Audit Procedures and Ethics

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Questions and Answers

Which event most likely signifies that the auditor's independence may be impaired?

  • The audit engagement partner previously served as the client's CFO. (correct)
  • The audit firm provides tax services to the audit client, separate from the audit engagement.
  • The audit firm's subsidiary in another country offers internal audit services to the client.
  • The audit firm’s partner owns immaterial shares in the audit client.

During an audit of a manufacturing company, the auditor identifies a high risk of inventory obsolescence. What course of action should the auditor undertake?

  • Rely entirely on management's representation regarding the valuation of inventory.
  • Reduce the extent of testing for inventory, as obsolescence is a difficult area to audit.
  • Disclaim an opinion because of the high risk of inventory obsolescence.
  • Increase the sample size for testing the pricing and obsolescence of inventory. (correct)

An auditor discovers that a client has not capitalized a material lease that should have been capitalized under IFRS 16. What is the auditor's most appropriate response?

  • Issue a disclaimer of opinion due to the client's lack of adherence to accounting standards.
  • Withdraw from the engagement, as the client's refusal indicates professional conduct issues.
  • Request management to adjust the financial statements to capitalize the lease, and if they refuse, issue a qualified or adverse opinion. (correct)
  • Issue an unqualified opinion, as the material lease will have no impact on the financial statements taken as a whole.

Which procedure would an auditor most likely rely on to verify the existence of a client's inventory?

<p>Performing test counts of inventory items and comparing them to the client's count. (C)</p> Signup and view all the answers

What is the primary purpose of performing analytical procedures during the planning phase of an audit?

<p>To identify areas that might represent specific risks relevant to the audit. (A)</p> Signup and view all the answers

An auditor is concerned about the risk of fraud in revenue recognition. Which procedure would be most effective in addressing this risk?

<p>Perform a detailed review of sales transactions, especially near the period end. (A)</p> Signup and view all the answers

What is the correct order of steps in assessing control risk?

<p>Identify controls, evaluate effectiveness, conclude on the acceptable level of detection risk, design audit procedures. (A)</p> Signup and view all the answers

An auditor is using statistical sampling to test the effectiveness of internal controls. What factors would affect the sample size?

<p>Tolerable error rate, desired confidence level, and expected error rate. (A)</p> Signup and view all the answers

An auditor is examining a client's statement of cash flows. Which of the following activities is typically classified as a financing activity?

<p>Repaying a long-term loan. (C)</p> Signup and view all the answers

Which of the following is the most reliable form of audit evidence?

<p>Bank confirmation received directly by the auditor. (B)</p> Signup and view all the answers

When auditing related party transactions, an auditor should place primary emphasis on:

<p>Ascertaining the substance of the transactions and whether they have been properly accounted for. (B)</p> Signup and view all the answers

What is the auditor's responsibility concerning subsequent events?

<p>To perform procedures to obtain reasonable assurance that all events occurring between the date of the financial statements and the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements are identified. (C)</p> Signup and view all the answers

Which situation would potentially bias the objectivity of an internal auditor?

<p>The internal auditor audits a department for which they had previous responsibility. (B)</p> Signup and view all the answers

What is the purpose of a management representation letter?

<p>To document management's responsibilities and representations regarding the financial statements. (B)</p> Signup and view all the answers

During the audit of a not-for-profit organization, the auditor discovers that a significant portion of donations was not properly recorded as income. What is the auditor's primary responsibility?

<p>Ensure the donations are properly recorded, modify the audit opinion accordingly, and communicate with those charged with governance. (C)</p> Signup and view all the answers

Which assertion is most directly related to the audit of accounts payable?

<p>Completeness. (A)</p> Signup and view all the answers

In assessing the risk of material misstatement, an auditor identifies that a client is overly aggressive in recognizing revenue. Which of the following management characteristics is most concerning?

<p>Management's emphasis on meeting earnings expectations. (A)</p> Signup and view all the answers

An auditor is planning the audit of a company that has a complex IT environment. What should the auditor consider regarding IT general controls?

<p>IT general controls have a pervasive effect on application controls and the reliability of financial data. (B)</p> Signup and view all the answers

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern, the auditor should:

<p>Include an emphasis-of-matter paragraph in the auditor's report. (C)</p> Signup and view all the answers

An auditor uses a "top-down" approach when auditing internal control over financial reporting. What does this mean?

<p>The auditor starts with the financial statements and then works backward to identify relevant controls. (C)</p> Signup and view all the answers

Flashcards

What is Auditing?

A systematic process to objectively evaluate 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.

Professional Skepticism

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Audit Risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Auditing Standards

A set of standards that guide the conduct of quality audits. They provide a framework for auditors to fulfill their professional responsibilities.

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Internal Control

A process designed, implemented, and maintained by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives.

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Control Risk

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

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Inherent Risk

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

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Detection Risk

The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

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Audit Procedures

Planning, supervision, and gathering evidence.

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Unmodified Opinion

Statements providing reasonable assurance that the financial statements are presented fairly in all material respects, in conformity with the applicable financial reporting framework.

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Adverse Opinion

An opinion issued when the auditor concludes that the financial statements are not presented fairly in conformity with the applicable financial reporting framework, or the auditor is unable to obtain sufficient appropriate evidence to conclude that the financial statements are free from material misstatement.

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Qualified Opinion

Issued when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the possible effects of undetected misstatements on the financial statements, if any, could be material but not pervasive.

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Disclaimer of Opinion

Issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

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Emphasis-of-matter paragraph

Used when the auditor believes it is necessary to draw users’ attention to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users’ understanding of the financial statements; or when the auditor is required to communicate a matter.

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Financial Statement Fraud

A type of fraud that involves deceiving investors, shareholders, or other stakeholders.

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Asset Misappropriation

Defalcation or other misappropriation of assets.

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Fraud

Involves one or more individuals among management, those charged with governance, employees, or third parties, using deception to obtain an unjust or illegal advantage.

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