Audit Final Exam
Types of audit tests
- Risk assessment procedures -Test of controls -Substantive Procedures
Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm's largest client, the Grey Elephant. Ms. Zadina who works in the same office as Ms. Lembke, has a sister who is the controller for the grey elephant. Because of potential independence issues, Ms. Zadina does no work for the grey elephant. Ms. Zadina is being considered for promotion to partner. What independence issued shouls Ms. Lembke consider before promoting Ms. Zadina?
-All partners of a firm must be independent of any attestation clients of the firm -if Ms Zadina is promoted to partner, DTS would no longer be able to provide attentation services to the grey elephant. -If ms Zadina is promoted, she will have to move to another office or DTS will have to give up its largest client
Roles o the audit committee
-Appoint CPA firm -Determine audit fees -Oversee audit work -must have a financial expert
SAS 99
-Audit team must brainstorm about fraud -Asses fraud risk -Consider fraud in planning and preforming the audit -Take specific step when fraud is suspected -Document the work related to fraud
Identify the risk that goes with each of the following:
-Auditors risk of financial loss and damage to professional reputation: engagement risk -The risk that the sample drawn is not representative of the population and that, as a result, the auditor will reach an incorrect conclusion about an account balance or group or transactions: Sample risk -The risk that a material misstatement exists without considering a clients internal controls: Inherent Risk -The willingness of the auditor to accept that the financial statements contain a material misstatement after a clean audit opinion has been issued: Audit Risk
Major Phases of the Audit
-Client acceptance/continuance -Preliminary engagement activities -Plan the audit -Consider and audit internal controls -Audit business processes and related accounts -Complete the audit -Evaluate results and issue audit report
Your client requires al credit sales over $, to be approved by the credit manager in order to prevent a material misstatement from occurring. What kind of risk is increased if this procedure is not effectively preformed by the client? What is the impact on the amount of testing for an increase in this kind of risk?
-Control risk -Increase testing
What to consider when relying on the work of an internal auditor
-Evaluate their competence -Evaluate their objectivity -Must still test their work
Which of the following is an example of an incentive to commit fraud
-Financial stability or profitability is threatened
Quantitative bases for materiality
-Income before taxes -Total assets -Net assets -Total revenues
Qualitative bases for determining materiality
-Material misstatement in prior years -High risk of fraud -Potential loan covenant violations -Higher than normal risk of bankruptcy
Things to consider when accepting a new client
-Obtain and review financial information -consider unusual business or audit risks -determine if the firm is independent
Give a specific test you would pref0rm to test the completeness, accuracy, and cutoff assertions for purchases at the same time
-Take a sample from receiving documents -Trace the vendor name and quantity to the vendor invoice -Trace the customer name and amount from the vendor invoice to the purchases journal -Match the date on the receiving document to the date in the purchasing journal Match the date in the purchases journal to the date on the receiving document
In the space below explain why you think an audit is needed on a public companies financial statements
-The audit is needed to sure that management is acting in a way that is in the best interest of the owners/shareholders -since management is self-interested, then they might not act in a way that is in the best interest of the owners/shareholders -the audit increases the creditability of the financial statements
According to the Code of Professional Conduct, which of the following individuals is not in a position to influence the attest engagement?
-The partner in another office in a nearby city who regularly plays golf with the engagement partner
Audit opinions
-Unqualified:Clean -Qualified: Medium -Adverse: Bad
Risk Assessment Procedures
-Used to obtain an understanding of the entity and its environment, including internal controls(inquiry of management, prelim analytical procedures, observation and inspection)
2 types of fraud
-fraudulent financial reporting -misappropriation of assets
The components of the fraud triangle
-incentive/pressure -opportunities -attitudes/rationalization
Assume you are a ew staff auditor auditing a publically held company. Control risk has been assessed to be medium high. After doing some preliminary tests of controls prior to year end you discover more errors in controls that was expected. What are possible ways that you could respond to this change in risk?
-increase the amount of evidence -have a more experienced auditor preform the testing -do the rest of testing at year end
How to identify related parties in a business
-review board minutes -review conflict of interest statements -review significant unusual transactions
Dual Purpose Test
-test of controls -substantive test of transactions
If the auditor significantly increases materiality
-the amount of testing decreases
Limitations of the audit risk model
-the desired level of audit risk might not be able to be achieved -it doesn't consider potential audit error
Reasons to assess business risk
-to understand the entity's business and transactions -to identify financial statement accounts likely to contain errors
Preliminary engagement activities include
-understanding the client and the clients industry -determining audit engagement team requirements -ensuring the independence of the audit team and audit firm ALL OF THE ABOVE
Steps in applying materiality on an audit
1. Determine overall materiality 2. Determine tolerable misstatement 3, Evaluate audit findings
List 4 types of audit tests
1. Test of controls 2. analytical procedures 3. test of detail: substantive test of transactions 4. Test of detail: account balances and disclosures
General Standards-GAAS
1. adequate Traning and proficiency as an auditor 2. Independence in attitude 3. due Professional care in planning and preforming
Fieldwork Standards-GAAS
1. adequately Planned and assistants supervised 2. understand Internal controls to determine the nature, timing, and extent 3. sufficient competent Evidence
The SEC's rules with respect to services provided by auditors are predicted on three basic principals of auditors objectivity and independence. What are the three basic principals?
1. an auditor should not audit their own work 2. an auditor should not function in the role of management 3. an auditor should not serve in an advocacy role for their client
Reporting Standards-GAAS
1. presented in Accordance with GAAP 2. identify when principals haven't been applied Consistently 3. Express and opinion 4. adequate Disclosure
Direct financial relationship
A financial interest that is owned directly by an individual or entity, or is under the control of an individual or entity
Testing for Existence-A/R
A/R Trial Balance>Sales Invoice>Shipping Document
Existence-A/P
AP Trial Balance>Vendor Invoice>Receiving Document
In testing the existence assertion for an asset, and auditor ordinarily works from the
Accounting records to the supporting evidence
Engagement Risk
An auditors exposure to financial loss and damage to professional reputation
Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures
Assigning personnel to engagements
Audit Risk Formula
Audit Risk=IR x CR x DR
Which of the following statements best describes the role of audit risk in a financial statement audit?
Audit risk indicates that the auditor has not tested everything, so there is still risk that a misstatement is present upon the completion of the audit
Relationship between the different auditing services
Auditing>attest>assurance
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion
Auditor judgement
Risk of material misstatement
Client risk, the combination of inherent risk and control risk
Which of the following best describes the general character of the three generally accepted auditing standards classified as standards of fieldwork
Criteria for audit planning and evidence gathering
Test of controls
Directed toward the evaluation of the effectiveness of the design and operation of internal controls
Explain how fraud risk is incorporated into the Audit Risk model given there is not a fraud term in the model
Fraud risk is assessed as part of Inherent risk and Control Risk
A violation of the profession's ethical standards would most likely have occurred when a CPA
Issued an unqualified opinion on the 2014 financial statements when fees for the 2013 audit were unpaid
For each of the following indicate whether the auditor is generally more concerned with overstatement or understatement
Long term debt: Understatement Allowance for doubtful accounts:understatement
Who has primary responsibility for the financial statements?
Management
Which of the following statements best describes managements and the external auditors respective levels of responsibility for a public companies financial statements?
Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement
Tolerable misstatement is
Materiality allocated to a specific account
As generally conceived, the audit committee of a publically held company should be made up of
Members of the board of directors who are not officers or employees
As lower acceptable levels of audit risk are established, the auditor should plan
More testing
Select the answer that reflects which authoritative body governs over the audit of public and private companies
PCAOB-public -ASB-private
Occurrence-Purchases
Purchase Journal>Vendor Invoice>Receiving Document
A CPA firms personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of
Quality control
Completeness-A/P
Receiving Document>Vendor Invoice>AP Trial Balance
Completeness-Purchases
Receiving Document>Vendor Invoice>Purchase Journal
Material indirect financial relationship
Results when a covered member has a financial interest in an entity that is associated when an attest entity, for example as investment in a mutual fund that owns the entity's stock
Testing for Occurrence-SALES
Sales Journal>Sales Invoice>Shipping Document
Testing for Completeness-A/R
Shipping Document>Sales Invoice>A/R Trial Balance
Testing for Completeness-SALES
Shipping Document>sales Invoice>Sales Journal
Materiality
The magnitude of an omission or misstatement that would likely change the judgment of a reasonable financial statement user
Inherent Risk
The risk that a material misstatement exists without considering a clients internal controls
Detection Risk
The risk that the auditor is willing to accept that they will fail to detect a material misstatement
Audit Risk
The risk that the auditor will unknowingly fail to modify the audit opinion hen a material misstatement exists
What is business risk?
The risk that the client will not achieve its objectives(ex. nature of entity, management, business processes)
Control Risk
The risk that the clients internal controls will not prevent or detect a material misstatement
Substantive Procedures
To detect material misstatements in a transaction class, account balance, and discloseure components of the financial statements -Analytical procedures -Test of Details: Substantive test of transactions -Test of Details: Account balances and disclosures
Code of Professional Conduct triangle
Top: Principals Middle: Rules Bottom: Interpretations
Assue you are auditing a publically traded company. You have set materiality to be $1,000,000. You identify that the only misstatement is an understatement of long-term debt by $400,000. The debt covenants require the company to keep the debt-to-equity ratio to be below .60. if the client books the adjustment to the long-term debt account, the debt-to-equity ratio will be .1. Is the $400,000 misstatement material? why or why not?
Yes, even though the amount is below overall materiality, is it material because the bank is a reasonable financial statement user and the misstatement would impact whether the debt covenant is violated
Why is inspection of tangible assets more persuasive evidence that inquiry of the client?
You cant trust what the client says. you must gather additional information to support what the client says. A tangible asset has value in itself, so inspecting it can provide evidence toward the existence and valuation assertion.
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertions of
completeness
The role of auditing
dissolves: -Information Asymmetry -Conflicts of interest between principal and agent(owner and manager)
