Chapter Five
Factors that affect inherent risk include the nature of the:
Client, Client's Environment, & Account
Common methods for auditors to determine related parties include:
Conflict-of-interest statements; Inquires of management; Reviewing SEC filings
The possibility of material misstatement of an assertion before consideration of the client's internal control is called (Blank) risk.
Inherent
Significant audit findings or issues that need to be documented include:
Issues related to accounting estimates; Selection of appropriate accounting principles; Accounting for complex and unusual transactions
In-Charge Partner
Review of entire set of working papers to determine audit was performed in accordance with GAAS and provide support for audit report
Horizontal Analysis:
Review of the client financial statement amount over time.
Manager:
Review of work done by staff and senior auditors near the end of the audit to make sure papers "tie together."
Test of Disclosure:
Test of property, plant, and equipment
Test of Class Transaction:
Tests of inventory purchases to determine if properly accounted for
As audit papers are prepared, auditors use several symbols or (Blank) (Blank) to identify specific steps in the work performed.
Tick Marks
True or False: Auditors are not required to use analytical procedures as substantive procedures to provide evidence about financial statement assertions.
True
Most effective audit procedures are performed by auditors at:
Year-end
For the audit risk model, auditors must restrict this risk through the performance of substantive procedures.
Detection
The objective analytical procedures (Blank) is to help the auditors identify items that indicate a heightened risk of material misstatement of the financial statements.
Performed at the risk assessment stage
Much of the information contained in the (Blank) file is gathered during the course of the first audit of a client's records.
Permanent
For related party transactions, auditors should be most concerned about obtaining evidence regarding:
Presentation and disclosure
Second Partner Review
Quality review to provide assurance that the CPA firm's in-house quality control policies have been complied with
In evaluating the appropriateness of audit evidence, auditors consider its:
Relevance and Reliability
Which of the following relates to the circumstances in which evidence is obtained?
Reliability
Comparing the price on an invoice to that on an approved price list is an example of the audit procedure of:
Reperformance
The type of audit procedures performed by auditors to obtain audit evidence include:
Substantive procedures; Risk assessment procedures; Tests of controls
To audit fair value estimates, auditors can use all of the following approaches:
Test management's process; Independently develop an estimate to compare to management; Hire a valuation specialist
Throughout the audit, auditors accumulate non-trivial misstatements identified and propose appropriate (Blank) journal entries.
Adjusting
Memoranda of the planning process and significant discussions with management are considered:
Administrative working papers
In performing audit procedures, auditors must make sure the procedures cover:
All material and relevant assertions
Evaluations of financial statement information by a study of relationships among financial and non-financial data is the basis of (Blank) procedures
Analytical
External confirmations are normally used to gather evidence for all of the following accounts EXCEPT:
Building
The audit risk model is a function of:
Control Risk, Detection Risk, and Inherent Risk.
The working papers that pertain solely to this year's audit are called the (Blank) files.
Current
Recalculations:
Are used to prove the accuracy of client calculations such as earnings per share; Include making certain that accounting records agree with the financial statements
The working papers for a particular engagement are included in the:
Audit file
The examination of big data to uncover hidden patterns, unknown correlations, market trends, and other useful business applications is called:
Data Analytics
Auditors gather evidence to restrict this risk to the appropriate level.
Detection
Audit evidence in paper or electronic form that is obtained through inspection of records is referred to as (Blank) evidence
Documentary
Auditing standards require auditors to perform analytical procedures:
During the risk assessment stage; Near the conclusion of the audut
Test of controls are designed to test the operating (Blank) of controls in preventing or detecting material misstatements.
Effectiveness
The reliability of customer sales and invoices created by the client and held internally depends on:
Effectiveness of internal control
Auditors are required to:
Ensure accounting estimates are properly accounted for and disclosed; Evaluate the reasonableness of accounting estimates
Factors that can influence the level of audit documentation detail include:
Extent of judgement involved; Nature of auditing procedures; Risk of misstatement
Management makes assertions for financial statements regarding all of the following except:
Fairness of the audit opinion
The audit risk model is AR=
IR x CR x DR
The record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach is called audit documentation or:
Working Papers
The backbone of the working papers is the (Blank), which is the key schedule that controls and summarizes all supporting papers.
Working trial balance
Cross Sectional:
Comparison with similar firms (ex. Industry) at a point in time.
Under the (Blank) assertion, all assets, liabilities, equity interests, and transactions that should have been recorded have been recorded.
Completeness
Inherent risk is generally highest for (Blank) transactions because they involve management judgements or assumptions.
Estimation
Confirmations are generally effective at providing evidence for the (Blank) assertion.
Existence
Separate summary or (Blank) (Blank) (also call group sheets) are set up to combine general ledger accounts.
Lead Schedules
The use of statistical models to quantify the auditors' expectation about a financial statement amount or ratio is called:
Regression Analysis
At the conclusion of the audit, the CPAs obtain a written (Blank) (Blank) from client officers that includes several specific items, such as the fact that all known liabilities are reflected in the financial statements.
Representation Letter
Senior:
Review the work performed by staff assistant to make sure audit procedures performed properly and conclusions are clearly expressed
Sufficient audit evidence is affected by:
Risk of misstatement and reliability of evidence
The nature of (Blank) transactions restricts inherent risk, although controls must be implemented to assure proper recording.
Routine
When developing expectations for analytical procedures:
Separate relationships may be computed for each division or product line; Dollar amounts, quantities, ratios, or percentages may be used; Prior year financial statements may be used
Detection risk is restricted through the performance of:
Substantive Procedures
Data analytics:
May assist in the assessment of risk of material misstatement; Results in a more detailed understanding of the client; May involve testing entire populations instead of samples
During an audit, client oral inquiries:
May be made of both officers and employees
More/ Less Evidence Needed
More: Greater the risk of misstatement, The lower quality of the evidence obtained Less: Lower the risk if misstatement, The higher quality of the evidence obtained
Auditing standards require that audit documentation provide evidence:
Of the auditor's basis for concluding on the achievement of the audit's overall objectives; That the audit was planned and performed in accordance with GAAS
The comparison of relationships between two or more financial statement accounts is called:
Ratio Analysis
An individual or company that has a certain expertise in a field of knowledge other than accounting and auditing is called a:
Specialist
Audit documentation should identify all of the following:
The dates audit work was performed; Auditors reviewed the work; Auditors who performed the work
Test of Account Balance:
Confirmation of accounts receivable balance
The risk that a material misstatement could occur in a relevant assertion and not be detected on a timely basis by the client's internal control is called (Blank) risk.
Control
True or False: Inspection of assets is the best way to determine ownership, valuation, and condition of the assets.
False
Audit evidence gathered from oral or written inquiries made by the auditor can include:
Written representations from company personnel; Written representations from outside parties; Oral representations from company personnel