What is the purpose of a financial statement audit?
To provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the acceptable financial reporting framework based on sufficient evidence.
What is the purpose of the audit of internal controls over financial reporting?
To provide financial statement users with an opinion regarding the effectiveness of the company's internal control over financial reporting based on sufficient evidence.
What are the 3 basic responsibilities of management regarding preparation of the material that must be audited?
(1) preparation and fair presentation (free of material misstatement due to error or fraud) of the financial statements in accordance with the acceptable financial reporting framework
(2) design, implementation, and maintenance of internal control
(3) providing the auditor with access to info and persons to complete the audit
In addition to expressing an opinion on the financial statements, the auditor is responsible for these 5 other items
(1) maintaining professional skepticism
(2) complying with relevant ethical requirements
(3) exercising professional judgment
(4) obtaining sufficient and appropriate audit evidence
(5) complying with GAAS
Define professional skepticism
The recognition that circumstances may exist that cause the financial statements to be materially misstated.
"Independence in both fact and appearance" is part of which standard? Are there any exceptions to this requirement?
This is part of GAAS as well as the AICPA Code of Professional Conduct
The exception is when the auditor is required by law or regulation to accept the engagement regardless of independent status.
What are some examples of the application of professional judgment during an audit?
Evaluating management's judgments in applying the applicable framework
Determining the level of materiality
Assessing the audit risk
Determining the nature, extent, and timing (NET) of audit procedures
Evaluating whether sufficient evidence to support the audit opinion (not the financial statements) has been obtained
Drawing conclusions based on the audit evidence obtained
True / False: Since GAAS is the approved standard for all auditing engagements, GAAS may be used to override certain laws or regulations
GAAS is a guideline. Laws and regulations override GAAS.
True / False: The auditor must obtain sufficient evidence to prove the financial statements are free of error or fraud.
The auditor must obtain reasonable assurance of whether the financial statements are free of material misstatement.
True / False: An audit is the equivalent of an investigation into the potential wrongdoings of management.
An audit is neither an investigation, nor does the auditor have specific legal powers to conduct an investigation even if wrongdoing is suspected
True / False: GAAS prevent the same firm from performing both the audit and tax services.
The same firm can perform both services, but it must be pre-approved by the entity's Audit Committee.
True / False: A non-issuer who chooses to have an audit performed, must have an integrated audit that includes the internal controls.
A non-issuer has the option of an audit for a single period, multiple periods, the full financial statements, a single or subset of the statements, and whether or not to include an audit of internal controls.
True / False: The auditor can rely on the observations of the previous year's auditor regarding management's ethics and honesty when determining audit risk?
The auditor must make its own assessment and it must be performed each year
What are the 3 elements that lead to fraud
Pressure to commit fraud
An opportunity to commit fraud
Rationalization of the action
What is meant by the nature of audit procedures?
Either control testing (segregation of duties, management approval, reconciliation, etc), or substantive procedures.
What is meant by the extent of audit procedures?
A lot of work when the system is weak
A little work when the system is strong
What is meant by the timing of audit procedures?
Whether you perform the procedures during the interim, or more at year-end.
When applying PCAOB-AS, ISAs, GAGAS, or other specialty standards, these standards override GAAS standards.
GAAS standards must be followed first, and then these other standards are applied in addition to GAAS.
True / False: Weak internal control means the auditor must prepare an adverse opinion.
Weak internal control means that more substantive procedures must be performed.
Name several financial statement accounts that lend themselves to higher risk and why? What is the nature of the audit procedures that will probably be used for these types of accounts?
(I don't need to know all of these...)
The following accounts contain management estimates and are subject to higher risk
** A/R, due to bad debt allowance
** Inventory due to obsolescence or method used (FIFO, LIFO, Wt Avg)
** PP&E due to life and salvage
** Contingencies such as lawsuits
What is the difference between fraud and error?
Fraud = intentional
Error = unintentional
True / False: An issuer may choose to have only an audit of the financial statements.
An issuer must have an integrated audit of both the financial statements and the internal controls.
What are the 5 general steps of the audit process?
Accept the engagement
Assess risks and plan a response
Perform procedures and obtain evidence
Report the opinion and other reporting considerations
When applying professional skepticism what types of information ensure sufficient evidence?