1
Q
What are the 6 elements of a Quality Control System?
A
- Leadership responsibilities such as tone at the top
- Relevant and ethical requirements
- Acceptance and continuance of clients and specific engagements
- Human Resources
- Engagement Performance
- Monitoring ongoing quality control
2
Q
What is the Audit Planning Process?
A
- Decide to accept the engagement
- Perform risk assessment to address the risks of material misstatements
- Evaluate requirements for staffing
- Prepare audit programs for each audit area
- Obtain an understanding of the clients internal controls
- If internal controls are relied upon need to perform tests of control
3
Q
What are the two Substantive Procedures used to verify financial stmts?
A
- analytics procedures- comparisons to expectations and industry benchmarks
- Tests of details
Tests of ending balances
Tests of transactions
4
Q
What are the 4 Main Sections of the Clarified Standards?
A
- Identifies the nature of the engagement and the entities financial stmts involved
- Mgmt Responsibility for the Financial Stmts….mgmt is responsible for the fair presentation of Fin stmts
- Auditors Responsibility
- Opinion
5
Q
What are the two levels of assurance in an audit engagement?
A
Positive Assurance- highest level of assurance which is used for an Audit
Negative Assurance-
Moderate level of assurance used in A Review
6
Q
What are the Standards of Reporting?
A
- Compliance with GAAP
- Consistency of GAAP
- Adequate Disclosure
- Opinion
7
Q
Remote chance of loss results in what type of opinion?
A
Unmodified Or clean Opinion
8
Q
What is a component?
A
An entity that has separate financial information that will be included in group statements
9
Q
The group audit team needs to determine materiality for…
A
BOTH the entity as a whole and at the component level
10
Q
What is the Emphasis of Matter Paragraph and where is it on the report?
A
After opinion paragraph to point out a matter that is crucial to the user being able to understand the financials
- Auditor doubts the firms ability to continue as a growing concern
- Prepared with special framework
- Change in acct. principle
11
Q
What must an auditor do to obtain REASONABLE ASSURANCE?
A
- Plans adequately and properly supervises staff
- Determines the appropriate materiality levels
- Identifies and assesses risks of material misstatements
- Obtains appropriate audit evidence
12
Q
What is in the Other Matter Paragraph?
A
After emphasis of matter paragraph
Auditor considers relevant but NOT crucial to the users understanding
13
Q
When is a Qualified Opinion issued?
A
- Qualified Opinion
A. Financial Stmts are materially misstated
B. Scope
Auditor was not able to get “sufficient appropriate audit evidence
Scope Limitation or Misstatement is NOT PERVASIVE (affecting multiple areas)
14
Q
When is an adverse opinion issued?
A
Financial Misstatements are BOTH material & pervasive
15
Q
When is a disclaimer opinion presented?
A
When an auditor is unable to obtain sufficient appropriate audit evidence and the effects could be BOTH material and pervasive
16
Q
How does an Auditor treat Supplementary information?
A
The auditor is NOT required to audit supplementary information, but Apply certain limited procedures to them and report any deficiencies
17
Q
What is an auditor supposed to do when statements are NOT appropriately titled to fit their framework?
A
Auditor should disclose their reservations on the audit report and qualify the opinion. Make sure the statement uses the right title applicable to their framework.
18
Q
What is a Special Report?
A
A special report is when engagements involved compliance with some type of regulation related to the financial statements…like testing a clients compliance with federal regs.
19
Q
What is a scope limitation?
A
When you are unable to obtain appropriate audit evidence
20
Q
What is a type 1 or type 2 report?
A
Appropriate audit evidence for a service org. Usually comes in a type 1 or type 2 report or through contacting the org. To obtain certain info.
21
Q
What are Comfort Letters?
A
These are letters to underwriters stating “reasonable grounds to believe there are no material omissions or misstatements in financial stmts related to a securities offering”
Negative (moderate) assurance on whether unaudited financial info complies with GAAP.
Provides an opinion as to whether the audited financials comply in form with the acct requirements of the SEC
22
Q
When must a Govt or Local Agency receive a “single audit”?
A
When a state or local govt agency spends atleast $750,000 in federal funding that must get a single audit to verify if funds are being spent where they are supposed to be spent
23
Q
Governmental Auditing Standards require what types of reports on internal control?
A
A report on internal control that includes a description of the scope of the auditors work in obtaining an understanding of internal control.
Also include any significant deficiencies or material weaknesses notes.
The regular audit report and report and internal controls may be combined
24
Q
What are the 3 reports required by an audit subject to the Yellow Book Standards?
A
- Audit Report
- A report on Internal Control
- A report on any applicable compliance
25
When is a Auditor required to report any fraud or illegal acts during an audit?
1. Management fails to the report the info as required by law
2. Or if the management fails to take timely action to respond to the fraud or illegal act
26
CAVE CROC
C. Completeness
A. Accuracy
V. Valuation and Allocation
E. Existence
C. Cutoff
R. Rights and Obligations
O. Occurence
C. Classification and Understandibilty
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Unconditional Responsibility
MUST
28
Presumptively Mandatory Responsibility
SHOULD
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Professional Judgement
MAY
MIGHT
COULD
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Financial Forecast
Prospective Financial Statements that forecast an entity's expected financial position.
Based on the responsible party's assumptions and reflecting conditions it expects to exist and the course of action it is expected to take
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Financial Projection
Prospective Financial Statements that project an entity's expected financial position based on HYPOTHETICAL ASSUMPTIONS
32
Pro Forma Financial Information
Shows what the significant effects on historical financial information would have been had a consummated or proposed transaction occurred at an earlier date
33
Attestation Results
Written conclusion about subject matter or a written assertion of another party
Goal: reliable information
34
Assurance Results and Objective
Better info for decision makers, recommendations might be a byproduct
Goal: better decision making
35
Consulting results and goals
Recommendations based on the objectives of the engagement
Goal: better outcomes
36
Preparation
NON ATTEST SERVICE
* No requirements for accuracy or finding misstatements
* No need to determine if independent
* No need to report or need to obtaine vidence
37
Compilation
- Attestation but NOT Assurance
- Determine if independent
- Report on stmts
- Disclaim any assurance
- Disclose any lack of independence
- strictly drafting statements
38
Review
- Limited or Negative (Moderate) Assurance
- Must be independent
1. Possess knowledge of a client's industry
2. Apply Analytical Procedures
3. Perform inquiries of MGMT
4. Obtain a representation Letter
Each page that has been reviewed should include the reference "See Accountant's Review Report"
In a review the Auditor is NOT required to obtain an understanding of Internal Controls, like an Audit would
39
When can an Audit Engagement be Accepted?
1. The auditor and MGMT have a common understanding of the terms of the engagement
a. Using an acceptable framework (GAAP)
b. MGMT and Governance have the responsibility to provide the auditor with all relevant info for the FIN STMTS
c. Engagement Letter
d. Permission from client to contact Previous Auditor
40
What does the Engagement Letter Address?
1. Objective and Scope of the Audit
2. Respective Responsibilities of the auditor and MGMT
3. A statement about the inherent limitations of an audit
4. A statement identifying the applicable framework
5. Other matters based on auditor judgement such as fees or deadlines
41
What must be discussed with the Previous Auditor?
1. Permission from client to talk to previous auditor
2. If Client refuses to let Auditor talk to previous auditor they should seriously consider rejecting the engagement
1. Info about the integrity of MGMT
2. Disagreements with MGMT about acct or aduting issues
3. Communications to those charged with governance about fraud
4. Communicattions to MGMT about significant deficiences
5. Previous auditor's understanding about the reason for changing auditors
42
What are the main Preliminary Engagement Activities?
1. Auditor needs to evaluate any quality control issues
2. Auditor needs to evaluate independence
3. Auditor needs to create overall strategy
4. Auditor needs to determine if a specialist is needed
5. Audit Documentation of strategy, programs, and any major changes
43
What are the components of Overall Audit Strategy?
1. Identify characteristics that could affect scope
2. Identify reporting objectives and req. communications
3. Determine nature and timing of resources for the engagement
4. Communicate to thsoe charged with governance to communicate the planned score and timing of the audit
5. Create Audit Programs in practice, with specific steps that will be taken to test balances and address risks identified during the planning phase
44
Under the Clarified Standards at what levels does Materiality need to be Documented at?
1. The financial stmt level
2. Materiality levels for specific transacations or account balances "performance materiality"
3. Any revisions to materiality
45
What is Audit Risk?
The risk or probability that the auditor expresses a clean opinion when there is actually a material misstatement
Auditor's main responsibility is to obtain Reasonable Assurance which is a low level of Audit Risk
46
What are the 3 Audit Risk Model Elements?
```
Inherent Risk (IR)
Control Risk (CR)
Detection Risk (DR)
```
DR X CR X IR = Audit Risk
47
What are Analytical Procedures?
Evaluations based on Relationships among both financial data and non-financial data...using ratios and trends to compare data
48
What are the 3 Ways Analytical Procedures are used?
1. Used in the planning stage for risk assessment
2. Can be used a substantive procedure but it's NOT required
3. Used as a final review
**********Analytics are always required in the Planning and Final Review Stages
49
In regards to Fraud, Auditors are required to....
An audit Provides REASONABLE ASSURANCE that material errors or fraud will be detected
50
What is professional skepticism?
Auditors are required to practice Professional Skepticism.
This means:
-An auditor is supposed to have a "questioning" mind
-Make "critical assessments" of audit evidence
- NOT assuming fraud is happening but "questioning" assertions of managment
51
What are the 2 types of Fraud?
1. Fraudlent Financial Reporting
| 2. Misappropriation of assets
52
What are the risk factors involved with Pressure to meet expecations or requirements that could lead to fraudulent financial reporting?
1. Pressure to meet expectations or requirements such as
- earning projections
- debt covenants
- requirements for financing agreements
- business model creates opportunity because of it involves a lot of estimates that are hard to corroborate
- All significant decisions are made by a very select few key decision makers
53
What is the proper communication if Fraud is found?
The auditor informs "those charged with governance when senior mgmt is involved in the fraud, or if it is material even if senior management is not involved
If NOT material, then the auditor must inform the appropriate level of management, one level above where the fraud has occurred
54
When does the auditor report fraud to an outside party?
1. When a subpoena has been issued
2. When an SEC client is changing auditors
3. As required by government auditing standards
4. When an auditor has been authorized to communicate with the preceding auditor
55
Illegal acts can have 2 types of effects on the financial stmts...
Direct- if fraud or noncompliance with regulations is direct, the auditor NEEDS TO OBTAIN SUFFICIENT AUDIT EVIDENCE
Indirect- If indirect the auditor performs specifc audit procedures such as inquiry of management and inspecting correspondence with relevant authorities
56
Who is responsible for evaluating the adequacy of the specialist;'s work and conclusions reached?
The auditor
57
When does the Auditor refer to the Specialist in the opinion?
If the auditor is issuing a "unmodified opinion" (clean), the auditor does NOT refer to the specialist in the report
If the report is modified (qualified, adverse, or disclaimer) the auditor may refer to the specialist to help the user understand why the report is modified
58
The auditor has the responsibility to communicate what information to the Audit Committee?
1. Mgmt and the Auditor's respective responsibilities under GAAS (generally accepted auditing responsibilities)
2. The planned scope and timing of audit procedures
3. Significant Findings from the Audit including:
a. significant difficulties encountered
b. disagreements with mgmt over acct.
c. Uncorrected misstatements identified by the auditor
d. Independence issues
e. mgmt consultations with other auditors
59
The auditor is required to document their understanding of the client's Internal Control Structure...this document includes:
The auditor is interested in about the internal controls whether they affect the financial stmt asserts
Obtaining Understanding of Internal Controls involves evaluating the design of the control, and determining whether the control has been implemented. The auditor performs walkthroughs of key controls to verify that controls have been implemented
For accounts that are immaterial, AND have a low inherent risk, the auditor does NOT need to perform procedures to evaluate internal controls
Sometimes an auditor will make a flowchart to document a client's acct system to depict their understanding of the controls
60
What happens when an Auditor Relies on Internal Controls?
If the auditor relies on internal controls to reduce substantive audit procedures, then the auditor will perform "tests of controls" to make sure that design effectiveness of the controls is working right
61
What happens when an Auditor does NOT rely on Internal Controls?
The audit plan will be "wholly substantive", which means the auditor will test the account through substantive procedures and will not rely on the internal controls
62
If the auditor questions management's integrity,
the audit could not be conducted and the auditor would withdraw from the engagement
63
What kinds of risks does the auditor assess?
The auditor assesses control and inherent risk because it affects the level of detection risk that the auditor can accept.
64
An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to
Determine the nature, timing, and extent of substantive procedures for financial statement assertions.
65
Inherent Limitations of Internal Control
1. management override
2. Faulty Judgment
3. Collusion among employees
4. Cost benefit
66
Components of Internal Control
1. the control environment
- policies and procedures to establish overall control of the organization
2. risk assessment process
- the policies set to identify and analyze relevant risks
3. control activities
- policies and procedures set so that mgmt's objective will be achieved
- ex. segregation duties, physical controls, authorization
4. info systems
- policies and procedures to identify, capture, and exchange relevant info so that employees can meet responsibilities in a timely manner
5. monitoring of controls
- policies and procedures to measure the effectiveness of internal controls as time goes on
67
Components of an Entity's Control Environment
1. participation of those charged with governance
2. integrity and ethical values
3. organization structure
4. management's philosophy
5. assignment of authority and responsibilty
6. HR policies and practices
7. commitment to competence
68
Segregations of duties
Reduces the employee's opportunity to perpetuate fraud or error and subsequently conceal it in the normal course of his or her duties
For instance, an employee who receives and lists cash receipts should not be responsible for comparing the recorded accountability for cash with existing amounts.
69
Information System
1. physical and hardware components
2. software
3. people
4. procedures
5. data
70
What does an auditor need to understand about Internal Controls?
1. Consider factors that affect the risks of material misstatement
2. Determine whether controls have been implemented
3. Identify the risks of material misstatement
*** The auditor does NOT need to obtain knowledge or understanding about the OPERATING effectiveness of internal control
71
Auditors must focus on substance rather than form of operating controls because...
Management may establish appropriate controls but not apply them.
72
Order of Procedure for Internal Controls
1. Understanding of Internal Control
- used to design further audit procedures (tests and substantive procedures)
2. Tests of Controls
- determining operating effectiveness of controls
3. Substantive Procedures
- performed for all relevant assertions related to material classes of transactions, balances ,
73
The auditor's knowledge about the design of relevant controls should be used to:
1. evaluates the design of relevant controls
2. determines whether they have been implemented
This knowledge is used to
1. identify the types of potential misstatements
2. identify factors that affect the risks of material misstatements
3. design further audit procedures
74
Normal sequence of documents and operations on a well prepared systems flow chart is:
Top to Bottom and left to right
75
Risk assessment procedures of Internal Control
1. inquiries of mgmt and others
2. observation and inspection of documents
3. analytical planning procedures
4. the review of information from prior periods
5. audit team discussing about the risks identified. Discuss how the risks affect specific areas of the audit
76
Auditors are required to document the following in regards to Internal Controls:
1. audit team discussion about RMM and the key elements about the entity, its environment
2. the assessment of RMM at the financial stmt level and at at the relevant assertion level
3. identified significant risks and related controls the auditor obtained an understanding
77
The auditor is required to obtain and understanding, and document this for Internal Controls but is NOT required to:
NOT required to
1. perform tests of controls, (can if necessary)
2. search for significant deficiencies in in controls
3. determine whether controls are suitably designed to prevent or detect material misstatements
* **(the auditor does this but ONLY to controls related to signficant assertions and accounts NOT all controls)
78
The auditor is required to communicate 2 things with regard to the design or operation of internal control:
Auditor must discern if a deficiency is a material weakness or significant deficiency. Reported within 60 days of issuing the audit report...only to governance
1. any identified material weaknesses
- any deficiency that presents a reasonable possibility that a material misstatement of the entity's financial stmts will not be prevented, detected or corrected
2. Any identified significant deficiencies (LESS SEVERE)
- a deficiency in internal control that is less severe than a material weakness but important enough to be communicated to those charged with governance
79
Scope of Communication Report on Internal Controls
Should in include a paragraph that states that the purpose of the audit was to report on the financial stmts and not provide assurance on internal control, the deficiencies happen to be found as a result of auditing the financial stmts
No communication if no deficiencies
80
Judgments from Internal Auditors
The external auditor cannot allow judgment from the internal auditor on materiality of misstates or evaluation of accounting estimates...
The internal auditor can be used to help test internal controls and perform substantive tests...
But the final conclusions must be made by the external auditor
81
Segregation of Duties
Best tested by observing employees as they apply procedures
Segregration of duties involves separating duties so that employees are in a position to both commit fraud and then be able to cover it up
82
Internal Control Objectives for Sales...
Segregation of Duties
a. authorization....execution
b. access (custody)
3. accounting (record keeping)
Physical Controls
1. computer passwords and different account types within the system with different levels of permissions
2. Custody of cash recipts and inventory should be handled by employees
Authorization
1. Transactions should be authorized
2. Adjusting journal entries should be reviewed and approved by mgmt
Review
1. Monthly stmts should be sent to customers
2. Related docs such a the sales invoice, sales order form, and shipping docs should be compared
3. Cutoff should be verified to make sure tansacations have been recorded int he proper period
83
Assertions
Underlying claims made by MGMT about the financial stmts
84
3 categories of Assertions
Account Balances
Account Balances (4 assertions)
Existence: The assertion means that all the assets, liabilities, and equity actually exists
Completeness: all assets, liabilities, and equity that should have been recorded, have been recorded...nothing has been left out
Rights and OBligations
The entity holds or controls the rights to its assets, and the liabilities are that of the entity
Valuation and Allocation
Assets liabilities and equity are included in the financial stmts at the proper amounts
AUD
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