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Audit Exam 1

Question	Answer
The primary reason for an audit by an independent external audit firm is to:	provide increased assurance to users as to the fairness of the financial statements
Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as:	a discipline that attests to financial information presented by management.
Users of an issuer's financial statements demand independent audits because:	management may not be objective in reporting
An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to	Express an opinion as to the fairness of Camden's financial statements.
Notes that are included with financial statements are the responsibility of the	company's management
Brandnew Company is going public and its stock will be listed on a stock exchange. Audited financial statements are required to be filed with the SEC. Who is expected to be the primary user of the audited financial statements?	Brandnew Company's investors
The committee of Sponsoring Organizations of the Treadway Commission issued a document in 1992 that has been embraced by numerous organizations, including the AICPA and the GAO. That document is:	Internal Control--Integrated Framework
When Congress passed the SOX Act of 2002, it imposed greater regulation on issuers and their auditors and required increased accountability. Provisions of the act include:	executives must certify the appropriateness of the financial statements, provides criminal penalties for fraud, auditors may not provide specific nonaudit activities for clients
Who establishes generally accepted auditing standards?	Auditing Standards Board and the Public Company Accounting Oversight Board
Which of the following best describes what is meant by GAAS?	measures of the quality of the auditors performance.
Credibility Crisis	Enron scandal and WorldCom fraud discovered; the criminal conviction of Arthur Andersen, LLP, on charges of destroying documents related to Enron case brought into question the ethics of the profession
What action did Congress take to help deal with the Credibility Crisis?	2002- SOX act 2003-PCAOB
What are the major objectives of a financial statement audit?	gather evidence and provide a high level of assurance that the financial statements follow GAAP or some other appropriate basis.
What are the auditor's responsibilities?	searching and verifying accounting records and examining other evidence
What are management's responsibilities?	determining the audit procedures applicable to specific audits and for maintaining uniform standards of fieldwork
Compliance audits	determine whether reports or returns are in compliance with established criteria or standards. must have verifiable data and established standards
Operational audits	study of some unit or aspect of organization to measure performance
How does the AICPA impact the financial statement audit?	issues the audits for nonpublic companies, establishes standards for reporting on financial statements when the CPAs role is to compile or review the financial statements rather than to perform the audit
How does the PCAOB impact the financial statement audit?	register public accounting firms that audit public companies, perform inspections of the practices of the registered firms, conduct investigations and disciplinary proceedings of registered firms, sanction registered firms
The form of attestation that provides the highest form of assurance is an:	Examination
Audits of financial statements include an expression of a conclusion about which financial statement characteristic?	Reliability
A review of a company's financial statements by a CPA firm is designed to:	provide limited assurance
The SOX Act included provisions establishing the	PCAOB
In performing a financial statement audit, what would an auditor be least likely to consider?	Quality of management's business decisions
Internal auditors are most likely to issue a report on:	internal control
What is the AICPA least concerned with?	standards guiding the conduct of internal auditors
The attest function includes:	the preparation of a written report of the CPA's findings.
GAAP are distinguished from GAAS in that:	GAAP are the principles for presentation of financial statements and underlying transactions, while GAAS are the standards auditors should follow when conducting an audit
When GAAS often do not provide "hard and fast" rules, they provide subjectivity guidance which allows auditors to:	use adequate professional judgement when applying the standards
The SOX Act requires that auditors of certain large publicly traded companies in the US perform an integrated audit that includes providing an audit report on a company's internal control and:	financial statements
What are the underlying premises of an audit relating to management's responsibility to provide an auditor?	provide all info relevant to the prep and fair presentation of the fin statements, provide any add'l info requested by the auditor, provide unrestricted access to those within the entity whom the auditor determines it necessary to obtain audit evidence
The auditors provide an opinion on whether the financial statements are in accordance with the	applicable financial reporting framework
The primary difference between financial statement errors and fraud is that:	Errors are unintentional mistakes or omissions, while fraud involves intentional misstatements
Auditors responsibility for identifying "direct effect" illegal acts differs from their responsibility for detecting	other illegal acts
When the Statements on Auditing Standards use the word "must" relating to a requirement, it means that the auditor:	must fulfill the requirement when possible
The level of assurance provided by an audit detecting a material misstatement is referred to as	reasonable assurance
Functions of the PCAOB	conduct inspections of registered public accounting firms, establish or adopt auditing standards, register public acct firms that prepare audit reports of publicly traded companies
If financial statements are not fairly presented on an overall basis, the most likely type of audit opinion will be an:	Adverse opinion
Professional skepticism includes a questioning mind and a	critical assessment of audit evidence
GAAS	concern with the measure of the quality of performance of auditor's work and the objectives to be achieved by procedures undertaken, designed to ensure the quality of work
purpose of an audit	to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly
personal responsibilities of an auditor	responsible for having appropriate competence and capabilities to perform the audit, comply with ethics, and maintain professional skepticism
Statements on Auditing Standards	interpretations of generally accepted auditing standards and provide detailed guidance as to compliance with GAAS, developed by the AICPA
Responsibility for detecting material misstatments	to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements
material misstatements include	material error, material fraud, and certain illegal acts
Unqualified opinion	clean bill of health, adequate in scope and financial statements are fairly represented
Qualified opinion	there exists some limitation on the scope of exam or 1 or more items in the statements are not presented in accordance with GAAP
Disclaimer	auditor is unable to determine the overall fairness of the financial statements
adverse	states that the financial statements are not presented in accordance with the GAAP, so material that statements are misleading
Elements of Quality control	Leadership responsibilities for quality, relevant ethical requirements, acceptance and continuance of clients and engagements, HR, engagement performance, monitoring
Regulation of Public companies	PCAOB & the SEC, registration of public accounting firms, conduct inspection of practice, establish, amend, or modify standards, conduct disciplinary proceedings
regulation of nonpublic companies	AICPA and State Boards of Accountancy, peer review for nonpublic practice segments
3 General Standards	audit is to be performed by a person having adequate technical training & proficiency, independence in mental attitude, due professional care
Meaning of independence in mental attitude	an auditor cannot have a vested interest in the client that is being audited
example of leadership leadership responsibility procedure	assign management responsibilities so that commercial considerations do not override the quality of work performed
example of relevant ethical requirements	at least annually, the firm should obtain written confirmation of compliance with its independence policies and procedures from all firm personnel who are required to be independent
example of acceptance and continuance of client relationships and specific engagements	deciding whether to continue a client relationship by considering significant issues that have arisen during the current and previous engagement
example of human resources	design effective recruitment processes and procedures to help the firm select individuals of integrity who have the capacity to develop the necessary competence and capabilities
example of engagement performance	design policies and procedures that address the tracking of progress of each engagement
example of monitoring	communicate, at least annually, the results of the monitoring to engagement partners and other appropriate individuals within the firm
GAAS are binding on the members of	AICPA
What best describes the primary purpose of SAS	They are generally accepted auidting standards
In deciding to undertake an audit engagement the CPA would most likely consider which GAAS?	The three general standards
An individual just beginning an auditing career must obtain professional experience primarily to achieve	seasoned judgement
An independent auditor must have what?	Technical training that is adequate to meet the requirements of a professional
Competence as an independent auditor includes:	having the technical qualifications to perform an engagement, possessing the ability to supervise and evaluate the quality of staff work, doing additional research or consulting others
GAAS require the auditor to be independent in mental attitude. An auditor is independent if they are	independent in fact and appearance
Beth Babett, CPA, is associated with a client's financial statements but is not independent with respect to that client. If she is requested to perform an audit on the financial statements, she should:	disclaim an opinion
The SOX Act limits the nonaudit services that an audit firm can provide to issuer audit clients. What is an allowable service that an auditor may provide to an issuer client?	tax compliance service
The SOX Act has strengthened auditor independence by requiring that management	select auditors through audit committees
audit committees have been identified as a major factor in promoting independence in both internal and external auditors. What is the most important imitation on the effectiveness of audit committees?	Audit committees are composed of independent directors. However, those directors may have close personal and professional friendships with management
The auditor should not initiate discussion with those charged with governance concerning	details of the procedures that the auditor intends to apply
the exercise of due professional care requires that an auditor with final responsibility for an engagement	be responsible for the assignment of tasks to and supervision of assistants
A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by	having an appropriate system of quality control
A firm of independent auditors must establish and follow quality control policies and procedures because these standards	give reasonable assurance that the firm as a whole will conform with applicable auditing standards
Quality control for a CPA firm, as referred to in Statements on Quality Control Standards, applies to	auditing and accounting and review services
What are the elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures	Human resources, monitoring, and engagement performance
The nature of a CPA firm's quality control policies and procedures depend on	The firm's size, the firm's operating characteristics, and whether any segments of engagements are performed by affiliates
What is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?	Managing human resources
One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to	provide reasonable assurance that the integrity of the client is considered
Within the context of quality control, the primary purpose of continuing professional education and training activities is to provide a CPA firm with reasonable assurance that personnel within the firm have	the ability to fulfill assigned responsibilities and the qualifications for advancement
In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which parnters or employees of the CPA firm were previously employed by the clients. Which quality control element is this procedure most likely to satisfy?	Relevant ethical requirements
In connection with the element of monitoring, a CPA firm's system of quality control should provide for the maintenance of	documentation to demonstrate compliance with its policies and procedures
Williams and Co. is a medium sized CPA firm enrolled in the Private Companies Practice Section. The firm is to have a peer review under the AICPA Peer Review Program. The review will most likely be performed by:	Another CPA firm
Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with auditing standards should be planned and performed with an attitude of	professional skepticism
What reflects an auditor's responsibility for detecting fraud?	An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
an auditor's responsibility for material misstatements caused by illegal acts that have a direct and material effect on the financial statements is the same as	that for errors and fraud
The most likely reason an audit cannot reasonably be executed to bring all illegal acts by the client to the audit's attention is that:	illegal acts by client often relate to operating aspects rather than accounting aspects
CPA, is audting the financial statements of XYZ. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's fin statements and illegal acts that have a material but indirect effect on fin statements will be detected?	Reasonable assurance for direct effect and no assurance for indirect
Some illegal acts relate to operating aspects of an entity more than to its financial or accounting aspects. In a financial statement audit,	the auditor should inquire of management about the violations of laws and regulations.
When an auditor becomes aware of a possible client illegal act, the auditor should obtain an understanding of the nature of the act to	evaluate the effect on the financial statements
What best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance?	A distinguishing mark of a profession to its acceptance of responsibility
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a	set of specific mandatory rules describing minimum levels of conduct a member must maintain
AICPA Conduct rule that applies only to members in the practice of public accounting	Independence (101)
When management refuses to disclose material illegal acts that were identified by the independent auditor, the independent auditor may be charged with violating violating the AICPA Code of Professional Conduct for	disclaiming an opinion
Most closely describes how independence has been defined by the CPA profession	Possessing the ability to act with integrity and objectivity
An auditor strives to achieve independence in appearance to	maintain public confidence in the profession
The concept of materiality is least important to an auditor when considering the	effects of a direct financial interest in the client upon the auditor's independence
A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust sec. were not material to the CPA but were to the child. Is the independence to the CPA impaired?	Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor
Under the ethical standards of the profession, what situation involving nondependent members of an auditor's family is most likely to impair the independence of an individual participating in an audit engagement?	a spouse's employment with a client
When would a CPA who audits XM corporation lack independence?	The CPA and XM's president each owns 25% of FOB corporation, a closely held company
Under this situation the independence of the CPA most likely would not be impaired.. The CPA has been retained as the auditor of a	credit union of which the CPA is a member
legal situation that is considered to impair the auditor's independence	actual litigation by the auditor against the current management alleging management fraud or deceit
An audit independence issue might be raised by the auditor's participation in engagements involving other nonattest services. What is the profession's attitude toward this statement?	The auditor should not make management decisions for the client
A CPA who performs primary actuarial services for a nonissuer client normally is precluded from expressing an opinion on the financial statements of that client if the	CPA prepared an actuarial report using assumptions determined by the CPA and not approved by the client
What would not impair a CPA's independence?	The client is in bankruptcy and has not paid fees related to the previous year's audit
B have provided annual audit and tax compliance services to M for several years. Mare has been unable to pay B in full for service B rendered 19 months ago. B is ready to begin field work for the current year's audit. What will permit B to work on audit?	Mare commits to pay the past due fee in full before the audit report is issued
Under the ethical standards of the profession, this investment in a client is not considered to be a direct financial interest	an investment held through a 5% interest in a nonclient diversified mutual fund
According to the professional ethical standards, a CPA is considered independent in this instance..	the CPA belongs to a country club client in which membership requires the acquisition of a pro rata share of equity
An issuer that disagrees with the independent auditor on the significant matter affecting its financial statements has several courses of action. What would be inappropriate?	appeal to the FASB to review the significant matter
With respect to records in a CPA's possession, the Code of Professional Conduct provides that	extensive analytical review schedules prepared by the client at the auditor's request are working papers that belong to the auditor and need not be furnished to the client upon request
A CPA's retention of client provided records after a demand has been made for them in an action that is	prohibited under the AICPA Code of Professional Conduct
Ethical dilemma generally involve situations in which the	welfare of one or more individuals is affected by another's decision
a form of organization that is most likely to restrict the personal liability of CPAs not involved on a particular audit that their firm has conducted	Limited Liability Partnership
The AICPA Conceptual Framework for Independence standards suggests that	it applies only when the Code of Professional Conduct does not directly address a threat to independence
What is not considered by the AICPA Conceptual Framework for Independence Standards a broad category of threat to auditor independence?	safeguards
A CPA's investment int he stock of an audit client is considered a	direct financial interest which impairs independence regardless of amount
What is true with respect to the SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?	the auditor in not independent
In what circumstance is a CPA firm's independence most likely to be impaired?	The spouse of a staff member on the audit has an immaterial common stock investment in the audit client
What partner would be least likely to be considered a covered member for the purposes of the audit of Company A, performed by the Chicago office of a national CPA firm?	A partner in the San Diego office of the CPA firm who maintains a small immaterial investment in Company A
True statement concerning the SOX Act of 2002	It makes performance of nonattest services relating to financial info systems design and implementation for audit clients unlawful
Contingency fee based pricing of accounting services is	prohibited if associated with the type of audit opinion received
What best describes the passing of confidential info from a client to its auditor, that information	is not legally protected and can be subpoenaed by a federal court
Correct statement concerning a publicly traded company that purchases the practice of a public account firm	It must separate performance of attest services and allow them to be performed by the remain "shell" public accounting firm it has purchased or by another public accounting firm
Why do we need professional ethics?	to maintain public confidence and provides practical guidance to the individual member in maintaining a professional attitude
2 major sections of the code	Principles and Rules
what are covered members	an individual, firm, or entity that is capable of influencing an attest engagment
What is the impact of a covered member?	influencing someone to over look fraudulent statements, make the CPA firm noncredible, mislead the public and investors
How does the past employment with the client impact independence?	CPAs must disassociate themselves and must not participate in audits of any periods during which they were employed
How does future employment with the client impact independence?	CPAs considering future employment must notify the accounting firm of any offers so they can remove the CPA from all engagements until the offer has been accepted or rejected
Rule 501-- Acts Discreditable	gives the AICPA authority to discipline those members who act in a manner damaging to the reputation of the profession
Client provided records always should be	returned to the client
Client records prepared by the CPA should be provided to the client, unless	they are incomplete or fees are due to the CPA for preparing those records
Supporting records not reflected in the client's books and records should be	provided to the client, but may be withheld if there are fees due to the CPA for preparing those records
CPA working papers are	the CPAs property and need not be provided to the client, unless required by state or federal law
nature of ethics	moral principles and values that govern the actions and decisions of an individual or groups
ethical dilemmas	a situation that an individual faces involving a decision about appropriate behavior
framework for addressing ethical dilemmas	identify the problem, identify possible courses of action, identify constraints to decision, analyze likely effects of possible courses of action, select the best course of action
need for professional ethics	provide members with guidelines for maintaining a professional attitude and provide guidelines for conduct in a manner that will enhance the stature of the member's profession
Four major parts of the AICPA code	Principles, Rules, Interpretations, Ethical rulings
Details of the Principles of the Code	Responsibilities, The public interest, integrity, objectivity and independence, due care, scope and nature of services
details of the rules	independence, integrity and objectivity, compliance with standards and accounting standards, confidential client info, contingent fees, other topics, form of practice and name
Under section 11 of the Securities Act of 1933 what standards may a CPA use as a defense	GAAP
The prevailing legal view is that an auditor's liability to 3rd parties at common law may be based on:	ordinary negligence if such parties belonged to a specifically foreseen class but were not specifically known
An auditor's statutory liability	the auditor has a greater burden of defense under the Securities Act of 1933 than the Securities Exchange Act of 1934
Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted	without good faith
Major characteristic of Securities Act of 1933	regulates the initial sale of securities in interstate commerce, burden of proof is on the auditor, must prove due diligence
Major characteristic of Securities Exchange Act of 1934	Burden of proof is on the plaintiff-must prove they relied on the financial statement and that the auditor was grossly negligent
Major characteristic of RICO Act	auditor may be subject to this in that racketeering activities are defined to include mail fraud and fraud in the sale of sec. court decided they can't be held liable unless they actually participated
Major characteristic of Private Securities Reform Act of 1995	provides for proportionate liability so that auditors pay only their portion of judgement
What is the auditor's legal liability to clients under common law?	based on a contractual agreement may be sued by client for ordinary negligence, gross negligence or fraud auditor may be sued on basis of breach of contract or negligence
What is the auditor's legal liability to 3rd parties under common law?	governed by accountant’s knowledge of use of work by third parties,not liable for ordinary negligence if third parties are unknown as users of accountant’s work. If third parties are known as users, then they may sue for ordinary negligence
ordinary negligence	Lack of reasonable care. Failure to perform engagement in accordance with applicable professional standards. Failure to exercise due professional care
gross negligence	Lack of even the slightest care. Substantial failure to comply with Generally Accepted Auditing Standards
fraud	Misrepresentation of a material fact. Intent to deceive.
joint and several liability	Defendant may be required to pay the losses attributed to the actions of other defendants who do not have the financial resources to pay.
proportionate liability	provides that defendant is responsible for only the losses caused by that defendant’s negligence.
What is the importance of the 1136 Tenants Case?	engagement letters are essential, be alert for and follow up on unusual items,report clearly and concisely using standardized language in SAS and SSARS
What types of liability do CPAs have in the US?	both common law and statutory law
Ordinarily a claim of negligence against a CPA states that the CPAs performed their duties	without due professional care
Under which common law approach are auditors most likely to be held liable for ordinary negligence to a reasonably foreseeable third party?	Rosenblum Approach
Under which common law approach is an unidentified third party least likely to be able to recover damages from a CPA who is guilty of ordinary negligence?	Ultramares Approach
A CPA is considered 5% responsible for an investor's loss. Under which concept is it most likely that the CPA will be held liable for 100% of the damages if the other defendants are bankrupt?	Joint and several liability
Establishing due diligence is most directly related to court cases tried under:	The 1933 Securities Act
A common stock investor's burden of proof relating to a CPA's deficiency of performance under the 1933 Securities Act, when compared to the 1934 Securities Exchange Act is:	Less
Under common law rules, a claimant suing a CPA firm based on an audit of financial statements must prove:	a loss was sustained, reliance upon the the financial statements, auditors were guilty of ordinary or gross negligence
the concept of privity may be important in defending auditors against potential claimants. Privity in general only allows	clients to sue their auditors
LIMITED LIABILITY PARTNERSHIP (LLP)	Most large public accounting firms have recently selected this form of business, loss of any partner is limited to his or her capital in the partnership,liable for their own acts but their personal assets are not at risks for acts of other partners
Limited Liability Corporations (LLC)	limited liability regardless of their participation in the corporation. The personal assets of members are protected.
The audit risk against which the auditor and those who rely on their opinion require reasonable protection is a combo of 2 separate risks. 1st risk is that statements contain material misstatements. the 2nd is:	material misstatements that occur will not be detected by the audit
Some account balances are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as	inherent risk
As the acceptable level of detection risk decreases, an auditor may change the	nature of substantive tests from a less effective to a more effective procedure
the risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is	detection risk
the acceptable level of detection risk is inversely related to the	assurance provided by substantive tests
analytical procedures can best be categorized as	substantive tests
the objective of performing analytical procedures in planning an audit is to identify the existence of	unusual transactions and events
analytical procedures used in planning an audit should focus on	enhancing the auditor's understanding of the client's business
analytical procedures alone may provide	the appropriate level of assurance for some assertion
for all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent	in the planning stage and in the review stage
regarding specialists, the auditor should obtain an understanding of	the methods and assumptions used by the specialist
An auditor would not rely on this type of specialist:	internal auditor
The measure of quantity and quality of audit evidence lies in the	auditor's judgement
In gathering evidence in the performance of substantive procedures, the auditor	relies on persuasive rather than convincing evidence in the majority of cases
a clients accounting records cannot be considered sufficient	audit evidence to support the financial statements
This would provide the most reliable audit evidence	inspection of the bank statements obtained directly from the clients financial institution
ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion	auditor judgement
audit documentation that records the procedures used by the auditor to gather evidence should be	designed to meet the circumstances of the particular engagement
standardized working papers are often used, chiefly because they allow audit documentation to be prepared more	efficiently
although the quantity and content of audit documentation varies with each particular engagement, an auditor's permanent files most likely include	analyses of capital stock and other equity accounts
The audit working paper that reflects the major components of an amount reported in the financial statements is the	lead schedule
an auditor who has accepted an engagement to audit financial statements wishes to review the predecessor's audit documentation. such a review is	permitted if the client and the predecessor auditor consent
a purpose of a management representation letter is to reduce	the possibility of a misunderstanding concerning management's responsibility for the financial statements
when an audit is made in accordance with auditing standards, the auditor should always	obtain certain written representations from management
an auditor should obtain written management representations when	management's knowledge of allegations of fraud or suspected fraud affecting the entity
an auditor would most likely include in a management representation letter	management's acknowledgement of its responsibility to detect employee fraud
when considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations	complement, but do not replace, substantive tests designed to support the assertion
a written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the	CEO and CFO
Which type of risk does an auditor have control over through substantive auditing procedures?	Detection Risk
Which type of risk does the management of a company have the most control over in the short term?	Control Risk
inherent risk	The possibility that a material misstatement will occur in any given account before considering internal control.
Further audit procedures include:	Tests of controls
basic procedure used in an audit	Substantive procedures
Auditors must gather "sufficient appropriate audit evidence" to support their audit opinion. What is least likely to serve as a substitute for performing other audit procedures	Obtaining a representation letter signed by top management.
The type of transactions that ordinarily have a high inherent risk because they involve management judgments or assumptions are referred to as:	Estimation transactions.
ordinarily is considered the weakest form of evidence?	Replies by company employees to auditor oral inquiries
method of analytical procedure analysis is most useful because many expenses, such as cost of goods sold, might be expected to bear a predictable relationship to net sales?	Vertical analysis
example of trend analysis	Comparison of inventory levels over the past 3 years
Audit documentation relating to the A Company audit should be sufficient to allow which type of auditor to understand the audit work performed?	An experienced auditor
Documentation may not be deleted from the working papers after the:	Documentation completion date.
What are financial statement assertions?	representations of management embodied in the financial statements
How are financial statement assertions related to audit objectives and audit procedures?	used by the auditor to develop audit objectives
What is audit risk?	risk that auditor will not unknowingly modify auditor's report when financial statements are materially misstated.
3 components of audit risk	inherent risk, control risk, detection risk
Are the 3 components of audit risk related to each other?	the less the inherent risk and control risk the greater the detection risk that can be accepted by the auditor. inherent and control risks exist independently
inherent risk	susceptibility of account balances to material Eor I in the absence of internal control, function of the nature of the account
control risk	risk that material e or i will not be detected on timely basis by system of internal control, function of the effectiveness of internal control
detection risk	risk that auditor will not discover material e or i in an account balance when they do exist. function of the effectiveness of auditing procedures
physical evidence nature	evidence obtained from inspection and observation of assets
physical evidence usefulness	provides evidence as to physical existence and condition of assets
physical evidence limitations	provides no proof of ownership, sometimes difficult to determine quality or condition of certain types of assets
documentary evidence nature	examination of documents supporting recorded transactions, documents which can be easily created, altered, or forge are not as reliable as those that can't
documentary evidence reliability	largely dependent on nature, source of the document, and the condition of the internal control structure
documentary evidence usefulness	provides information as to the cost and ownership of assets and the validity of recorded transactions
analytical procedures	evaluation of financial info by studying financial and non financial relationships
analytical procedures timing of procedures	planning stage, during field work, or applied at the end of exam --most useful are before or after
oral and written client representations	oral response of client to auditor's inquiries
factors of oral representation reliability	objectivity of person providing evidence, knowledge of person providing evidence, reasonableness of the response, generally given low level of reliability because this type of evidence represents assertions of the company
3 types of audit procedures	substantive, tests of controls, risk assessment
substantive procedures	procedures designed to verify the accuracy of account balances, most determine if material misstatements exists in the balances
tests of control	designed to test the operating effectiveness of controls that have been prescribed by management
risk assessment procedures	designed to obtain an understanding of the client environment and to assess the risks of material misstatement
What are working papers?	the record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach
2 primary functions of working papers	provide principle support for the representation that the audit was performed in accordance with GAAS, the auditors' opinion
How long should audit working papers be retained?	five years for nonpublic, seven years for public
audit documentation completion date	60 days for nonpublic, 45 days for public, means that after that period the papers can no longer be altered
How are working papers organized?	current files: applicable to the current year and permanent files: applicable to many years
internal control structure nature	policies and procedures established to provide reasonable assurance that apecific entity objectives will be achieved
internal control structure usefulness	adequate system promotes accuracy and reliability in accounting data- major factor in determining nature, timing, and extent of substantive tests
accounting information system nature	records of the client which result from recording classifying and summarizing of transactions
accounting information system reliability	depends on condition of internal accounting system and control procedures over preparation of records
relationships expected to exist within analytical procedures	financial information for comparable prior periods giving consideration to known changes, anticipated results, elements among financial info within the period, relevant non financial info
3rd party representation confirmations	written communication receive by auditor directly from a party outside the client organization, very reliable but less effective at addressing completeness and evaluation
3rd party representation lawyer's letters	referred to as "letter of audit inquiry" client request their attorney's to furnish directly to their auditor their assessments of the outcomes of litigations being handled
3rd party representation reports of specialists	persons possessing special skill or knowledge in a field other than accounting, must be evaluated on competence, independence and not referred to on audit report
usefulness of oral evidence	useful in corroborating other types of evidence, may disclose situations which require investigation, may provide evidence not available elsewhere
letters of representation nature	written representation of management in response to inquiries of auditor, attesting to items relating to the financial statements
objectives of obtaining a letter	serves to confirm oral rep, may provide types of info not reflected in acct records, provide evidence supporting opinion, avoids misunderstanding, reminds mgmt of its responsibility of fin statements
Who prepares the letter of representation?	Auditor
When is the letter of representation prepared?	upon completion of the audit
Who signs the letter of representation?	CEO and CFO of client
computations	independent computations made by the auditor to prove the arithmetical accuracy of the client's accuracy and records
preconditions for an audit engagement	determine the acceptability of the financial reporting framework, agreement of responsibilities of management, determine if there are limitations on scope
acceptance and continuance decision	integrity of management and those charged with governance, engagement team has necessary capabilities, time and resources, comply with ethical requirement, background check
external factors affecting the entity	industry, laws and regulations
internal factors affecting the entity	structure, operation, ownership, governance structure, types of investments, mgmt views and attitudes, financing activities
entity's selection and application of accounting policies	indication of management bias, method of accounting for unusual transactions
the entity's financial performance	current and future profitability, how they measure and review financial performance

Created by: 1401120066

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