Definitions
What is an audit of a company's internal controls?
An audit of internal control over financial reporting
What kind of company is Sarbox Scooter?
International manufacturer and distributor for pocket bikes and scooters
Which PCAOB Audit Standard provides guidance for the audit of internal control?
PCAOB AS 2201
What does PCAOB stand for?
Public Company Accounting Oversight Board
An audit that involves both a traditional financial statement audit and an audit of internal control over financial reporting.
An integrated audit
True or False: If financial statement account goes above the planning materiality, then it is considered significant.
True
If how many material weaknesses exist, the company's internal control over financial reporting cannot be considered effective.
One or more
What are internal controls?
The mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
What are significant accounts?
Accounts that present a reasonable possibility of misstatement that could have a material effect on the financial statements.
What is the main source of Sarbox Scooter's revenue?
What section of the Sarbanes-Oxley Act of 2002 requires an integrated audit?
Section 404
What is materiality?
used to determine what’s important enough to be included in — and what can be omitted from — a financial statement
What is a control deficiency?
exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Name 3 Entity-Level Controls:
Control Environment
Risk Assessment
Communication
Monitoring
Period-End Financial Reporting Process
True or False: PCAOB AS 2201 requires the auditor to visit all of the company's business units or locations.
False
What is a material misstatement?
information in the financial statements that is sufficiently incorrect that it may impact the economic decisions of someone relying on those statements.
What is a significant deficiency?
A control deficiency that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.
What are the three audit decisions that need to be made to identify which internal controls to test?
1. Identify Significant Accounts
2. Identify Relevant Financial Statement Assertions
3. Identify Significant Processes and Major Classes of Transactions
True or False: Auditing Standard 2201 requires that all control deficiencies be evaluated to be either:
• Internal control deficiencies that do not rise to the level of significant deficiencies,
• Significant deficiencies, or
• Material weaknesses.
True
What is a qualified vs. unqualified opinion?
Unqualified: auditor's opinion that financial statements are fairly presented and that there is reasonable assurance that they are free from material misstatements.
Qualified: the auditor's inability to give an unqualified/clean audit report.