Chapter 1

The end product of an auditor's work is the ______. - audit opinion - engagement letter - materiality assessment - financial statements

- audit opinion

The report on ICFR ______. - can be combined with the financial statement audit or presented separately - must be combined with the financial statement audit - must be presented separately

- can be combined with the financial statement audit or presented separately

Predictive audit data analytics ______. - combines firm, industry, and market data to help auditors identify numbers that might be off - presents data to users in ways that match their various needs and interests - allows auditors to analyze and understand enormous sets of information

- combines firm, industry, and market data to help auditors identify numbers that might be off

Accuracy

Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described.

Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information. True or False

False

Auditing services and attestation services are exactly the same thing. True or False

False

Materiality

The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement

Overview of auditors

They render an opinion, an nonbiased objective independent opinion, on the financial statements and gives assurance to the readers of the financial reports that the company is reasonable in nature.

Presentation

Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Cutoff

Transactions and events have been recorded in the correct accounting period.

Classification

Transactions and events have been recorded in the proper accounts.

Occurrence

Transactions and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity.

Auditing is a type of attest service. True or False

True

Testing all transactions that occurred during the period is cost prohibitive in the absence of computer data analytic approaches.

True

True or false: Audits can save a company money by enabling them to get lower interest rates on loans.

True

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

True

Existence

assets, liabilities, and equity interests exist.

Accounting professionals perform various services that provide assurance about the ___________and________ of information given by one party to another.

Reliability; relevance

Reasonable assurance

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

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

Materiality; audit risk

Summary of Management Assertions by Category: Assertions about classes of transactions & events, related disclosures, for the period under audit: (income/financial statement) annual period

Occurrence Completeness Authorization Accuracy Cutoff Classification Presentation

Audit Services

-A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating results to interested users. -Report on Financial Statements, includes Audit Opinion

Attest Services

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

Summary of Management Assertions by Category: Assertions about account balances, & related disclosures, at the period end: Balance sheet for a day

-Existence -Rights and obligations -Completeness -Valuation and allocation -Accuracy, valuation and allocation -Classification - Presentation

Read the stages of an audit listed below and put them in the correct order. - Obtain an understanding of the client and its environment, including internal control - Assess the risks of misstatement and design further audit procedures - Complete the audit - Plan the Audit - Perform further audit procedures - Form an opinion and issue the audit report

- Plan the Audit - Obtain an understanding of the client and its environment, including internal control - Assess the risks of misstatement and design further audit procedures - Perform further audit procedures - Complete the audit - Form an opinion and issue the audit report

Overview of Principal-Agent Relationship Leading to Demand for Auditing

- Principal provides capital and hires agents to manage resourses. -Agents is accountable to principal; provides financial reports. -Agent hires an independent auditor to report on the fairness of agent's financial reports. - Auditor issues audit opinion to accompany agent's financial reports, adding credibility to the reports and reducing principal's information risk.

Select all that apply Which of the following have given rise to an explosion in the demand for the assurance provided by auditors? - A decrease in the number of sole proprietorships - The development of limited liability companies - The development of the corporate form of business - The expanding world economy

- The development of the corporate form of business - The expanding world economy

Put the following components of the standard auditors' report in the correct order. - Basis for Opinion - Title - Opinion on the Financial Statements - Critical Audit Matter - Critical Audit Matter and Auditor Response - Addressee - Name, Service Period, and Address of Audit Firm or Auditor - Date

- Title - Addressee - Opinion on the Financial Statements - Basis for Opinion - Critical Audit Matter - Critical Audit Matter and Auditor Response - Name, Service Period, and Address of Audit Firm or Auditor - Date

When business owners hire others to manage their business, the demand for auditing can be understood as the need for ______. - performance evaluation - benchmarking - accountability

- accountability

When a client's financial statements contain a material misstatement that pervasively affects the interpretation of the financial statements, a(n) ______ opinion should be issued. - unqualified - qualified - adverse - disclaimer of

- adverse

Select all that apply Rapid advances in electronic technologies used by many businesses ______. - eliminates many risks associated with the audit - facilitates efficient corroboration of the reliability of data - can create automatic audit trails

- facilitates efficient corroboration of the reliability of data - can create automatic audit trails

Professional standards require that public accounting firms establish policies and procedures for deciding ______. Select all that apply - if current clients should be retained - the number of auditors to use for an engagement - whether to accept new clients - how to set their audit fees

- if current clients should be retained - whether to accept new clients

A very small difference that is unlikely to affect an investor's decisions in a significant manner is deemed to be ______. - immaterial - an audit risk - material

- immaterial

An important preliminary engagement activity is to ensure the ______ of the audit firm and audit team. - reliability - independence - objectivity - integrity

- independence

Select all that apply The paragraph containing the auditor's opinion ______. - indicates how the audit was conducted - indicates the criteria used to assess management assertions - emphasizes the concept of materiality

- indicates the criteria used to assess management assertions - emphasizes the concept of materiality

If the client is a public, rather than a private company, the assessment of internal controls will be ______ thorough. - less - equally - more

- more

Increasing use of audit data analytics ______ auditors' ability to ask the right questions and evaluate the answers yielded by the data. - places a greater premium on - reduces the need for the - has no effect on the

- places a greater premium on

Auditing is demanded because it ______. - ensures that companies can raise capital - plays a valuable role in monitoring contractual relationships - is required by federal law for all companies - is a form of job security for accountants

- plays a valuable role in monitoring contractual relationships

To ensure the audit is conducted effectively and efficiently, it is important to ______. - properly plan the audit - ensure all audit team members have worked on the audit before - discuss the audit with the board of directors

- properly plan the audit

Select all that apply The increased used of data analytics in auditing ______. - makes it less important for audit professionals to reason through challenging concepts - requires the auditor to be an expert in technology and computer programming - requires the ability to query, manipulate, and interpret information - streamlines some tedious audit tasks

- requires the ability to query, manipulate, and interpret information - streamlines some tedious audit tasks

The audit report is addressed to the ______. - shareholders and board of directors - chief executive officer - management and audit committee

- shareholders and board of directors

Select all that apply In order to reach and justify a conclusion on the fairness of the financial statements, an auditor must obtain evidence that is ______. - material - readily available - sufficient - appropriate

- sufficient - appropriate

Select all that apply In order to reach and justify a conclusion on the fairness of the financial statements, an auditor must obtain evidence that is ______. - readily available - sufficient - appropriate - material

- sufficient - appropriate

The most common type of audit report (opinion) issued by auditors is a(n) ______ opinion. - qualified - disclaimer of - adverse - unqualified

- unqualified

Assurance Services

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

1. The ___________ is (are) responsible for the financial statements. 2. The auditor's report is the __________ of an audit. 3. An audit report includes a title, addressee, the financial statements audited, the auditor's ___________ on the financial statements, the basis for the opinion, and the critical audit matters and responses. 4. An opinion indicates that the financial statements are presented __________. 5. An audit report indicates that the audit evidence obtained is ____________ to provide a basis for the auditor's opinion.

1. management 2. end product 3. opinion 4. fairly 5. sufficient

1. Audit __________ begins with determining the requirements for the engagement. 2. __________ assessment procedures are performed when obtaining an understanding of the client. 3. __________ risk is the risk of material misstatement of an assertion without considering internal control. 4. Tests of controls are performed to determine whether key controls operate __________. 5. The final step of an audit is issuing the audit __________.

1. planning 2. Risk 3. inherent 4. effectively 5. report

A lawsuit in progress against a company is an example of a(n)__________ _________ that needs to be considered when completing an audit.

contingent liabilities

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to: A. identify areas of relatively high risk of misstatement and plan the audit accordingly. B. provide suggestions for improvement to the company. C. serve as a basis for setting audit risk and materiality. D. decide whether to perform an audit for the company.

A. identify areas of relatively high risk of misstatement and plan the audit accordingly.

Before accepting an engagement to audit a new entity, an auditor is required to: A. make inquiries of the predecessor auditor. B. tell the company whether or not the auditor is willing to issue a "clean" opinion. C. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. become a member of the entity's board of directors.

A. make inquiries of the predecessor auditor.

Completeness regarding period end

All assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Completeness

All transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Presentation regarding period end

Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Accuracy, valuation and allocation

Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

Classification

Assets, liabilities, and equity interests have been recorded in the proper accounts.

Audit Risk

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

Auditing differences from other accounting courses

Auditing courses usually uses Analytical and logical skills. Much more conceptual in nature Other Courses: Rules, techniques and computations to prepare and analyze financial information

Relationships among Auditing, Attest, and Assurance Services

Auditing is the smallest, surrounded by attest, which in turn in surrounded by assurance. This indicates that audits are a form of the attest function which is a form of assurance.

Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an auditee. B. The risk that the auditor will provide an inappropriate opinion on financial statements that are, in fact, materially misstated. C. The overall risk that a material misstatement exists in the financial statements. D. The risk that auditors use audit procedures that are inappropriate.

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

For publicly-held companies, which of the following is integrated with the audit of financial statements? A. budgetary information audit B. the audit of internal controls C. audit of management forecasts D. audit of interim financial statements

B. the audit of internal controls

Which of the following best describes why an independent auditor is engaged to express an opinion on the fair presentation of financial statements? A. It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor. B. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. D. It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

C. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.

Auditors are most likely to use the most rigorous audit procedures to examine: A. routine transactions. B. management assertions that are deemed to be of low risk in a particular engagement. C. only the rights and obligations assertion. D. management assertions that are deemed to be of high risk in a particular engagement.

D. management assertions that are deemed to be of high risk in a particular engagement.

Evidence

Evidence that assists the auditor in evaluating management's financial statement assertions consists of the underlying accounting data & any additional information available to the auditor, whether originating from the client or externally. •Relevance - Is evidence related to the specific assertion being tested? •Reliability - Can evidence be relied upon to signal the true state of the specific assertion being tested?

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

assertions

Much of what auditors do revolves around collecting and evaluating evidence about management's financial statement____________.

assertions

Valuation and allocation

assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Oral or visual information as well as paper or electronic documents that originate either within or outside the organization are all types of____________ _____________ .

audit evidence

public company

is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use of the company's resources. Principals: are generally the stoctholders of the company Agents: Managers upper echelons In a public company setting we (principals) expect the (agents) will run the company in our best interests.

To increase the likelihood that a sample is representative of the population of transactions or account items, auditors use ___________ sampling procedures.

random

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

reasonable assurance

Rights and obligations

the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Authorization

•All transactions and events have been properly authorized.

Fundamental Concepts in Conducting a Financial Statement Audit

•Materiality •Audit Risk •Evidence