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53 Cards in this Set
- Front
- Back
Two Types of Fraud Considered in an Audit are...
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Fraudulent Financial Reporting
Misappropriation of Assets |
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The 7 steps involved in considering the risk of fraud are...
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1) Audit Team Discussion
2) Identify Information Necessary to Assess Fraud Risk Factors 3) a. Identify Risk Factors Related to Fraudulent Financial Reporting b. Assess Fraud Risks 4) Respond to Assessed Risks 5) Evaluate Audit Evidence 6) Communicate Fraud Matters 7) Document Fraud Matters |
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The 5 Materiality Judgment Criteria are...
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1) Absolute Size
2) Relative Size 3) Nature of the Item or Issue 4) Circumstances 5) Cumulative Effects |
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The Audit Risk Model Equation is...
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AR=IR*CR*AP*TD
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Audit Risk (AR) is...
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The amount of Material Misstatement that might remain undetected after the auditor has completed all audit procedures deemed necessary.
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Business Risk is affected by what 3 factors?
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1) The degree to which external users rely on the financial statements
2) The likelihood that a client will have financial difficulties after the audit report is issued 3) Auditors evaluation of managements integrity |
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What is "Business Risk"?
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The risk that the auditor will suffer harm because of a client relationship, even if the audit report rendered was correct
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Control Risk (CR)
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Risk that material misstatement will not be prevented or detected on a timely basis by the CLIENTS IC System
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Inherent Risk (IR)
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The risk of a material misstatement assuming there are no related internal control structure policies or procedures
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Analytical Procedures Risk (AP)
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The risk that analytical procedures would fail to detect material misstatements that are not detected by the IC structure
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Substantive Test of Details Risk (TD)
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The risk that substantive test of details would fail to detect material misstatements that are not detected by the IC structure or the analytical procedures
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Factors that may affect the inherent risk are...
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1) Nature of Clients Business
2) Fraud Factors 3) Results of previous audits 4) Intial vs. Repeat Engagement 5) Related Parties 6) Non-Routine Transactions 7) Judgement required to correctly record account balances and transactions 8) Susceptibility of Assets to Misappropriation |
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The 3 Fraud Factors are...
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a. Management's characteristics and influence over controls
b. Industry Conditions c. Operating characteristics and Financial Stability |
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Vouching
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Selecting Item of Information from accounting records (Journal, Ledger) and following the path back to the origin
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Tracing
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Selecting a source document and following the path forward to entries and posting (Test for Completeness)
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Scanning
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To indentify unusual items and events.
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3 types of Confirmation are...
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1) Positive with info to be supplied by the recipient
2) Positive with info included on the form 3) Negative (Weakest Type) |
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Five Types of Analytical Procedures
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1) Compare client and industry data
2) Compare client data with similar prior-period data 3) Compare client data with client-determined expected results 4) Compare client data with auditor-determined expected results 5) Compare client data with expected results, using non-financial data |
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Preengagement Arrangements
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1-Obtaining and reviewing financial information about the prospective client
2-Inquiring of external parties 3-Considering whether the engagement would require special attention or involve unusual risks 4-Evaluating the accounting firm's independence with regard to the prospective client 5-Considering the need for special skills |
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Burden of communication is on...
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The Successor Auditor
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4 things contained in the Engagement Letter
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1) Objectives of Engagement
2) Management's Responsibilities 3) Auditor's Responsibility 4) Any Limitations of Engagement |
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7 steps to understanding the client's business
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1-Gaining an understanding of a client's business risk
2-Risk-Based Auditing (RBA) 3-Inquiry and observation of client personnel 4-Identification of related parties 5-Review of prior audit documentation 6-Study industry accounting and auditing practices 7-Considering the work of internal auditors (SAS 65) |
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Analytical Procedures are done how often?
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Twice in an audit:
1) At the Beginning 2) At the End |
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Managements IC Responsibilities
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1) Mgt's responsible for establishing and maintaining adequate IC over financial reporting
2) Identifying the framework used to evaluate effectiveness of the entity's IC 3) Mgt's assessments of the effectiveness of the entity's IC |
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Auditors IC Responsibilities
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1) If a PCAOB audit, auditors must evaluate the effectivness of the internal control over financial reporting and express an opinion on it
2) Auditors must assess the level of control risk, as a means of planning the audit |
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Reasonable Assurance regarding the achievement of objectives in the following three categories:
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1) Reliability of financial reporting
2) Efficiency and effectiveness of operations (only to extent financial statements) 3) Compliance with applicable laws & regulations (only to extent on financial statements) |
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COSO's five components of Internal Controls are...
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1-Control Environment
2-Risk Assessment 3-Information and Communication 4-Control Activities 5-Montoring |
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7 Internal Control Objectives for Transactions are...
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1-Validity
2-Completeness 3-Authorization 4-Accuracy 5-Classification 6-Accounting 7-Proper Period |
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Internal Control Objective test for Validity tests
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whether transactions did exist or actually did occur
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Internal Control Objective test for Completeness tests
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whether every transaction does get recorded
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Internal Control Objective test for Authorization tests
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whether transactions were approved by the appropriate people
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Internal Control Objective test for Accuracy tests
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whether transactions were recorded at the proper amounts
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Internal Control Objective test for Classification tests
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whether transactions were recorded at the correct amounts
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Internal Control Objective test for Accounting tests
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whether transactions and accounts are grouped properly
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Internal Control Objective test for Proper Period tests
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whether transactions were recorded on the proper date and period
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The 3 phases of Internal Control Evaluation are...
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1) Understand and Document the Client's Internal Control
2) Assess the Control Risk (preliminary) 3) Perform Test of Controls and Reassess Control Risk |
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Perform Test of Controls require what 4 things be done?
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1-Make inquires of appropriate client personnel
2-Examine Documents, records and reports 3-Observe control related activities 4-Reperform client procedures |
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PCAOB requires how many walkthroughs?
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2
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Phase 1-Understand and Document the Client's Internal Control requires what 3 things be done?
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1-Identifying entity-level controls
2-Document the Internal Control Understanding 3-Accounting and Control System Flowcharts- |
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Document the Internal Control Understanding can be accomplished by either of these 2 items?
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Internal Control Questionnaires
Narrative Descriptions |
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Identifying entity-level controls are accomplished by these 4 steps
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1-Making inquires of appropriate client personnel
2-Inspecting company documents 3-Observing the application of specific control 4-Tracing transactions through the IS. "walkthrough" |
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Six Step Audit Procedure
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1-Planning the engagement
2-Using a top-down approach 3-Testing controls 4-Evaluating control deficiencies 5-Wrapping up 6-Reporting on Internal Control |
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Significant Deficiencies
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Not material but inform audit committee. Could adversely affect financial data
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Internal Control Letter
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Is an SAS not PCAOB requirement
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Management Letter
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Optional
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In a PCAOB audit, auditor must...
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communicate in writing to the management and the audit committee all material weaknesses identified
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2 limits to Internal Controls are...
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1-Management override
2-Collusion |
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Inherent Risks in the Revenue and Collection cycle are...
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1-Revenue Recognition
2-Collectivity of Accounts Receivable 3-Customer Accounts & Allowances |
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5 types of Control Activities for the Revenue and Collection cycle are...
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1-Segregation of Duties
2-Authorization of Transactions 3-Access to Assets 4-Adequate Documents and Records 5-Independent Checks on Performance |
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Control Risk Assessments should include...
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1-Activities to understand IC system
2-Test of Controls |
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Audit procedures to test for existence are...
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Inspection
Inquiry Examination Scanning Analytical Recalculation |
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3 reasons to justify the omission of a confirmation of a client's accounts receivable
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1-Not material
2-If the combined level of the inherent risk and control risk is low 3-If the confirmation of accounts receivable is expected to be ineffective |
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May use Negative Confirmation is ALL what are true?
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1-Combined assessment of IR and CR is low
2-Large number of small balances 3-Receipts expected to give confirmations adequate attention |