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Audit CH 4
Test 2
| Question | Answer |
|---|---|
| Business Risk | risk that an organization will fail to achieve its goals and objectives |
| financial reporting risk | risk that relates to the recording of transactions and the presentation of financial data in an organizations financial statements |
| engagement risk | risk that auditors face by being associated with an audit and a particular client, includes loss of reputation, financial loss, etc |
| audit risk | risk that an auditor provides an unqualified opinion of financial statements that are materially misstated |
| Preliminary Analytical Procedures (SAS 56) | -Attention Directing: identify potential problem areas -an organized approach: a stdrd starting place to start examining the fin stmnts -describe the financial activities: identify unusual changes in relationships in the data -ask relevant questions |
| Analytical Procedure steps A/R and allowance ex | 1.DEVELOP an expectation 2.DEFINE a significant difference 3.CALCULATE predictions and compare them to recorded amount 4.INVESTIGATE significant differences 5.DOCUMENT each of the above steps |
| Analytical procedures: stages of use | Preliminary-required Substantive testing-optional Final review-required |
| Fraud | knowingly making material misrepresentations of fact, with the intent of inducing someone to believe the falsehood and act on it and thus suffer a loss or damage |
| errors | UNINTENTIONAL misstatements or omissions of amounts or disclosures in fin stmnts |
| management fraud | INTENTIONAL misstatements or omissions os amounts or disclosures in fin stmnts |
| embezzlement | employees misappropriating funds or property entrusted in their care, custody, and control |
| direct-effect illegal acts | violations of laws or govnt regulations by the company or its management or employees that produce DIRECT and material effects on DOLLAR AMOUNTS IN FINANCIAL STATEMENTS |
| Indirect-effect illegal acts | (far removed) violations of laws and regs that are FAR REMOVED from fin stmnts effects EX. violation relating to insider securities trading, occupational health and safety, FDA, ENVIRONMENTAL PROTECTION, AND EMPLOYMENT opportunity |
| Fraud assessment risk | first step, requires; exist. of red flags, auditors skill in noticing red flags and assessing fraud risk, auditors willingness to follow them with fraud detection procedures |
| fraud assessment risk ex | cash not being deposited intact and daily, delays in deposits, customer complaints about appropriate credits to their accts, etc |
| Overview of auditors prof responsibilities -External auditors (CPAs) SAS 99 | consideration of fraud in a FS audit: SPECIFICALLY MUST ASSESS THE RISK OF MATERIAL MISSTATEMENT DUE TO FRAUD FOR EVERY ENGAGEMENT. design audit to provide reaonable assurance of detect fraud that could have material effect on FS. perf fraud related proc. |
| Overview of auditors prof responsibilities -External auditors (CPAs) SAS 54 | Illegal acts: focused primarily is on DIRECT-EFFECT ILLEGAL ACTS |
| Overview of auditors prof responsibilities -External auditors (CPAs) SAS 114 | "The auditors communication with those charged with governance." |
| SAS 99 Cosidering the risk of fraud | Steps: 1. audit team discussion 2.identify info to assess fraud risk factors 3.identify and asses fraud risk factrs 4.respond to risk assessment 5.eval audit evidence 6.comm. fraud matters 7.document fraud matters |
| SAS 99 step 1 | Brainstorming-discussion among engagement personnel -required -understand motivations to commit fraud -objectives 1.gain understanding of motives and how they would commit fraud 2. set proper tone -should be continuous |
| SAS 99 step 2 | identify info necessary to assess risks -attempt to identify red flags -inquiries -planning analytical procedures ex. company discussion boards, yahoo health south |
| SAS 99 step 3a | identify risk factors related to fraudulent fin. reporting -mngmnts characteristics and influence, industry conditions, operating characteristics, and fin. stability |
| typical FS fraud techniques | -overstating revenue and asset-dangling debit -understating liabilities and expenses -giving confusing disclosures |
| SAS 99 step 3b | assess fraud risks -type of risk -liklihood of risk -significance of risk magnitude -pervasiveness of risk-how widespread -assess controls and programs |
| SAS step 3b required risk assessments | -presume that improper revenue recognition is a fraud risk -identify risks of management override of control--examine journal entries and other adjustments, review acct estimates for biases, eval business rationale for signif unusual transactions |
| SAS 99 step 4 basic responses | respond to assess risks -basic responses--alter way aufit is done, change nature timing & extent of procedures, perform procedures to address the risk related to mgmts ability to override controls and rev recognition |
| SAS 99 step 4 overall effect on audit/extend procedure | assignment of personnel choice of acct principles predictability of auditing procedures examination of journal entries/adustments retrospective review of prior year acct estimates EXECS ARE OFTEN CPAs extend procedure |
| SAS 99 step 6 | -evidence of fraud must be communicated to appropriate level of mgmt. depends on materiality -inconsequential report it one level up -SOX: signif dificiencies must be comm. to those charged with governance -ANY fraud commited by mgmt is materia |
| audit risk | the risk (likelihood) that the auditor may unkowingly FAIL TO MODIFY THE OPINION on FSs that are MATERIALLY MISSTATED (eg an unqualified opinion on misstated FSs) |
| Audit Risk Model (ARM) | decomposes overall audit risk into three components: inherent risk (IR) control rsk (CR) and detection risk (DR) AR=IRxCRxDR |
| Risk of material misstatement (RMM) equation | IRxCR=RMM |
| inherent risk | likelihood that in absence of ICs an error or fraud will enter the AIS measure of the susceptibility of an account misstatement |
| control risk | likelihood that an error or fraud will not get caught by the clients ICs |
| detection risk | likelihood that an error or fraud will not be caught by the auditors procedures. Auditors control detection risk |
| audit risk | likelihood that an error or fraud will occur and not get caught by either the ICs or auditors procedures |
| ARM concepts | -auditor can only assess inherent risk or control risk and cannot affect them -he can only affect detection risk, gen. by examing more evidence -detection risk is inversely related to control risk and inherent risk |
| factors affecting account IR | -dollar size of acct -liquidity -volume of transactions -complexity of transactions -subjective estimates |
| factors affecting CR | -environment in which the Co operates -existence and effectiveness of control procedures -monitering activities |
| factors affecting DR | nature. timing, extent of audit procedures -sampling risk--risk of choosing an unrepresentative sample -nonsampling risk--risk the auditor may reach inappropriate concl based on avail evidence |
| limitations of ARM | -IR is diff. to formally assess -AR is subjectively deterimined -model treats ea. component as separate and independent -prof. judgement is req. throughout--so model is only as good as person assessing it |
Created by:
BMookieW
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