BYU ACC 406 AUDITING MIDTERM 1
CH 1: Introduction to Assurance and Financial Statement Auditing
The role of auditing - Answer -Study figure 1-1 on p. 7
Assertions about classes of transactions and events for the period under audit: -
Answer -• Occurrence
• Completeness
• Authorization
• Accuracy
• Cutoff
• Classification
Assertions about account balances at the period end: - Answer -• Existence
• Rights and obligations
• Completeness
• Valuation and allocation
Assertions about presentation and disclosure: - Answer -• Occurrence and rights and
obligations
• Completeness
• Classification and understandability
• Accuracy and valuation
Auditing definition - Answer -A systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established
criteria and communicating the results to interested users
Attestation - Answer -occur when a practitioner is engaged to issue...a report on
subject matter, or an assertion about subject matter, that is the responsibility of another
party
Assurance - Answer -Independent professional services that improve the quality of
information, or its context, for decision makers
Materiality - Answer -A set of financial statements could be misstated without affecting
the judgment of reasonable people
Information is material if omitting it or misstating it could influence decision that users
make on the basis of financial information of a specific reporting entity.
Different opinion on an audit report - Answer -- Unqualified
- Qualified
, - Adverse
Major phases of an audit: - Answer -1. Client acceptance/continuance
2. Preliminary engagement activities
3. Plan the audit
4. Consider and audit internal control
5. Audit business processes and related accounts
6. Complete the audit
7. Evaluate results and issue audit report
1. Client acceptance/continuance - Answer -• Review available financial information
(annual reports, financial statements, tax returns, etc.)
• Inquire of 3rd parties about client's integrity
• Communicate with predecessor auditor (with client's permission)
• Consider special circumstances - litigation or going concern
• Determine independence
• Determine firm's technical skills and knowledge of industry
2. Preliminary engagement - Answer -• Determine the audit engagement team
requirements (training and proficiency)
• Ensure the audit team and firm comply with ethical and independence requirements
• Establish an understanding with the client (engagement letter, use of work of internal
auditors, role of audit committee)
3. Plan the audit - Answer -• Risk assessment procedures (inquire of mgt, required
preliminary analytical procedures for assessing risk, observation/inspection) - AR, IR,
CR, etc.; materiality: planning materiality & tolerable misstatement
• Determine audit steps (reliance vs. Substantive approach); auditing standards require
the auditor obtain an understanding of internal control in order to plan an audit; inquire,
inspections of docs/reports, observation of activities/operations
4. Consider and audit internal control - Answer -• Test of controls: audit procedures to
test the operating effectiveness of controls in preventing or detecting & correcting
material misstatements; management assertion; evidence; public companies: ICFR -
internal control over financial reporting
5. Audit business processes and related accounts - Answer -• Substantive tests:
1. Test of details ( test of transactions and test of balances)
2. Substantive analytical procedures to management assertions
• Evidence: sampling for test of account balances
• Audit a cycle
6. Complete the audit - Answer -nah
7. Evaluate results and issue audit report - Answer -• Required final analytical
procedures for reasonableness
CH 1: Introduction to Assurance and Financial Statement Auditing
The role of auditing - Answer -Study figure 1-1 on p. 7
Assertions about classes of transactions and events for the period under audit: -
Answer -• Occurrence
• Completeness
• Authorization
• Accuracy
• Cutoff
• Classification
Assertions about account balances at the period end: - Answer -• Existence
• Rights and obligations
• Completeness
• Valuation and allocation
Assertions about presentation and disclosure: - Answer -• Occurrence and rights and
obligations
• Completeness
• Classification and understandability
• Accuracy and valuation
Auditing definition - Answer -A systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established
criteria and communicating the results to interested users
Attestation - Answer -occur when a practitioner is engaged to issue...a report on
subject matter, or an assertion about subject matter, that is the responsibility of another
party
Assurance - Answer -Independent professional services that improve the quality of
information, or its context, for decision makers
Materiality - Answer -A set of financial statements could be misstated without affecting
the judgment of reasonable people
Information is material if omitting it or misstating it could influence decision that users
make on the basis of financial information of a specific reporting entity.
Different opinion on an audit report - Answer -- Unqualified
- Qualified
, - Adverse
Major phases of an audit: - Answer -1. Client acceptance/continuance
2. Preliminary engagement activities
3. Plan the audit
4. Consider and audit internal control
5. Audit business processes and related accounts
6. Complete the audit
7. Evaluate results and issue audit report
1. Client acceptance/continuance - Answer -• Review available financial information
(annual reports, financial statements, tax returns, etc.)
• Inquire of 3rd parties about client's integrity
• Communicate with predecessor auditor (with client's permission)
• Consider special circumstances - litigation or going concern
• Determine independence
• Determine firm's technical skills and knowledge of industry
2. Preliminary engagement - Answer -• Determine the audit engagement team
requirements (training and proficiency)
• Ensure the audit team and firm comply with ethical and independence requirements
• Establish an understanding with the client (engagement letter, use of work of internal
auditors, role of audit committee)
3. Plan the audit - Answer -• Risk assessment procedures (inquire of mgt, required
preliminary analytical procedures for assessing risk, observation/inspection) - AR, IR,
CR, etc.; materiality: planning materiality & tolerable misstatement
• Determine audit steps (reliance vs. Substantive approach); auditing standards require
the auditor obtain an understanding of internal control in order to plan an audit; inquire,
inspections of docs/reports, observation of activities/operations
4. Consider and audit internal control - Answer -• Test of controls: audit procedures to
test the operating effectiveness of controls in preventing or detecting & correcting
material misstatements; management assertion; evidence; public companies: ICFR -
internal control over financial reporting
5. Audit business processes and related accounts - Answer -• Substantive tests:
1. Test of details ( test of transactions and test of balances)
2. Substantive analytical procedures to management assertions
• Evidence: sampling for test of account balances
• Audit a cycle
6. Complete the audit - Answer -nah
7. Evaluate results and issue audit report - Answer -• Required final analytical
procedures for reasonableness
