MGT3160 > Audit > Flashcards

Audit Flashcards

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1
Q

T or F: The purpose of audit is to identify fraud.

A

F

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2
Q

Information risk

A

The risk that users and shareholders do not have the same information as managers.

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3
Q

Three levels of assurance/nonassurance

A

Assurance: most expensive.
Review: less expensive, faster, lower level of confidence.
Notice to Reader (NTR): 0 assurance. Done for CRA/bookkeeping but not accepted by banks.

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4
Q

Examples of audit of information other than the financial statements.

A
  • mall stores may be audited if their rent is based on revenues.
  • condo corporations
  • more detailed level of materiality
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5
Q

Examples of audits for non financial information

A
  • effectiveness of internal controls
  • audit of controls of service organization
  • compliance
  • IT
  • greehouse gas emissions
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6
Q

Who is responsible for the preparation of financial statements: auditor or management?

A

Management.

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7
Q

Who is responsible for the design, implementation, and maintenance of internal controls: auditor or management?

A

Management.

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8
Q

Auditors’ personal responsibilities (3)

A
  • Professional competence and due care (education, experience)
  • Compliance with ethical and independence requirements
  • Professional skepticism and professional judgement
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9
Q

Auditors’ performance responsibilities

A
  1. Adequate planning and supervision
  2. Determining and applying materiality levels
  3. Identify and assess risks of material misstatement
  4. Obtain sufficient and appropriate evidence
  5. Reporting
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10
Q

Ethics vs. Professional Ethics

A

Ethics: moral principles/values (personal)

Professional ethics: morally permissible standards the profession has defined

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11
Q

CPA Code of Professional Conduct: Relevant section 200 rules

A

201: Maintenance of good reputation of the profession
202: Integrity, due care, objectivity
203: Professional competence
204: Indpendence
205: False and misleading documents and oral representations
206: Compliance with professional standards
208: Confidentiality of information
210: Conflicts of interest
211: Duty to report breaches of the CPA code
214: Fee quotations and billings
215: Contingent fees
217: Advertising, solicitation, endorsements
218: Retention of documentation and working papers

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12
Q

CPA Professional Conduct: Relevant section 300 rules

A

302: Communication with predecessor
303: Provision of client information

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13
Q

2 Types of Independence required

A

Independence in fact, independence in appearance

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14
Q

Threats to independence (5)

A
  • Self-interest
  • Advocacy
  • Intimidation
  • Self-review
  • Familiarity
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15
Q

True or false: when a threat to independence is identified, the auditor must immediately be removed from the client’s case.

A

False. First, try to reduce or resolve the threat before withdrawing. Eg. Can the auditor sell their shares before conducting the audit?

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16
Q

Safeguards to independence created by the profession, legislation, or securities regulation

A

Education and training

Periodic rotation of senior members on the engagement

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17
Q

Safeguards to independence provided by the audit client

A

Qualified, independent audit committee
Corporate governance policies
Corporate policies and ethical codes

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18
Q

Safeguards to independence available within the audit firm’s procedures

A

Tone at the top
Firm policies and procedures
Rotation of senior personnel
Required consultation

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19
Q

True or False: CPA Canada sets the rules for auditing

A

False. PROVINCIAL self-regulating CPA boards.

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20
Q

Business failure vs. audit failure

A

Business failure: business cannot repay debts, perhaps due to poor mgmt, shift in demand, economic factors.
Audit failure: auditor issues an incorrect audit opinion.

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21
Q

Expectation gap

A

The difference between what users expect from the audit and what the audit actually provides.

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22
Q

Examples of incorrect expectations by users of an audit, which create an expectation gap.

A
  • Auditors should accept primary responsibility for fin stmts.
  • Auditors certify the fin. stmts.
  • A clean opinion guarantees the accuracy of fin stmts.
  • Auditors perform 100% verification.
  • Auditors should give early warning about possible business failure
  • Auditors are supposed to detect fraud.
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23
Q

3 Audit evidence decisions

A

NATURE: Which audit procedures to use?
EXTENT: Which items to select for testing?
TIMING: When to perform the procedures?

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24
Q

3 Categories of audit procedures

A

RISK ASSESSMENT: risk of material misstatement
TEST OF CONTROLS: evaluate effectiveness
SUBSTANTIVE: tests of details & analytical procedures

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25
3 Characteristics of persuasive evidence
APPROPRIATE: relevant & reliable SUFFICIENT TIMELY
26
6 factors of evidence reliability
Evidence obtained directly by the auditor Independence of source Qualifications of source Consistency from multiple sources Effectiveness of client's internal controls Degree of objectivity
27
7 Types of audit procedures
``` INSPECTION OBSERVATION EXTERNAL CONFIRMATION RECALCULATION REPERFORMANCE ANALYTICAL PROCEDURES INQUIRY ```
28
T or F: External documents are considered more reliable than internal documents.
True.
29
Vouching vs tracing
Vouching: Use documentation to support recorded transactions/amounts. Tracing: Use documentation to determine if transactions or amounts are included in the accounting records.
30
Analytical procedures: 4 types of data that balances and ratios are compared with
Industry data Similar prior-period data Client-determined expected results Auditor-determined expected results
31
Possible adjustments to strategy if audit risk is determined to be pervasive
Assign more experienced staff Heighten level of professional skepticism Increase involvement of audit partners and managers Closer supervision and review
32
What must be considered in identifying significant risks?
Risk of fraud Risk related to key economic, accounting, other developments Complexity of transactions Significant related party transactions Degree of subjectivity in measurement of financial information Significant transactions outside the normal course of business
33
The fraud triangle: conditions for fraud
1. Incentives/pressures 2. Opportunities 3. Attitudes/rationalization
34
The risk of material misstatement is a function of (3 types of risk)
Detection risk Inherent risk Control risk
35
Indicators of doubt of continuance as a going concern
``` Liquidity position Profits(losses) in previous years Method of financing growth Nature of the client's operations Competence of management ```
36
What is the objective of conducting an audit of the financial statements?
To express an OPINION of whether the financial statements are FREE FROM MATERIAL MISSTATEMENTS and presented fairly in conformity with the APPLICABLE REPORTING FRAMEWORK.
37
Management (client) responsibilities in an audit
- Adopt sound and appropriate accounting POLICIES - Implement and maintain adequate INTERNAL CONTROLS - Provide FAIR REPRESENTATIONS in the financials. - Provide auditor with access to ALL RELEVANT INFORMATION - Provide auditor with any additional information they may request - Provide unrestricted access to PERSONS within the entity from whom the auditor determines it necessary to obtain evidence
38
Responsibilities of those charged with governance
(board of directors) - oversight of management - approve audited financial statements
39
Key difference between error and fraud
intent
40
Fraudulent financial reporting
- harms users of financial statements by providing them with incorrect information for decision making - usually committed by management
41
Misappropriation of assets
- harms stockholders, creditors, and others because assets are no longer available to their owners - usually committed by employees
42
Auditor's responsibility to evaluate going concern
- conclude opinion on the appropriateness of management's use of the going-concern basis of accounting - conclude if there is material uncertainty about the entity's ability to continue as a going concern.
43
What are management assertions?
Implied or expressed representations about: - classes of transactions or events - related account balances in the fin. stmts. - classification, presentation, disclosure of information
44
Management assertions about classes and transactions of events (statement of comprehensive income)
``` OCCURRENCE COMPLETENESS ACCURACY CUTOFF - correct reporting time period CLASSIFICATION - correct accounts ``` it occurs to her to completely and accurately cut off the class
45
Management assertions about account balances (statement of financial position)
EXISTENCE COMPLETENESS VALUATION AND ALLOCATION RIGHTS AND OBLIGATIONS - the entity does control the rights to assets, and liabilities are the obligation of the entity
46
Management assertions about presentation and disclosure (notes to the financial statements)
OCCURRENCE AND RIGHTS AND OBLIGATIONS - disclosed info did occur and does pertain to entity COMPLETION ACCURACY AND VALUATION CLASSIFICATION AND UNDERSTANDABILITY
47
Services, other than audit, offered by public accounting firms
``` Tax Accounting Management advising Valuation Assistance with adoption of IFRS Environmental & CSR reporting ```
48
Greatest challenge in assessing operational efficiency during an audit
Developing criteria
49
Stakeholders of an audit
management, users of financial statements, CRA, banks, employees, customers
50
Implications of accepting an audit engagement
auditors must have: - independence - competence
51
Additional issues when filing with the OSC
- IFRS compliance - specific forms required by OSC that must be filed in a specific time frame - must be registered with CPAB
52
Quality controls that audit firms must have in place
- Culture/tone at top - Ethical requirements (independence, integrity) - Policies and procedures relating to: - acceptance of engagements - HR practices - engagement performance - Monitoring these quality controls
53
True or False: audit evidence must be convincing and conclusive
False, it must be persuasive
54
Examples of internal documentation
cheque request form receiving report payroll time card adjusting journal entry
55
Examples of external documentation
vendor's invoice cancelled note cancelled cheque validated deposit slip
56
Analytical procedures are performed during what phase of the audit engagement?
The planning phase, to help determine the nature, extent, and timing of work to be done.
57
What should be disclosed if there exists a related party transaction?
- the nature of the relationship - description of transx - amounts due to or from related parties if not otherwise apparent
58
acceptable audit risk
a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued
59
True or false: The less audit risk the auditor is willing to accept, the higher the level of evidence that the auditor will collect.
True
60
Inherent risk or control risk? | The management bonuses at CFHI are based on net income
Inherent risk
61
Inherent risk or control risk? Due to the size of the CFHI’s business, only one accounting clerk does most of the accounting.
Control risk
62
Which assertion is being upheld when sales invoices are matched with shipping documents by a computer system which creates an exception report?
Occurence
63
Which assertion is being upheld when receiving reports are prenumbered and accounted for on a daily basis?
Completeness and Cut Off
64
Which assertion is being upheld when sales invoices are independently verified before being sent to customers?
Accuracy
65
Why does the auditor obtain an understanding of internal controls?
To assess risks of material misstatement to the financial statements.
66
What should the auditor due of they find significant deficiencies in internal controls?
Report the weaknesses to the audit committee or an appropriate representative of management
67
Test of controls vs substantive tests
Test of controls: verify whether a client's controls are applied in the manner described in documentation eg. examination that JE's received approval Substantive tests: test for dollar errors in transx or financial statement balances eg. recalculation of amounts
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