Audit 2 Exam 148 Questions with Verified Answers,100% CORRECT

Audit 2 Exam 148 Questions with Verified Answers What are the characteristics professions are distinguished by? - CORRECT ANSWER mastery of certain skill, or education/training; adherence to a common code of values and conducts; and acceptance of a duty to society as a whole utilitarisism - CORRECT ANSWER the greatest happiness should be achieved for the greatest number of people golden rule - CORRECT ANSWER treating others as you want to be treated (reciprocity) theory of rights - CORRECT ANSWER rights of decision maker and other parties should be equally balanced in making a decision theory of justice - CORRECT ANSWER treat all stakeholders fairly, impartially, and equitably enlightened self interest - CORRECT ANSWER pursuing long term self interests and avoiding short term focus that might harm others when do judgements become ethical in nature? - CORRECT ANSWER when they result in a conflict between the auditors own self interest and auditors duty to society as a whole auditing is first and foremost? - CORRECT ANSWER a judgmental process what does higher we set materiality imply? - CORRECT ANSWER higher we set materiality, easier it is for us. reduces the amount of testing. might set it high but dont want it to be unethical. when does detection arise in an engagement? - CORRECT ANSWER the decisions that auditors make regarding the evidence to obtain and how it should be interpreted what are the four main types of decision errors an auditor can make? - CORRECT ANSWER 1. failure to select the appropriate procedure 2. failure to properly perform the selected procedures 3. failure to recognize that an item tested is a misstatement 4. failure to remedy a misstatement some of the reasons why well intentioned auditors may make mistakes in professional judgements? - CORRECT ANSWER - may not be able to define their decision problem clearly - may act in a biased manner - may not select the best alternative - may fail to understand the dynamic nature of their clients availability heuristic - CORRECT ANSWER - a mental shortcut that relies on immediate examples that come to mind. representative heuristic - CORRECT ANSWER - estimate the likelihood of an event by comparing it to an existing prototype that already exists in our minds. anchoring and adjustment heuristic - CORRECT ANSWER uses a specific target number or value as a starting point (anchor) and subsequently adjusts that info until an acceptable value is reached over time confirmation bias - CORRECT ANSWER seeking info to confirm your original belief what are the ways that create a potential tension between individual ethics and organizational actions? - CORRECT ANSWER - contracting with the client: (disagreements with client is hard cuz they pay cuz but hopefully bod helps with disagreements) - firm reward system what are the four main reasons someone may choose to act unethical? - CORRECT ANSWER - "everybody does it" rationalization - the legal equals ethicals - no one will ever know - slap on the wrist - if punishment isn't strong enough, so you might continue doing it. self regulation - CORRECT ANSWER aicpa common law? - CORRECT ANSWER liability through court decisions - contract law - tort law based on breach of contract - CORRECT ANSWER contract law based on failure to exercise due care - CORRECT ANSWER tort law statutory law? - CORRECT ANSWER liability based on state statues or federal securities laws. the law is u do this. gov or pcaob regulator will come after u - securities act of 1933 - securities and exchange act of 1934 -sarbanes-oxley act audit firm quality controls standards - CORRECT ANSWER - the firm and its personnel comply with professional standards and applicable legal and regulatory requirements - reports issued by the firm are appropriate in the circumstances some quality control processes firms have in place? - CORRECT ANSWER - partners reviewing each others work - internal auditor in ur firm that will select random engagements to see how they are being performed aicpa requires its members firms to undergo a peer review every? - CORRECT ANSWER every three years a _______ is a periodic external review of a firm's quality control system in accounting and auditing and is also known as the AICPA's practice monitoring program - CORRECT ANSWER peer review who is regulator performing the inspection and who is the one conducting peer review? - CORRECT ANSWER - pcaob is regulator performing inspection - aicpa conducts peer review (self regulation) public companies get both what are breach of actions? - CORRECT ANSWER - failing to complete the engagement in the agreed-upon time - withdrawing from engagement without sufficient justification - violating client confidentiality - failing to provide professional quality work what are the court remedies to a breach? - CORRECT ANSWER - order auditors to fulfill the contract - issue injunction to prohibit the auditor from continuing the breach - order auditor to pay compensatory (actual) damages many financial statement users believe audits provide absolute assurance is? - CORRECT ANSWER expectations gap people look to sue the party that actually has funds available to pay out - CORRECT ANSWER deep pockets theory some jurisdictions allow for auditors to only be held liable to the extent the loss is attributable to the auditor - CORRECT ANSWER proportionate liabiltiy permit plaintiffs to collect the full amount of the settlement from any defendant, even those only partially responsible for the loss - CORRECT ANSWER joint and several liability monetary damages awarded more to penalize the defendant than to reward the plaintiff - CORRECT ANSWER punitive damages unintentional breach of duty due to lack of reasonable care - CORRECT ANSWER ordinary negligence unintentional breach of duty due to lack of minimal care (greater degree) - CORRECT ANSWER gross negligence the mental state embracing the intent to deceive, manipulate, or defraud - most extreme form of guilt - CORRECT ANSWER scienter to prove fraud, what must exist? - CORRECT ANSWER - a false representation by cpa - knowledge or belief by the cpa that the representation was false - cpa intended to induce the 3rd party to rely on the false representation - the 3rd party relied on the false representation - 3rd party suffered damages reckless disregard for the truth. doesn't have to have knowledge but they really should have known. - CORRECT ANSWER constructive fraud auditor defenses of breach of contract: - CORRECT ANSWER - auditor did not breach the contract - client was contributory negligent - client losses were not caused by the breach common law claims that____ while staturoy law claims that ____ - CORRECT ANSWER Common law claims generally posit that the auditor didn't take appropriate care. Statutory charges generally claim the auditor didn't follow specific laws written in the code. - when companies first issue stock to shareholders (IPOs) - highest level of care from auditors (burden on auditor is highest here) - auditor with ordinary negligence will be liable - CORRECT ANSWER securities act of 1933 - covers publicly traded securities - people suing must have relied on the fs - need to have gross negligence or more - third party must prove its above ordinary negligence , relied on the fs, and the damages suffered as a result of reliance on the fs - level of misconduct is higher than 1933 act - CORRECT ANSWER securities exchange act of 1934 to sue the auditor as breach of contract, plaintiff must have ? - CORRECT ANSWER had a contract with the auditor (privity of contract) foreseeable users of fs can sue for? - CORRECT ANSWER gross negligence . 33 and 34 come under foreseeable users how do auditors manage detection risk? - CORRECT ANSWER through the nature, extent, and timing of their substantive testing. the smaller the materiality is ____? - CORRECT ANSWER the more work we need to do audit risk formula - CORRECT ANSWER IR x CR x DR = AR or RMM X DR = AR risk that an auditor will not detect a material misstatement that exists (likelihood that substantive tests will fail to detect an existing misstatement) - CORRECT ANSWER detection risk reasons substantive tests could fail? - CORRECT ANSWER - inadequate planning - sampling omission (error) - procedural error - improper corrective actions transaction assertions - CORRECT ANSWER - occurence - completeness - accuracy - cutoff - classification account assertions - CORRECT ANSWER - existence - completeness - valuation and allocation - rights and obligations presentation and disclosure assertions - CORRECT ANSWER - occurrence and rights and obligations - completeness - classification and understandability - accuracy and valuation the nature of an audit procedure refers to : - CORRECT ANSWER - its purpose (test of controls or substantive procedures) - itys type (inspection, inquiry, etc) dual purpose tests - CORRECT ANSWER a specific test that can serve both a substantive procedure and test of controls refers to the strength/persuasiveness of audit evidence - CORRECT ANSWER appropriateness what does the extent of audit testing refer to? - CORRECT ANSWER how much work is done. increasing the extent of audit testing would involve? - CORRECT ANSWER - decreasing materiality/ tolerable error of individual accounts - increasing sample sizes if better internal controls, when can we do substantive testing? - CORRECT ANSWER toward interim periods. if client has good internal controls, less risk that something is going to go wrong between october and december so we can do our testing in october and rely more so on the controls that nothing will happen in between october and december when is it best to do audit testing? - CORRECT ANSWER towards year end is going to be stronger audit evidence substantive analytical procedures is? - CORRECT ANSWER client inquiries and analytical procedures. it is indirect audit evidence. doesn't say that transaction is wrong just provides a red flag. test of details: transactions - CORRECT ANSWER more direct evidence supporting a transaction. actual errors can be detected in the transactions that have been examined. test of details: account balance - CORRECT ANSWER direct: actual errors can be detected in year- end balances test of details: presentation and disclosure - CORRECT ANSWER direct: actual errors can be detcted in fs line items or footnote disclosures are lists of audit procedures to be performed by audit staff in order to obtain sufficient appropriate evidence - CORRECT ANSWER audit programs when is the audit program developed? - CORRECT ANSWER prior to control testing. what does increasing substantive testing have on detection risk - CORRECT ANSWER lowers detection risk what is efficient way to segment the audit plan? - CORRECT ANSWER by business processes : - sales and customer service - supply chain management - hr management (payroll) - facilities management (fixed assets) - financial resource management sheet to floor count or test - CORRECT ANSWER vouching existence goes with? - CORRECT ANSWER vouching floor to sheet count. see if exists on sheet? - CORRECT ANSWER tracing completeness goes with? - CORRECT ANSWER tracing from fs to real world? - CORRECT ANSWER vouching (occurence) residual risk - CORRECT ANSWER amount of risk that persists after we think about those entity level process controls. risk we are going to address through our substantive testing. some activities that make up revenue cycle - CORRECT ANSWER - marketing and brand awareness - customer approval - sales order entry - collection computers must be linked. vendor can see when product is running low and order automatically placed. - CORRECT ANSWER electronic data interchange customer agrees to purchase goods but the seller retains physical possession until customer requests shipments - delivery has not occurred. u record it as a sale - CORRECT ANSWER bill and hold boost sales by inducing distributors to buy substantially more inventory than they can promptly resell. - CORRECT ANSWER channel stuffing what are the fraud risks in the revenue cycle - CORRECT ANSWER - side agreements - channel stuffing - related party transactions - bill and hold sales what is the criteria for rev recognition - CORRECT ANSWER 1. persausive evidence of an arrangement exists 2. delivery has occurred or services have been rendered 3. the seller's price to the buyer is fixed or determinable 4. collectability is reasonably assured what identifies the fob point - CORRECT ANSWER bill of lading evidences that product has been shipped - CORRECT ANSWER bill of lading what is the mechanism that triggers the sale being recorded in our clients accounting system as revenue? - CORRECT ANSWER invoice sales returns - CORRECT ANSWER refunding customer payments or granting customers credit . also restocking returned goods in inventory . sales return evidenced by a credit memo what can AFDA be based on - CORRECT ANSWER percent of sales or previous experience/economic conditions bad debt estimation effects? - CORRECT ANSWER balance sheet and NI fraud in bad debt write offs? - CORRECT ANSWER Potential chance for fraud here - if customer had long outstanding debt and then finally pays it. If bad segregationn of duties u could have someone collect that payment and then write off the account and pocket the cash. bad debt expense estimation is matched with? - CORRECT ANSWER revenue u recognize . Match the bad debt expense with the period of the related revenue when that sale took place. four options to respond to risk - CORRECT ANSWER accept, share, avoid, reduce some controls in the sales process? - CORRECT ANSWER - segregation of duties - processing controls (authorizations, pre-numbered docs) - physical controls some entity level controls over rev cycle - CORRECT ANSWER - top management review of policies for establishing goals - evaluate competence and training of key employees - internal analyses related to competitors, customers, marketing efforts, and market conditions performance indicaors - CORRECT ANSWER - financnial performance - market performance - process performance internal control for receipts - CORRECT ANSWER - control over cash and checks upon taking possession - immediate creation of cash prelist (completeness) internal control for sales adjustments and bad debts - CORRECT ANSWER proper authorization procedures are particularly important (occurence) purpose of substantive testing - CORRECT ANSWER to provide direct evidence that an account is not materially misstated occurence, accuracy, timing, and classification is v or tracing? - CORRECT ANSWER vouching - start at accounting records (sales journal) and then vouch down to the related documentation. completeness is - CORRECT ANSWER tracing - want to get as close to economic activity (bill of lading) , look at the shipments taking place and see if all these sales made it into the sales journal. is the sales journal complete? - CORRECT ANSWER tracing Request to provide a response to the auditor, whether or not the customer agrees with the information listed in the confirmation. - CORRECT ANSWER positive confirmation - positive cuz either way pls respond. are confirmations good evidence - CORRECT ANSWER yes because they are obtained from sources outside the company ; external validation, but can be time consuming and costly Request to contact the auditor only if the customer has an issue with the information contained within the confirmation - only let us know if this number is wrong. - CORRECT ANSWER negative confirmation purpose of cut off tests - CORRECT ANSWER to determine if the client has recorded transactions in the correct period - should be on look out for channel stuffing . want to examine documentation for transcations that occur just before or after year end . bill of lading seuqentially numbered helps us find where cutoff takes palce shipping a great deal of merchandise at the end of the year to pump sales numbers up - CORRECT ANSWER channel stuffing substative audit procedures for revenue include: - CORRECT ANSWER - Tests of sales transactions - Test of accuracy of the aged receivables trial balance - Confirmations - Cut-off tests - Tests of revenue recognition - Tests of receivables valuation tests of rev recongiition? - CORRECT ANSWER begin with review of the company's rev recognition policies to make sure they are in accordance w the applicable accounting pronouncements and interpretations tests of accounting estimates (receviables) - CORRECT ANSWER - auditors should determine if receivables have been adjusted to reflect potentially uncollectable amounts - examine documentation of large balances that are outstanding- see if there is adequate afda on those the greater the sample size, the greater ____ - CORRECT ANSWER evidence we gather. larger sample size relates to ______ while sampling approach we take relates to ____ - CORRECT ANSWER extent, nature of the audit procedures •The factors that are important to collecting the sample are quantified and used as input to the sampling process - CORRECT ANSWER statistical sampling - allows us to make more concrete conclusions about the broader population This approach relies on the auditors experience and judgement to determine how many sample items to select and how to interpret the sample evidence - CORRECT ANSWER non statistical - doesnt allow us to make conclusions about broader population. looking at population and testing the most risky items what are the three issues that need to be considered when using sample based evidence? - CORRECT ANSWER - # of transactions (how large sample needs to be) - actual transactions or items to examine -interpreting the results of the sample (conclusions about broader population) what does the sample size depend on? - CORRECT ANSWER - the assertion being tested - assessment of risk as u increase sample size, what happens to the extent of audit testing? - CORRECT ANSWER will increase , quality of evidence will be increasing. Refers to the possibility that the sample drawn is not representative of the broader population and that, as a result, the auditor will reach an incorrect conclusion about the account balance or class of transactions based on the sample - CORRECT ANSWER Sampling risk An aspect of audit risk that results from an incomplete examination of the available data. It is the failure of an auditor to catch a mistake or a misstatement - CORRECT ANSWER non sampling risk misinterpreting the evidence of misapplying the procedures that are inappropriate is what sort of sampling risk - CORRECT ANSWER non sampling risk what are the five sampling techniques used by auditors? - CORRECT ANSWER - random sampling - systematic sampling - block sampling - haphazard sampling - judgemental sampling might go through population and u select every tenth item (nth item) for testing. - CORRECT ANSWER systematic sampling u has a human try to say u doing random sampling. - CORRECT ANSWER haphazard sampling are looking for certain items our selves. Risky items. Using judgement to select certain transactions for a specific reason - CORRECT ANSWER judgemental sampling Is based on the assumption that every item in the population has an equal probability of selection regardless of its individual attributes - CORRECT ANSWER random sampling seed numbers - CORRECT ANSWER allow for sample reperformance (for ur random sample to be replicated) Starts with one randomly selected transactions and then uses a predetermined selection interval to identify the rest of the sample - CORRECT ANSWER systematic sampling Øthe auditor mentally generates a set of numbers that are scattered throughout the population by making up numbers with the range of interest - CORRECT ANSWER haphazard sampling sampling the most risky items (cant really apply our findings to the broader population here) - CORRECT ANSWER judgmental sampling An auditor may wish to split a population into smaller groups and use different sampling approaches for each group - CORRECT ANSWER stratified sampling why do prenumbered documents help us with sampling? - CORRECT ANSWER allows us to come up wtih assurance about the completeness of our sample population in a easy way attribute sampling is - CORRECT ANSWER - the auditor is searching for violations of some pre-specified condition that is of interest - used for test of controls - a yes or no thing dollar unit sampling relates to - CORRECT ANSWER substantive testing. - is it like how many dollars are they off and what it mean for the broader population for this account some errors in sampling? - CORRECT ANSWER - sample size is too small - use of statistical evaluation on the results from a judgmental sample (cant apply finding to broader population for judmental sampling) - failure to project known errors to the population the 12 steps to attribute sampling - CORRECT ANSWER 1. identify the audit procedure and purpose of the test 2. define the population and sample unit 3. define the deviation conditions 4. specify the tolerable deviation rate 5. specify the acceptable risk that the auditor's conclusion will be incorrect 6. estimate the expected population deviation rate (want it less than the tolerable rate) 7. determine the sample size 8. select the sample 9. perform the audit procedure and document the results 10. generalize the sample results to the population 11. analyze individual deviations 12. conclude whether the assertion tested is acceptable or not A complete set of elements that possess some common characteristic defined by the sampling criteria established - CORRECT ANSWER population One of the units into which an aggregate is divided for the purpose of sampling, each unit being regarded as individual and indivisible when the selection is made - CORRECT ANSWER sample unit deviation indicates that that process or control has failed but does not mean that the transaction is necessarily misstated - CORRECT ANSWER deviation are situations where a transaction is processed improperly and may or may not result in a monetary misstatement - CORRECT ANSWER transaction errors is a measure of how many deviations or errors the auditor can willingly accept before concluding that the process or control is not effective - CORRECT ANSWER Tolerable deviation rate the more significant to the audit, what happens to the tdr - CORRECT ANSWER the lower the tdr will be set Øis a measure of the risk that the auditor will conclude that the actual deviation rate is below TDR, when in fact, it is higher - CORRECT ANSWER Acceptable risk of overreliance (ARO) the lower the risk of overreliance, the ____ audit evidence? - CORRECT ANSWER stronger what do we need in order to determine how large our sample size should be? - CORRECT ANSWER expected deviation rate (EDR) sample size formula - CORRECT ANSWER N= R/P P = (TDR -EDR) R = reliability factor what happens to sample size as expected deviation rate increases? - CORRECT ANSWER increases too sample deviation rate (SDR) - CORRECT ANSWER (number of deviations found/n) formula for generalizing the results - CORRECT ANSWER P = R/n P = upper deviation limit TDL > UDL to be effective if large numbers of deviations are found, what will auditor do? - CORRECT ANSWER increase control risk, decrease detection risk. acceptable risk of incorrect acceptance - CORRECT ANSWER trying to quantify the risk that u are going to say that we believe this account is stted properly in all materially respects, that we accept this account balance as being materially correct, When in fact it is not. - dus dus considers what - CORRECT ANSWER the magnitude of deviations