1 - Intro
Who establishes the Auditing principles for Private Companies?
AICPA (PCAOB is for public companies)
Name the four different types of Auditors and Example of each
Internal External Governmental Forensic
What is the name of the document used to validate and working agreement between the auditor and auditee?
Engagement Letter
What is audit risk?
is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Gave unqualified opinion but should have been adverse or qualified.
Name the 5 PCAOB Assertion and a financial statement account it could relate to
• Existence or Occurrence – Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period.
• Completeness – All transactions and accounts that should be presented in the financial statements are so included.
• Valuation or Allocation – Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.
• Rights and Obligations – Company holds or controls rights to the assets, & liabilities are obligations of the company at a given date.
• Presentation and Disclosure – The components of the financial statements are properly classified, described, and disclosed.
What is the name of the annual financial report produced by public companies in the US?
10-K
Name the two Aspects of Auditor Independence
Fact and Appearance
What is the difference between the Audit Strategy and the Audit plan?
Develop an overall audit strategy for conducting the audit
•Scope, objectives, etc.
Audit Plan (more detailed than the audit strategy)
•Nature, timing, and extent of planned procedures
•Promote effectiveness and efficiency
What are the two causes of misstatements?
Error and Fraud
Which PCAOB assertion relates only to Balance Sheet accounts?
Rights and Obligations
Name one benefit of Financial Statement Audits
Credibility to F/S, Monitoring decreases rule breaking, establishes faith in the economic system and market, etc.
Which of the following best places the events in proper sequence?
Name at least 3 of the primary aspects of the engagement letter
•Objective of the engagement
•Auditor responsibilities
•Management responsibilities
•Limitation of the engagement
It also includes information about fees, additional services, and the use of specialists
What are the three types of misstatements?
•Factual Misstatements These are misstatements about which there is no doubt. For example, an auditor may test a sales invoice and determine that the prices applied to the products ordered are incorrect. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.
•Judgmental Misstatements These are misstatements that arise from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.
•Projected Misstatements These are the auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn.
What is the term used to describe an auditor's inquisitive mentality before, during, and after an audit? This term relates to their independence and duty to the profession.
Professional Skepticism
What is the purpose of a Financial Statement Audit?
Provide reasonable assurance that the client’s financial statements are free of material misstatement
Come up to the board and draw the complete the graph with the relationship between Auditing, Assurance and attestation
Assurance, Attestation, Audit
Name 3 of the roles of the audit committee
•Responsible for financial reporting & disclosure process
•BOD subcommittee (independent members)
•Hires, fires, and compensates external auditor
•Preapprove audit & non-audit services provided by auditor
•Establish process for handling of complaints related to accounting, internal control and audit issues
•Each AC member can engage independent counsel or other advisors
Write the Audit Risk Formula on the board
AR= RMM (IR*CR)*DR
List 3 standard audit procedures and provide an example of each
1.Inspection (tangible assets and/or records and documents)
2.Observation
3.Inquiry
4.Confirmation
5.Recalculation
6.Reperformance
7.Analytical procedures
What is the definition of auditing?
Auditing involves objectively obtaining and evaluation evidence to assess another party’s assertions that a particular set of information has been recorded and presented in accordance with a predetermined set of criteria, together with the issuance of a report that indicates the degree of Correspondence between the assertions and the criteria.
Who generates the GAAP principles?
FASB
What is the Rule of thumb for calculating overall materiality?
5% of Per-tax income
If the internal control testing indicates failures within the internal controls, how would that impact our Audit risk and Detection Risk?
Audit risk would risk would rise if nothing else change. If we wanted to keep audit risk at the same level which we normally do then, Detection risk would need to decrease (we decrease detection risk by doing more auditing)
Overall Materiality: $1M
Tolerable Materiality: $500K
Total Misstatements found: $1.25M
Total Corrected Misstatements: $600K
What opinion would the auditors give?
Trick question: you need more information to truly decide. If all the uncorrected misstatements were from one account then qualifed/Adverse if multiple accounts and no single account is misstated by >500K then Unqualified