing exceptions times the control fails to operate are not predictable

Audit _______ begins with determining the requirements for the engagement. 1) strategy 2) reporting 3) planning 4) risk 5) opinions

planning

auditors should attempt to identify all related parties during the ________ phase of the audit

planning

many public accounting firms find it appropriate to use ______ in the audit risk model

qualitative terms (low, medium, high)

preventive control

segregation of duties

to identify significant accounts and disclosures and their relevant assertions, the auditor assesses risk factors including ___________

susceptibility to misstatement nature of the disclosure account size and composition

rollover approach

the carryover effects of uncorrected prior year misstatements are ignored when misstatements are evaluated

four standards of reporting auditors must consider before rendering an audit opinion

the degree of responsibility the auditor takes and the character of their work whether all appropriate disclosures have been made whether the principles are consistently applied whether the financial statements are presented in accordance with GAAP

most firms have a policy that publicly traded companies and privately held companies whose financial statements are expected to be widely distributed will __________

undergo an engagement quality review

the total of the projected misstatement and the allowance for sampling risk is referred to as the _________ _______ limit

upper misstatement limit

plausibility

whether the relationship used to test the assertion makes sense

Type 2 subsequent events come into existence _____ the balance sheet date.

after

Examining a new plastic extrusion machine to ensure that this major acquisition was received.

assertions about account balances existence

the risk of incorrect acceptance is also commonly known as the risk of_________

assessing control risk too low overreliance

based upon the risk assessment, management determines which relevant business processes require ____ _____

control activities

the best way to address sampling risk is to test 100% of the population true/false

false

a public accounting firm should document independence compliance by having all personal complete an annual ____________ ___________

independence questionaire

Quick Ratio (Acid Test)

(Current Assets - Inventory) / Current Liabilities most readily convertible to cash and provides a picture of the entity's liquidity position

Gross Profit Percentage

(Gross Profit)/(Net sales) measures profitability after cost of goods sold is deducted good indicator of potential misstatements errors in sales records or inventory can distort failure to record sales gross profit % less than previous years

Times Interest Earned

(Net Income + Interest Expense) / Interest Expense

FASB standard relating to going concern issues requires a "look-forward" period of _________

1 year from the financial statement issuance date

when a significant event occurs that may be of interest to investors, the SEC requires a publicly traded company to file a(n)

8K

the tainting factor for an account with a book value of $42,750 and audit value of $38,900 is ______ %

9% 42,750 - 38,900/42,750

independence

A state of objectivity in fact and in appearance, including the absence of any significant conflicts of interest.

the international counterpart to the FASB is the

IASB

Return on Equity (ROE)

Net Income / Average Stockholders' Equity return on the resources contributed by stockholders

business processes

Processes implemented by management to achieve entity objectives. Business processes are typically organized into the following categories: revenue, purchasing, human resource management, inventory management, and financing processes.

reliability of evidence

The diagnosticity of evidence—that is, whether the type of evidence can be relied on to signal the true state of the assertion.

this type of report provides assurance on the operating effectiveness of the service organizations controls based on the auditors test of those controls

Type 2 report

adverse opinion

a material misstatement is considered pervasive financials do not present fairly due to a GAAP departure that materially affect the financials overal auditor explains the nature and size of the misstatement and states the opinion that the financial statements do not present fairly in accordance with GAAP

communicating results to interested users __________ a) varies based on the auditors findings b) is the same for all types of audits c) can be done using whatever manner the auditor and client agrees on d) relates to the audit report

a) varies based on the auditors findings d) relates to the audit report

management engages in the five business processes to ____________

achieve objectives implement strategies

Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

assertions about account balances valuation and allocation

Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

assertions about account balances valuation and allocation

if the controls are operating effectively, this allows control risk to be set ___ the ____

below maximum

symbols used in flowcharts are divided into _________ symbols

data flow and storage processing input/output

controls that can be applied at various stages and are mainly concerned with the accuracy assertion are __________ controls

data validation

disadvantage is statistical sampling

deal with the lack of consistent application across audit team

a control deficiency exists when the _________ or _______ of a control does not allow management or employees to prevent or detect misstatements on a timely basis

design operating

one of the most difficult step of an audit sampling application is generally ____________

determining the sample size

During the initial planning phase of an audit, a CPA most likely would a) evaluate the reasonableness of the entitys accounting estimates b) identify specific internal control activities that are likely to prevent fraud c) discuss the timing of the audit procedures with the entity's management. d) inquire of the entitys attorney if it is probable that any unrecorded claims will be asserted

discuss the timing of the audit procedures with the entity's management.

in applying attribute sampling to tests of controls, the auditor normally attempts to determine the operating _________ of a control in terms of ______ from a prescribed internal control

effectiveness deviations

overall responsibility for an audit engagement rests with the __________

engagement partner

working papers prepared by the audit manager are reviewed by the

engagement partner

in performing nonattest services for an attest entity, a CPA should __________

ensure that the entity assumes all management responsibilities

auditing standards dictate how audit documentation should be organized true/false

false

possible causes of significant differences

fraud accounting changes economic conditions errors

the larger the sample size, the _______ the confidence level and the _________ the sampling risk

higher lower

in many entities, this produces much of the knowledge used in monitoring

information system

auditors can reduce sampling risk by taking ______ samples

larger

the lower the account tolerable misstatement, the _____ the sample size

larger

the auditor obtains the representation letter form _________

management

accounting standards update disclosure of uncertainties about an entitys ability to continue as a going concern requires:

management to first evaluate the entitys ability to continue in existence as a going concern auditors to make an independent assessment to evaluate the adequacy of managements going concerns disclosures

proper planning leads to a more effective audit that is more likely to detect ____________

material misstatements

audit evidence is subject to human error which is referred to as _______ risk

nonsampling

a deficiency or combination of deficiencies in ICFR that is less severe than a material weakness yet important enough to merit attention is a __________ deficiency

significant

prior to the issuance of the auditors report on ICFR, the auditor must communicate in writing to both management and the audit committee identified

significant deficiencies material weaknesses

the fact that there should be a well-planned and thorough approach for conducting the audit is implied by the phrase _______________ ______________

systematic process

tests of controls are performed to ________

test the operating effectiveness of controls

the SEC rules do not limit _________

the scope of nonaudit services provided by accounting firms to nonpublic companies or to public companies that are not audit entities accounting firms are allowed to provide certain types of tax services to their audit entities

final evaluation of audit evidence

the sufficiency of the audit evidence and the effects of detected misstatements in the financial statements are the primary concerns

an amount or amounts that reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements that would result in material misstatement of the financial statements is ___________ ___________

tolerable misstatement

although the auditor owns the audit documents, they cannot be show to outside parties without the entitys consent, except under certain circumstances true/false

true

the policies and procedures that help ensure that managements directives are carries out and implemented to address risks identified in the risk assessment process are________ activities

control

when a control necessary to meet the relevant control objective is missing, a(n) ______ ________ exists

design deficiency

Assurance Services

independent professional services that improve the quality of information, or its context, for decision makers auditing and attestation are specialized forms of assurance services

the first section in Part 1 of the AICPA Code of Professional Conduct includes the Codes ______ rule

integrity and objectivity

the size of the population _________ an important factor in determining sample size for attribute sampling

is not

PCAOB

issues statements on attestation on the effectiveness of ICFR

subsequent events need to be disclosed in the financial statements: otherwise, the financial statements would be __________

misleading

items that may result in significant risks include

industry specific issues revenue recognition assertions identified with fraud risk factors

substantive tests when audit risk is low and the risk of material misstatement is high, substantive tests should be performed _________

mostly at year end

risk factors relating to attitudes/rationalizations to report fraudulently include:

ineffective communication and enforcement of ethical values claims against board members alleging fraud excessive management interest in increasing entity stock prices

low-reliability types of evidence because they require further corroboration by the auditor include

inquiry observation

evidence where audit sampling is common

inspection of records or documents confirmation recalculation inspection of tangible assets

the severity of a control deficiency depends on _______

likelihood and magnitude

Components of the standard auditors' report in correct order

1) title 2) introduction 3) managements responsibility for the financial statements 4) auditor's responsibility 5) opinion

observation

looking at a process or procedure being performed by others

in the second standard of field work ________ refers to what procedures are performed, ______ refers to when the audit work is done, and ______ refers to how much work is done

nature timing extent

factors that can impact the effectiveness of the board of directors or audit committee include

nature and extent of interactions with auditors experience of members information availability

the auditor should obtain information about the conduct of operations, joint ventures, planned acquisitions, and major subsidiaries as part of learning about the

nature of the entity

in documenting the overall audit strategy and audit plan, auditors should document the ________

nature, timing and extent of audit tests

to perform a compilation of an entitys financial statements a CPA _____ be independent

need not

the auditor determines which items should be tested individually and which items should be subject to sampling in many ____________ sampling applications

nonstatistical

a loan to or from an audited entity is permissible if _________ lending procedures, terms and requirements are used

normal

classic variables sampling uses _____ ____ theory to evaluate the characteristics of a population based on sample data

normal distribution

if an entitys accounting system has control weaknesses that result in a high level of assessed control risk, substantive procedures will probably _____________

not be conducted at interim dates

indexing and cross-referencing

notations that provide a trail from financial statements to audit documents

if the work of others is to be used, the auditor should assess the ________ and _________ of the persons whose work will be used

objectivity competence

the SEC's rules with respect to services provided by auditors are based on the principles of auditor _________ and _________

objectivity independence

confirmation

A confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party) in paper form or by electronic or other media.

The examination of all of an entity's transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample? A) A decrease in the materiality level. B) A decrease in the desired level of assurance. C) An assessment that the account being audited is high risk. D) An increase in the desired level of assuranc

A decrease in the desired level of assurance

information processing controls

made up of two broad categories referred to as general and application controls

the difference between a control deficiency, a significant deficiency, and a material weakness is determined solely based on ________

magnitude

audit program

A set of audit procedures prepared to test assertions for a component of the financial statements

misstatements due to error or fraud include

omission of an amount incorrect accounting estimates inaccurate data processing

unrestricted random sampling without replacement means

once an item is selected, it cannot be selected a second time

Who addresses business risks by implementing a risk assessment process?

management

tests of controls for _______________ effectiveness include procedures such as inquiry, documentation inspection, observation and reperformance of the application of the control

operating

the evaluation of the _______________ effectiveness of a control considers whether the person performing the control possesses the necessary authority and competence to perform the control effectively

operating

an effective system of internal controls allows management to focus on _________ while maintaining compliance with relevant laws and minimizing surprises

operations financial performance goals

if an auditor has evidence that there is an unacceptably high risk that accounts receivable is materially misstated _______

management ca be asked to adjust the account balance

when an auditors opinion is based in part on the report of another auditor, explanatory language is added to the ____________

opinion paragraph auditors responsibility paragraph

identify the fraud risk factors that organizations must consider in assessing risks to the achievement of objectives

opportunities incentives rationalization

integrated audit

An audit of both financial statements and internal control over financial reporting, provided by the external auditor. Required for public companies.

Public Accounting Firm

An organization created to provide professional accounting-related services, including auditing. Usually formed as a proprietorship or as a form of partnership.

an audit team generally includes

partner senior (one or two) manager staff members

governmental auditors

Auditors who work for the federal, state, or local government: - Government Accountability Office (GAO) Auditors: conduct audits for Congress - Internal Revenue Agents: conduct compliance audits for the IRS

the quality of internal control is directly related to the _______ of the personnel operating the system

quality

analytical procedures

Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data.

because each audit provides information relevant to the other, the auditor must integrate the audits of ________

ICFR financial statements

with regard to other information in documents containing audited financial statements, the auditor is required to ____________

read the other information consider whether such information is consistent with the information in the audited financials

The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor's decision when reporting on the financial statements as a whole relates most closely to which major audit concept? A) Materiality. B) Audit risk. C) Management assertions. D) Reasonable assurance

Materiality

by increasing sample size, the auditor can _____________-

reduce uncertainty and risk

if an entity's response to identified risks is adequate, the risk of material misstatement may be __________

reduced

when an auditor is not independent the auditor must disclaim an opinion __________

regardless of the significance of the condition that caused the lack of independence

inspection of tangible assets

Physical examination of the tangible assets.

information that is capable of making a difference in user decisions has the characteristic of _________

relevance

management responsibilities that would impair a CPAs independence include ________

Setting policy or strategic direction for the attest client Authorizing, executing, or consummating a transaction or otherwise exercising authority on behalf of an entity Preparing source documents, in electronic or other form, evidencing the occurrence of a transaction Having custody of entity assets Supervising the entity's employees in the performance of their normal recurring activities Determining which recommendations of the member should be implemented Establishing or maintaining internal controls, including performing ongoing monitoring activities for an entity Reporting to those charged with governance on behalf of management Accepting responsibility for the preparation and fair presentation of the attest client's financial statements

the independence of the source of the evidence, the effectiveness of internal controls and the auditors direct personal knowledge all affect the ______ of data for developing expectations

reliability

when an auditor decides to follow a(n) ______ strategy, he or she has to understand the control activities that relate to assertions for which a lower level of control risk is expected

reliance

when the auditor intends to depend on the entitys controls, a(n) ______ strategy is chosen

reliance

a benchmark strategy allows the auditor to _________

rely on previously tested automated control

benchmarking strategy allows the auditor to ____________

rely on previously tested automated control

recalculation

The auditor's checking the mathematical accuracy of documents or records either manually or electronically.

Substantive Strategy

The auditor's decision not to rely on the entity's controls and to audit the related financial statement accounts by relying more on substantive procedures.

control activities

The policies and procedures that help ensure that management's directives are carried out.

when an entity has a material weakness, it should take steps to correct it, which is referred to as ___________

remediation

assessing control risk

The process of evaluating the effectiveness of an entity's internal control in preventing, or detecting and correcting, material misstatements in the financial statements

in order to gain more persuasive evidence, the auditor could _________ a control such as by checking a voucher package for accuracy and completeness, essentially repeating the steps taken to initially perform the control

reperform

if the auditor defines a deviation for a purposes as a vendors bill not supported by a receiving report, and the auditor selects a telephone bill, the auditor should _________

replace the item with another purchase transaction not report the lack of receiving report as a deviation

if a sample item selected is not appropriate for the definition of the control, the auditor should _________

replace the item with another sample item

The final step of an audit is issuing the audit ________.

report

material weakness

report externally, to audit committee and to management

Sarbanes-Oxley Act of 2002

requires that the CEO and CFO of large companies that have publicly traded stock personally certify that financial reports made to the SEC comply with SEC rules and that info in the reports are accurate. prohibits external auditors from providing many forms of non-audit services and consulting work to public companies for which the auditor also provides a financial statement audit transferred authority to set and enforce auditing standards for public company audits to the Public Company Accounting Oversight Board

_________ assessment procedures are performed when obtaining an understanding of the client 1) engagement 2) risk 3) planning 4) audit 5) opinion

risk

consideration of possible changes in the internal or external environment because changes can introduce or change risks to the entitys objectives are part of the _______ identification process

risk

Audit the partnership tax return of a real estate development company.

Type of Audit: Compliance Type of Auditor: Government

Examine the financial records of a division of a corporation to determine if any accounting irregularities have occurred.

Type of Audit: Forensic or financial statement Type of Auditor: Internal, external, or forensic

Evaluate the policies and procedures of the Food and Drug Administration in terms of bringing new drugs to market.

Type of Audit: Operational Type of Auditor: Government

the carryover effects of uncorrected prior year misstatements are ignored when misstatements are evaluated using the ______ approach

rollover

AS5 defines policies and procedures that "provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the entitys assets that could have a material effect on the financial statements as the _____ of assets

safeguarding

managements internal control assessment process involves special consideration of _________

safeguarding assets service organizations

auditors will tolerate deviation and still consider a control to be effective because there is a risk that the __________ deviation rate differs from the _________ deviation rate

sample population

when using audit sampling, the auditor ______ select only items that are unusual or large or items that are the first or last items in the frame

should not

in evaluating the risk of material misstatement due to fraud and the risk of management override of controls, the auditor should consider controls over

significant, unusual transactions resulting in unusual journal entries journal entries and adjustments made in the period-end financial close

access and security the physical protection of computer equipment, software and data as well as loss of assets and information through theft or unauthorized use is the concern of __________ controls

access and security

covered members immediate family subject to the independence rule include:

spouse dependent (regardless of relation)

when there is a lack of consistency in the application of accounting principles due to accounting changes, an auditor ________

adds an explanatory paragraph to a standard unqualified audit report

PCAOB standards require that audit documentation contain ____________

all documents that form the basis of the audit

auditing standards require that the sample items be selected so that the sample can be expected to represent the population. Thus, ________ opportunity to be selected

all items must have an equal

haphazard sampling

allows the auditor to select items judgmentally selects items that will be representative of the population

FASB's Accounting Standards Codification (ASC) is recognized as the source of US GAAP by the ___________

american institute of Certified public accountants (AICPA) public company accounting oversight board (PCAOB) securities and exchange commission (SEC)

a firms independence is impaired with respect to an entity if a partner or professional employee leases the firm and is ___________

subsequently employed by the entity in a key position

auditor should develop expectation about plausible relationships that are expected to exist when performing preliminary ______________ ______________

analytical procedures

evaluations of financial information made through the study of plausible relationships among both financial and nonfinancial data are referred to as ______ ____________

analytical procedures

data capture, data validation, processing,output and errors controls are all categories of __________ contols

application

the requirement to ___________ journal entries is an example of a preventive control

approve

engagement letters may include

arrangements involving the use of specialists or internal auditors any limitation of liability of the auditor or client additional services to be provided relating to regulatory requirements arrangements regarding other services

performing test counts of the warehouse personnels count of the raw material

assertions about account balances completeness/existence

Reviewing the general ledger for unusual adjusting entries.

assertions about account balances valuation and allocation

Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity.

assertions about account balances valuation and allocation / completeness

Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list.

assertions about classes of transactions and events accuracy

in order to respond to pervasive risks, auditors may:

assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud evaluate whether the selection and application of accounting policies by the entity may create a material misstatement incorporate an element of unpredictability in the audit procedures

these occur when a practitioner is engaged to issue a report on subject matter that is the responsibility of another party a) attest service b) accounting service c) assurance service

attest service

a subgroup of the board of directors that is responsible for the financial reporting and disclosure process is called the ________ __________

audit committee

American Institute of Certified Public Accountants (AICPA)

supports accounting and auditing research, produces a number of important publications and provides a wide range of continuing education programs

the principal auditor accepts full responsibility for the work done and conclusions drawn by other auditors when the __________

audit report does not refer to the work of other auditors

the selection and evaluation of less than 100% of the items in a population that is expected to be representative of the population to provide a reasonable basis for a conclusion is the definition of ________ ______

audit sampling

disclaimer of opinion

auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive

MUS advantages

automatically stratified sample no requirements to make assumptions about the distribution of misstatements smaller sample size than classical variable sampling when few misstatements expected

the assumption of ________ _________ is that any undetected misstatements in the population are misstated by 100%

basic precision

when should the audit committee meet with external auditors to discuss the auditors responsibilities and significant accounting policies

before the engagement starts

when a client restricts the scope of the engagement and the auditor disclaims an opinion, the paragraph that explains the limitation is presented:

before the opinion or disclaimer paragraph

if the frame and the intended sampling population differ _____

the auditor might draw an incorrect conclusion

responsibility for establishing mechanisms to communicate and hold individuals accountable for performance of internal control responsibilities across the organization rests with

board of directors management

examining ______- __________ and their related accounts allows the auditor to gather evidence by understanding the processing of related transactions through the information system from their origin to their ultimate disposition in the accounting journals and ledgers

business processes

the auditors evaluation of the period end financial reporting process should consider ________

the extent of IT involvement the number of locations involved management oversight of the process

when significant changes are made to the planned audit approach at any point during the audit, the final documentation should indicate ________

the original plan modification to the plan rationale for the change in plan

within an entity, there is always a risk of the fraud of ____________ between individuals will destroy the effectiveness of segregation duties

collusion

the objective of communication with the audit committee is to ________

communicate the auditors responsibilities establish an understanding of the terms of the audit engagement with the committee communicate an overview of the overall audit strategy and timing

in relying on a specialist, the auditor should evaluate the specialists _______________

competence inputs used objectivity

Management makes assertions about components of the financial statements. the accounts and transactions that should be included are included, thus the financial statements are complete

completeness

the amount of reliance to be placed on audit tests and the consequences of a decision error must be considered in determining __________

confidence level

control environment

the tone of an organization, which reflects the overall attitude, awareness, and actions of the board of directors, management and owners influecing the control consciousness of its people

Assignment of Authority and Responsibility for operating activities and the establishment of reporting relationships and authorization hierarchies are part of the _______ environment principle

control

The risk that the relevant assertions related to the account balances or disclosures contain misstatements that could be materia to the financial statements consists of ______ and ________ risk

control inherent

based upon the risk assessment, management determines which relevant business processes require _________ _________

control activities

in regards to applying the audit testing hierarchy, starting with tests of _______ is generally more effective and efficient than starting with tests of _________

controls details

working papers document the ____________

correspondence of the financials with GAAP scope of the audit was adequate basis for the audit report decision

Current Ratio

current assets divided by current liabilities usually acceptable if it is 2 to 1 or better can be distorted if current assets include old accounts receivable or obsolete inventory

Auditors _____ an opinion when they are unable to form an opinion.

disclaim

if the UML is less than or equal to the ___________ misstatement, the evidence supports the conclusion that the account balance is not materially misstated

tolerable

if the entitys management does not provide satisfactory information about possible illegal acts, the auditor should consult with the ________

entitys legal counsel

once the desired confidence level is set, the appropriate sample size is determined by how much ___

tolerable error exceeds expected error

the objectives of attribute sampling when used for tests of controls are to _____________

evaluate the operating effectiveness of the internal control for purposes of the internal control audit determine the degree of reliance that can be placed on controls for a financial statement audit

given a tolerable misstatement of $140,000 and an expected misstatement of $40,000 for an account balance with a book value of $2 million, the tolerable misstatement is _____% and the expected misstatement is _%

tolerable misstatement: 7% 140,000/2,000,000 expected misstatement: 2% 40,000/2,000,000

Compliance Audit

examination of organizational compliance with applicable rules, laws, regulations, policies, covenants and procedures

the _________ is the rate the auditor expects to exist in the population

expected population deviation rate

when an auditor adds a paragraph to an audit report to emphasize a matter it is referred to in the PCAOB standards as an _________ paragraph

explanatory

when an auditor adds a explanatory paragraph to an audit report the:

explanatory paragraph follows the opinion paragraph

data capture controls must ensure that ____________

transactions are only recorded once rejected transactions are identified, controlled and reentered all transactions are recorded in the application system

auditing standards identify four conditions and events which may indicate going concern issues including:

external matters internal problems negative financial trends

misstatements about which there is no doubt are called ______ misstatements

factual

attitudes/rationalizations that may suggest misappropriation of assets include

failure to correct known internal control deficiencies disregard for the need to reduce misappropriation risk changes in behavior of lifestyle

a control deficiency is defined as an existing control that is not properly designed to meet control objectives even if it operates as designed true/false

false

comparing current year financial statements with budgeted amounts is usually performed using _________ analysis

trend

MUS automatically results in a stratified sample when applied using a probability-proportional-to-size sample selection procedure true/false

true

The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. true/false

true

an entitys risk assessment process should consider the possibility of events that threaten the achievement of objectives true/false

true

Audit of internal control over financial reporting (ICFR) must be completed prior to the audit of financial statements true/false

false the audits must be integrated

entity personnel may be asked to explain unexpected differences true/false

true

financial ratios should not be evaluated in isolation true/false

true

haphazardly selected samples should not be formally evaluated statistically true/false

true

higher quality financial reporting is a benefit of the attestation on the effectiveness of ICFR true/false

true

indirect financial interests are generally permissible if the amount involved is immaterial with respect to the covered members income and wealth true/false

true

inquiries of others outside the entity may provide information that assists the auditor in uncovering fraud true/false

true

when a CPA has such a close, long-standing relationship with a client that is has become difficult to maintain objectivity it is called a(n) __________ threat

familiarity

it is easier to determine sample size using MUS when the auditor expects little or no misstatements true/false

true

it is expected that all known misstatements will be corrected true/false

true

material misstatement may not significantly affect some ratios true/false

true

technology will never totally eliminate the need for auditors to rely on sampling to some degree true/false

true

an auditor performs analytical procedures to help evaluate overall financial statement presentation during the ______- stage of the audit

final review

The SEC has the authority to establish standards for

financial accounting professional conduct of public accountants audits of public companies

flowchart on a flowchart, the movement of documents, records or information is shown using __________

flow arrows

when it comes to ICFR documentation management should ________________

focus on controls deemed adequate to address financial reporting risk

the period form the date of the financial statements to the date of the auditors report is sometimes referred to as the _____________ subsequent events period

formal

in auditing, the physical representation of the population is known as the _____

frame

physical representation of the population is referred to as the __________

frame

under the Code of Professional Conduct, a CPA who is an accounting instructor must maintain objectivity and integrity when providing educational services true/false

true

Headed by the Auditor General, the work of _________includes compliance, operational, and financial audits.

government auditors

when a scope limitation exists but overall the financial statements present fairly due in conformity with GAAP the auditor will ______

use the word "except for" in the report issue a qualified opinion

final analytical procedures

used as an overall review of the financial info in the final review stage of the audit to consider the overall reasonableness of the financial statement amounts

audits of financial statements and ICFR

have different objectives work must be planned to achieve both objectives

occurrence assertion

whether all recorded transactions and events have happened and pertain to the entity

occurrence and rights obligations assertions

whether disclosed events, transactions and other matters have occurred and pertain to the entity

If a CPA performs a managerial role for an entitys organization during the period covered by an attest engagement, the CPA's _____________ is impaired

independence

in classical variables sampling, to project the mean misstatement for the population, the auditor multiplies the _________--

mean statement per sampling item by the population size

As generally conceived, the audit committee of a publicly held company should be made up of

members of the board of directors who are not officers or employees

if the frame and the population differ, the auditor _________

might draw the wrong conclusion about the population

Senior/in-charge

responsible for assigning tasks of associates and directing the day-to-day performance of the audit

partner

responsible for ensuring that the audit is properly planned and conducted in accordance with applicable auditing standards

associates/staff

responsible for preparing adequate and appropriate documentation of completed work

manager

responsible for reviewing the working papers, financial statements and audit report

if an entity has not previously been audited, the prospective auditor should ____________

review the clients financial information before accepting the engagement

engagement team members performing supervisory activities should ___________

review the work of engagement team members inform engagement team members of their responsibilities

Management makes assertions about components of the financial statements. the assets are the rights of the entity, and the liabilities are its obligations

rights and obligtions

consideration of possible changes in the internal or external environment because changes can introduce or change risks to the entitys objectives are part of the _________ identification process

risk

as it relates to the external financial reporting objective, the entitys __________ _________ process should consider internal and external events and circumstances that may arise and adversely affect the entitys abiilty to initiate, authorize, record, process and report financial data consistent with managements financial statement assertions

risk assessment

detection risk

risks that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements

upper deviation rate formula

sample deviation rate + allowance for sampling risk

Mean misstatement per sampling item is calculated by dividing the known audit difference in the sample by the _______

sample size

the sampling interval can be determined by dividing the book value of the population by the _________

sample size

the individual members of the sampling population are called the __________

sampling units

segregation of duties

separating the custody of assets, authorization of transactions and recording of transactions

if inherent and control risks are high, in order to achieve the planned level of audit risk, the auditor will _______ level of detection risk

set a lower

if the auditor determines that internal controls are not properly designed or not implemented the auditor will ___________

set the level of control risk at high use substantive procedures to reduce the risk of material misstatement to an acceptable level

if the auditor determines that internal controls are not properly designed or not implemented the auditor will ____________________

set the level of control risk at high use substantive procedures to reduce the risk of material misstatement to an acceptable level

for management and the auditor to assess whether ICFR is effective, it is necessary to define what constitutes a control deficiency and to define different levels of ________

severity

if auditor is concerned about goods shipped but not billed, the appropriate population to sample is _________

shipping documents

if the auditor is interest in examining the effectiveness of a control designed to ensure that all shipments to customers are billed, the correct population to test is the population of _________

shipping records

if an auditor assesses a larger level of materiality amount for an account, they will need a _______ sample than if materiality were a smaller amount

smaller

the two general approaches to audit sampling are ________ and _______

statistical nonstatistical

an auditor issues a standard unqualified audit report when _________

sufficient evidence has been gathered by the auditor the audit has been performed in accordance with applicable auditing standards the auditor believes the financial statements conform to GaAP in all material respects

the categories of substantive procedures are__________

tests of details substantive analytical procedures

for public companies, qualified and adverse opinions on financial statements are not accepted by __________

the SEC

scanning

the auditor's exercise of professional judgment to review accounting data to identify significant or unusual items to test medium reliability evidence

Electronic Data Interchange (EDI)

the transmission of business transactions over telecommunications networks

the risk of incorrect acceptance is the risk that the auditor will mistakenly accept a population as fairly stated when the true population misstatement is greater than the ____________ misstatement

tolerable

the second step in the analytical procedures decision process is to define a ____ difference

tolerable

when using nonstatistical sampling, the auditor may individually test any that may contain potential misstatements that individually exceed ______ misstatements

tolerable

In some cases, fraud may consist of illegal acts true/false

true

Management makes assertions about components of the financial statements. assets, liabilities, equity, revenues and expenses are appropriately valued and are allocated to the proper accounting period

valuation or allocation

risk assessment, benchmarking and recommendations based on the assessment of business risk are all examples of ___________ _____________ services

value added

an auditor uses an other-matter paragraph

when an auditors opinion on prior period financial statements differs from the opinion the auditor previously expressed

when would an auditor be most likely to issue an unqualified opinion and add a discussion of the change in an explanatory paragraph

when an entity makes a change in accounting principle and the auditor concurs with the change

occurrence and rights obligations assertions about presentation and disclosure

whether disclosed events, transactions and other matters have occurred and pertain to the entiy

completion assertion for disclosures

whether disclosures that should have been included in financials have been included

inventory management process

- Transactions related to accumulating and allocating costs to inventory - Not applicable to some service-type companies varies widely between different types of businesses

rank the steps of the financial statement auditing process from the auditors perspective in order from beginning to end

1) obtains evidence 2) tests managements assertions against criteria 3) determine the overall fairness of financial statements 4) issue audit report to accompany financial statements

Stages of an Audit

1) plan the audit 2) obtain an understanding of the client and its environment, including internal control 3) assess the risks of misstatement and design further audit procedures 4) perform further audit procedures 5) complete the audit 6) form an opinion and issue the audit report

COSO framework components

1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication 5. Monitoring

The CPA firm of Lumley & Lu uses a quantitative approach by implementing the audit risk model. Calculate detection risk for each of the following hypothetical clients. (Round your final answer to the nearest whole number.) client # 1: AR 5%, RMM 20% client #2: AR 5% RMM 50% client #3: AR 10% RMM 15% client #4: AR 10% RMM 40%

25% 10% 67% 25% DR = AR/RMM

for public companies, a relative percentage for establishing overall materiality is typically

3-10% of income before taxes

if the population to be sampled is the $50,000 accounts payable balance that represents amounts due to 14 vendors, there are _____ sampling units in the MUS population

50,000

for an account balance with a book value of $2 million, the sampling interval is $23,256, what is the sample size

86 2,000,000/23,256

a company generated total sales of $1,500,000 and has accounts receivable of $14,550, if 85% of sales are made on credit, the receivables turnover ratio is

87.6 1,500,000 x 85% = 1,275,000 / 14,550 = 87.6

Generally Accepted Accounting Principles (GAAP)

Accounting principles that are generally accepted for the preparation of financial statements in the United States. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC. International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board.

Which of these statements concerning illegal acts by clients is correct? a) An auditor considers illegal acts from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. b) An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud. c) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements. d) An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.

An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.

financial interest

An ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

The primary objective of final analytical procedures is to a) Satisfy doubts when questions arise about an entity's ability to continue in existence. b) Assist the auditor in assessing the validity of the conclusions reached on the audit. c) Identify areas that represent specific risks relevant to the audit. d) Obtain evidence from details tested to corroborate particular assertions.

Assist the auditor in assessing the validity of the conclusions reached on the audit.

standards issued by the PCAOB are called

Auditing Standards (AS)

An auditor's evaluation of the reasonableness of a company's loan loss reserve would normally be made during which phase of the audit? A) Gaining an understanding of the auditee's industry. B) Client acceptance. C) Consideration of internal control systems. D) Auditing business processes and related accounts

Auditing business processes and related accounts

Which of the following best describes the relationship between attestation services and audit services? A) Attestation is a subset of auditing that improves the quality of information for decision makers. B) Auditing is a subset of attestation and focuses on providing companies with advisory services and decision support. C) Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements. D) Attestation is a subset of auditing that provides more assurance than does an audit engagement.

Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements

Electronic (Internet) commerce

Business transactions between individuals and organizations that occur without paper documents, using computers and telecommunication networks.

purchasing process

Businesses must acquire goods and services to support their operations

Audit evidence A) May only be gathered from parties external to the auditee to be reliable. B) May only be gathered from the auditee to be reliable since they are the most knowledgeable source of information. C) May only be gathered from computerized sources to avoid human error. D) Can be gathered from many sources and is not limited to the underlying accounting data.

Can be gathered from many sources and is not limited to the underlying accounting data

Which of the following is an example of fraudulent financial reporting? a. Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. b. An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold. d. An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

application controls

Controls that apply to the processing of specific computer applications and are part of the computer programs used in the accounting system.

general controls

Controls that relate to the overall information processing environment and have a pervasive effect on the entity's computer operations.

Short term liquidity ratios

Current Ratio Quick Ratio Operating Cash Flow Ratio an entitys ability to meet its current obligations

formula to determine the appropriate level of detection risk is ________

DR = AR/RMM

assertions

Expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.

holding out

In general, any action initiated by a member that informs others of his or her status as a CPA or AICPA-accredited specialist constitutes holding out as a CPA. This would include, for example, use of the CPA designation on business cards or letterhead, or listing as a CPA in local telephone directories.

Which of the following would be considered a nonattest assurance service engagement? I. Expressing an opinion about the reliability of an entity's financial statements. II. Reviewing and commenting on an entity-prepared business plan.

Neither I nor II

SAS a re classified by which numbering categories

SAS and AU

the physical protection of computer equipment, software and data as well as loss of assets and information through theft or unauthorized use is the concern of __________ controls

access and security

after planned tests of controls have been completed, the auditor should reach a conclusion of the _________ level of control risk

achieved

Type 1 Subsequent Event

additional evidence about conditions that existed at the balance sheet date during the audit, a customer with a large a/r balance at year-end declares bankruptcy a lawsuit that was in progress as of year-end was settled shortly thereafter

accuracy and valuation assertions

address whether financial and other information is disclosed fairly and in appropriate amounts

Rights and Obligations Assertion

addresses whether the entity holds or controls the rights to assets included on the financial statements, and that liabilities are the obligations of the entity

auditors consider materiality from a reasonable user perspective and communicate to users that "the financial statements present fairly in ____________ material respects

all

The AICPA's Code of Professional Conduct

all auditors must follows (Including those auditing public companies)

if a small number of large transactions make up a large percentage of an account, auditors will typically test ________-

all the transactions greater than a particular dollar amount

management asserts that ICFR is effective ___________

as of the end of the fiscal year

sending a written request to the entitys customers requesting that they report the amount owed to the entity

assertions about account balance existence

estimating the portion of a population that possesses a specified characteristic is the basis of ____________ sampling

attribute

an active role in the oversight of the assessment of the risk of fraud should be assumed by the __________

audit committee

proxy statements and annual reports issued by public companies must contain disclosures regarding ____________

audit fees audit-related fees tax fees all other fees billed during the prior two fiscal years by the principal auditor of the company's financial statements nature of services provided in earning other fees preapproval policies of the companys audit committee purpose - make companies more sensitive to public perceptions of auditor independence and objectivity

the nature and extent of planning activities that are necessary depend on the __________ the entity

auditors previous experience with size of complexity of

the look forward period related to the going concern assessment is for one year from the __________ for the PCAOB and one year from the _____ for FASB

balance sheet date financial statement issuance date

the auditor should evaluate the qualitative aspects of the deviations, including the _________ deviations

causes of nature of consequences of

When using probability-proportional-to-size sampling, logical units with a book value larger than the sampling interval are ____ to be selected

certain

as the sample size increase, the sampling risk

decreases

if control risk is mistakenly set at a low level __________

detection risk will be set too high

the goal to find a misstatement that has already been made is a type of ____________ control

detective

monitoring is done to:

determine if internal control components are present and functioning

when an entity has changed auditors, the predecessor auditor can reissue, at the request of the entity, the report on the financial statements of prior periods when those prior period statements are presented for comparative purposes. The predecessor auditor must _______________

determine if the previously issued reports are still appropriate

for a control system to be considered ________, each of the five components and relevant principles must be present and functioning, and the five components must operate together in an integrated manner

effective

the auditor's report is the _________ of an audit 1) byproduct 2) correspondence 3) end product 4) solution 5) starting point

end product

going concern which of the following parties is most likely involved in the decision to issue a going concern opinion? a) engagement partner b) entity CEO and CFO c) entity internal audit staff d) accounting firms head office e) engagement senior manager

engagement partner accounting firms head office engagement senior manager

systematic selection provides a sample where ___________

every sampling unit has an equal chance of being selected

accounting firms that audit the financial statements of nonpublic entities in the U.S. are required to comply with the auditing standards established by the PCAOB true/false

false

at the completion of the audit, the actual or achieved level of audit risk is known with certainty by the auditor false

false

professional skepticism is not a way to reduce judgment errors true/false

false

to ensure compliance with independence standards CPA firms use _________

firm-specific independence rules (typically ore stringent that AICPAs standards) Firms are required by AICPA and PCAOB standards to establish and maintain a system of quality control

some level of deviation may be expected because the controls that auditors use sampling to test are dependent on _______ involvement, and ________ are not perfect

human humans

an effective accounting system establishes methods and records that will __________

identify and record all valid transactions determine the proper time period in which transactions occurred describe transactions in sufficient detail to permit proper classification

in assessing material weaknesses in ICFR management must

identify financial reporting risks and related controls consider which locations to be included in the evaluation evaluate evidence about the operating effectiveness of ICFR

if the auditor selects a voided document in a sample _________

if it is has been properly voided, it does not represent a deviation the item should be replaced with a new sample item

Internal performance measures

include both financial and nonfinancial indicators

public accounting firms can be organized as

limited liability partnerships corporations proprietorships general partnerships

assessing the quality of internal control performance over time is the intention of _______ of controls

monitoring

according to the code of professional conduct, members employed in industry _____________

must take steps to ensure that a disagreement with his/her supervisor does not result in subordination of judgment

heading of working papers

name of entity title of the working paper entitys year-end date

physical contorls

periodic counting and comparison with amounts shown on control records

financial statement level risks are ________ risks in that they apply to multiple components of the financial statements

pervasive

Negative financial trends

poor results from operations and adverse financial ratios

a CPA may serve as a director or trustee for an audited not-for-profit entity as long as the __________

position is clearly honorary cPA does not participate in a managerial role

at the planning stage of an audit sampling application, _____ is the difference between the expected and tolerable deviation rate or misstatement

precision

flowcharts

provide a diagrammatic representation of the entitys accounting system

principles underlying an audit conducted in accordance with generally accepted auditing standards (GAAS)

purpose and premise of an audit responsibilities performance reporting

if management chooses not to eliminate an identified material misstatement, appropriate audit opinions include

qualified modified adverse

when a scope limitation exists but overall the financial statements present fairly due in conformity with GAAP the auditor will ________________

qualified, auditor describes why t he limitation arose and indicates that financials present fairly except for the possible effects of the limitation

if the auditor relies on evidence that is unrelated to the assertion, an incorrect conclusion may be reached because the evidence used was not __________

relevant

evidence is considered appropriate when it provides information that is both __________ and __________

relevant reliable

a control issue does not rise to the level of control deficiency if the likelihood is _______

remote

Review the payment procedures of the accounts payable department for a large manufacturer.

Type of Audit: Compliance or Operational or possibly internal control Type of Auditor: Internal or external

Investigate the possibility of payroll fraud in a labor union pension fund.

Type of Audit: Compliance or forensic Type of Auditor: Government, external, or forensic

Determine the fair presentation of Ajax Chemical's balance sheet, income statement, and statement of cash flows.

Type of Audit: Financial statement Type of Auditor: External

the possibility that an auditor will issue an unqualified opinion on materially misstated financial statement is called ____________ ______________

audit risk

internal auditors

audit the company they work for

based on an understanding of the entity and environment, the auditor identifies those _________ risks that may result in material misstatements

business

to understand the nature of the entity, auditors should obtain information about the entity's: _____________

business operations financial reporting financing and financing activities investments

classical variables sampling is most appropriate for populations that contain a ______ rate of misstatement

moderate-to-high

small test

do the financial statement amounts make sense

PCAOB requires that the auditor retains all ___________

documents inconsistent with the final conclusion for significant matters documents that form the basis of the audit or review

as with attribute sampling, population size does not influence sampling computations when testing monetary account balances true/false

false misstatements discovered in testing account balances must be projected to the population

risk factors relating to opportunities to report fraudulently include __________

financial numbers based on subjective judgments or uncertainties complex or unstable organizational structure significant related party transactions

__________ are the only auditors that work for the company that they are auditing

internal auditors

all else being equal, the less risk that the auditor is willing to accept, the _________ the sample size must be

larger

the loss of an entitys manufacturing facility resulting from an earthquake that occurred after the balance sheet date but before the financial statements are issued is considered a Type ______ subsequent event

type II

in drawing a conclusion about the statistical sampling application for tests of controls, the auditor compares the tolerable deviation rate to the _______ deviation rate

computed upper

people that significantly influence the control consciousness of the entity and must take their fiduciary responsibilities seriously and actively oversee the entitys accounting and reporting policies and procedures include

board of directors audit committee

reperformance

The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of computer-assisted audit techniques.

the opinion paragraph is modified to state that "the financial statements do not present fairly in conformity with GAAP" when ________________

an adverse opinion is issued

generally, a loan to or from an audited entity is _________

considered to impair a covered members independence

differences are investigated in the same way for both planning and final analytical procedures true/false

false

how the components of internal control are implemented is not impacted by the size of the entity true/false

false

if the amount of difference between the auditors expectation and the recorded amount exceeds the auditors tolerable difference, the auditor accepts the account true/false

false

if two samples of different sizes yield a similar, defect rate, the smaller sample is associated with less risk

false

if you examine a sample of 100 transactions and find 8 with errors, this suggests a transaction error rate of 12.5% true/false

false

Internal Control System

consists of the policies and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies to ensure transactions are handled and recorded appropriatel

If the auditor determines that the previously issued financial statements are in error and the audit report is affected, and the effects cannot immediately be determined, the entity should

contact the SEC contact appropriate regulatory agencies notify persons relying on the statements and audit report

IRS auditors

enforce federal tax laws only

type 1 decision error

evidence does not support the fairness of the account when it is in reality not materially misstated (is fair)

the infrastructure, stoftware, people, procedures and data used to support the functioning of internal control is known as a(n) ___________ ___________

information system

there is a(n) __________ relationship between sample size and materiality, and a(n) ______ relation between sample size and desired level of assurance

inverse, direct

an inability to collect sufficient appropriate evidence in considered a(n)

scope limitation

what should be used when it is necessary to show the movement of a document or report back to a previous function

on-page connector

a financial statement component can be an account or a business process true/false

true

a nonstatistical approach can involve random selection and a judgemental evaluation true/false

true

a public accounting firm should investigate a prospective client prior to accepting the engagement true/false

true

the assertion related to these address whether financial information is appropriately presented and described, and disclosures are clearly expressed

understandability and classification

the auditor must define the ________ so that the selected samples appropriate for the assertions being tested

population

the effect of expected _________ deviation rate on sample size highlights the importance of a good estimate of the _______________ deviation rate

population expected

auditing standards distinguish between illegal acts that have ___________ and material effects on the financial s tatements and those that have __________ but _________ effects

direct and material material but indirect

managements refusal to provide a representation letter is ordinarily sufficient to cause an auditor to

disclaim an opinion withdraw from the engagement

if an entity is experiencing immediate financial distress and a bankruptcy is impending, the auditor will generally ____________

disclaim an opinion on the entity

a change in accounting estimate is __________

disclosed in the notes of the financial statements but does not require an explanatory paragraph in the auditors report

if the auditor believes that additional management information in its report of ICFR contains a material misstatement of fact the auditor should immediately __________-

discuss the matter with management

if a member of the attest engagement team _______ with an attest entity, independence may be impaired with respect to the entity

discusses potential employment receives a job offer

potential management responses to dealing with adverse conditions or events that may indicate doubt about the ability of the entity to continue include plans to:

dispose of assets increase ownership equity restructure debt

a public accounting firm may disassociate itself from an auditing client due to ______________

disputes over fees accounting issues auditing issues

standards require extensive ___________ of the auditors risk assessment procedures and audit responses to identified risks

documentation

procedures manuals, organization charts, internal control questionnaires, flowcharts and narrative descriptions are all tools for _________ the auditors understanding of internal controls

documenting

when an auditor using wording in their report such as "February 19, 2019 except for Note 4 which is as of March 3, 2019" the audit report is said to be

dual dated

tests of controls are performed to determine whether key controls operate 1) correctly 2) fairly 3) properly 4) effectively 5) efficiently

effectively

the integrity and ethical values of management personnel heavily influence the ______ of an entitys internal controls

effectiveness

in applying attribute sampling to tests of controls, the auditor normally attempts to determine the operating ________ of a control in terms of _______ from a prescribed internal control

effectiveness deviations

the risk of incorrect rejection (type 1) relates to the _______ of the audit. the risk of incorrect acceptance (type II) relates to the ________ of the audit

efficiency effectiveness

although some control can be exercised through the careful acceptance and continuance of clients, _____________ risk cannot be directly controlled by the auditor

engagement

the PCAOB independence rules state that auditor independence is impaired when the auditor _________

enters into contingent fee arrangements with the entity

an auditor may not accept a prospective client because the ____________

entity has unusual business risks client refuses to allow contact with the predecessor auditor

the auditor must test the effectiveness of __________ __________ controls because they can have a pervasive effective on the entitys ability to meet the COSO control criteria

entity level

in assessing financial reporting risks, management must evaluate _________

entity level controls other pervasive elements of ICFR

a financial interest is an ownership interest is a(n) __________ or a(n) __________ security issued by an entity

equity debt

substantive test of transaction test for ___________ or _____________ in individual transactions

errors fraud

if the auditor has evaluated managements plans to mitigate going concern issues and concludes that substantial doubt exists, the auditor will ____________

include an explanatory paragraph in the audit report consider the adequacy of the disclosures about the entity's ability to continue as a going concern

the auditor is required to obtain corroborative evidence for planned analytical procedures true/false

false no because planning analytical procedures do not provide substantive audit evidence regarding specific assertions

AICPA professional standards require a public accounting firm and all of the accounting firms partners, professional and administrative employees to be independent whenever the form performs an attest service true/false

false the firm, partners and professional employees must be independent

analytical procedures can be used by auditors to accomplish _________ procedures

final analytical risk assessment substantive analytical

if the auditor determines that elements of managements annual report on ICFR are incomplete or improperly presented, the auditor should ___________

include an explanatory paragraph in the audit report

the approach to taking and monitoring business risks and attitudes and actions towards financial reporting are characteristics that may signal important information to the editor about managements ___________ and _________ values

integrity ethical

intangible assets such as musical, literary and artistic works, copyrights, trademarks and patents are all examples of

intellectual property

to make recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues, the auditor normally prepares a(n) _____ ______

management letter

internal control the auditor should obtain an understanding of the major types of activities the entity uses to _________ internal controls, including the sources of information related to activities

monitor

the auditor should obtain an understanding of the major types of activities the entity uses to _________ internal controls, including the sources of information related to activities

monitor

a low level of detection risk implies that the investigation of an account will be _______ thorough

more

compared to the objectives listed in the COSO definition, the PCAOBs objectives of internal control are _______ specific

more

when compared to automated controls, manual controls should be subject to ______ testing

more extensive

determining the sample size is typically one of the ________ steps of an audit sampling application

most difficult

Any misstatements detected during the audit process must be considered in terms of their effects on the __________.

must be considered in terms of the materiality of their effects on the financial statements

risk factors relating in incentives/pressures to report fraudulently include:

need to obtain debt or equity financing profitability expectations of external parties high degree of competition or market saturation

poor results from operations and adverse financial ratios are the basis of ________

negative financial trends

profit margin

net income/net sales measures profitability after all expenses are considered significant fluctuations may indicate misstatements exist in selling, general or admin expense accounts

Compilation and Review Services

non audit accounting services relating directly to the financial statements of companies

the risk auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation is called _________ risk

nonsampling

when net income is fluctuating, the auditor should consider basing materiality on _____________

normalized earnings for the past three years a benchmark other than net income

tests of controls directed toward _____________ _______ are concerned with assessing how the control was applied,the consistency with which it was applied during the audit period and by whom it ws applied

operating effectiveness

designated lines of authority and responsibility are presented on an entitys ______ _____

operational chart

internal control An effective system of internal controls allows management to focus on _________ while maintaining compliance with relevant laws and minimizing surprises

operations financial performance goals

an opinion includes an introduction, the auditors and managements responsibility and a(n) ______________

opinion

if a misstatement is detected by substantive procedures, the auditor should consider whether the control deficiency might affect the _______________ on the audit of ICFR

opinion

going concern which of the following categories is a particularly important issue for going concern assessment because it could impact the ability to meet cash requirements? a) internal problems b) other financial difficulties c) external matters d) negative financial trends

other financial difficulties

the main concern of _______ is that computer reports, checks, documents or other printed or displayed information may be distributed or displayed to unauthorized users

output

turnaround documents

output documents that are later entered back into the same or another information system

the risk of incorrect rejection is also commonly known as the risk of _______

overreliance assessing control risk too high

a MUS application is designed primarily to test for _______ errors

overstatement

parties that can have financial interests in an audited entity and not impair the independence of the CPA

parent, brother

MUS uses attribute sampling theory to estimate the __________ of monetary units in a population that might be misstated

percentage

direct tests of controls

performed by objective individuals

ongoing monitoring

performed by people using controls

an auditor has read the minutes of the board of directors meetings, inquired of legal counsel regarding litigation, read the interim financial statements, and made inquiries of management. The auditor is most likely

performing audit procedures for subsequent events

financial statement auditors

performs independent audits of financial statements

comparison of current-year financial information with comparable prior periods

perhaps the most commonly used analytical procedure

entity-level controls that require specific evaluation by the auditor are the ______________

period end financial reporting process control environment

a former employee of an attest entity can become a member of the attest engagement team when the ____________

period of the attest engagement does not cover any period of his or her employment with the audited entity

Board of Directors (BOD)

persons elected by the stockholders of a corporation to oversee management and to direct the affairs of the corporation the body that is primarily responsible for management oversight in the U.S. corporations

in most instances, auditors rely on evidence that is _______ rather than _________ in forming an opinion on a set of financial statements

persuasive convincing

financial statement level risks are ___________ risks in that they apply to multiple components of the financial statements

pervasive

authorization requirements for access to computer programs and periodic counting and comparison with amounts shown on control records are examples of ____________

physical controls

control activities commonly categorized

physical controls performance reviews segregation of duties information processing controls

when a client has multiple locations, the auditor determines which locations or business units to audit and the extent of audit procedures to be performed during the _______ process

planning

analytical procedures are required during the _________ stages of an audit

planning final review

a predecessor auditor should obtain a letter of representations from the current-year, successor auditor when the predecessor auditor ___________

plans to reissue a report on the financial statements of prior periods presented for comparative purposes

MUS approaches using attribute tables use ___________ size in the conversion of tolerable and expected misstatements to percentages which does influence the sample sizze

population

if the auditor believes that the expected ___________ deviation rate exceeds the ____________ deviation rate, statistical testing should not be performed

population tolerable

the engagement partner generally reviews working papers ________________

prepared by the manager related to critical audit areas

random number selection is used in many statistical sampling applications because the auditor is required to be able to measure the ________ of selecting the sampling units selected

probability

the auditor selects a sample for MUS by using a systematic selection approach called ______ selection

probability-proportional-to-size

in general, an attorney is only required to disclose an unasserted claim when it is _________ that the claim will be asserted and there is a _______ that the outcome will be unfavorable

probable reasonable possibility

a policy might call for two people to sign all checks over a certain dollar amount and the ________ is the action of having two people sign a check

procedure

many organizations prepare ________ which include documentation of the accounting system and related control activities

procedure manuals

When testing automated IT controls, the auditor may decide to test just one of each type of transaction because automated information systems___________

process transactions consistently unless the system or programs are changed

processing controls the proper execution of transactions is ensured by ___________ controls

processing

understanding and assessing the effectiveness of an entitys internal control assists the auditor in:

recognizing factors that affect the risks of material misstatements designing appropriate audit procedures identifying types of potential misstatements

preparing bank _________ can help detect misstatements that have been made

reconciliations

industry, __________ and other __________ factors are relevant to the auditors understanding of an entity and in identifying the risks of materialmisstatements

regulatory external

ratio projection is used when the dollar amount of misstatement is expected to ________

relate to the dollar amount of items tested

audit personnel should be provided with the names of identified __________ __________ so that transactions with them are identified and investigated

related parties

in evaluating the risk of material misstatement due to fraud and the risk of management override of controls, the auditor should consider controls ___________

related to significant management estimates over related party transactions

cutoff assertion

relates to whether transactions and events have been recorded in the correct accounting period

there should be a direct __________ between the risk that a material weakness could exist in a particular area of the internal controls of the entity and the amount of audit work that is devoted to that area

relationship

when evaluating the control environment, the auditor should assess whether ________

the board understands and exercises oversight responsibility over financial reporting and internal control sound integrity and ethical values are developed and understood

standards produced by some of the several standing committees housed by the AICPA

the code of professional conduct quality control and peer review standards attestation standards compilation and review standards

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a) Bank statements obtained from the entity. b) Prenumbered entity sales invoices. c) Vendors' invoices included in the entity's files. d) Computations made by the auditor.

Computations made by the auditor.

permanent files

Contain historical data about the entity that are of continuing relevance to the audit

for a financial statement audit, if the auditor concludes the evidence supports the planned level of control risk, no modifications of planned ___________ procedures are necessary

substantive

the risk that material misstatements are present in financial statements may be increased by conducting __________ procedures only at an interim date

substantive

regarding litigation by entity security holders or other third parties

such lawsuits do not generally alter the fundamental relationship between the entity and the auditor if management intends to testify against the CPA, the CPA should disclaim an opinion on the audit

after the sample items have been selected, the auditor may not be able to conduct the planned procedures on a particular logical unit because a supporting document is missing. when other evidence is not available ___________

such logical unit(s) should be considered misstatements

an audit report indicates that the audit evidence we have obtained is __________ to provide a basis for the opinion 1) adequate 2) fair 3) sufficient 4) correct 5) enough

sufficient

processing steps and computer processing are included in a __________ flowchart

systems

in order to provide evidence to support the lower level of control risk when using a reliance strategy, the auditor performs ____________

tests of controls

operating effectiveness is checked using _________

tests of controls only

Principles Underlying an Audit Performed in Accordance with GAAS

the ASB replaced the 10 generally accepted auditing standards with these Principles, organized into four parts; purpose of an audit and premise upon which an audit is conducted, Auditor responsibilities, audit performance and audit reporting

if the logical unit is equal to or greater than the sampling interval, the projected misstatement is equal to __________-

the actual misstatement detected in the logical unit

The assurance bucket is filled with all of the following types of evidence except a) tests of details. b) substantive analytical procedures. c) the audit report. d) test of controls.

the audit report.

audit strategy the extent of an auditors understanding of control activities is a function of ___________

the audit strategy

haphazard selection may be useful for nonstatistical sampling, but it should not be used for statistical sampling because

the auditor cannot measure the probability of an item being selected

an indirect financial interest arises when __________

the auditor does not control or supervise the intermediary the financial interest is beneficially owned through an estate a covered member has a financial interest in an entity that is associated with an attest entity

audit evidence

the auditor is determining whether there is enough to support each relevant assertions when evaluating the sufficiency of the audit evidence

when a client significantly restricts the scope of the engagement ___________

the auditor should consider disclaiming an opinion

disadvantage of nonstatistical sampling

the auditors judgement may diverge significantly from sampling theory

the auditor is required to read the other information and consider whether such information is consistent with the information in the audited financial statements when ____________

an entity publishes documents that contain other information in addition to the audited financials

a(n) _________ opinion is appropriate if a material misstatement is considered pervasive

adverse

if a subsequent event related to internal control reveals information about a material weakness that existed as of the end of the reporting period, the auditor should issue a(n) _______ opinion on the effectiveness of internal control over financial reporting

adverse

the presence of a material weakness in ICFR at the end of the period necessitates a(n) __________ assessment by management and a(n) _______ opinion by the auditor

adverse adverse

many public accounting firms adopt a policy of not completing the current audit until ________ fees have been paid

all of the prior years

an employee may be motivated to misappropriate assets due to ______

an adverse relationship with the employer the susceptibility of assets to misappropriation inadequate internal controls over assets

Professional Skepticism

an attitude that includes a questioning mind and a critical assessment of audit evidence

forensic audit

an audit specialized in discovering, disclosing and following up on frauds and crimes business or employee fraud, criminal investigations involving assets or matrimonial disputes involving the division of assets

the SEC's rules with respect to services provided by auditors are based on the principles that an auditor should ___________

an auditor should not audit their own work an auditor should not function in the role of management an auditor should not serve in an advocacy role for the entity have no conflicting interest with an audit client

in MUS, each dollar in the population has chance _______ of being selected. When using probability-proportional to size sample selection logical units containing more dollars have _______ chance of being selected

an equal a higher

characteristics of a contingent liability

an existing condition or set of circumstances ultimate resolution when some future event occurs or fails to occur uncertainty about the amount of loss

contingent liability characteristics

an existing condition or set of circumstances ultimate resolution when some future event occurs or fails to occur uncertainty about the amount of loss

inquiry

an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity

Association of Certified Fraud Examiners (ACFE)

an international professional organization committed to detecting, deterring, and preventing fraud and white-collar crime primary organization supporting forensic auditors

when determining whether to use the work of the entitys internal auditors, the external auditor must obtain ___________

an understanding of the internal audit function

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?

an unqualified report

to consider the overall reasonableness of the financial statement amounts, the auditor performs final _______ _______

analytical procedures

When a substantive analytical procedure is used as the principal substantive procedure for a significant financial statement assertion, the auditor should document:

any additional auditing procedures performed in response to significant differences identified the expectation and how it was developed results of the comparision of the expectation to the recorded amounts

agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account

assertions about account balances completeness

Watching the entity's warehouse personnel count the raw materials inventory.

assertions about account balances completeness/existence

Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

assertions about classes of transactions and events cutoff

items that may result in significant risk include:

assertions identified with fraud risk factors nonroutine or unsystematically processed transactions significant accounting estimates and judgments highly complex transactions application of new accounting standards revenue recognition industry specific issues

steps that should be performed as part of audit planning activities include

assess business risk consider violations of laws and regulations establish materiality

in testing a control, the risk that the sample supports a conclusion that the control is operating effectively when, in truth, it is not operating effectively is the risk of ________

assessing control risk too high incorrect acceptance overreliance

in order to respond to pervasive risks, auditors may

assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud evaluate whether the selection and application of accounting policies by the entity may create a material misstatement incorporate an element of unpredictability in the audit procedures

the use of the audit risk model _________

assist the auditor in determine the scope of audit procedures involves considerable auditor judgment

if the auditor believes that the expected population deviation rate exceeds the tolerable deviation rate ___________

the control should not be relied on additional substantive procedures should be performed statistical testing should not be performed

a substantive strategy requires the auditor to have a sufficient understanding of the entitys internal controls to know whether they are properly designed and implemented true/false

true

accounting principal choices can impact some ratios true/false

true

an auditor uses an other-matter paragraph ____________

when a auditors opinion on prior period financial statements differs from the opinion the auditor previously expressed

Iron curtain approach

when misstatements are quantified based on the amount required to correct the misstatement in the balance sheet at period end, regardless of misstatement's year of obligation

completeness assertion

whether all assets, liabilities and equity interests that should have been included as ending balances on the financials have been included

valuation and allocation assertions

whether assets, liabilities and equity interests included in financials are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

existence assertion

whether ending balance of assets, liabilities and equity interests included in financials actually exist at the date of the financials

the reliability of inspection of records and documents depends primarily on __________

whether the document is internal or external

classification and understandability of disclosures assertions

whether the financial information is appropriately presented and describes, and disclosures are clearly expressed

classification assertion

whether transactions and events have been recorded in the proper accounts

When using probability-proportional-to-size selection, accounts larger than the sampling interval:

will automatically be selected

management is required to make disclosures when it is determined that the entity _________ within the forward looking period

will be unable to meet its obligations within the look-forward period has developed a plan that reduces the doubt of meeting obligations to less than probable

if the scope of the auditors work is limited because of circumstances beyond the control of management or the auditor, the auditors options are to ________

withdraw from te engagement disclaim an opinion

audit documentation is referred to as __________ _________ or audit files

working papers

working papers reviewers evaluate whether the work was performed and documented and whether the objectives of the procedure were achieved when reviewing the ________ _________

working papers

the commencement of litigation by the CPA against the present management alleging management fraud or deceit _______ be considered to impair independence

would

when an entitys computer system is not compatible with the auditors GAS, the auditor should ________

write custom audit software

When using probability-proportional-to-size sampling, the probability that a customer with a zero balance will be selected using systematic selection of monetary values is _________

zero

when there is a known departure from GAAP, a(n) ______ opinion is not an option

disclaimer of

the combination of inherent risk and control risk.

Risk of material misstatement

Going Concern

The accounting assumption that a business is expected to operate indefinitely. the auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to keep doing business

Gaining an understanding of the auditee and its environment includes all of the following areas except A) Regulatory issues unique to the industry. B) The entity's application of accounting policies. C) The audit fee and timeline for completion of the work. D) The entity's business risks.

The audit fee and timeline for completion of the work

practice of public accounting

The performance for an entity, by a member or a member's firm, while holding out as CPA(s), of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council.

Relevance of evidence

The relevance of audit evidence refers to its relationship to the assertion or to the objective of the control being tested.

quantification

determining whether the explanation or error can explain the observed difference

working trial balance

links the amounts in the financial statements to the audit working papers

appropriateness

measure of the quality of audit evidence

segregation of duties is a control aimed at __________ misstatement

preventing

significant deficiency

report to audit committee and to management

professionalism

the conduct, aims, or qualities that characterize or make a profession or professional person

immediate family

A spouse, spousal equivalent, or dependent (whether or not related).

control deficiency

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.

significant deficiency

A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance.

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.

Independent auditing can best be described as A) A branch of accounting. B) A discipline that provides assurance regarding the results of accounting and other functional operations and data. C) A professional activity that measures and communicates financial and business data. D) A regulatory function that prevents the issuance of improper financial information.

A discipline that provides assurance regarding the results of accounting and other functional operations and data.

Indirect financial interest

A financial interest that is beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary does not control the intermediary or have authority to supervise or participate in the intermediary's investment decisions

Direct financial interest

A financial interest that is owned directly by an individual or entity, or is under the control of an individual or entity

management letter

A letter from the auditor to management making recommendations to the entity based on observations during the audit; the letter may include topics relating to organizational structure and efficiency issues.

representation letter

A letter that corroborates oral representations made to the auditor by management or by other auditors and documents the continued appropriateness of such representations. purpose is to document, in writing, significant oral representations made to the auditor also reduces the possibility of misunderstanding between management and the auditor generally dated the same date as auditor's report

key position

A position in which an individual has (a) primary responsibility for significant accounting functions that support material components of the financial statements; (b) primary responsibility for the preparation of the financial statements; or (c) the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors, or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.

inspection of records and documents

Examination of internal or external records or documents that are in paper form, electronic form, or other media.

Which of the following presumptions is least likely to relate to the reliability of audit evidence? a) The more effective internal control, the more assurance it provides about the accounting data and financial statements. b) An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. c) Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity d) The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

internal auditing

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

Management Advisory Services

Consulting services that may provide advice and assistance concerning an entity's organization, personnel, finances, operations, systems, or other activities.

Which of the following audit phases would generally be conducted before all of the others listed below? A) Auditing business processes and related accounts. B) Evaluation of audit evidence. C) Gaining an understanding of the auditee's industry. D) Consideration of internal control systems

Gaining an understanding of the auditee's industry

_______ perform compliance audits of income tax returns of individuals and corporations to determine that income has been computed and taxes paid as required

IRS auditors

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor

Obtains reasonable assurance about whether the financial statements are free of material misstatement.

Audit Evidence

Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information

Audit risk A) Can be completely eliminated through appropriate sampling of transactions. B) Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated. C) Is what creates the demand for an audit. D) Is the risk that a company may hire an incompetent auditor.

Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated

Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of field work and reporting? a. Internal control. b. Expected misstatement. c. Control risk. d. Materiality and audit risk.

Materiality and audit risk.

Return on Assets (ROA)

Net Income/Total Assets return earned on the resources invested by both the stockholders and the creditors

Information asymmetry A) Refers to an imbalance of information among stockholders in a company. B) Refers to an imbalance of information between the auditor and the management of the company. C) Refers to an imbalance of information between stockholders and the management of the company. D) Refers to an imbalance of information between the auditor and the stockholders of the company.

Refers to an imbalance of information between stockholders and the management of the company

type 2 report

Report on management's description of a service organization's system and the suitability of the design and operating effectiveness of controls. provides assurance on the operating effectiveness of the service organizations controls based on the auditors test of those controls

The study and practice of auditing is unlike other areas in accounting because it A) Requires the memorization of formulas and patterns. B) Requires the knowledge of GAAP. C) Requires common sense and some creativity. D) Is required by law for all companies in the United States

Requires common sense and some creativity.

financial reporting risk

Risk that a misstatement could result in a material misstatement to the financial statements

sampling risk

Risk that a sample is not representative of the population.

business risk

Risks resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect management's ability to execute its strategies and to achieve its objectives, or through the setting of inappropriate objectives or strategies.

the ultimate authority to set standards for audits of public companies lies with the ________

SEC

Standards (AS) of the PCAOB

Standards regarding the conduct of financial statement audits for public companies. Currently consist of a mix of standards and statements established by the ASB, as these statements and standards were adopted by the PCAOB in 2003 on an interim basis, together with Auditing Standards (AS) issued by the PCAOB since 2003.

international standards on auditing (ISA)

Statements issued by IFAC's International Auditing and Assurance Standards Board.

statements on auditing standards (SAS)

Statements issued by the AICPA's Auditing Standards Board.

the auditor is required to use substantial ___________ and should adequately document the sampling application in the audit working papers

judgment

Reliance Strategy

The auditor's decision to rely on the entity's controls, test those controls, and reduce the direct tests of the financial statement accounts.

period of the professional engagement

The period for which a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for an entity, whichever is earlier. The period lasts for the entire duration of the professional relationship and ends with the formal or informal notification, either by the member or the entity, of the termination of the professional relationship or by the issuance of a report, whichever is later. Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year's attest engagement.

nonsampling risk

The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation.

engagement risk

The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that A) The buyer [or user] pays directly for this assurance in both situations. B) There are often information asymmetry and conflicts of interest. C) The cost of obtaining information is not relevant. D) Independence is not relevant in either situation

There are often information asymmetry and conflicts of interest.

factual misstatements

These are misstatements about which there is no doubt. For example, an auditor may test a sales invoice and determine that the prices applied to the products ordered are incorrect. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.

judgmental misstatements

These are misstatements that arise from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.

projected misstatements

These are the auditor's best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn.

audit committee

a subcommittee of the board of directors that is generally composed of three to six "outside" members of the organization's board of directors responsible for the financial reporting and disclosure process

ethics

a system or code of conduct based on moral duties and obligations that indicates how an individual should behave

Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? a) To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed. b) To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity's information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed. c) To achieve its business processes, a business formulates objectives, which are carried out through the entity's strategies. The entity's information and internal control systems must be designed to ensure that the entity's strategies are properly executed, captured, and processed. d) To achieve its objectives, a business formulates strategies to implement its transactions, which are carried out through business processes. The entity's information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed.

To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

Which of the following best describes the primary reason an independent auditor reports on financial statements? A) To give stockholders some assurance that any fraudulent activities will be detected. B) To identify a poorly designed internal control structure that may produce unreliable financial statements. C) To provide expertise to management, which may not be totally knowledgeable of prevailing GAAP. D) To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.

To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.

Forensic Auditors

Trained in detecting, investigating, and deterring fraud and white collar crime. reconstructing incomplete or damaged accounting records and probing money-laundering activities are examples

Evaluate the feasibility of forecasted rental income for a planned low income public housing project.

Type of Audit: Operational Type of Auditor: Government, external, or internal

Evaluate a company's computer services department in terms of the efficient and effective use of corporate resources.

Type of Audit: Operational Type of Auditor: Internal or External

what makes an approach nonstatistical

a haphazard sample selection technique is used sample results are evaluated judgmentally judgment is used to determine the sample size

other financial difficulties

a particularly important issue for going concern assessment because it could impact the ability to meet cash requirements

managements assessment of the entitys ICFR must be based on _______

a recognized control framework

detective control

a requirement to prepare bank reconciliations

financial statement auditing

a specialized form of an attest service

using a systemic selection approach to select a sample means ___________

a starting number is selected first and then every nth item is selected

Risk that a misstatement could result in a material misstatement to the financial statements is called

a financial reporting risk

evaluations of financial information through analysis of plausible relationships among financial and non-financial data is the meaning of the term_________ _______________

analytical procedures

tests of controls

check the operating effectiveness of controls

in order to evaluate profitability ratios, each should be interpreted by comparison to __________ data

industry

with regard to a covered member, a blind trust and the underlying investments in the blind trust are considered a direct financial interest because the ____________

investments ultimately revert to the covered member covered member retains the right to amend or revoke the trust

an intentional management error can be considered _______ by the auditor regardless of the magnitude of the error

material

the portion of the consolidated financials audited by one independent auditor compared to another independent auditor is used to determine the designation as _________ auditor

principal

the proper execution of transactions is ensured by _______ controls

processing

listings

represent a schedule of items remaining in the ending balance of an account and are often called trial balances

internal control

the method by which an entitys board of directors, management, or other personnel provide reasonable assurance about the achievement of objectives in the following categories: a) reliability of financial reporting b) effectiveness and efficiency of operations c) compliance with appliable laws and regulations

errors

the unintentional misstatements or omissions of amounts or disclosures in financial statements

for practical purposes, the acceptable risk of incorrect acceptance is the same as ___________ risk

detection

the auditor can manipulate ________ risk by changing the scope of the auditors test procedures

detection

the level of __________ risk is used to determine the nature, timing, and extent of substantive test

detection

the level of __________ risk is used to determine the nature, timing, and extent of substantive tests

detection

if the other auditors report is not a standard unqualified audit report, the principal auditor must __________

determine the nature of the departure and its significance in relation to the overall financials if departure is not material to overall entity, principal auditor need not refer to the departure if departure is material to the overall financials, it may be necessary to refer to the issue giving rise to the other auditors qualified opinion and how the departure affects the overall audit opinion

Attribute Sampling Steps

determine the test objectives define the population characteristics determine the sample size select sample items perform the auditing procedures calculate the sample deviation rate and the computed upper deviation rate

when fact are encountered that may affect the auditors previously issued report, the auditor should

determine whether the facts are reliable inquire how management intends to address the issue discuss the matter with those charged with governance

the auditor should request that the entity issue an immediate revision to the financial statements when the auditor __________

determines that previously issued financial statements are in error and the audit report is affected

the auditor should request that the entity issue an immediate revision to the financial statements when the auditor ___________

determines that previously issued financial statements are in error and the audit report is affected

generally, the three preliminary engagement activities are ________

determining the audit engagement team requirements ensuring the audit team and firm are in compliance with ethical and independence requirements establishing an understanding with the entity

for tests of controls a(n) _________ is a departure from adequate performance of the internal control

deviation

a sampling technique that uses information about misstatements to determine sample size, projected misstatement and confidence bounds is called ______ ________

difference estimation

when using classical variables sampling, _________ ___________ computes the likely misstatement in the population by projecting the average misstatement of each item in the sample to all the population

difference projection

common methods for projecting the amount of misstatement found in a nonstatistical sample include

difference projection ratio projection

with regard to a covered member, the underlying investments in a blind trust are considered a(n) _________ financial interest

direct

auditors are prohibited from any ________ or ___________ _________ financial interest in an audited client

direct material indirect

under current auditing standards, management assertions fall into categories of assertions about __________

1) assertions about classes of transactions and events for the audit period 2) assertions about account balances at the period end 3) assertions about presentation and disclosure

When planning a financial statement audit, a CPA must understand audit risk and its components. The firm of Pack & Peck evaluates the risk of material misstatement (RMM) by disaggregating RMM into its two components: inherent risk and control risk Components of Audit Risk: Required: For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. Control risk, Detection risk & Inherent risk

1. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.Control risk correct 2. Cash is more susceptible to theft than an inventory of coal. Inherent risk correct 3.Confirmation of receivables by an auditor fails to detect a material misstatement.Detection risk correct 4. Disbursements have occurred without proper approval. Control risk correct 5. There is inadequate segregation of duties. Control risk correct 6. A necessary substantive audit procedure is omitted. Detection risk correct 7.Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.Inherent risk correct 8. Technological developments make a major product obsolete. Inherent risk correct 9. The client is very close to violating debt covenants. Inherent risk correct 10.XYZ Company, a client, lacks sufficient working capital to continue operations.Inherent risk correct

if the book value of the logical unit is less than the sampling interval, and it is 100% misstated, then the projected misstatement is equal to ________

100% of the sampling interval

an auditor calculated the mean misstatement persampling item to be $2.75 for a sample size of 120 units. If the total population size in the sampling unit is 3,500 the projected population misstatement is $ _______

2.75 x 3500 = 9625

Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter. determine the amount of overall materiality for the audit based on these preliminary amounts (round to nearest thousand value)

287,000

Days outstanding in accounts receivable

365 days/receivables turnover receivable turnover: credit sales / receivables

if an auditor expected that a control would have a 1 percent deviation (failure) rate and they were willing to tolerate a deviation rate of 5 percent, the allowance for sampling risk would be ______ percent

4

an account has a balance of $1.5 million. individually significant items total $325,000. Tolerable misstatement is $40,000 and expected misstatement is $10,000. Given this information, and a confidence factor of 1.2, the nonstatistical sample size should be ___________

47 1,500,000 - 325,000/(40,000 - 10,000) x 1.2

internal control over financial reporting (PCAOB)

A process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that (1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; Page 223 (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements (AS5, ¶A5).

engagement quality review

A review of audit documentation by an additional person (normally, a partner or equivalent with the firm) who has not been involved with the audit to ensure that the quality of the audit work and reporting is consistent with the quality standards of the public accounting firm.

walkthrough

A transaction being traced by an auditor from origination through the entity's information system until it is reflected in the entity's financial reports. It encompasses the entire process of initiating, authorizing, recording, processing, and reporting individual transactions and controls for each of the significant processes identified.

attest engagement

An engagement that requires independence as defined in AICPA Professional Standards. Attest engagements include financial statement audits, reviews, and examinations of prospective financial information.

Assurance services differ from auditing services in that A) Assurance services are more narrow in scope than audit services. B) Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information. C) Assurance services are limited to economic events or actions, and audit services are not similarly limited. D) Audit services do not improve the quality of information as do assurance services.

Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.

other information

Audit evidence that includes minutes of meetings; confirmations from third parties; industry analysts' reports; comparable data about competitors (benchmarking); controls manuals; information obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning.

a CPA seeking employment with an educational institution that is an audited entity of his or her CPA firm will not impair independence as long as_______________

CPA does not set policies for the educational institution position is nontenured

Analytical Procedures

Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data.

Audit documentation (working papers)

The auditor's principal record of the work performed and the basis for the conclusions in the auditor's report. It also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work by providing the reviewer with written documentation of the evidence supporting the auditor's significant conclusions. provide principal support that the audit was conducted in accordance with GAAS should: demonstrate how the audit complied with appropriate standards enable a knowledgeable reviewer to determine who performed the work show that standards of fieldwork have been followed

audit risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

because the objectives and work involved in performing audits of internal controls and financial statements are closely interrelated, auditing standards require a(n) __________

integrated audit

a going concern opinion can be a self-fulling prophecy because

it can interfere with the entitys ability to obtain capital through issuance of debt or equity

safeguards to threats to a CPAs integrity and objectivity include:

additional training hotlines on ethical matters involvement of an otherwise uninvolved third party

the auditors standard unqualified audit report for a public company contains the ____________

address opinion paragraph name of auditor

major types of statistical sampling techniques include _____ sampling

monetary unit classical variables attribute

in order for the external auditor to complete an audit of ICFR, management must ___________

accept responsibility for the effectiveness of ICFR evaluate the effectiveness of ICFR

If an auditor has determined that material misstatements were or may have been the result of fraud and is unable to determine if the effect is material, the auditor should:

attempt to obtain evidence in order to determine whether material fraud has occurred and its effect consider the implications for other aspects of the audit suggest that the appropriate level of management consult with legal counsel discuss the matter and the approach to further investigation with appropriate level of management that is at least one level above those included in committing the fraud and with senior management

assertions companies make about sustainability has led to promising new area of __________ services for auditors

attest

a statistical sampling method used to estimate the proportion of a characteristic in a population is called _______ sampling

attribute

if the auditor discovers fraud involving senior management while auditing ICFR, the auditor must communicate the matter directly to the ______

audit committee

whenever the auditor finds evidence of fraud that causes a material misstatement of the financial statements, it should be reported directly to the ________________

audit committee

Those charged with governance

audit committee board of directors

if management finds any significant control deficiencies or material weaknesses, they should be reported to the _________

audit committee and external auditor

the audit procedures that will be conducted by the auditor are contained in the _________ ________

audit program

if an auditor is not independent, the auditor _______________

audit report consists only of two sentences must withdraw from the engagement or disclaimer of opinion must be issued (should NOT state the reasons for lack of independence or describe any audit procedures performed)

the auditors standard unqualified audit report for a public company contains the ___________

audit report date introductory paragraph report title

engagement planning involves all of the issues the auditor should consider in developing an overall _____________ __________ for conducting the audit

audit strategy

the overall decision approach used to gather evidence is referred to as the _________ __________

audit testing hierarchy

requirement intended to prevent auditors from attempting to minimize or explain away the circumstances surrounding a lack of indepence

auditor does not describe any audit procedures performed, or the reason for the lack of indepence

unqualified opinion with an emphasis-of-matter paragraph

auditors have doubt about a companys ability to continue as a going concern

unmodified opinion

auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated

corroboration

auditors must corroborate explanations for unexpected differences by obtaining sufficient appropriate audit evidence linking the explanation to the difference and substantiating that the information supporting the explanation is reliable examination of supporting evidence, inquiries of independent persons and evaluating evidence obtained from other auditing procedures

when an auditors opinion is based in part on the report of another auditor, explanatory language is added to the ___________

auditors responsibility paragraph opinion paragraph

AICPA establishes standards for

audits of nonpublic companies

being the low-cost or high-quality provider of a product are example of business __________

strategy

that an entity will continue as a going concern _________

basic assumption of financial reporting is assessed by management and evaluated by the auditor

the allowance for sampling risk when zero misstatements are observed is referred to as the _____ _____

basic precision

using industry information as a basis of comparison can serve as a(n) ___________ for assessing how well the entitys financial position and performance compares with others in the industry

benchmark

when an individual or entity is not the recorded owner of a financial interest but has a right to some or all of the underlying benefits of ownership, the interest is said to be _____________ owned

beneficially

if a significant deficiency of material weakness exists because of the audit committees ineffective oversight, the auditor must communicate the specific deficiency or weakness, in writing, directly to the ___________

board of directors

if oversight by the audit committee is ineffective, the auditor must communicate significant deficiencies and material weaknesses to the ___________

board of directors

subject to certain conditions, CPAs may provide ________ to nonpublic attest entities

bookkeeping systems implementation internal audit outsourcing and other services (not actuarial services)

evidence on the operating effectiveness of a control may be obtained from

both direct testing and ongoing monitoring

in classical variables sampling, if _____ within the bounds of tolerable misstatement, the evidence supports the conclusion that the account is not materially misstated

both limits are (upper and lower)

when companies use service organizations to process transactions ________

both management and the auditor must consider the service organization activities the service organization is considered part of the information and communication component of the entitys ICFR

classical variable sampling can handle

both overstatement and understatement errors

threats from significant events that could adversely affect an entity's ability to achieve its objectives and executie its strategies are ___________ _________

business risk

if the computed upper deviation rate is less than or equal to the tolerable deviation rate, the auditor can conclude that the control tested ________ be relied on

can

Operating Cash Flow (OCF)

cash flow from operations / current liabilities provides a longer-term measure of the ability to meet current liabilities if small or negative will likely need alternative sources of cash

change in accounting principle that affects both comparability and consistency

change from straight-line depreciation to an accelerated method

a change in accounting principle that does not have a material effect in the current year but which is expected to have a material effect in future years is __________

change in account principles should be included in the footnotes to the financial statements, but the auditors report does not need to include an explanatory paragraph in the current year

MUS can be used to test the assertion that no material misstatements exist in a(n) account balance ______

class of transactions or disclosure component of the financial statements

estimating the dollar value of a class of transactions or account balances or determining whether an account is materially misstated are common uses of ________ ________ sampling

classical variables

normal distribution theory is used in ________ ________ sampling to evaluate the characteristics of a population based on sample data

classical variables

when the auditor expects a relatively large number of differences between book and audited values, __________ ___________ sampling will normally result in a smaller sample size than ___________ __________ sampling

classical variables montiary unit

when management asserts that all major restrictions on the entity resulting from debt covenants are disclosed in the footnotes and expressed clearly to users of the financial statements, it is making assertions about

classification and understandabiltiy

unmodified or unqualified opinions both refer to a(n) ________ audit opinion

clean

professional standards indicate that sample sizes for nonstatistical applications should be ____ sample sizes for statistical applications

comparable to

confidence level and the risk of incorrect acceptance are _________

complements

failure to meet the _________ assertion results in an understatement in the related account, while failure to meet the __________ assertion results in an overstatement in the account

completeness occurrence

data capture controls are concerned primarily with the __________ assertions

completeness occurrence accuracy

controls that may be relevant to the audito when they have an impact on data the auditor uses to apply audit procedures include ____________________ contols

compliance, operations

Upper Misstatement Level steps

compute basic precision rank detected misstatements based on the size of the tainting factor add misstatement detected in logical units greater than sampling interval

substantive tests of transactions

concerned with monetary misstatements

A written representation from management related to the audit of ICFR include management ________

conclusion about the effectiveness of the entitys ICFR as of a specified date responsibility for establishing and maintaining effective ICFR

the primary purpose of sampling is to draw _________ about the whole population based on the results of testing only a subset of the population

conclusions

type 11 subsequent event

conditions that have come into existence after the balance sheet date a flood damages a significant portion of the operating facility after year-end

the risk of incorrect acceptance is the complement of the level of _______

confidence

the allowance for sampling risk is represented b y the _________ ________

confidence bound

distribution theory allow auditors to quantify sampling risk through the use of ______ _______

confidence bounds

distribution theory allows auditors to quantify sampling risk and form a ______

confidence interval

the converse of sampling risk is ______________ _____________

confidence level

factors to determine sample size

confidence level expected error tolerable error

ranking the logical units by their tainting factors leads to a UML that ___________ because the largest tainting factor is multiplied by the largest incremental change in the misstatement factor

conservative

if an auditor is not able to apply a planned audit procedure to a sample item the auditor should ________

consider the effects of not being able to apply the planned procedure

the disadvantages of statistical sampling include additional costs of __________

designing and conducting the sampling application lacking consistent application across audit teams due tot he complexity of the underlying concepts training auditors in the proper use of sampling techniques

if the results of audit tests indicate a significant risk of fraud, the auditor should ________

consider withdrawing from the engagement

a fundamental principle of accounting is that financial statements should be __________ and ___________ across periods

consistent comparable

an existing condition or set of circumstances involving uncertainty about a possible loss that will ultimately be resolved when some future event occurs or fails to occur is a(n) ________ _________

contingent liability

the risk that a material account or disclosure assertion will not be prevented, detected or corrected on a timely basis by the entitys internal controls is ___________ risk

control

understanding the nature and cause of a deviation helps the auditor better assess control risk and evaluate whether the deviations represent

control deficiencies

the tone of an organization is set and the foundation for impementing the entitys system of internal control is established by the __________ ___________

control environment

legal letter primary purpose of a legal letter is to ___________

corroborate information provided by management about litigation, claims and assessments

an individual on the attest engagement team ___________

covered member: must be independent an individual on the attest engagement team an individual in a position to influence the attest engagement a partner, partner equivalent, or manager who provides more than 10 hours of nonattest services to the attest client within any fiscal year a partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement the firm including the firms employee benefits plans an entity whose operating, financial or accounting policies can be controlled by any of the individuals or entities described above or by two or more such individuals or entities if they act together

rotation of duties and mandatory vacations, review of the operating system log and regular updates of anti-virus software are examples of __________ controls

data center and network

when an entity issues comparative financial statements, the date on the auditors report is normally _______

date of the most recently completed audit (audit report on the comparative statements)

control deficiencies classification

design operation

detection risk the effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the ____________ risk

detection

when misstatements that occured in prior years were left uncorrected because they were deemed immaterial, the SEC requires the current year misstatements be:

evaluated using both the iron curtain and rollover approach

when misstatements that occurred in prior years were left uncorrected because they were deemed immaterial, the SEC requires t he current year misstatements be:

evaluated using the "iron curtain" and the "rollover" approaches

Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.

evidence

an auditor should be thorough in searching for audit _________ and unbiased in its ______________

evidence evaluation

type II decision error

evidence support this account as fairly stated when the account actually contains a material misstatement

whenever the audit opinion is qualified, the opinion paragraph will include the words __________ __________

except for

Management makes assertions about components of the financial statements. the assets and liabilities exist, and the recorded transactions have occurred

existence or occurrence

the dollar amount of misstatement that the auditor believes exists in the population is defined as the ____________ misstatement

expected

the larger the _________ misstatement, the larger the sample size must be

expected

an auditor issued a qualified opinion on prior-period financial statements due to lack of conformity with GAAP. The entity has fixed the issue in the current year and appropriately restated the prior-period financial statements. If the restated prior period statements are presented with the current statements as comparatives, the auditor should:

express unmodified opinion on the restate prior-period financial statements other-matter paragraph after opinion paragraph and contains the date of the previous report, the type of opinion previously issued, the reasons for the previous report, and mention the fact that the current report differs from the previously issued report

_________ are required to be public accountants

external auditors

independent auditors are also called

external auditors

an opinion indicates that the financial statements are presented ______________

fairly

when the aggregated misstatements are less than the overall materiality, the auditor can conclude that the financial statements are presented __________

fairly

audit sampling is most often used in substantive testing to test the hypothesis that a financial statement account is _________

fairly stated

if tolerable misstatement is $120,000 and the upper limit o n the accounts possible misstatement is less than $120,000, then the account is considered to be ________ _______

fairly stated

the CPAs opinion on the _________ of the financial statements may be changed by subsequent events

fairness

information that is complete, neutral and free from error has the characteristic of _________ __________

faithful representation

audit sampling is always appropriate, regardless of the level of risk true/false

false

consideration of audit risk at the financial statement level is referred to by the term assertion true/false

false

in evaluating misstatements related to accounting estimates, if the auditor believes the estimated amount included in the financial statements is unreasonable, the difference between the estimated amount and the closest reasonable estimate should be disclosed in the footnotes true/false

false

inspecting tangible assets provides significant assurance for the rights and obligations assertion true/false

false

observation and inspection audit procedures should be limited to current activities performed inside the organization true/false

false

refusal by an entitys attorney to furnish information in a legal letter is a limitation on the scope of the audit, but not sufficient to preclude an unqualified opinion true/false

false

standard audit procedures are normally not sufficient to identify conditions and events that indicate going concern problems true/false

false

the extent of effort that goes into evaluating a new client is normally much less than the decision to continue with an existing client true/false

false

when the book value of the logical unit is less than the sampling interval and it is 100% misstated, the projected error for this unit is assumed to be the book value of the unit true/false

false

MUS is based on attribute sampling theory modified to express a rate of occurrence true/false

false MUS is based on attribute sampling theory modified to express a monetary conclusion

auditing standards base the need for substantive procedures for significant account balances on the assessed risk of material misstatement true/false

false auditing standards require testing regardless of the assessed risk of material misstatement

unpaid audit fees pertaining to services provided more than one year prior to the date of the audit report that relate to an audited entity that is in bankruptcy impairs the auditors independence true/false

false independence is impaired if the entity is not in bankruptcy

model of business process - 5 categories

financing process purchasing process human resource management process inventory management process revenue process

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to

find smaller errors

if final analytical procedures indicate material misstatements the auditor should

gather additional audit evidence

controls over network operations are included as part of _________ controls which relate to the overall information processing environment

general

controls that relates to the overall information processing environment, have a pervasive effect on the entitys computer operation and are sometimes referred to a supervisory, management or information technology controls are called _________ controls

general

nonstatistical sampling includes

haphazard sampling random sample systematic sample (with random start)

a conflict of interest may occur if a CPA ___________

has a financial interest in a product they are recommending

the lead partner on an engagement team for a public company audit ______

has a five-year "time out" after rolling off the engagement of an entity

factors that would cause the auditor to use a lower percentage for tolerable misstatement include a _________

high risk of misstatement within the account balance history of material weaknesses in internal control

when a auditor reviews the minutes of the board of directors meetings and makes inquiries of entity personnel during the audit of the revenue and purchasing processes, they are most likely trying to _________

identify long-term commitments

the auditor may decide to follow a substantive strategy for some or all assertions because _________

implemented controls are assessed as ineffective implemented controls do not pertain to the assertion under consideration testing the operating effectiveness of the controls would be inefficient

in setting the desired confidence level and acceptable level of risk, the auditor considers the _________

importance of the assertion significance of the account difficulty or complexity in applying the control

when deciding on the extent of testing, the auditor should consider the _____

importance of the control frequency of operation nature of the control

an ASB audit report ____________

in accordance with generally accepted auditing standards titled independent auditors report

when would auditors have a duty to disclose fraud to an outside entity?

in response to a subpoena to a governmental FUNDING agency to comply with legal and regulatory requirements

which of the conditions are generally present when material misstatements due to fraud occur

incentive opportunity rationalization

identifying controls to be tested is a(n) _________ task that requires professional judgement

subjective

in substantive testing, the risk that the sample supports a material misstatement does not exist when a material misstatement actually does exist is the risk of ___________ ________

incorrect acceptance

the risk that the sample supports the conclusion that the recorded account balance is fairly stated when in fact it is not is the risk of _________ __________

incorrect acceptance

in substantive testing, the risk that the sample supports a material misstatement when it does not exist is the risk of __________ _______

incorrect rejection

in testing an internal control, the risk that the sample supports a conclusion that the control is not operating effectively when, in truth, the control is operating effectively is the risk of __________

incorrect rejection assessing control risk too high

for a financial statement audit, if the planned level of control risk is not supported by samples results and tests of control, t he auditor may choose to ___________

increase the assessed level of control risk and modify substantive procedures test other control procedures that could support the level of risk

due to the nature of spreadsheets, when an entity uses many of them as art of period-end closing financial statement preparation, there is a(n) ________ risk that controls over spreadsheets will not be effective

increased

MUS disadvantages

increased possibility of rejecting an acceptable book value overstatement of the allowance of sampling risk zero balances are not automatically selected

if detection risk is set too high, the risk that the auditor will fail to detect an actual material misstatement ________

increases

ranking the logical units by their tainting factors leads to a UML that ___________ the chance that an acceptable account balance will be rejected by the auditor

increases

The Code of Professional Conduct's ___________ rule is a very general statement that relates only to attestation-related services, including audits

independence

activity ratios

indicate how effectively the entity's assets are managed effectively help determine if accounts contain material misstatements

if prior-period financial statements have been audited but the predecessors report will not be included, the successor auditor indicates in the reports introductory paragraph _____________

indicate in the introductory paragraph that the financial statements for the prior period were audited by other auditors and mentions the date and type of report issued by predecessor auditor if predecessors report was not standard (unqualified) the successor auditor should describe the nature of and reasons for the departure from the standard report

what sources can be used to develop an expectation for an analytical procedure

industry publications budgets and forecasts competitor information

current files

information and data specifically related to this years audit

The extent of an entity's use of _______ can affect internal controls because this function effects the way transactions are initiated, authorized, recorded, processed and reported

information technology

The extent of an entity's use of __________ can affect internal controls because this function affects the way transactions are initiated, authorized, recorded, processed and reported

information technology (IT)

auditors usually use the term _________ to refer to unwritten questions asked of the entitys personnel or of a third party, and the term __________ to refer to written requests for a written response from a third party

inquiry confirmation

which of these processes are generally considered highly reliable because the auditor has direct knowledge about them a) inspection of tangible assets b) analytical procedures c) recalculation of tangible assets d) inspection of records and documents e) reperformance of tangible assets

inspection of tangible assets recalculation of tangible assets reperformance of tangible assets

disclaimer of opinion

insufficient appropriate evidence to form an opinion on the overall financials lack of independence

risk factors that affect the likelihood that a control deficiency will result in a misstatement of an account balance or disclosure include the:

interaction of the deficiencies complexity required to determine the amount involved susceptibility of the related assets or liability to loss or fraud

auditors may test controls at an __________ date because the assertion being tested may not be significant, the control has been effective in prior audits,or it may be more efficient to conduct the tests at that time

interim

auditors should ask the _____________ about its assessment of the risk of fraud, including whether management has satisfactorily responded to internal audit findings during the year

internal audit function

Most large corporations typically have a large group of __________.

internal auditors

an active and qualified board of directors, proper authorization of transactions and procedures to ensure assets exist are all examples that may be part of the entity's ________ _________

internal control

the auditors understanding of ______________ is used to identify the controls that are likely to prevent, or detect and correct,material misstatement in specific assertions

internal controls

MUS is commonly used by auditors to test accounts such as

inventory accounts receivable loans receivable

the same size is ______ related to the tolerable deviation rate

inversely

if a misstatement accumulated to a material amount over two or more periods, the entire accumulated misstatement must be corrected under the ______ ______ approach

iron curtain

a limited liability partnership ___________

is generally governed by the laws applicable to general partnerships provides some personal protection against lawsuit

a professional staff member of the CPA firm must be independent of the attest entity if he or she ____________

is in a position to influence the engagement performs work directly for the entity becomes a partner in the same office where the attest engagements lead partner works

if the computed upper deviation rate exceeds the tolerable deviation rate, the auditor will normally conclude that the control ___________

is not operating at an acceptable level

the entitys balance sheet date is Dec 31, 2016, the date of the auditors report is Feb 8, 2017, and the financial statements are issued on March 2, 2017. Regarding the period between Feb 8 and March 2, 2017, the auditor:

is not responsible for making any inquiries or conducting any audit procedures

contingent liability the amount of loss associated with a contingent liability is accrued by a charge to income when it ________

is probable and can be reasonably estimated

the amount of loss associated with a contingent liability is accrued by a charge to income when it _______

is probable and can be reasonably estimated

random or systematic sample selection

is required for statistical sampling and may be used for nonstatistical sampling

if the auditor concludes that there is substantial doubt about the entitys ability to continue as a going concern even after considering managements plans, the auditor will normally

issue a modified audit report describing the going concern issue

if the auditor concludes that there is substantial doubt about the entitys ability to continue as a going concern even after considering managements plans, the auditor will normally _________________

issue a modified audit report describing the going concern issue

if an entity fails to disclose information in the financials or footnotes as required by GAAP, the auditor should _______________

issue a qualified or adverse audit report provide the omitted information, if practicable, in the audit report

if a departure from GAAP is pervasive and the financials taken as a whole do not fairly present the entitys financial position, results of operations, and cash flows in accordance with GAAP, the auditor should ____________

issue an adverse opinion

international auditing and assurance standards board (IAASB)

issues international standards on auditing (ISA) the predominantly recognized international auditing standards setter outside the U.S.

advantage of classic variable sampling (CVS) include _____

it will normally result in a smaller sample size than MUS when a relatively large number of differences between book and audited values are expected the selection of zero balances does not require special sample design considerations the techniques are effective for both overstatements and understatement

when documenting the quantity of evidence gathered through inspection of documents or confirmation of balances, the auditor should identify the ________

items tested

when an auditor considers managements selection of an accounting policy to be inappropriate, a(n) ________ misstatement arises

judgmental

controls that are important to the auditors conclusion about whether the entitys controls sufficiently address the assessed risk of misstatement are often referred to as __________ controls

key

the lower the acceptable risk of incorrect acceptance, the ____ the sample size must be

larger

the smaller the difference between tolerable error and expected error, the __________ the sample size needed

larger

sample size all else equal, an increase in the expected defect rate will require a____,because there is not less room for sampling risk to be accommodated and the sampling conclusion needs to be more precise

larger sampling size

by using the interval value in the sample selection process, _____ logical units have a _______ probability of being selected

larger, higher smaller, lower

nonaudit services that are considered by the SEC to impair independence if provided to a public company audit entity include

legal services booking actuarial services internal audit outsourcing

tolerable misstatement will almost always be _______ overall materiality

less than

if the computed upper deviation rate is _____ the tolerable deviation rate, the auditor can conclude that the control tested can be relied upon

less than or equal to

when no misstatements were found in the logical units tested, then the upper misstatement limit will be _________ the tolerable misstatement used to compute the same size

less than or equal to

before reissuing a report on the financials of prior periods which will be presented for comparative purposes, a predecessor auditor should obtain a(n) letter __________ ____________ from entity management and the current-year successor auditor

letter of representations

in judging the significance of a control deficiency, management and auditors must consider two dimensions, the __________ and ___________ of misstatements that could result from the deficiencies

likelihood magnitude

when using classical variables sampling techniques, the sampling unit can be a(n) ______

line item individual transaction customer account

in MUS, the customer account or transaction that contains the selected dollar is called the _______ ________

logical unit

account balances sampled by auditors typically have _____ error rates

low

the auditor plans and conducts the audit to achieve an acceptably ________ level of audit risk

low

when audit risk is low and the risk of material misstatement is high, detection risk will be set at ___________

low

the ______ the tolerable deviation rate, the __________ the sample size

lower larger

if the result for testing a particular control were favorable in the prior year, and no changes were made to the control, the auditor might assess risk _______ testing this year

lower and reduce

the competence level for a particular job should be specified and translated into a job description that details the specific knowledge and skills required. This task should be done by __________

management

ultimate responsibility for the financial statements rest with the _______________

management

the auditor should gain sufficient knowledge about the control environment to understand the attitudes, awareness, and actions concerning the control environment of the ________

management board of directors

revenue process

management establishes controls to ensure that sales and collection transactions are appropriately handled

the auditor makes recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues by preparing a(n) ________

management letter

auditors report on the effectiveness of internal control requires

managements conclusion about the effectiveness of ICFR the definition of ICFR

the terms of the audit engagement should include ________________

managements responsibilities the objectives of the engagement auditors responsibilities limitations of the engagement

performance reviews

managers should periodically check the quality of subordinates work

the operating effectiveness of the control can be affected by whether the control is performed ___________ or _________

manually or automated

a GAAP departure that is seen as ___________ but not _________ will generally result in a qualified opinion

material pervasive

if an entity's response to identified risks are inadequate, the auditor's assessment of the risk of __ __ may increase

material misstatement

in deciding the appropriate percentage to apply to a selected materiality benchmark, the auditor would choose a lower percentage within the range for qualitative factors such as _________

material misstatements in prior years high risk of fraud the entity is close to violating a covenant in a loan agreement

a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of the entitys financial statement will not be prevented, or detected and corrected on a timely basis is a _________

material weakness

the conceptual and procedural details of a financial statement audit build on which three fundamental concepts?

materiality audit risk evidence

qualified opinions are issued when the financials are _______ misstated

materially

an auditor disclaimed an opinion on the prior period financial statements but was able to conduct the current year audit without limitation. In this case the auditor _____________

may issue an unmodified opinion on this year's statements unmodified opinion may be issued on the prior years balance sheet,not all statements

Generally Accepted Auditing Standards (GAAS)

measures of the quality of the auditors performance Ten broad statements guiding the conduct of financial statement auditing. The 10 GAAS are still found in PCAOB standards but they have been replaced in the ASB standards by the "Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards." categories include: general standards, standards of field work, standards of reporting

the understanding of internal control may be documented in a(n) __________ which is most appropriate when the entity has a simple internal control system

memorandum (narrative description)

ASB and PCASOB standards use which words to describe actions and procedures auditors have a responsibility to consider?

might, may, could

information regarding related parties may be found in __________

minutes of the board of directors meetings conflict of interest statements from management and others financial and reporting information provided to creditors, investors and regulators

for MUS, the difference between monetary amounts in the entitys records and amounts supported by audit evidence is defined as a(n) _________

misstatement

defalcation

misstatements arising from misappropriation of assets involve the theft of an entitys assets where the theft causes the financial statements to be misstated exambles: embezzling cash received stealing physical assets and intellectual property causing the entity to pay for goods or services not received using an entitys assets for personal use

The CPA firm of Quigley & Associates uses a qualitative approach to implementing the audit risk model. Audit risk is categorized using two terms: very low and low. The risk of material misstatement and detection risk are categorized using three terms: low, moderate, and high. Calculate detection risk for each of the following hypothetical clients. Client #1: AR Low RMM moderate Client #2: AR very low RMM high Client #3: AR low RMM low client #4: AR very low RMM Moderate

moderate low high low

if management chooses not to eliminate an identified material misstatement, appropriate audit opinions include _________

modified adverse qualified

when an auditor adds explanatory wording to the existing paragraphs of the report it is referred to as _______________ wording

modified wording

if the achieved level of audit risk is greater than the planned level, auditor options include _____

modifying the audit opinion performing additional audit work

to obtain an understanding of an entitys internal controls auditors may use ____________

observation of entity activities and operations inquiry of appropriate personnel inspection of entity documents and reports

auditor risk assessment procedures are used to __________

obtain an understanding of the entity and its environment

if, during the planning, performance or completion of the audit there is substantial doubt about the entitys ability to continue as a going concern, the next step for the auditor is to _______

obtain managements plan to mitigate the going concern problem

most of the auditor's work in arriving at an opinion on the financial statements consists of __________ audit evidence relating to management's assertions

obtaining and evaluating

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 auditing is a type of attest service

unrestricted random sampling without replacement means __________

once an item is selected, it cannot be selected a second time

the "cooling off" period must pass before an accounting firm can audit a public companys financial statements where a former member of the audit team is currently employed by the entity in a financial reporting oversight role is __________ year

one year

if management concludes it is probable that the entity will not be able to meet its obligations within the look forward period but develops a plan to mitigate the risk, the plan can be considered sufficient to overcome a substantial doubt conclusion _________

only if it is probable that the plan can be effectively implemented

tests of controls for ___________ effectiveness include procedures such as inquiry, documentation inspection, observation and reperformance of the application of the control

operating

the auditor must perform tests of controls over a period of time that is adequate to determine whether the significant controls were _________ as of the date indicated in managements report

operating effectively

the auditor must perform tests of controls over a period of time that is adequate to determine whether the significant controls were __________ as of the date indicated in managements report

operating effectively

The code of professional conduct places responsibility for ethical behavior squarely on the __________

professional

financial ratios used by auditors as analytical procedures

profitability activity coverage short-term liquidity

The auditor's best estimate of misstatements in population are called ___________ misstatements

projected

IDEA refers to the _________ _______ as the most likely error

projected misstatement

statistical sampling uses the laws of _______ to compute sample size and evaluate the sample results

propability

the uncertainty related to nonsampling risk can be controlled by ________-

proper planning adequate training effective supervision

coverage ratios

provide information on the long-term solvency of the entity

COSO framework

purpose is to help management better control the organization and to provide boards of directors an added ability to oversee internal control

operational auditing

purposes is to assess performance, identify areas for improvement, and develop recommendations

a material, but not pervasive, scope limitation will normally result in a(n) __________

qualified

most firms have a policy requiring an engagement ______ ______ be performed for publicly traded companies and for privately held companies whose financial statements are expected to be widely distributed

quality reivew

explanations for significant differences observed for substantive analytical procedures must be followed up and resolved through _____________

quantification, corroboration and evaluation

the major advantages of statistical sampling are that it helps the auditor _________

quantify sampling risk measure the sufficiency of evidence obtained design an efficient sample

The Sarbanes-Oxley Act of 2002 requires the CEO and the CFO to certify the appropriateness of the financial statements and related disclosures for ____________

quarterly and annual filings with the SEC

an internal control _______ is generally used for entities with a relatively complex internal control structure

questionnaire

classical variables sampling normally relies on _______ selection techniques

random

to increase the likelihood that a sample is representative of the population of transactions or account items, auditors use ___________ sampling procedures

random

before reissuing a report on the financial statements of prior periods which will be presented for comparative purposes, a predecessor auditor should ___________

read the current period financial statements compare the prior-period financial statements on which the predecessor reported with the current-year statements on which the successor will report

to idendentify contingent liabilities an auditor might ________

read the minutes of board of directors meetings review tax returns and IRS reports review contracts, loan agreements and leases

audit procedures occuring after the balance sheet date that are done specifically to detect subsequent events include

reading any available interim financial statements that are available after year end asking legal counsel about any developments related to litigation, claims and assessments

observation and inspection audit procedures include _________

reading management reports tracing transactions through the information system visits to the entitys premises and plant facilities

a material weakness is a deficiency or combination of deficiencies in ICFR such that there is a(n) _______ possibility that a material financial misstatement will not be prevented or detected on a timely basis

reasonable

the auditor provides ______ assurance that the financial statements are fairly present

reasonable

modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using _______ analysis

reasonableness

internal control according to COSO, a system of internal controls is designed to provide reasonable assurance about the achievement of entity objectives in ____________

reliability, timeliness and transparency of internal and external financial and non financial reporting effectiveness and efficiency of operations compliance with applicable laws and regulations

ifa large number of deviations are detected early in the tests of controls in the context of a financial statement audit, auditor options include

relying on other internal controls setting the control risk at the maximum for audit assertions affected enhancing related substantive tests

misunderstanding between management and the auditors are reduced by the __________

representation letter

when the evaluation of the sample results leads to the same conclusions that would be drawn if the same audit procedures were applied to the entire population, the auditor has selected a(n) _________ sample

representative

setting an audit strategy _________

requires a detailed understanding of the entitys internal controls

setting an audit strategy __________

requires a detailed understanding of the entitys internal controls

when using MUS, the selection of zero or negative balances ________

requires special design consideration

to obtain an understanding of the entitys internal controls which helps identify key controls, recognize types of potential misstatements and design test of controls and substantive procedures, auditors use _________ ___________ procedures

risk assessment

control risk

risk that a misstatement that could occur in an assertion about an account 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 entitys internal control

confidence level, is the complement of _________

sampling risk

one reason why auditors must accept some detection and audit risk is _________

sampling risk

the uncertainty associated with sampling is known as ________ ________

sampling risk

when sampling is used to estimate monetary misstatement, a confidence limit must be established as an allowance for _________

sampling risk

an auditor issues a qualified opinion when there is ____________

scope limitation or specific departure from GAAP exists, but overall financials present fairly in conformity with GAAP for scope limitation, auditor describes why the limitation arose and indicates the financials present fairly except for the possible effects of the limitation for GAAP departure, the report describes the nature and impact of the faulty accounting and indicates the financial statements present fairly except for the effects of the departure

ensuring that asset custody, transaction authorization and transaction recording are all assigned to different people is the basis for the control principle __________ _________ _____________

segregation of duties

vouching

selecting an item for testing from the accounting journals or ledgers and then examining the underlying source document

audit sampling

selecting and evaluation less than 100% of the items in an audit population is such a way that the auditor expects a representative group to provide a reasonable basis for conclusions about the population is__________

if the financial reporting risk for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment

self-assessment processes in conjunction with entity-level controls

Debt to Equity Ratio

short term debt + long term debt / stockholders equity can indicate the entity is too highly leveraged if the ratio is to large relative to the industry

Less severe than a material weakness ___________ _________ is still important enough to merit attention by those charged with governance

significant deficiency

an auditor is likely to add an emphasis-of-matter paragraph to an unqualified opinion when:

significant related-party transactions that are appropriately disclosed exist important events occurred after the balance sheet date

auditing standards indication that the sample size for statistical sampling should be _______ that of nonstatistical sampling

similar to

if a misstatement is considered material to the financial statements the financial statements need to be adjusted ______________-

so that any remaining misstatement would be considered immaterial under both the iron curtain and rollover approaches

the first step in calculating the confidence bound is to calculation the ______ ________ of audit difference

standard deviation

auditing standards recognize and permit both ________ and _________ methods of audit sampleing

statistical nonstastical

three steps involved in the auditors use of the audit risk model at the assertion level

step 1 -setting a planned level of audit risk step 2 - assessing the risk of material misstatement step 3 - solving the audit risk equation for the appropriate level o f detection risk

if a large number of deviations are detected early in the tests of controls, the auditor should consider __________

stopping the test as soon as it is clear that the results of the test will not support the planned assessed level of control risk

Date of the auditor's report

the date on which all significant audit documentation must have bee reviewed and approved the date on which management must have explicitly taken responsibility for the financial statements no earlier than the date on which the auditor has obtained sufficient appropriate evidence

audit plan

the document that outlines the auditor's understanding of the entity and potential risks as well as the strategy to be followed by the auditor

classical variables sampling disadvantages

the estimated variance used for evaluation purposes may underestimate the true variance if few misstatements are detected in the sample some techniques do not work well when little or no misstatement is expected the auditor must estimate the standard deviation of the audit difference in order to determine samale size

audit documentation related to the audit of internal controls must include

the evaluation of deficiencies discovered the scope of testing the extent of reliance on work performed by others

working papers

the focal point for reviewing the work of subordinates and for quality control reviewers

nature of evidence

the form or type of information, which includes accounting records and other available information

sampling unit

the individual members of the sampling population

SEC human resource and compensation-related rules

the lead engagement review partner cannot provide audit services for a particular audit entity for more than 5 consecutive yeas an audit partner cannot perform audit services for a particular entity for more than 7 consecutive years

sufficiency

the measure of the quantity of audit evidence

if a control deficiency is a material weakness, management must disclose it in its assessment of the effectiveness of ICFR, including:

the nature of the material weakness(es) managements current plans, if any, for remediating the weakness its impact of the entitys financial reporting and its ICFR

prior to performing nonattest services for an attest client, the CPA should establish in writing the ____________

the objectives of the engagement the services to be performed the entitys acceptance of its responsibilities the CPAs responsibilities any any anticipated limitations of the engagement

corporate governance

the oversight mechanisms in place to help ensure the proper stewardship over an entity's assets. Management and the board of directors lay primary roles, and the independent auditor plays a key facilitating role

accounting records

the records of initial entries and supporting records, such as checks and records of electron fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations,reconciliations and discloseures

final evaluation

the sufficiency of the audit evidence and the effects of detected misstatements in the financial statements are the primary concerns

inherent risk

the susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls

if the logical units book value is less than the sampling interval, and it is misstated by less than 100%, the projected misstatement is equal to __________-

the tainting factor multiplied by the sampling interval

the principal auditor is sharing responsibility for the audit report with other auditors when __________

there is a reference to the other auditors in the audit report

factors that should be considered in the determination of staffing requirements for an audit include ____________

timing of the work personnel availability engagement size engagement complexity

a common formula for sample size is: sampling population book value /( ___________ misstatement - __________ misstatement) x ___________ factor

tolerable expected confidence

sample sizes will become too large to be practical or are simply not computable because there is insufficient allowance for sampling risk when _________ are too close together

tolerable and estimated deviation rates

The maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective is called the _________ rate

tolerable deviation

the amount of overall materiality used to plan and perform audit procedures at the account or disclosure level is called _________ ___________

tolerable misstatement

the maximum amount by which the account can be misstated and still be acceptable to the auditor as being fairly presented is called _______________ _______________

tolerable misstatement

auditing standard no. 5 requires that the auditor follow a(n) _________ - __________, _______=__________ approach to evaluating ICFR

top-down risk-based

in evaluating misstatements related to accounting estimates,if the auditor believes the estimated amount in the financial statements is unreasonable, the difference between the estimated amount and the closest reasonable estimate should be ____________

treated as a misstatement

in evaluating misstatements related to accounting estimates, if the auditor believes the estimated amount in the financial statements is unreasonable, the difference between the estimated amount and the closest reasonable estimate should be ___________

treated as a misstatemet

an entity received a going concern report in 20x1. The auditor determines the substantial doubt regarding going concern has been removed in 20x2. The emphasis-of-matter paragraph included in the prior years audit report is not included with the auditors report covering the comparative financial statements true/false

true

during planning the auditor determines whether planned procedures need to be revised due to preliminary analytical precedures true/false

true

sample results can only be projected to the population from which the sample was selected true/false

true

the application systems acquisition, development and maintenance controls are critical for ensuring the reliability of information processing true/false

true

the auditor should understand the control procedures used by the entity to provide financial statement assurance true/false

true

the look-forward period related to the going concern assessment is one year from the balance sheet date for the PCAOB true/false

true

understanding the information system requires knowing how IT is involved in data processing true/false

true

unexpected differences may be addressed by reviewing the working papers for sufficient evidence true/false

true

when an entity issues comparative financial statements, the auditor can express a standard unmodified report on prior years' financial statements but qualify the opinion on current-year financials true/false

true

MUS uses attribute-sampling theory to estimate the percentage of monetary units in a population that might be misstated true/fasle

true % is multiplied by an estimate of how much dollars are misstated

if a misstatement is considered material to the financial statements the financial statements need to be adjusted ________

under both the iron curtain and rollover approaches so that any remaining misstatement would be considered immaterial

according to ASB standards, when assessing materiality, users are assumed to __________

understand financial statements are prepared and audited to levels of materiality recognize uncertainties inherent in the measurement of amounts based on estimates make appropriate economic decisions on the basis of the financial statements

If a CPA owns an insurance policy issued by an attest client, independence is not considered impaired so long as the policy

was purchased under the insurance company's normal terms and conditions does not offer an investment option

steps auditors perform as part of the fraud risk assessment process includes:

understanding the entitys period-end closing process inquiries of management about their views on the risks of fraud identification and assessment of fraud risk factors consideration of unusual or unexpected relationships

an auditor disclaimed an opinion on the prior period financials but was able to conduct the current year audit without limitations. In this case the auditor ____________

unmodified opinion o prior years balance sheet, and on all of the current years financials

when the auditor concludes there is substantial doubt about the entitys ability to continue as a going concern and management has adequately disclosed the financial problems, the auditor will typically express a(n) ______ opinion

unqualified

for most tests of controls, if the auditor is unable to examine a document to test whether the control was adequately performed, the auditor should ________

use an alternative procedure

an auditor who receives evidence concerning material but indirect illegal acts should _________

use audit procedures to determine whether the illegal acts have occurred

the auditor reviews the financial statements to

verify the inclusion of all necessary disclosures ensure compliance with GAAP check proper presentation of accounts

to perform a(n) __________ the auditor traces a transaction from origination all the way to its reflection in the entitys financial statements

walkthrough