Audit Day 11 Quiz
Unqualified Opinion, Disclaimer of Opinion, Adverse Opinion
3 Components of Step 5: Wrapping Up
Restatement of previously issued financial statements to reflect the correction of a material misstatement, Evidence of material misstatements (caught by the audit team) that were not prevented or detected by client's internal control, Ineffective oversight of financial reporting process by entity's audit committee, Indication of fraud (either material or immaterial) by senior management.
4 Indicators of material weaknesses
control defficiency
A __________ _________________ 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 misstatements on a timely basis.
material weakness
A ____________ ______________ is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
material weakness, material weakness
If the CEO steals $5, the deficiency is categorized as a _____________ __________________. If CEO steals $5 million, the deficiency is categorized as a _____________ __________________
Beginning + Additions - Subtractions = Ending
Reconciliation formula:
ineffective
Tests of controls would not be performed if design is deemed to be __________________
top-down approach
The approach used to perform an integrated audit. Performed by starting from the financial statement down to testing individual controls that help create each FSLI
material weakness
The auditor is not required to search for deficiencies that individually or in combination, are less severe than a ___________ ________________.
confirmation
What is the one procedure not used during Step 3: Selecting and Testing Controls
definition of material weaknesses, a statement that the MW was identified and that is was or was not identified in management's assessment
When an adverse opinion is issued the auditor should include two things...
CONTROL ENVIRONMENT (tone at the top, culture), Controls over MANAGEMENT OVERRIDE OF CONTROL, company's RISK ASSESSMENT processes, controls to MONITOR results of operations and other controls, controls over PERIOD-END
When performing Step 2 of the Integrated Audit, auditors must identify and evaluate these 5 entity-level control categories
understand the flow of transactions, identify points where misstatements can arise, Identify controls in place to address any potential misstatements
When performing walkthroughs in Step 2, auditors must... (3 things)
Absence of appropriate separation of duties, Absence of appropriate reviews and approvals of transactions, Evidence of failure of control procedures, Several instances of transactions that were not properly recorded in subsidiary ledgers; transactions were not material, either individually or in the aggregate, A lack of timely reconciliations of the account balances affected by the improperly recorded transactions
5 common things we observe and say that "this deficiency is more of a significant deficiency than a control deficiency"
significant deficiency
A _____________ ________________ is a deficiency, or a combination of deficiencies, in internal control over financial reporting, that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the company's financial reporting.
the effectiveness of ICFR and the fairness of the company's F/S
A combined report on the ICFR and the F/S includes the auditor's opinions on both...
Design Deficiency
A necessary control is missing or an existing control is poorly designed that it fails to meet the control's objective.
Operating Defieciency
A properly designed control is ignored or is inappropriately applied, does not operate as designed, or is operated by the "wrong" person.
Test Design Effectiveness
After an understanding of internal controls is gained through inquiry, inspection, observation, and reperformance (walkthrough) the controls are evaluated (preliminary assessment) for the possibility that the controls would not prevent or detect a misstatement. One of two components of Step 3: Selecting and Testing Controls
Unqualified, Disclaimer of Opinion, Adverse Opinion
Auditors can issue one of three types of opinions on ICFR
Yes
Can auditors use the work of internal auditors during Step 2 of performing an integrated audit: Using a top-down approach?
Yes
Can the auditor's written report/opinion on internal controls be separate from the report/opinion on the financial statement?
must writing, management, audit committee, significant deficiencies, material weaknesses
Communication about Deficiencies within an integrated audit ________ communicate in _________ to _______________ and the _________ ______________ all: ___________________ _______________ and _______________ ________________
should, prior
Communication about deficiencies ____________ be made ______ to the issuance of audit report on ICFR
reference
Companies must _____________ the other report if separate reports on internal control and financial statement
management
Control Deficiencies must be communicated to one party:
vital
During Step 3: Selecting and Testing Controls, auditors should test controls that are _______ to the auditor's conclusion about if the company's controls sufficiently address the assessed RMM for each relevant assertion.
written representation
During Step 5: Wrapping Up, auditors must obtain a __________ _____________________ from mgmt. about ICFR.
Knowledge of industry, Knowledge of the company's business, Knowledge of the company's ICFR, Extent of changes in operations, Extent of changes in ICFR, Auditor's preliminary judgments about materiality risk and effectiveness of ICFR, Control deficiencies previously communicated to the audit committee or management, Public information relevant to evaluating the likelihood of material misstatements, Legal or regulatory matters of which the company is aware
Eight things to consider during Step 1: Planning the Engagement
No
Is it possible to issue a qualified or adverse opinion on F/S, and an unqualified opinion on ICFR?
Yes
Is it possible to issue an adverse opinion on ICFR and an unqualified opinion on the F/S?
management, audit committee, public (10k)
Material Weaknesses must be communicated to three parties:
significant deficiencies, material weakness, severity, misstatement actually occurring
More severe control deficiencies are categorized as _____________ _________________or _________ _________________, depending on their ___________ (likelihood and magnitude)....not about a _____________________ ___________ _______________.
unqualified
One of three types of opinions on ICFR. States that no material weakness were identified
Adverse opinion
One of three types of opinions on ICFR. States that one or more material weaknesses were identified
Disclaimer of Opinion
One of three types of opinions on ICFR. States that the auditor could not perform all of the procedures required
Begin at Financial Statement Level, Understand Overall Risks, Focus on Entity-Level Controls, Work to Significant Accounts Disclosures and Relevant Assertions, Attend to Possibility of Material Misstatement, Verify Understandings of Process Risks, Select Controls for Testing
Seven steps of the Top-Down Process (Integrated Audit Step 2)
affected
Should disclose whether the opinion on the F/S was __________ by the adverse opinion on ICFR.
management, audit committee
Significant Deficiencies must be communicated to two parties:
True
True or False: Auditor should not report in writing that no deficiencies or significant deficiencies were noted.
Test Operating Effectiveness
Usually, a sample of transactions is examined using inquiry, observation, inspection, and re-performance. (NOT CONFIRMATION). One of two components of Step 3: Selecting and Testing Controls "Each time that I break does my car stop? Or does it stop only every other day?" - Udeh
Management letter
Value-adding letter. In this letter you are asking questions and interrupting them, you are learning about them, coming up with ideas, suggestions on how they can do something different or improve (instead of just poking around their financial statements)
inquiry, observation, inspection, and reperformance
What are the four audit procedures used during Step 3: Selecting and Testing Controls
Planning and Engagement, Using a top-down approach, Selecting and Testing Controls, Evaluating Identified Deficiencies, Wrapping Up, Reporting on Internal Control
What are the six steps of performing an Integrated Audit
Deficiencies, significant deficiencies, material weakness
What are the three types of deficiencies/weaknesses when performing an Integrated Audit? (Step 4: Evaluating identified Deficiencies)
Identify entity-level controls, walkthroughs
What are the two components of ensuring Step 2: Using a top-down approach
Design Deficiencies, Operating Deficiencies
What are the two subcategories of Control Deficiencies (Step 4a)
Design effectiveness tests, operating effectiveness tests
What are the two ways to test controls? (Step 3 Testing Controls)
Ineffective oversight
_____________ _______________ by the audit committee is a material weakness indicator and should be communicated in writing to the board.
