...Chapter 9 - Materiality and Risk ← Multiple Choice Questions From CPA Examinations 9-22 a. (4) b. (4) 9-23 a. (1) b. (1) c. (1) 9-24 a. (2) b. (3) c. (1) 9-25 a. The justification for a lower preliminary judgment about materiality for overstatements is directly related to legal liability and audit risk. Most auditors believe they have a greater legal and professional responsibility to discover overstatements of owners' equity than understatements because users are likely to be more critical of overstatements. That does not imply there is no responsibility for understatements. b. There are two reasons for permitting the sum of tolerable misstatements to exceed overall materiality. First, it is unlikely that all accounts will be misstated by the full amount of tolerable misstatement. Second, some accounts are likely to be overstated while others are likely to be understated, resulting in net misstatement that is likely to be less than overall materiality. c. This results because of the estimate of sampling error for each account. For example, the likely estimate of accounts receivable is an understatement of $7,500 + or - a sampling error of $11,500. You would be most concerned about understatement for accounts receivable because the estimated understatement of $19,000 exceeds the tolerable misstatement of $18,000 for that account. d. You would be most concerned about understatement amounts since the total estimated understatement...
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...Exam is worth a total of 150 points Chapter Break-Down Chapter 1 * 1 MC question * 3 total points (2% of the exam) Chapter 2 * 3 MC questions * 9 total points (6% of the exam) Chapter 3 * 5 MC questions * 1 Short answer question * 20 total points (~13% of the exam) Chapter 4 * 5 MC questions * 1Short answer question * 20 total points (~13% of the exam) Chapter 5 * 6 MC questions * 18 total points (12% of the exam) Chapter 6 * 5 MC questions * 1 Short answer question * 20 total points (~13% of the exam) Chapter 7 * 5 MC questions * 1 Short answer question * 20 total points (~13% of the exam) Chapter 8 * 6 MC questions * 1 Short answer question * 23 total points (~15% of the exam) Chapter 9 * 4 MC questions * 12 total points (8% of the exam) Current Events * 1 Short answer question * 5 total points (~3% of the exam) Important Topics (This is intended to help guide the focus of your review for the exam, however, it is not intended to be sufficiently detailed to the exact exam questions. Note: many of the topics listed are broad and cover a variety of more specific points. Thus, not everything can or will be tested.) Chapter 1 * What is an audit * Fundamental Concepts in conducting a financial statement audit * Materiality, audit risk, and audit evidence * Sampling * Major phases of an audit Chapter 2 * Audit environment has been reshaped ...
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...Between Audit Risk and Audit Evidence The audit risk model is used to help the auditor develop a knowledgeable perspective about the risk of misstatement and make decisions about the sufficiency of evidential matter. In making generalizations about the audit risk model, care must be taken in specifying the risk term about which a generalization is being made. Figure 9-7 Interrelationship among Materiality, Detection Risk, and Substantive Audit Evidence There is an inverse relationship between detection risk and the sufficiency and competency of evidence needed to support the auditors opinion on the financial statements. That is, for a particular client, the lower the level of detection risk to be achieved, the greater the amount of evidence needed. For a particular assertion, the lower the acceptable level of analytical procedures risk or tests of details risk determined by the auditor, the greater the sufficiency and competency of substantive test needed to restrict overall detection risk to that level. Interrelationship among Materiality, Detection Risk, and Substantive Audit Evidence In separate sections, we previously explained that there is an inverse relationship between materiality and audit evidence, and an inverse relationship between detection risk and the evidence obtained from substantive audit procedures. Figure 9-7 illustrates these relationships, as well as the interrelationships among all three concepts. For example, if in figure 9-7, we hold detection...
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...responsibilities • Auditors professional judgment • The evaluation and testing of internal controls • The effect of IT on the audit process • The development of an audit program • PCAOB standards • The auditor's reports Book: Auditing and Assurance Services by Arens, Elder and Beasley 14ed Publisher Pearson/PrenHall ISBN 978013257595 |2013 |Topic |Assignment/Chapter to read | |Thursday September 5th |Introduction to the CPA Profession and the Auditing |Chapters 1 and 2 | | |Environment | | | | | | |Thursday September 12th |Introduction to the CPA Profession and the Auditing |Chapters 1 and 2 | | |Environment | | | |...
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...Chapter #1 1. What is assurance engagement? * An engagement performed by an auditor to enhance the reliability of the subject matter * Involves auditor arriving at an opinion about the fair representation of financial statements 2. Explain why there is a demand between types of assurance services * Users demand audited financial statements because of their remoteness from the entity, accounting complexity their incentives competing with those of the entity’s manager and their need for reliable information on which to base decisions. 3. Differentiate between types of assurance services * Financial Statement – provides reasonable assurance regarding GAAP * Compliance- Determine whether the entity has followed the rules * Operational Audit – Assessment of the efficiency and effectiveness of the operation. * Comprehensive- range of audit, which covers FS, compliance, and operational audit. * Internal-Independent service within the entity that evaluates control, procedures, and governance 4. Explain different level of assurance * Reasonable assurance- Assurance that provides high but not absolute assurance on the reliability of the subject matter * Moderate Assurance- Assurance the provides negative assurance on the reliability of the subject matter * Review/compilation- No assurance, minimal work has been done . 5. Outline different audit opinion Unmodified > modified > adverse Unmodified...
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...Executive Summary In the performance of a risk-based audit, adequate planning is of paramount importance as it allows to direct the audit effort towards the areas expected to be most at risk of material misstatement. Additionally, adequate planning helps identify and resolve problems on a timely basis and allows the auditor to organize the engagement, including selecting suitably experienced team members to deal with specific risks, so that it can be performed in an effective and efficient manner. ISA 300 in particular requires setting out an overall audit strategy and a detailed audit plan. The overall audit strategy should indicate the scope of the work, the resources to be allocated to specific high-risk areas in terms of experienced staff or hours and the timing of the work. A more detailed audit plan follows on from the approach identified in the audit strategy and indicates the audit procedures to be performed in respect of specific items in the financial statements and their timing. The audit strategy and the audit plan are not necessarily separate documents or processes as they are strictly interrelated. For example the results of initial risk assessment procedures, like the entity’s business risk assessment or the assessment of internal control, will inform the planning for further audit procedures and, vice versa, the outcome of detailed audit procedures may be so different from what expected at the time of planning to require a modification of the audit strategy and...
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..._____________________________________________________________________ 1. SYNOPSIS This is a continuation of Audit and Assurance 1. It intends to strengthen and enhance the students’ understanding in auditing. Among the topics that will be discussed are code of ethics, auditors’ liability and in-depth explanations on analytical procedures, computer assisted audit techniques, audit sampling, materiality and audit risk, group audit and current issues facing the auditing profession. This course will justify other activities than financial statement audit that can be performed by a public accountant like performance/operational audit, internal audit and compliance audit. 2. COURSE OBJECTIVES This course intends the student: 1. To comprehend applicable regulations, legal responsibilities and ethical standards and current issues facing the audit profession. 2. To appreciate the concepts of internal control system and the use of computer assisted audit techniques in auditing a computerised environment. 3. To understand and apply audit risk, materiality, and statistical and non statistical audit sampling techniques. 4. To be familiar with related issues in audit completion, group audit, internal audit and related audit services and other services that can be provided by the public accounting firms. 3. LEARNING OUTCOMES Upon completion of the course, students will be able to: 1. Explain the professional conduct and ethics of...
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...The University of Illinois at Chicago College of Business Administration Department of Accounting...
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...ACC 491 Entire Course http://homeworkgallery.com/index.php/product/acc-491-entire-course/ http://homeworkgallery.com/index.php/product/acc-491-entire-course/ http://homeworkgallery.com/index.php/product/acc-491-entire-course/ ACC 491 Week 1 Individual Assignment Generally Accepted Auditing Standards Paper Write a 700- to 1,050-word paper in which you explain the nature and functions of auditing. Relate your explanation to the audit functions in your organization, or an organization with which you are familiar. In your paper, be sure to address the following: Describe the elements of the Generally Accepted Auditing Standards (GAAS). Describe how these standards apply to financial, operational, and compliance audits. Explain the effect that the Sarbanes-Oxley Act of 2002, and the Public Company Accounting Oversight Board (PCAOB), will have on audits of publicly traded companies. Discuss the additional requirements that are placed on auditors from this Act, and the actions of the PCAOB. ACC 491 Week 1 DQs Access the SEC home page at http://www.sec.gov. What is one of the most recent litigation brought by the SEC against a public firm or against an accounting firm? Read the abstract of the complaint and download the document filed with the court. Comment on the nature of the litigation. What is one the most recent Staff Accounting Bulletin that provides guidance to the profession? What was the...
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...Chapter 9 Multiple-Choice Questions |1. |If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then| | |that information is, by definition of FASB Statement No. 2: | | |a. material. | | |b. insignificant. | | |c. significant. | | |d. relevant. | | | | |2. |The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and | | |still not affect the decisions of reasonable users. ...
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...and integrity due to conflict of interest. Corporations focused on short-term goals. A lot of managers adjusted financial result to meet the projected results. Question 5: Compare and contrast management’s responsibility for the entity’s financial statements with the auditor’s responsibilities for detecting errors and fraud in the financial statements. Answer5: Managements are responsible for presenting fair financial statements in conformity with general accepted accounting principles and auditors are confined to express his or her opinion on the information provided. Auditors are responsible to check if managers are conforming to GAAP with no errors and materiality. Management and auditors both have to conform to GAAP. Question 9: What kind of organization is PCAOB, why was it formed, and what does it do? Answer 9: PCAOB is a quasi-governmental organization (government owned corporation) over seen by the SEC. Formed to provide governmental regulations of the standards used in conducting public company audits because of a perceived failure of the profession to adequately regulate itself. Question 10: What role does the SEC play in the establishment of accounting and...
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...Chapter 3 Audit Reports Key objectives: 1. Describe the parts of the standard unqualified audit report for non-public entities under AICPA auditing standards. 2. Specify the conditions required to issue the standard unqualified audit report. 3. Understand reporting on financial statements and internal control over financial reporting required under PCAOB auditing standards. 4. Describe the five circumstances when an unqualified report with an emphasis-of-matter explanatory paragraph or modified wording is appropriate. 5. Identify the types of audit reports that can be issued when an unqualified opinion is not justified. 6. Explain how materiality affects audit reporting decisions. 7. Know the key terms that identify different audit reports. 8. Determine the appropriate audit report for a given audit situation. 1. Purpose of audit report • Communicates auditor's work and conclusions reached. • It's the auditor's product, and the only visible outcome of the audit process. 2. Short-form report (unqualified or "clean" opinion) A. When appropriate 1. All 4 statements and appropriate disclosure (An opinion can be issued on less than a full set of financial statements - see Ch. 24). GAAS specifically provides that in the case of omission of the cash flows statement, a qualified opinion is issued. 3. Auditor has gathered sufficient appropriate evidence in accordance with GAAS ...
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...CHAPTER 1 AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING Answers to Review Questions 1-1 The study of auditing is more conceptual in nature compared to other accounting courses. Rather than focusing on learning the rules, techniques, and computations required to prepare financial statements, auditing emphasizes learning a framework of analytical and logical skills to evaluate the relevance and reliability of the systems and processes responsible for financial information, as well as the information itself. To be successful, students must learn the framework and then learn to use logic and common sense in applying auditing concepts to various circumstances and situations. Understanding auditing can improve the decision making ability of consultants, business managers, and accountants by providing a framework for evaluating the usefulness and reliability of information. 1-2 There is a demand for auditing in a free-market economy because the agency relationship between an absentee owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost-effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation such as statutory audit requirements. Additionally, many private companies and other entities not subject...
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...study of the theory and practice of professional auditing. The successful completion of the course provides a basic understanding of the nature of auditing, the responsibilities of auditors, and generally accepted auditing standards. It will provide a basic foundation to facilitate further study for those who wish to take professional examinations such as the Certified Public Accounting Exam, and the Certified Internal Auditing Exam. IV. LEARNING OBJECTIVES This course is concerned with the technical and conceptual skills involved in an audit or examination of financial statements. You will learn about Auditing Standards and Principles involving planning of an audit, report wording for different engagements and situations, audit risk, and fraud consideration. Various engagement tasks will be introduced including the collection of audit evidence, the study and evaluation of internal control systems, the use of sampling, and documenting work performed on the engagement. Communication skills and analytical...
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...Chapter 3 Audit Reports Key objectives: 1. Describe the parts of the standard unqualified audit report for non-public entities under AICPA auditing standards. 2. Specify the conditions required to issue the standard unqualified audit report. 3. Understand reporting on financial statements and internal control over financial reporting required under PCAOB auditing standards. 4. Describe the five circumstances when an unqualified report with an emphasis-of-matter explanatory paragraph or modified wording is appropriate. 5. Identify the types of audit reports that can be issued when an unqualified opinion is not justified. 6. Explain how materiality affects audit reporting decisions. 7. Know the key terms that identify different audit reports. 8. Determine the appropriate audit report for a given audit situation. 1. Purpose of audit report • Communicates auditor's work and conclusions reached. • It's the auditor's product, and the only visible outcome of the audit process. 2. Short-form report (unqualified or "clean" opinion) A. When appropriate 1. All 4 statements and appropriate disclosure (An opinion can be issued on less than a full set of financial statements - see Ch. 24). GAAS specifically provides that in the case of omission of the cash flows statement, a qualified opinion is issued. 3. Auditor has gathered sufficient appropriate evidence in accordance with GAAS 4. Statements in accordance...
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