AUDTHEO 5

What does verifiability of accounting records require?

Access to documents; Access to client personnel

What must management accept responsibility for in an audit?

FS Preparation and Presentation; Internal Controls of the Entity

What independence is required of auditors?

Independence of mind and appearance

What competency is required of the auditor?

Auditor’s Competence

Who is required to communicate with the predecessor auditor?

Successor auditor is required to communicate with the predecessor auditor

What must be obtained before communicating with the predecessor auditor?

must first ask permission from the prospective client

Why does the successor auditor communicate with the predecessor auditor?

To help in the verification of the beginning balances

What should the successor auditor ask regarding a change in auditors?

To ask the reason for change of auditor

What happens if audit fees remain unpaid for more than one year?

you cannot conduct audit

What is the purpose of the engagement letter?

To agree on the terms of engagement

Why is an engagement letter important?

To minimize misunderstandings of responsibilities

What does the engagement letter document?

To document the auditors acceptance of engagement

What management responsibilities are included in the engagement letter?

Management responsibilities

What audit limitation is stated in the engagement letter?

Inherent limitations of audit

What scope information is included in the engagement letter?

Scope and Objectives of Audit

What access must be granted in the engagement letter?

Required unlimited access to documents and records

What financial term is included in the engagement letter?

Fees

Are changes in the terms of engagement generally allowed?

Generally: not allowed

When are changes in engagement terms allowed?

Except: for valid reason

What type of opinion results from management refusing communication with legal counsel?

Scope Limitation (Disclaimer of Opinion)

What is a contingent liability?

Possible obligation from past events whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events

How is a remote contingent liability treated?

ignore

How is a reasonably possible contingent liability treated?

disclosed

How is a probable or virtually certain contingent liability treated?

recognize a provision

What are commitments?

Agreement to commit the entity to a set of fixed conditions in the future

What are subsequent events?

Favorable or unfavorable events that occurred after the balance sheet date but before the FS issuance date

What is an adjusting event?

Pre-existing condition arises on or before the balance sheet date

What is a non-adjusting event?

Pre-existing condition arises after the balance sheet date

What must auditors do after discovering subsequent events?

Ipareturn yung FS and Auditor’s Report

What is dual dating?

Dual dated: 3/31/23 and 4/5/23

What is the going concern assumption?

Entity will continue to operate for the foreseeable future

Who is responsible for assessing going concern?

responsible to assess the entity’s ability to continue as going concern

What is the auditor’s responsibility regarding going concern?

consider the appropriateness of management’s use of the going concern assumption

What opinion is issued when going concern has appropriate disclosure?

Unqualified with EMP

What opinion is issued when disclosure is insufficient?

Qualified or adverse

What opinion is issued when use of going concern is inappropriate?

Adverse

Who are considered related parties?

Control, Significant Influence, Joint Venture, Associate, Key Management Personnel

Who is responsible for identifying related parties?

Identification and disclosure of related parties

What must the auditor check regarding related parties?

Nature of relationship; Description of transaction; Amounts due to or due from

What is the purpose of the management representation letter (MRL)?

To confirm oral representation made by the management

What does the MRL remind management of?

To remind the management of its primary responsibility with the Financial Statements

Why must the MRL be dated the same as the auditor’s report?

to make sure that the subsequent events are all covered

What happens if management refuses to sign the MRL?

Qualified Opinion / Disclaimer

What is the purpose of final analytical procedures?

Used to identify unusual items and significant fluctuations not noted during the substantive testing phase.

What is audit evidence?

Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based

What determines the persuasiveness of audit evidence?

Sufficiency and appropriateness

What is sufficiency of audit evidence?

Measure of the quantity of audit evidence

What is appropriateness of audit evidence?

Measure of the quality of audit evidence

What two factors affect sufficiency?

Risk of misstatement; Quality of evidence

What affects the reliability of audit evidence?

Source and nature of evidence

What type of evidence is more reliable: internal or external?

External evidence

What type of evidence is more reliable: directly obtained or indirect?

Evidence obtained directly by the auditor

What type of evidence is more reliable: documentary or oral?

Documentary evidence

What type of evidence is more reliable: original or photocopy?

Original documents

What is inspection as an audit procedure?

Examining records or documents

What is observation as an audit procedure?

Watching a process or procedure being performed

What is inquiry as an audit procedure?

Seeking information from knowledgeable persons

What is confirmation as an audit procedure?

Obtaining a written response from a third party

What is recalculation as an audit procedure?

Checking mathematical accuracy

What is reperformance as an audit procedure?

Independent execution of procedures or controls

What is analytical procedure?

Evaluation of financial information through analysis of plausible relationships

When are analytical procedures required?

Planning and final review stages

What is audit sampling?

Application of audit procedures to less than 100% of items

What is sampling risk?

Risk that the auditor’s conclusion based on a sample may differ from the conclusion if the entire population were tested

What is non-sampling risk?

Risk that the auditor reaches an incorrect conclusion for reasons unrelated to sampling

What are the causes of non-sampling risk?

Human error; Misinterpretation of evidence; Failure to recognize misstatements

What is tolerable misstatement?

Maximum misstatement that the auditor is willing to accept

What is expected misstatement?

Misstatement that the auditor expects to exist in the population

What is audit documentation?

Record of audit procedures performed, relevant audit evidence obtained, and conclusions reached

What is the purpose of audit documentation?

Provide evidence that the audit was planned and performed in accordance with standards

Who prepares audit documentation?

the auditor

Who owns audit documentation?

the auditor

How long should audit documentation be retained?

At least five (5) years

What is permanent audit file?

Contains information of continuing importance to future audits

What is current audit file?

Contains evidence relating to the audit of a particular period

What is audit working paper?

Schedules, analyses, memos, confirmations, and letters

What are the characteristics of good working papers?

Complete, clear, concise, accurate, and neat

What is materiality?

Magnitude of an omission or misstatement that could influence economic decisions

What is overall materiality?

Materiality for the financial statements as a whole

What is performance materiality?

Amount set at less than overall materiality to reduce risk of aggregation

What is specific materiality?

Materiality for particular classes of transactions or disclosures

What factors affect materiality?

Size and nature of misstatement

What is qualitative materiality?

Misstatements that affect compliance or contractual obligations

What is quantitative materiality?

Misstatements measured by amount

What is audit opinion?

Conclusion expressed by the auditor on the financial statements

What is an unqualified opinion?

Financial statements present fairly, in all material respects

When is an unqualified opinion issued?

When sufficient appropriate audit evidence is obtained

What is a qualified opinion?

Except for the effects of the matter described

When is a qualified opinion issued?

Material but not pervasive misstatements or scope limitation

What is an adverse opinion?

Financial statements do not present fairly

When is an adverse opinion issued?

Material and pervasive misstatements

What is a disclaimer of opinion?

Auditor does not express an opinion

When is a disclaimer issued?

Pervasive scope limitation or lack of independence

What is emphasis of matter paragraph?

Draws attention to a matter presented in the FS

Does emphasis of matter affect opinion?

Does not modify the opinion

What is other matter paragraph?

Refers to matters not presented or disclosed in the FS

What is comparative financial statements?

Financial statements of more than one period presented side by side

What is corresponding figures?

Prior period amounts presented for comparison

What is predecessor auditor?

Auditor who audited the financial statements of a prior period

What is successor auditor?

Auditor who audits the current period financial statements