Review and Audit Jeopardy

Planning and Procedures

100

What is one common time management mistake made during a review engagement?

Spending too much time on minor details while neglecting more critical areas of the review, leading to inefficiency and missed deadlines.

200

What is an example of a common analytical procedure used in a review engagement?

Comparing current year financial results with prior periods or budgets to identify significant variances.

300

Which of the following is a qualitative factor affecting the materiality of an audit?

a) The company operates in a highly competitive industry
b) A tight reporting deadline to the bank
c) The company has an unusually large cash balance
d) The company's main lender is considering an increase to the company's line of credit pending a review of the FS being audited

D) The company's main lender is considering an increase to the company's line of credit pending a review of the FS being audited

400

What is a potential risk if analytical procedures are performed without a proper understanding of the business or industry?

The risk of misinterpreting data, leading to false conclusions or missing critical anomalies.

500

Why is it important to obtain an understanding of the entity and its environment?

The practitioner is not in a position to identify areas in the financial statements where material misstatements are likely to arise or to design suitable inquiry and analytical procedures.

Documentation & Procedures

100

Why is proper documentation critical in a review engagement?

Proper documentation ensures that all review procedures, findings, and conclusions are clearly recorded, providing evidence for the review and facilitating communication with clients or stakeholders.

200

In a review engagement, which of the following is least likely to occur during the engagement? 

a) Analytical procedures
b) Discussions with management
c) Enquires with management and other personnel
d) Review of the internal controls of the entity

D) Review of the internal controls of the entity

300

What is the recommended practice for documenting communication with clients during a review engagement?

Document the date, client name, client role, content, and any decisions or follow-up actions from client communications to ensure clarity and support transparency.

400

Why is it important to ensure that documentation is completed in a timely manner during a review engagement?

Timely documentation helps prevent memory lapses, ensures the accuracy of the information, and allows for a more efficient review process by providing an up-to-date record of work completed.

500

An auditor performs an analytical review of a client's financial statements during the planning stage of an assurance engagement. The review shows in a decrease in the accounts receivable turnover over the prior year. Which of the following statements is correct?

a) There is an understatement of the accounts receivable balance
b) There is a cut-off issue with the accounts receivable balance
c) Accounts receivable are not being collected as quickly as they were
d) The company tightened its credit granting policy

c) Accounts receivable are not being collected as quickly as they were

Materiality

100

Materiality significantly impacts the _____ of financial statements by shaping the quality, relevance, and reliability of the information presented.

Users (bank, SHL, owners, managers, employees, BOD, regulators, CRA, etc).

200

True or false: During the calculation of overall materiality the net loss before taxes, gross revenues, and the shareholder loan preliminary balances, are all common benchmarks used by auditors for profit-oriented enterprises.

False; if the base is negative it cannot be used and the shareholder loan balance is usually not considered an appropriate base used for materiality. The determination of materiality is always subject to professional judgment.

300

In an audit, _______ materiality is a threshold set for particular account balances, transactions, or disclosures that users might consider material due to their nature or context, even if they are below overall materiality.

Specific materiality.

Performance Materiality: a threshold set below overall materiality to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

400

What type of items could be considered when “normalizing” net income for materiality of an entity?

• Non-recurring items: gain/loss from sale of assets, litigation settlement, restructuring costs (for layoffs, foreclosures, mergers, acquisitions), or natural disaster impacts.
• Unusual items: prior period adjustments, impairment of goodwill or long-lived assets or tax adjustments (change in standards or accounting policies).
• Non-operational items: abnormal bonuses or benefits paid to owners/executives, subsidies/grants, investment income, foreign exchange gains/losses that apart part of regular operations.

500

Name 3 qualitative factors that may be considered by an auditor when calculating materiality?

• Economic Environment: inflation, employee shortages, world pandemic, wars, or technology boom.
• Regulatory or Contractual Compliance: environmental regulations, foreign tax violations, previous loan covenant breaches, or illegal activities.
• Complex Transactions: misstatements in asset sales, acquisitions, or discontinued operations may be more material than recurring items.
• Organization Structure: code of conduct policies, performance incentives, level of staff sophistication, or changes in key employees.
• Management Integrity: fraud, errors consistently made, or the response actions that were taken in regards to prior year audit recommendations.
• Related Party Transactions: purpose to consider (why not being done with arm length company) and measurement (recorded at the right price).
• Changes to Accounting Policies: restatement of prior year financials or at minimum note disclosures in current year financials. 

Audit Testing

100

Audit risk (Audit Risk = Inherent Risk * Control Risk * Detection Risk) is determined by the auditor as a benchmark for misstatements that will impact the user’s decisions.

True or false;  A company’s IT issues, segregation of duties, and tone at the top are all examples of “inherit risks” that an auditor should considered when determining the overall financial statement level risk.

False; those are examples of control risks.

• Inherent (General) Risk: measure of likelihood that there are material misstatements in a segment simply due to the nature of the segment.
• Control Risk: measure of the likelihood that misstatements will not be detected, prevented, or corrected by the internal environment and control systems.
• Detection Risk: risk of not detecting an error.

200

Name a common substantive test that is performed during an audit?

• Bank confirmations: advisors confirm cash and loan balances.
• Inventory counts: observing physical inventory count and any slow-moving or obsolete inventory on hand.
• Board minutes examined: board member approval of prior year audited financials, approval of current year auditor, and approval for significant purchases or equity transactions.
• Legal confirmations: legal counsel confirms pending litigation and contingencies.

300

True or false; Substantive testing is essential when an entity’s control risk is determined to be low or the controls are working effectively?

False; if control testing indicates that internal controls are effective, the auditor may reduce the extent of substantive testing.

400

7 common “methods of evidence collection” performed during an audit engagement include:

Inquiry, analytical procedures, reperformance, recalculation, inspections, observation, and?

Confirmations

500

What may cause an auditor to revise materiality or performance materiality?

• Fraud or significant errors in estimates made by management/bookkeeping discovered.
• Assessment of the risk of material misstatement changes during the audit (internal controls are weaker than initially assessed than auditor could lower materiality to increase the likelihood of detecting misstatements).
• Size of the entity significantly changed (acquisition of another company/division or expansion of new product line).
• Undisclosed information (assets disposed of, major change in operating results compared to budget, or company changed primary location of operations/sales).
• Many misstatements are found (summary of identified misstatements exceeds performance materiality).
• Professional judgment: auditor feels the amount of testing it too much or too little (based on performance materiality).