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Audit Exa 2

Test 2

QuestionAnswer
What is audit risk? The possibility that the auditor may unknowingly fail to appropriately modify their opinion on a financial statement misstated.
How does the risk of misstatement and the quality of audit evidence impact the amount of evidence needed? The higher the risk and the lower the quality, the more evidence is needed.
What is management’s responsibility in relation to the financial statements? Manager is responsible for fair presentation of the financial statement, and that they are in conformity with gapp.
What are the three components managers of this responsibility? Account and Balances, Classes of transaction and events, Presentation and disclosure
Assertions about Account Balances? Existence,Completeness, Valuation and allocation, Right and obligation
Assertion about Classes of transaction and events? Occurrence,Completeness,Accuracy,Classification,Cutoff
Assertion about presentation and Disclosure? Occurrence,Completeness,Classification and understand-ability,Accuracy and valuation, Rights and obligation
Do all assertions apply to all financial statement items? NOT ALL ASSERTIONS APPLY TO ALL FINANCIAL STATEMENT
What are the components of audit risk? The risk of material misstatement of an assertion of disclosure, class of transaction, and account balances.
What are the components of the risk of misstatement? Inherit risk,Control Risk
What is inherent risk? Inherit risk refers to the possibility of misstatement before considering the clients internal control
What circumstances/characteristics impact inherent risk? Some of the things that effect the inherit risk are the nature of the business, substantial turnover, inconsistent profitability, going concern problem
What is control risk? A risk of material misstatement that is not detected by the client’s internal control.
Can auditors impact control or inherent risk? Both Inherit and control risk exits regardless of the audit, therefore auditors cannot impact this level of risk.
What is detection risk? Is the risk that Auditors will fail to detect a material misstatement that can exist in a relevant assertion.
Can auditors impact the level of this risk? Auditor can lower detection risk by test of balances, transactions, and disclosures, a better substantive analytical procedure.
Which types of risk do auditors assess? Auditors assess inherit and control risk.
Which types of risk do auditors restrict? Restrict detection risk through test of details of balances, substantive analytical procedures
How do these components of audit risk interrelate with each other? How do they impact overall audit risk? AR=IR*CR*DR AR=Audit Risk, IR=Inherent Risk, CR=Control Risk, DR=Detection Risk, RMM=Risk of Material Misstatement (IR*CR)
If you increase or decrease one form of risk and hold the other two constant, how would this impact overall audit risk? It will either increase or decrease the overall audit risk.
What is audit evidence? all the information used by auditors in arriving at the conclusions on which the audit opinion is based.
What is meant by sufficient and appropriate audit evidence? Sufficient evidence is the quantity of it, and appropriate evidence is a measure of the quality of evidence.
What makes audit evidence relevant? What makes it reliable? Relevant relates to the assertion being addressed, and reliability of evidence obtained and how it was obtained.
Given examples of audit evidence, be able to determine if the reliability is high, medium, or low and explain why it is so. Reliable if have original documents, documentary, obtained directly from auditor, through system of effective controls, source from outside the clients company.
Know the 7 major types of audit evidence and be able to give an example of each. Client representation,Documentary evidence, Third-party representation,Physical evidence, Computations, Data interrelationships,Accounting Information System
What is the audit trail? Paper or electronic trail to validate or invalidate journal entries.
Confirmations: used in the audit of a number of accounts, including cash, accounts receivable, dept. accounts
Lawyers’ Letters: source of information about litigation that is pending.
Representation Letter: summarize the most important oral representation made by management during the engagement.
Risk assessment procedures: designed to obtain an understanding of the clients and its environment also its internal control
Test of Controls: are designed to test he operating effectiveness in preventing material misstatement
Substantive procedures: used to detect misstatement of relevant assertions. Includes analytical procedures and, test of detail account balances.
Nature: Type and form of testing
Timing: Timing the audit occur at year end or interim dates
Extent: The greater the risk for material misstatement the greater the needed extent of substantive procedures
Be familiar with the 8 different categories of audit procedures: Inquiry,Inspection of records or documents Inspection of tangible assets,Observation Analytical procedures, Recalculation, Re-performance External conformation
How do audit cost considerations impact audit procedures and audit evidence? The greater the risk for material misstatement, the stronger the evidence required by auditors, which increases the cost to obtain it.
What are analytical procedures? The evaluations of financial statement information by a study of relationships among financial and non-financial data.
What are the four steps involved in performing analytical procedures? Develop an expectation of an account, Determine the amount of difference from the expectation that can be accepted without investigation, Compare the company’s account(ratio) with the expectation, Investigate and evaluate significant differences
In general, how do auditors approach the audit of accounting estimates and fair values? The auditors should pay special attention to the areas of accounting estimates, fair value, and related party transactions.
What is a related party? Officer, directors, principal owners, and members of intermediate family; affiliated companies.
Why is it important for the auditors to identify related parties? Related party transaction is often used to facilitate fraud.
What is the significance of related party transactions? They need to be disclosed in the financial statement.
What are working papers? A record of the audit procedures performed, relevant audit evidence obtained, and the conclusion the auditors reach.
What are the primary purposes of working papers? Evidence of the auditor basis for their conclusion required by PCAOB and AICPA Evidence that that the audit was performed in accordance with GAAS.
What are secondary functions of working papers? Assist both continuing audit teams and new engagements, Assists supervisors in reviewing the quality of work performed Demonstrate the accountability of the various audit team members, Assist peer review, successor auditors
What information should be documented in the working papers? o Bank reconciliation, analysis of ledger accounts, chart of flowchart of clients internal control, etc…
Who owns the working papers? The Auditor owns the working paper, not the client.
How long working papers must be maintained 7 years for public and 5 years for nonpublic companies
Can working papers be changed after the audit is completed? Your working papers can be changed 60 days after the audit release date
Be familiar with the five categories of working papers. o Audit Administrative Working Papers o Working Trail Balance o Lead Schedules o Adjusting Journal Entries and Reclassification Entries o Analysis of Ledger Account o Reconciliation o Computational Working Papers o Corroborating Documents
What are some general guidelines for preparing working papers. o Identified working paper prepared for each topic o PBC-prepared by client o Nature of work clearly indicated
Who reviews audit working papers? Are reviewed at supervisory level of the CPA firm
Created by: tidey4