Term
| What are the three main reasons why auditor should properly plan engagements? |
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Definition
1. Enable the auditor to obtain sufficient appropriate evidence for the circumstances
2. To help keep audit costs reasonable
3. To avoid misunderstandings with the client |
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Term
| What are the eight major parts of planning an audit |
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Definition
1. Accept client and perform initial audit planning
2. Understand the client’s business and industry
3. Assess client business risk
4. Perform preliminary analytical procedures
5. Set materiality and assess acceptable audit risk and inherent risk
6. Understand internal control and assess control risk
7.Gather information to assess fraud risks
8. Develop overall audit plan and audit program |
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Term
| What is acceptable audit risk? |
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Definition
| Acceptable audit risk is a measure of how willing the auditor is to accept that the financial misstatements may be materially misstated after the audit is completed and an unqualified opinon has been issued |
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Term
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Definition
| a measure of the auditors assessment of the likelihood that there are material misstatement in the account balances BEFORE considering the effectiveness of internal control |
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Term
| What are the four things Initial Planning involves |
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Definition
1. whether to accept a new client or continue serving an existing one
2. why the client wants/needs an audit
3. Obtains an understanding with the client about the terms of the engagement
4. an overall strategy for the audit |
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Term
| What are the five components of understanding the client's business and industry? |
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Definition
1. INdustry and External Environment
2. BUsiness Operations and Processes
3. Management and Governance
4. Objectives and strategies
5. Measurement and Performance |
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Term
| What is a primary source for identifying client business risk? WHy is this a a good source? |
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Definition
| Management beacasue they are required by the Sarbanes Oxley Act to disclose controls and procedures that include business risk to external stakeholders |
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Term
| THe Sarbanes Oxley Act requires managent to certify that it has inforned the auditor and audit committee of what? |
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Definition
| significant deficiencies in internal control, including material weakness |
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Term
| What is a major purpose of audit planning? |
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Definition
| gain an understanding of the client's business and industry, which is used to assess acceptable audit risk, client buisness risk and the risk of material misstatements in the financial statments |
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Term
| WHat does the second startd of field work state? |
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Definition
| a. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the f/s whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures |
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Term
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Definition
| Risk that the client will fail to meet its objectives |
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Term
| What are the factors that have increased the importance of understanding the client’s business and industry |
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Definition
a.Recent significant declines in the economic conditions increase bus. Risk
b.Information technology can more easily connect client companies with major customers and suppliers
c.Clients have expanded operations globally
d.Information technology affects internal client processes
e.Increased importance of human capital and other intangible assets
f.Increase in investing of complex financial instruments |
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Term
| Three primary reasons for understanding the industry and external environment |
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Definition
1. Risks associated with specific industries
2. Many inherit risks are common to all clients in certain industries
3. Many industries have unique accounting requirements that the auditor must understand to evaluate whether f/s are in accordance with GAAP |
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Term
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Definition
| an affiliated company, a principal owner of the client company, or any other party with which the client deals, where on eof the parties can influence the management or operating policies of the other |
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Term
| What is a related party transaction? |
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Definition
| any transaction between the client and a related party |
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Term
| What are some examples of related party transactions? |
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Definition
| Sales or purchases b/t a parent company and it's subsidiary, loans to officers, etc |
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Term
| How can a related party transaction affect it's value and why? |
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Definition
| It's not an arm’s-length transaction- may be valued less than the same transaction with a different third party |
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Term
| What kind of related party transaction does Sarbanes Oxley prohibit? |
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Definition
| personal loans to any director or executive officer of a public company |
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Term
| What part of Management and Governance should the audior know about? |
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Definition
| Code of Ethics and Minutes of Meetings |
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Term
| What are the corporate minutes? |
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Definition
| the official record of the meetings of the board of directors and stockholders |
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Term
| Are laws and Regulations internal or external? |
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Definition
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Term
| Are policies and procedures internal or external? |
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Definition
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Term
| Which area does management have most control over? Laws and Regs or Policies and Procedures? |
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Definition
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Term
| Auditors should understand client objectives related to: |
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Definition
1.Reliability of financial reporting
2.Effectiveness and efficiency of operations
3.Compliance with laws and regulations |
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Term
| What does the knowledge of client objectives and strategies help the auditor do? |
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Definition
| Asses client business risk and inherent risk in the financial statements |
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Term
| WHat does Measurement and Performance do? |
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Definition
| Go beyond f/s figures to include market share, sales growth, same-store sales, sales by country, etc |
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Term
| What is the auditor's primary concern of the auditor? |
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Definition
| the risk of material misstatemetns in the financial statments due to client risk |
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Term
| After evaluating client business risk, the auditor cna then do what? |
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Definition
| assess the risk of material misstatments in the f/s and appy the audit risk model to determine the appropriate extent of audit evidence |
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Term
| What are the liquidity ratios? |
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Definition
A/R Turnover
Inventory Turnover
Days to sell inventory
Days to collect A/R |
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Term
| WHat are the "Ability to Meet Long Term Obligations" ratios |
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Definition
| Debt to equity, times interest earned |
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Term
| What are the ratios for, "short term debt paying ability" |
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Definition
| cash ratio, quick ratio, current ratio |
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Term
| What are the profitability ratios? |
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Definition
| EPS, Gross Profit Percent, Profit Margin, Return on asset, common equity |
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Term
| WHat are analytical procedures |
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Definition
| evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations by the auditor |
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Term
| WHen are analytical procedures done in the engagement? |
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Definition
Planning Phase- required
Testing Phase- not required
Completion Phase- required |
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Term
| Why are analytical procedures done in the planning phase? |
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Definition
TO assist in determining the nature, extent, and timing of audit procedures also:
i. Understand the client’s business and industry
ii. Assess going concern
iii. Indicate possible misstatemetns
iv. Reduce detailed tests |
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Term
| Why are analytical procedures done during the testing phase? |
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Definition
done as a substantive test in support of account balances and during this phase, auditors are required to document in the working papers the expectation and factors considered in its development and also
detmeine appropriate audit evidence and to reach conclusions about the fair presentation of financial statements |
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Term
| WHy are analytical procedures done during the completion phase? |
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Definition
| to serve as a final review for material misstatements of financial problems and help the auditor take a final “objective look” at the audited f/s |
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Term
| What are the five major types of analytical procedures |
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Definition
*industry data
*similar prior-period data
*client-determined expected results
*auditor-determined expected results
*expected results using nonfinancial data |
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Term
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Definition
a. Cash ratio
Cash + marketable securities/
Current liabilities |
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Term
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Definition
Cash + marketable securities+ net accounts receivable/
Current liabilities |
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Term
| What is the current ratio |
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Definition
Current assets/
Current liabilities |
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Term
| What is the accounts receivable turnover ratio |
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Definition
Net sales/
Average gross receivables |
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Term
| What is the days to collect receivables ratio |
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Definition
365 days/
Accounts receivable turnover |
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Term
| What is the inventory turnover ratio |
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Definition
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Term
| WHat is the Days to sell inventory ratio |
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Definition
365 days/
Inventory turnover |
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Term
| WHat is the Earnings per share ratio? |
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Definition
Net income/
Average common shares outstanding |
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Term
| What is the Gross profit percent ratio? |
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Definition
Net sales- COGS/
Net sales |
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Term
| What is the profit margin ratio? |
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Definition
Operating income/
Net sales |
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Term
| What is the return on assets ratio? |
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Definition
Income before taxes/
Average total assets |
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Term
| What is the common equity ratio? |
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Definition
Income before taxes- preferred dividends/
Average stockholders’ equity |
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Term
| WHat is a beneit of comparing client data with industry data? |
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Definition
| Helps aid in understanding the client’s business and as an indication of the likelihood of financial failure. They are less likely to help auditors identify potential misstatements |
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Term
| What is a weakness of comparing client data with industry data? |
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Definition
| the difference b/t the nature of the client’s financial information and that of the firms making up the industry totals- comparisons might not be meaningful |
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Term
| What are the three options for comparing client data with similar prior-period data? |
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Definition
i.Compare the Current Year’s BALANCE with that of the Preceding year
ii.Compare the Detail of a Total Balance with Similar DETAIL for the Preceding Year
iii.Compute Ratios and Percent Relationships for Comparison with Previous Years |
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Term
| WHat is a rule for comparing the detail of a total balance with similar detail for the preciding year? |
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Definition
| 1. If there have been no significant changes in the client’s operations in the current year, much of the detail making up the totals should also remain unchanged |
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Term
| What is a benefit of computing ratios and Percent Relationships for Comparison with Previous Years |
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Definition
| Overcome the shortcomings of comparing balances or details, because it considers growth or decline in a business activity and notices the relationships of data to other data |
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Term
| What does comparing client data to client-determined expected results entail? |
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Definition
| Comparing acutal information to budgets |
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Term
| When client data are compared with budgets, what are two special concerns? |
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Definition
1. Where the budgets realistic plans?
2.Has the current financial information been changed by client personnel to conform to the budet? |
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Term
| What does comparing client data with auditor determined expected results entail? |
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Definition
| The auditor makes an estimate of what an account balance should be and calculates the expected balance for comparison with the actual balance |
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Term
| What does comparing client data with expected results using nonfinancial data entail? |
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Definition
| Examples: Average tuition x enrollment to figure tuition revenue |
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Term
| What is a major concern of using nonfinancial data>? |
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Definition
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