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  1. before acceptance of a client, firm should consider
    • firms ability to audit
    • independence
    • integrity of client mngt
    • auditability of client (possible scope limitation?)
  2. disagreements with assistants
    • consult with partner...if disagreement persists
    • assistant can disassociate, must document
  3. gain knowledge of client industry
    • *AICPA account and audit guide*
    • trade publications
    • government publications
    • AICPA accting trends and techniques
  4. gain knowledge of client business
    • tour facilities
    • review financial history
    • understand client accounting
    • inquire of client personnel
  5. materiality
    • affect judgement of reasonable person
    • professional judgement
    • smallest level of misstatement
    • can be revised as audit progresses
  6. 3 audit procedure categories
    • Risk assessment procedures
    • further audit procedures
    • substantive procedures
  7. assertions made by management
    • Completeness
    • cut-Off
    • Valuation, allocation, accuracy
    • Existence and occurrence
    • Rights and obligations
    • Understandability and classification
  8. items of a financial statement
    • Transactions and events
    • Account balances
    • Presentation and disclosure
  9. Relevent assertions for transactions and events
    • Completeness
    • cut-Off
    • Valuation, allocation and accuracy
    • Existence and occurrence
    • Understandability and classification
  10. Relevant assertions for account balances
    • Completeness
    • Valuation, allocation and accuracy
    • Existence and occurrence
    • Rights and allocations
  11. Relevent assertions for presentation and disclosure
    • Completeness
    • Valuation, allocation and accuracy
    • Rights and obligations
    • Understandability and classification
  12. audit risk
    • risk that auditor will give wrong opinion
    • AR=RMMxDR
  13. risk of material misstatement (RMM)
    • RMM=IRxCR
    • auditor cannot change risk, but can assess
    • IR=risk that client's system has error, susceptibility to misstatement assuming no controls
    • CR=clients IC will not catch misstatement
  14. Detection risk (DR)
    • risk that auditor will miss errors
    • revise NET to adjust DR up or down
  15. relationship between audit risk and materiality
    • inversly related
    • risk of big misstatement is low
    • risk of small misstatement is high
    • more material=less likely to be missed
    • decrease materiality=increase audit risk
  16. reasonable assurance
    • not absolute
    • sufficient appropriate evidence limits audit risk to low level
  17. auditors responsibility concerning fraud
    • plan and perform (Design) audit to provide reasonable assurance that f/s are free from matertial misstatement from error or fraud
    • ongoing fraud risk assessment
  18. analytical procedures
    • during planning and final review
    • identify and investigate unusual or unexpected relationships
  19. EVERY audit presumes 2 risks
    • improper revenue recognition
    • management override of controls
  20. 3 fraud risk factors
    • Pressure
    • Opportunity
    • Rationalization
  21. 2 factors increasing risk of manipulation
    • high degree of management judgement
    • very complex accounting principles
  22. 3 levels of response to fraud risk assessment
    • 1. overall, general response=adequate supervision, personnel assignment
    • 2. specific audit procedures=adjust NET
    • 3. address risk of management override=examine journal entries, review estimates
  23. conditions that might indicate fraud
    • discrepancies in accounting records
    • conflicting or missing evidential matter
    • problems between mngt and auditors
  24. Communication of fraud
    • any indication of fraud (even immaterial) brought to mngt attention
    • fraud causing material misstatements or done by senior management brought to those charged with governance
  25. 2nd fieldwork standard of GAAS
    • Internal control
    • understand entity, environment and i/c
    • assess risk of material misstatement
  26. assessing risk of material misstatement
    • I/C, entity and environment understanding
    • Material misstatement-assess the risk
    • Assessed level of risk-response
    • Controls testing
    • Perform substantive procedures
    • Appropriateness and sufficiency of audit evidence-evaluate
  27. Risk assessment procedures
    • Inquiries
    • Analytical procedures
    • Observation and inspection
    • Discussion with audit team
  28. analytical procedures
    • evaluate financial info
    • study relationships and ratios of financial and non fin. data
    • required during planning and final review
    • optional to obtain audit evidence
  29. internal control
    • process designed to provide reasonable assurance about the achievement of the entity's objectives
    • objectives include-reliability of financial reporting, efficiency and effectiveness of operations, compliance
  30. COSO's 5 components of internal control
    • Control environment-tone at the top
    • Risk assessment-mngt's identification of risk
    • Info and communication
    • Monitoring
    • Existing control activities=policies and procedures
  31. Control environment factors
    • Philosophy and operating style of mngt-risk, attitudes
    • HR
    • Reporting competency
    • Assignment of authority, responsibility, accountability
    • Structure of the organization
    • Ethical values and integrity
    • Director/those charged with governance
    • Commitment to competency
  32. Strong existing control activities
    • Prenumbered documents
    • Authorization of transactions
    • Independent checks
    • Documentation
    • Timely and appropriate performance reviews
    • Info processing controls
    • Physical controls to safeguard assets
    • Segregation of duties
  33. Segregate of duties separates
    • Authorization
    • Record keeping
    • Custody
  34. specific IT controls
    • General controls=policies and procedures related to many applications. ex. passwords
    • Application controls=individual transactions. ex. accuracy checks
  35. Service orgs effects on users i/c
    • services part of users info system
    • service orgs controls are part of users info sys
  36. 2 types of service auditor reports
    • Type 1=report on design and implementation of service orgs controls. no basis to reduce assessed level of control risk
    • Type 2=report on design, implementation and operating effectiveness of service orgs control. gives basis to reduce assessed level of control risk
  37. significant risk
    • require special audit consideration
    • use professional judgement
    • exists when inherent risk is exceptionally high
  38. substantive approach to the audit
    • only substantive procedures are performed
    • no relevent controls
    • controls are assessed as ineffective
    • inefficient to test operating effectiveness of controls
  39. combined approach to audit
    • substantive procedures and tests of operating effectiveness of controls
    • more reliance on controls=less substantive testing required
  40. when tests of controls are required
    • risk assessment is based on assumption that controls are operating effectively
    • substantive procedures are insufficient-extensive use of IT
  41. control testing evidence from PY
    • can be used if controls haven't changed
    • if changed controls must be retested
    • if not changed, controls must be tested once every third year
  42. control testing evidence includes
    • Were controls applied at relevent times
    • how were controls applied
    • consistency of application
    • who applied controls
  43. performing substantive tests
    • dollar balances
    • analytical procedures
    • ratios/comparisons
    • used to detect material misstatements at relevant assertion levels
    • required for each material transaction class, account balance and presentation or disclosure
  44. 2 types of substantive testing
    • tests of details-existence and valuation of acct balances. ineffective controls, no controls tested
    • substantive analytical procedures-lots of predictable transactions. effectively operating controls
  45. substantive test evidence from PY
    • usuallly can't be used in CY
    • not like control test evidence
Card Set:
2011-08-22 21:16:01
audit becker cpa exam

A3 flashcards
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