Test 1 Handouts

Question 1

GAAS-PCAOB

3 Categories of Standards

Answer 1

General Standards
Standards of Field Work (at client site, conducting audit)
Standards of Reporting

Question 2

GAAS

General Standards

Answer 2

1. [Skills] Should have adequate technical training and proficiency.
2. [Objectivity] Must be independent, neutral, objective.
3. [Professionalism] Must exercise due professional care.

Question 3

GAAS

Standards of Field Work

Answer 3

1. Adequate Planning and Supervision of assistants
2. Role of Internal Control in Audit Tests - understand IC to plan audit and determine scope of tests
3. Amount and Type of Evidence needed - Gather Documentation, Observe, Inquire, Confirm to provide reasonable assurance

Question 4

GAAS

Standards of Reporting

Answer 4

1. Accordance with GAAP
2. Consistency - reporting the way they did last year (principle)
3. Review Notes - disclosures accurate?
4. Expression of Opinion

Question 5

Major Phases of an Audit

Answer 5

1. Client acceptance/continuance
2. Preliminary Engagement Activities
3. Plan the audit
4. Consider and audit internal control
5. Audit business processes and related accounts (eg rev generation)
6. Complete the audit
7. Evaluate results and issue audit report

Question 6

Major Phases of an Audit

1. Client Acceptance/Continuance

Answer 6

• Review available fin. info (annual reports, fin st, tax returns, etc)
• Commuincate with predecessor auditor (with permission)
• Consider special circumstances – litigation or going concern
• Determine independence
• Determine firm’s technical skills and knowledge of industry

Question 7

Major Phases of an Audit

2. Prelim Engagement Activities

Answer 7

1. Determine the audit engagement team requirements (training and proficiency)
2. Ensure the team and firm comply with ethical and independence requirements
3. Establish an understanding with client (Engagement letter, use work of Int Auditors, Role of Audit Committee)

Question 8

Major Phases of an Audit

3. Plan the Audit

Answer 8

1. Risk assessment procedures (inquire mgt, prelim analytical proc for assessing risk, observe/inspect)
2. Determine Audit steps (Reliance vs. Substantive approach)
   *Must understand IC
   Inquiry, Inspection of docs, Observe activities/operations

Question 9

Major Phases of an Audit

4. Consider and Audit IC

Answer 9

3. Test Of Controls: test effectiveness of IC in preventing or detect and correct material misst.
   - Mgt Assertions
   - Evidence (Types of Test of Controls) Inquiry, Inspec, Obser, and Reperformance - Sampling for test of Controls
   - Public Companies - ICFR

Question 10

Major Phases of an Audit

5. Audit bus. Processes and related accounts

Answer 10

Substantive Tests

1. Test of Details (Transactions and Balances)
2. Subst. Analyt. Proc. to gather evidence.
   - Mgt Assertions
   - Evidence
   - Auditing a Cycle (See Handout)

Question 11

Major Phases of an Audit

6. Completing the Audit

Answer 11

Review for contingent liabilities

• commitments
• subsequent events(ntoes)
• communicate with audit committee board

Question 12

Major Phases of an Audit

7. Evaluate Results and Issue Audit Report

Answer 12

Final Analytical Procedures for Reasonableness

Question 13

Factor that Influence Acceptable Audit Risk

Answer 13

1. Level of reliance by external users
2. Probability of financial failure
3. Character or integrity of key personnel

Question 14

Factors that Influence Assessed Inherent RIsk

Answer 14

1. Nature of client’s industry/business
2. character or integrity of key personnel
3. Results of prior audits and audit history
4. Amount and types of related party relationships and transactions
5. Client motivation and incentives
6. Complexity and routineness of transactions
7. Level of subjective judgment required by acc standards
8. degree to which assets are susceptible to theft

Question 15

Factors that Influence Assessed Control Risk

Answer 15

1. Effectiveness of internal controls

2. Planned reliance on internal controls

Question 16

Relationship:

Acceptable Audit Risk and Planned Detection Risk

Answer 16

AcceptAR and PDR

Direct (increase in one leads to increase in other)

Question 17

Relationship:

Acceptable Audit Risk and Planned Audit Evidence

Answer 17

AcceptAR and PAE

Inverse (Increase in one leads to a decrease in the other)

Question 18

Relationship:

Assessed Inherent Risk and Planned Detection Risk

Answer 18

AIR and PDR

Inverse

Question 19

Relationship:

Assessed Inherent Risk and Planned Audit Evidence

Answer 19

AIR and PAE

Direct

Question 20

Relationship:

Assessed Control Risk and Planned Detection Risk

Answer 20

ACR and PDR

Inverse

Question 21

Relationship:

Assessed Control Risk and Planned Audit Evide

Answer 21

ACR and PAE

Direct

Question 22

Relationship:

Actual Audit Evidence and Achieved Detect Risk

Answer 22

AAE and ADR

Indirect

Question 23

Relationship:

Reassessed Inherent Risk, Achieved Detect Risk, Reassessed Control Risk and Achieved Audit Risk

Answer 23

RIR, ADR, RCR and AchAR

Direct

Question 24

Comparing AcceptAR and AchAR

Answer 24

Determines whether the audit was effective or efficient

Question 25

Test of Controls (ARM) Purpose 1. Public Co 2. Private Co

Answer 25

Purpose: To assist auditor in determining the SCOPE (nature, timing, and extent) of substantive tests 1. Public - Required. Same auditor performs audit for ICFR and for Fin St and issues opinion on each. 2. Private - Not required - After review of controls, only needs to test controls IF they're strong and the auditor plans to rely on them to reduce subst testing

Question 26

Do the Work (ARM) What: How:

Answer 26

What: Mgt Assertions How: 1. Test to =Controls (to see how much subst testing) 2. Analytical Proc. - Required when planning(risk assessment) and final review stage (final analyt proc)

Question 27

Evidence Types

Answer 27

``` PC RADIOS – Physical Examination (inspect assets) –Confirmation – Reperformance and Recalculation – Analytical Procedures – Documentation (inspect documents) – Inquiry –Observation –Scanning ``` or MIRADCOPS

Question 28

Management Assertions: | Transactions

Answer 28

``` AOCCCA Authroization Occurance Cutoff Classification Completeness Accuracy ```

Question 29

Management Assertions | Balances

Answer 29

``` RECeiVe Rights and Obligs Existence Completeness Valuation ```

Question 30

Management Assertions: | Disclosures

Answer 30

``` ROCuCVa Rights and Obligs Occurence Classification and understandability Completeness Valuation and Accuracy ```

Question 31

Audit Evidence Hierarchy

Answer 31

1. Auditor Generated Evidence 2. Outside 3rd Party provides Evidence 3. Inside the Company - provided by client

Question 32

Auditor Generated evidence

Answer 32

Most reliable - Inspection (tangible assets) - Reperformance - redo a process to make sure proc or control works as intended - Recalc - check math accuracy of records

Question 33

Evidence provided by 2) Outside 3rd Party 3) Inside the Company (Client)

Answer 33

-Inspection (Documents) -Confirmation (Written to 3rd party) -Analyt Proc - Analyze trends, ratios, relationships etc to ID inconsistencies or signif. differences Scanning - review of acc data to ID signif or unusual items ____________ Inquiry - seeking info (unwritten) Observation - watching client perform procedure

Question 34

3 Steps in Applying Materiality

Answer 34

1. Determine a mater. level for the overall financial statements 2. Determine a tolerable misstatement 3. Evalutate Audit Findings

Question 35

Determining tolerable misstatement is is necessary because

Answer 35

evidence is accumulated by fin state. segments during the course of the audit

Question 36

Evidence types commonly used to test controls

Answer 36

Reperformance Observation of procedures Inquiry Documents, inspection of

Question 37

In an audit area that has a higher level of inherent risk, it would be prudent to

Answer 37

1. increase amt of evidence 2. assign more experienced staff 3. review collected evidence more thoroughly