Auditing
Why does an audit exist?
Asymmetry of information
A firm has a ________ control system in place for client (re-acceptance).
Quality
_____ is worried if an account is overstated.
You start _____ and move _____.
Existence.
Internally with GL/TB and move outwards to supporting documentation.
List all 3 benchmarks and the minimums and maximums for all the benchmarks:
NIBT - 5-10%
Total assets 0.5-2.0%
Total revenues 0.5-2.0%
Name the 3 parts of the fraud triangle.
Incentive/Pressure
Rationalization
Opportunity
What type of assurance does an audit provide?
Reasonable level
What do you do when deciding whether to accept a first year client?
Hire investigator to look into management
_____ is worried if an account is understated.
You start _____ and move _____.
Completeness.
Externally with economic transactions and move internally to GL.
High volatility is a sign of _______.
Materiality
Direct effect pertains to _____ that have a _______ and ______ effect on the ______________.
Indirect effect __________ laws.
Direct effect pertains to laws that have a material and direct effect on the financial statements.
Indirect effect all other laws.
Difference between a public and private company in relation to asymmetry of information.
Public = more asymmetry
Private = less asymmetry
You must be _______ in _______ and _______ when auditing a company.
Independent in fact and appearance.
______ is worried that an account has ____ been _______________ amount.
Start with:
- _______ $ amount
- ______ what _____ did
- ______ assumptions
- engage a _______ specialist
Valuation - not been recorded at the proper amount.
- trace $ amount
- recalculate what management did
- challenge assumptions
- engage a valuation specialist
What are the 3 planning activities?
- _____________ (overall or entity level)
- __________ specific _______
- design _______________________
- identify financial statement level risks (overall or entity level)
- identify account specific assertions
- design audit procedures to address those risks
Auditor is required to know all of the _______ acts but not the ______ acts.
direct effect, indirect effect
For public companies _______ regulates the companies, _______ regulates the audits.
SEC, PCAOB
Independence rules are set by _______ for private clients and _______ and _______ for public clients.
AICPA for private clients and SEC and AICPA for public clients.
___________ is worried if the company ___________ something that _________ to them.
Start with what's been _____ then get copies of _________/_________ and make sure they _____________.
Rights/Obligations - worried if the company recorded something that doesn't belong to them.
Start with what's been recorded then get copies of supporting documents/invoices and make sure they include the company's name.
Flux analysis compares: _________
Vertical analysis examines: __________ accounts as a % of _______ and _________ accounts as a % of _________.
Ratio analysis compare ________ for the ______ with _______ for a _____.
Flux analysis compares: year over year changes.
Vertical analysis examines: balance sheet accounts as a % of assets and income statement accounts as a % of revenue.
Ratio analysis compare ratios for the current year with ratios for a prior year.
What are the 3 responsibilities of management in reference to fraud?
- set the proper tone (tone at the top)
- maintain a culture of honesty/high ethical standards
- establish controls to prevent, detect, and deter fraud
What are the 5 key auditing standards regulators?
What are the 4 parts of an engagement letter?
- ______________ responsibilities
- ________
- ________ by audit committee
- ________
- management and auditor responsibilities
- audit fees
- signed by audit committee
- timing
_______ relates to if the company ____________ things ________ in the ________.
Use ______ knowledge and read ____________, use _______ and _________.
Presentation and Disclosure relates to if the company didn't disclose things correctly in the financials.
Use GAAP knowledge and read financial statements, use checklist and footnotes.
Tolerable Misstatement is _________% of materiality and de minimis is ________% of materiality.
50-70%, 3-5%
Enron got in trouble for ________.
Tyco got in trouble for ________.
Worldcom got in trouble for ________.
- money laundering
- stock fraud
- overstated assets