Audit Planning and Engagement Acceptance (Ch 3)
Before accepting a new audit engagement, what should auditors do to evaluate whether they should take on the client?
Attempt to contact the predecessor auditor, evaluate management integrity, and assess firm resources.
In the fraud brainstorming session, what is the primary thing you are assessing the potential for?
Assess the potential for material misstatement due to fraud
When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about what kind of bias? (bonus points if you can define this)
Evidence of a conservative systematic bias
tendency in a system, method, or cognitive process to favor existing information, methods, or beliefs and to under-react or adjust insufficiently to new evidence.
When a new client is accepted or when an audit engagement continues from year to year, what is necessary to be written before the balance-sheet date?
An engagement letter
The risk that the auditors’ own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:
Detection risk
Generally accepted auditing standards require that auditors always initially prepare and use:
A written audit plan
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
Accounts receivable
More serious internal control deficiencies can be categorized into one of two groups and how are the two differentiated?
Significant deficiencies vs Material weakness: involves magnitude of the potential misstatement that could occur and would not be detected on a timely basis
The risk of material misstatement is composed of which audit risk components?
Inherent risk and Control Risk
What document defines the scope, timing, and responsibilities of both the auditor and client before the audit begins?
The engagement letter.
Confirmations of accounts receivable provide evidence primarily about which two assertions?
Existence and Rights & Obligations
When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will: (Increase or Decrease)
Decrease
What is the primary objective of the fraud brainstorming session?
Assess the potential for material misstatement.
The revenue cycle of a company generally includes accounts?
Cash, Accts receivable, Sales
The likelihood that severe errors may have entered the accounting system and not been detected and corrected by the client’s internal control is referred to as:
Risk of Material Misstatement
What’s the difference between the permanent file and the current file in audit documentation?
The permanent file contains continuing information such as the corporate charter and bylaws.
The current file contains evidence and procedures for the current year’s audit.
What are the two main deficiencies? Explain them.
Define internal control deficiency
Operating deficiency: when a properly designed control is either ignored or inappropriately applied (possibly bc employees are poorly trained)
A design deficiency: a problem relating to either a necessary control that is missing or an existing control that is so poorly designed that it fails to satisfy the control’s objective
Internal control deficiency exists when controls don't allow the entity’s management or employees to detect or prevent misstatements in a timely fashion
What is the audit risk model formula?
Do you want this number to be low or high?
What is the ideal % of issuing an incorrect audit opinion?
Inherent Risk (high if material misstatement is likely to encounter the accounting info system)
X
Control Risk (high if material misstatement is not likely to be detected by client’s internal controls)
X
Detection Risk (high likelihood we will detect a materially misstatement thing means we can afford less effective testing, low means we need more effective testing [this is scary])
Employees being poorly trained is an example of what kind of deficiency?
Operating deficiency
When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company’s precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes’s work in the audit report? (This isn't just a yes or no)
Yes, BUT the auditors’ report should mention the use of the audit specialist only when the audit specialist’s findings affect the auditors’ conclusions.
What is the difference of detection risk, control risk, risk of material misstatement, and inherent risk
- RMM is composed of two combined risks
DR: Auditor’s procedures will fail to detect material misstatement / / CR: The risk that a company’s internal controls will fail to detect or prevent a material misstatement. / / RMM: The combined risk that a material misstatement exists in the financial statements before the audit. (combination of control & inherent risk) / / IR: Financial statements have a material misstatement before considering internal controls