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