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Audit Quiz 2
| Question | Answer |
|---|---|
| what is the relationship between the successor and predecessor auditors? | successor auditor inquires about client and prior audit experience predecessor auditor allows access for client + workpapers w/ permission |
| what are the components of the engagement letter? | timing and fees, services that will be provided, auditor responsibilities and limitations, management responsibilities, special items/arrangements/ liabilities |
| what do internal auditors do? | provide objective assurance and consulting activity to improve the organization's operations; evaluate effectiveness of risk/control procedures; conduct audits within their organization and sometimes assist external auditors |
| can when the external audit firm rely on the work of the internal audit function? | (1) internal auditors are objective in their work (2) internal auditors are competent in t heir work (3) internal auditors are systematic and disciplined |
| which of the 3 GAAS categories requires proper planning? | fieldwork |
| what are the steps in planning the audit? (8) | 1. assess business risks 2. establish materiality 3. consider multi-locations 4. assess the need for specialists 5. consider laws / regulations 6. identify related parties 7. value-add services 8. document overall strategy |
| what are the 2 components of establishing overall materiality? | 1. establish tolerable misstatements for accounts 2. establish tolerable misstatement for disclosures |
| how do multilocations or business units affect the audit? | auditor must assess which locations will be audited, the extent of procedures to be performed, allocation to reduce overall risk |
| what are potential areas that require specialists? | 1. tax provision 2. valuation 3. pensions 4. information technology |
| who assumes responsibility for the work performed by a specialist? | the auditor |
| what are the 2 components of illegal acts as they relate to audits? | 1. direct and material (ex: accounting fraud) 2. material, but indirect (ex: employee has been bribing customers but the bribes are an immaterial amount) |
| how should a company do business with related parties? | consolidate if you own enough and conduct transactions at an "arm's length" |
| what are the 3 main decisions a company makes when creating its audit plan? | 1. nature (what types of testing / procedures) 2. timing (when am I doing the audit?) 3. extent of audit texts (how much work? based on materiality) |
| what are the 3 types of audit tests? | 1. risk assessment procedures 2. tests of controls 3. substantive procedures |
| what is the purpose of risk assessment procedures? | used to obtain an understanding of the entity and its environment, including internal controls |
| what is the purpose of tests of controls | directed toward the evaluation of the effectiveness of the design and operation of internal controls |
| what is the purpose of substantive procedure? | detect material misstatements in a transaction class, account balance, and disclosure components of the financial statements |
| what are the 2 types of substantive procedures? | 1. tests of details or transactions 2. analytical procedures |
| what are tests of details or transactions? | tests for errors or fraud in individual transactions, account balances, and disclosures |
| what are analytical procedures? | evaluations of financial information through analysis of plausible relationships among financial and non-financial data (what do you "expect"?) |
| what are the 5 PCAOB assertions substantive procedures test? | 1. existence or occurrence 2. completeness 3. valuation or allocation 4. rights and obligations 5. presentation and disclosure |
| what are dual purpose tests? | tests that combine tests of controls and substantive tests of transactions |
| what is materiality? | maximum amount by which the auditor believes the financial statements can be misstated and not affect the decisions of users |
| what is quantitative materiality? | numerical threshold for materiality calculated by the auditors |
| what is qualitative materiality? | anything, whether nominal or not, that would impact users of the financial statements |
| what are some factors that lead auditors to use the low end of the range of quantitative materiality? | - material misstatements during prior year - high fraud risk - loan covenant violations / going concern issues - high market pressures - volatile business environment - high bankruptcy risk |
| what are the 4 steps in applying materiality on an audit? | 1. determine overall materiality 2. determine tolerable misstatement 3. determine summary of audit threshold 4. evaluate auditing findings |
| what is typically used as the benchmark for setting overall materiality for for profit entities | income before taxes (common rule of thumb = 5% of income before taxes) |
| what is typically used as the benchmark for setting overall materiality for not for profit entities | total revenues / expenses |
| what is typically used as the benchmark for setting overall materiality for asset-based entities (investment funds) | net assets or total assets |
| low materiality threshold = | high risk and more work by the auditor |
| high materiality threshold = | low risk and less work by the auditor |
| what is tolerable misstatement | amount of planning materiality allocated to an account or class of transactions - typically 50% to 75% of total materiality |
| what is the purpose of tolerable misstatement | - establish a scope for the audit procedures over individual account balances - audit all account balances over the threshold - errors in any accounts below threshold would not generate material misstatements |
| why is the combined tolerable misstatement typically greater than materiality | - not all accounts are misstated by their full tolerable misstatement allocation - audits of individual accounts are conducted simultaneously - materiality serves as a safety net and is often a small fraction of the account being audited |
| what is the summary of audit difference threshold | typically 1% to 5% of materiality -- any misstatements over this threshold are accumulated and recorded |
| what are 6 procedures for evaluating a prospective client? | 1. review financials 2. contact 3rd parties 3. consider special circumstances / biz risk 4. determine independence 5. confirm technical skills 6. ensure abidance by regulatory codes |
| what does continuing client retention involve? | evaluating client retention periodically, especially after significant events like conflicts over accounting and auditing issues and siputest over fees |
| what are the 3 preliminary engagement activities? | 1. determining audit engagement team's requirements 2. ensuring audit team/firm comply with ethical and independence requirements 3. establish an understanding with the entity (engagement letter, internal auditors, audit committee) |
| who is the engagement letter addressed to? | the audit committee |
| how do auditors understand an entity's business and transactions | - industry reports - management compensation agreements / debt covenants - global economic events |
| how do auditors identify related parties | review board minutes, conflict of interest statements, contracts, and significant, unusual transactions |
| what is a related party? | company with a relationship to the company being audited -- gives a risk of hiding liabilities and must be disclosed |
| what is planning materiality? | total amount that is material based on the percentage applied to the measurement base (ex: pre-tax income) |
| what are some options if a company's measurement based changed significantly? | - add back non-recurring charge - normalize this year - use a different metric (total assets/revenues) |
| why is the materiality for cash often set at the lowest amount? | easier account to audit, typically no misstatements |
| what information should the successor auditor get from the predecessor auditor? | - integrity of management - disagreements with management regarding accounting principles - fraud allegations - information about internal controls - reasons for the change in auditors |
Created by:
graceatnyu