AC312 Test #3

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  1. Understand client's business and industry (5)
    • industry and external environment
    • business operations and processes
    • management and governance
    • objectives and strategies
    • measurement and performance
  2. Business Operations and Processes (4)
    • operational and reporting structure
    • technology infrastructure
    • touring the plant and offices
    • identifying related parties
  3. Management and Governance (4)
    • articles of incorporation and bylaws
    • code of ethics
    • minutes of meetings and contracts
    • corporate governance
  4. Client Risk Profile Evidence Gathering (4)
    • inquiries of management and others
    • observation (i.e. plant tour)
    • inspection (i.e. examining contracts, reports, minutes)
    • analytical procedures
  5. analytical procedure to understand the client's industry and business
    calculate key ratios for the client's business and compare them with industry averages
  6. analytical procedure to assess going concern
    calculate he debt-to-equity ratio and compare it with those of previous years and successful companies in the industry
  7. analytical procedure to indicate possible misstatements
    compare the gross margin with those of prior years, looking for large fluctuations
  8. analytical procedure to reduce detailed tests
    compare prepaid expenses and related expense accounts with those of prior years
  9. Purposes of working papers (5)
    • basis for planning the audit
    • record of the evidence accumulated and the results of the tests
    • data for determining the proper auditor's opinion
    • basis for review
    • file freeze
  10. the written or electronic audit documentation kept by the auditor to support audit conclusions
    working papers
  11. Included in working papers (4)
    • risk assessments
    • procedures or tests performed
    • information obtained
    • conclusions reached
  12. auditors' working papers that contain data of a historical or continuing nature pertinent to the current audit
    permanent files
  13. Included in the permanent files (4)
    • company documents of continuing importance, such as articles of incorporation, bylaws, contracts
    • analyses, from previous years, of accounts that have continuing importance to the auditor (long-term debt, shareholders' debt, goodwill, capital assets)
    • info related to the understanding of internal control and assessment of control risk (org charts, flowcharts, questionnaires)
    • results of analytical procedures from previous years' audits
  14. all working papers applicable to the year under audit
    current files
  15. a working paper that contains the detailed accounts from the general ledger making up a line item total in the worrking trial balance
    lead schedule
  16. Current files (6)
    • risk assessment and materiality
    • audit problem
    • overall planning information
    • working trial balance
    • adjusting and reclasssification entries
    • supporting schedules
  17. a listing of the general ledger accounts and their year-end balances
    working trial balance
  18. a detailed schedule prepared by the client or the auditor in support of a specific amount on the financial statements
    supporting schedule working papers
  19. a supporting schedule that shows the activity in a general ledger account during the entire period under audit
    analysis working paper
  20. a supporting schedule of the details that make up the year-end balance of a general ledger account
    trial balance or list working papers
  21. a schedule that supports a specific amount; it normally ties the amount recorded in the client's records to another source of information, such as a bank statement or a confirmation
    reconciliation of amounts working paper
  22. Major types of supporting schedules (8)
    • analysis
    • trial balance or list
    • reconciliation of amounts
    • tests of reasonableness
    • summary procedures
    • examination of supporting documents
    • informational schedule
    • outside documentation
  23. Characteristics of working papers (5)
    • properly identified (client's name, description of contents)
    • indexed and cross-referenced
    • clearly indicate the audit work performed
    • include sufficient information
    • conclusions
  24. 3 primary benefits from planning audits
    • helps auditor obtain sufficient, appropriate audit evidence
    • helps keep audit costs reasonable
    • helps avoid misunderstandings with the client
  25. Three broad objectives in designing an effective internal control system
    • reliability of financial reporting
    • efficiency and effectiveness of operations
    • compliance with laws and regulations
  26. Management objectives in designing effective internal controls (in addition to the 3 broad objectives) (4)
    • maintaining reliable control systems
    • safeguarding assets
    • optimizing the use of resources (human and financial)
    • preventing and detecting error and fraud
  27. the policies and procedures instituted and maintained by the management of an entity in order to provide reasonable assurance that management's objectives are met
    internal control
  28. a cooperative effort among employees to defraud a business of cash, inventory, or other assets
  29. COSO internal control components (5)
    • control environment
    • risk assessment
    • control activities
    • information and communication
    • monitoring
  30. individuals responsible for overseeing the straegic direction of the entity and the accountability of the entity, including financial reporting and disclosure
    those charged with governance
  31. those controls that are implemented for multiple transaction cycles or for the entire organization
    entity-level controls
  32. policies and procedures that management has established to meet its objectives for financial reporting
    control activities
  33. 5 types of control activities
    • adequate segregation of duties
    • proper authorization of transactions and activities
    • adequate documents and records
    • physical control over assets and records
    • independent checks on performance
  34. Steps in audit of internal controls (7)
    • obtain an understanding of relevant (key) controls
    • evaluate design effectiveness of controls
    • assess control risk
    • identify and assess risk of material misstatement
    • design tests of control
    • test controls
    • evaluate results of tests of control
  35. Procedures relating to understanding key controls (5)
    • update and evaluate auditor's previous experience with the entity
    • make inquiries of client personnel
    • read client's policy and systems manuals
    • examine documents and records
    • observe the entity's activities and operations
  36. Segregation of duties (6)
    • separation of custody of assets from accounting
    • separation of operational responsibility from recording or data entry of transactions
    • separation of systems development or acquisition and maintenance from accounting
    • separation of computer operations from programming and accounting
    • separation of reconciliation from data entry
    • proper authorization of transactions and activities
  37. actions, policies, and procedures that reflect the overall attitude of top management, directors, and owners of an entity about internal control and its importance
    control environment
  38. examples of control environment (5)
    • commitment to competence
    • board of director and audit committee participation
    • management's philosophy and operating style
    • organizational structure
    • human resource policies and practices
  39. management's identification and analysis of risks relevant to the preparation of financial statements in accordance with GAAP
    risk assessment
  40. Risk assessment processes (3)
    • identify factors affecting risks
    • assess significance of risks and liklihood of occurance
    • determine actions necessary to manage risks
  41. Categories of management assertions that must be satisfied (3)
    • assertions about classes of transactions and other events
    • assertions about account balances
    • assertions about presentation and disclosure
  42. methods used to initiate, record, process, and report an entity's transactions and to maintain accountability for related assets
    information and communication
  43. Transaction-related audit objectives (6)
    • occurence
    • completeness
    • accuracy
    • posting and summarization
    • classification
    • timing
  44. management's ongoing and periodic aassessment of the quality of internal control performance to determine whether controls are operating as intended and are modified when needed
  45. Examples of monitoring (2)
    • review department exception reports
    • conduct annual employee evaluations
  46. Documents (key controls) (3)
    • narrative
    • flowchart
    • internal control questionnaire
  47. written description of a client's internal controls, including the origin, processing and disposition of documents and records, and the relevant control activities
  48. a diagrammatic representation of the client's documents and records, and the sequence in which they are processed
  49. a series of questions about the controls in each audit area used as a means of gaining an understanding of internal control
    internal control questionnaire
  50. those controls that are expected to have the greatest impact on meeting the transaction-related audit objectives
    key controls
  51. the absence of adequate controls; increases the risk missttatemnts in the financial statements
    internal control weaknesses
  52. a control elsewhere in the system that offsets a weakness
    compensating control
  53. a measure of the auditor's expectation that internal controls will neither prevent material misstatements from occuring nor detect and correct them if they have occured
    assessment of control risk
  54. Procedures for tests of controls (5)
    • make inquiries of appropriate entity personnel
    • inspection of documents, records, and reports
    • observe control-related activities
    • reperform client procedures
    • recalculation
  55. fictitious transactions entered in controlled circumstances and processed through the client systems
    test data
  56. Extent of procedures (3)
    • reliance on evidence from prior year's audit
    • testing of controls related to significant risks
    • testing less than the entire audit period
  57. Major steps in developing the client risk profile (3)
    • understand client's business and industry (5 steps)
    • assess client business risk
    • perform preliminary analytical review
  58. a party that has the ability to exercise, directly or indirectly, control or significant influence over the over the operating and financial decisions of another party
    related party
  59. Information in the client's minutes that is likely to be relevant to the auditor (9)
    • declaration of dividends
    • authorized compensation of officers
    • acceptance of contracts and agreements
    • authorization for the acquisition of property
    • approval of mergers
    • authorization of long-term loans
    • approval to pledge securities
    • authorization of individuals to sign cheques
    • reports on the progress of operations
  60. Advantages of flowcharting (2)
    • provides concise overview of the workings of the client's internal control
    • superior to written descrition - easier to follow
  61. Disadvantage of flowcharting
    tendency for confusion if every processing detail is shown
  62. Advantages of internal control questionnaire (2)
    • a good questionnaire can give relatively complete coverage of the audit area
    • can usually be prepared easily at the beginning of an audit engagement
  63. Disadvantages of internal control questionnaire (3)
    • individual parts of the internal control are examined without providing an overall view of the client's internal control
    • a standard questionnaire is often inapplicable to some audit clients
    • in danger of being prepared in a mechanized fashion without carefully interviewing personnel and evaluating the implication of "no" responses
  64. exists if a necessary control is missing or not properly designed
    design deficiency
  65. exists if a well designed control does not operate as designed or when the person performing the control is insufficiently qualified or authorized
    operation deficiency
  66. significant weaknesses in the design or operation of internal control; they represent an absence of adequate controls and likely increase the risk of misstatements in the financial statements
    significant deficiencies
Card Set
AC312 Test #3
auditing test #3
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