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ACCT 3222-3, WILEY, LSU, EXAM 1 QUESTIONS WITH 100% CORRECT ANSWERS 2024, Exams of Advanced Education

ACCT 3222-3, WILEY, LSU, EXAM 1 QUESTIONS WITH 100% CORRECT ANSWERS 2024 Audit Services - Correct Answer-services by an independent CPA that provide financial statement users with (1) an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework and (2) an opinion on the effectiveness of ICFR, which enhance the degree of confidence that intended users can place in the financial statements Attestation Services - Correct Answer-Services performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the respo

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ACCT 3222-3, WILEY, LSU, EXAM 1 QUESTIONS WITH 100% CORRECT ANSWERS 2024 Audit Services - Correct Answer-services by an independent CPA that provide financial statement users with (1) an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework and (2) an opinion on the effectiveness of ICFR, which enhance the degree of confidence that intended users can place in the financial statements Attestation Services - Correct Answer-Services performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party Relationship of assurance, attestation, and auditing services from most to least improved of quality (i.e., assurance) - Correct Answer-Audit - highest quality/reasonable assurance (i.e., historical financial statements) Attestation - mid quality/limited assurance (i.e., review of historical financial statements, examination of internal controls, review of financial forecast) pg. 1 professoraxe l Assurance - lowest quality (i.e., compilation of historical financial statements, website security, IT operations, non- financial information) Assurance Services - Correct Answer-independent professional services that improve the quality of information, or its context, for decision makers Applicable financial reporting framework refers to - Correct Answer-the set of standards used in preparing the historical financial statements (i.e., GAAP, IFRS, or federal income tax basis of accounting) Independent implies that the service is performed by - Correct Answer-someone who was not involved with the creation of the information and who is objective in the evaluation of the information Quality refers to - Correct Answer-the relevance and realiability of the information Information refers to - Correct Answer-subject matter that can be financial or nonfinancial, historical or prospective, pg. 2 professoraxe l Materiality - Correct Answer-the ability of information to influence decisions that users make on the basis of the financial information of a specific reporting entity Compliance Audit - Correct Answer-an audit to determine whether the entity has conformed with regulations, rules, or processes Operational (Performance) Audit - Correct Answer-An assessment of the economy, efficiency, and effectiveness of an organization's operations Operational Audit economy, efficiency, and effectiveness refer to - Correct Answer-Economy refers to the cost of inputs Efficiency refers to the relationship between inputs and outputs Effectiveness refers to the achievement of certain goals or the production of a certain level of outputs Internal Audit - Correct Answer-A function within an entity which generally evaluates and improves risk management, internal control procedures, and elements of the governance process pg. 5 professoraxe l Those charged with governance - Correct Answer-Persons with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity The external auditor may rely on the work done by - Correct Answer-Internal auditors when evaluating the evidence needed to form an opinion on the financial statements or on ICFR Financial Statement Users include - Correct Answer-Investors, suppliers, customers, lenders, employees, governments, and the general public Sources of demand for audit and assurance services - Correct Answer-Remoteness (users do not have access to the company) Complexity (amounts affected by significant estimates requiring knowledge and experience to evaluate) Competing incentives (determine biased information) Reliability pg. 6 professoraxe l Management is responsible for - Correct Answer-1. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting frameowrk 2. Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements 3. Providing the auditor with access to all records, documentation, and personnel relevant to the preparation and fair presentation of the financial statements, and any additional information the auditors may consider relevant to complete the audit Also, mgmt is responsible for making estimates for some f/s items and selecting appropriate accounting policies within the applicable financial reporting framework Auditors are responsible for - Correct Answer-1. Conducting the audit in accordance with the appropriate auditing standards 2. Planning and performing the audit with professional skepticism 3. Planning and performing the audit with professional judgment pg. 7 professoraxe l Premise Upon Which an Audit Is Conducted - Correct Answer- (Mgmt's responsibilities) Mgmt have responsibility: a. Prep and fair presentation of the F/S in accordance with applicable financial reporting framework including design, implementation, and maintenance of IC b. to provide the auditor with access to all docs and client personnel Responsibilities of the Auditor - Correct Answer-Competence and capabilities to perform the audit - technical training, CPA exam, CPE Ethical requirements - independence Professional skepticism - maintain questioning attitude Professional judgment - uncertainty/subjectivity To obtain reasonable assurance - Correct Answer-Auditor must: Plan the work, supervise any assistants Determine and apply appropriate materiality level, or levels, throughout the audit Assesses risks including IC Obtains sufficient appropriate audit evidence pg. 10 professoraxe l Inherent limitations of an Audit - Correct Answer-Nature of financial reporting (complex) Nature of audit procedures (sampling; audit data analytics (ADA)) Time & Cost constraints Reporting the results of an audit - Correct Answer-Based on an evaluation of audit evidence, auditor expresses in form of a written report an opinion in accordance with findings or states that an opinion cannot be expressed ASB also issues - Correct Answer-Statements on Standards for Attestation Engagements (SSAE) Statements on Quality Control Standards (SQCS) AICPA is the _________ Committee - Correct Answer- Accounting and Review Services Committee Tasked with issuing Statements on Standards for Accounting and Review Services (SSARS) pg. 11 professoraxe l ASB members are - Correct Answer-Volunteers on the board from AICPA peers There are _____ state boards - Correct Answer-55 Why audit standards? - Correct Answer-1. Uniformity 2. Guidelines to measure quality of audit work FASB makes - Correct Answer-GAAP State boards of Accountancy - Correct Answer-Controls licensing. There are 55 boards NASBA - Correct Answer-Admin of CPA application and grade viewing ASB makes - Correct Answer-SAS Statements on auditing standards PCAOB makes - Correct Answer-AS (Auditing standards) pg. 12 professoraxe l 3. Report on the Financial Statements (IDs the F/S and what service performed) 4. Management's Responsibility for the Financial Statements (Prep and fair presentation of the F/S; design, implementation, and maintenance of IC; F/S free from material misstatement whether due to fraud or error) 5. Auditor's Responsibility (Express an opinion, used auditing standards (ASB), reasonable assurance F/S free from material misstatement, Obtain audit evidence and Procedures on auditor's judgment, considered IC relevant to design audit procedures, no expressed opinion on IC, evidence obtained sufficient and appropriate to provide opinion) 6. Opinion (present fairly, in all material respects, financial opinion in accordance with accounting principles GAAP) 7. CPA firm signature 8. Date end of field work, evidence gathering complete What does second paragraph of Auditor's Responsibilities represent? - Correct Answer-How an audit is performed PCAOB standards use the term ______ report - Correct Answer-Unqualified report. Equivalent to unmodified used in private companies and sometimes used interchangeably as unmodified used to be used for private companies too. pg. 15 professoraxe l Sections of Unqualified audit report of public company - Correct Answer-1. Report of Independent Registered Public Accounting Firm (registered w/ PCAOB) 2. To the shareholders and Board of Director of company 3. Opinion on the Financial Statements (note moves to top of report but stmt stays the same as private company) 4. We have also audited IC ... and reference IC report 5. Basis for opinion (F/S responsibility of company's mgmt, auditor responsibility to express an opinion and be independent 6. What is an audit section 7. Signature of audit firm 8. Date (end of fieldwork) 9. Statement about auditor tenure What is unique to the public company audit report? - Correct Answer-1. Title - registered with PCAOB 2. Opinion moves from last paragraph to top of report 3. Paragraph referencing the audit of IC as public companies are required to have an audit of ICFR and auditors issue a separate opinion for that audit pg. 16 professoraxe l 4. Basis for opinion paragraph - less detail than private company and that registered with PCAOB and independence requirements of the SEC and other federal securities laws 5. Scope paragraph - explicit statement that PCAOB audit standards were followed 6. Audit tenure - states the year audit firm began serving consecutively as the company's auditor Qualified or Adverse opinion - Correct Answer-Material departures and client refuses to make corrections Qualified or Disclaimer of Opinion - Correct Answer-Material limitation known as "Scope Limitation" on auditor's ability to gather sufficient appropriate evidence Disclaimer of Opinion - Correct Answer-Auditor is not independent PCAOB Auditing Standard 2201 states_____ - Correct Answer- PCAOB Auditing Standard 2201 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements states that auditors must conduct an integrated audit for public companies pg. 17 professoraxe l F/S users being educated as to the responsibilities of preparers and auditors of F/S Assurance providers reporting accurately level of assurance provided Principles - Correct Answer-Express the basic tenets of ethical conduct and provide the framework for the rules that govern the performance of the member's professional responsibilities Rules of Conduct - Correct Answer-Establish minimum standards of acceptable conduct in the performance of professional services Interpretations - Correct Answer-Provide additional guidance regarding the scope and applicability of the rules of conduct AICPA enforceability - Correct Answer-Principles are NOT enforceable Rules of Conduct are enforceable and members must be prepared to justify departures from the rules of conduct Interpretations must justify such departure in any disciplinary hearing pg. 20 professoraxe l 4 major sections of AICPA Code of Professional Conduct - Correct Answer-1. Preface applicable to all AICPA members 2. Part I which includes ethical rules for members in public practice (CPAs) 3. Part II, which includes ethical rules for members in business (CFOs, etc.) 4. Part III, includes ethical rules for other members (non-CPA members of AICPA) Conceptual Framework for Members in Public Practice - Correct Answer-relate to all work performed by CPAs in public practice, audit engagements, tax engagements, accounting services performed for clients or consulting engagements. Ultimately CPA should evaluate if relationship or circumstance would lead third party to conclude there is threat to CPA's rules compliance Conceptual Framework Steps - Correct Answer-1. ID threats - if none proceed with engagement 2. Evaluate significance of threats - if threats insignificant proceed, if significant step 3 3. ID and Apply safeguards pg. 21 professoraxe l 4. Evaluate the effectiveness of safeguards - if not acceptable level decline or terminate engagements, if acceptable step 5 5. Document threats and safeguards applied Seven common threats CPAs should be alert to - Correct Answer-1. Adverse interest threat - CPA's interest opposes client's 2. Advocacy threat - CPA promotes client interest to the point that independence is compromised 3. Familiarity threat - long, close relationship w/ client or too accepting of client work/sympathetic 4. Management participation threat - CPA takes on role of management (i.e., bkkp) 5. Self-interest threat - CPA could benefit financially or otherwise from an interest/relationship w/ client 6. self-review threat - put in position to review/audit CPA's own work 7. Undue influence threat - Subordinate CPA's judgement to client or 3rd party due to expertise, aggressive or dominate personality, attempts of coercion or excessive influence Evaluating significance of threats - Correct Answer-CPAs should evaluate and ID threats both individually and in pg. 22 professoraxe l *** MORE IMPORTANT*** Covered member - Correct Answer-A person in a position to potentially influence attest decisions or the outcome of an attest engagement Covered members include - Correct Answer-*Any member of the engagement team *Partners and managers with consultation, oversight, or review responsibilities related to the engagement Direct supervisors of the engagement partner, including successive sr. levels Accounting firm professionals who perform more than 10 hrs of non-attest services for the client *Partners who are in the same office as the lead partner on the engagement The firm, its benefit plans, and entities controlled by covered members Evaluators of partner's performance and compensations, including compensation committee members *Accounting firm professionals who consult with the attest team re: tech or industry related issues for the engagement. pg. 25 professoraxe l Includes those who are authorized to advicse the attest team and no hours test Quality Control individuals of the firm Prohibited Activities for covered members - Correct Answer- *Cannot have direct, or a material indirect, investment in the attest client *Cannot have a joint, closely held investment with an attest client that is material to the covered member *Cannot have loans to or from the attest client *Cannot be a trustee of a trust or executor of an estate who invests directly in an attest client Immediate family member - Correct Answer-A covered member's spouse, spouse equivalent, or dependent Close relative - Correct Answer-A covered member's parents, nondependent children, brothers and sisters, or stepbrothers or stepsisters Key position - Correct Answer-A position with an attest client where an individual can exercise influence over the financial statement pg. 26 professoraxe l Prohibited Activities of Covered Members' Immediate Family - Correct Answer-Exactly the same as for a covered member Cannot be employed in a key position with an attest client (i.e., exercise influence over the F/S, prepare or supervise others who prepare the F/S or material accounting records, or be involved in accounting decision making) Prohibited Activities of Covered Members' Close Relatives - Correct Answer-May not hold a key position with an attest client May not hold a material financial interest in an audit client, or have significant influence over an attest client If the former partner or professional employee joins the attest client in a key position within one year of disassociating from the firm and has significant interaction with the engagement team - Correct Answer-an appropriate professional in the firm should review the subsequent attest engagement to determine members maintained the appropriate level of skepticism Independence will be impaired if employee seeking employment with an attest client unless: - Correct Answer-A. pg. 27 professoraxe l SOX Section 203 - Correct Answer-Mandates rotation of lead audit partner and the audit partner having responsibility got reviewing the audit every 5 years SEC prohibits audit firms from providing these nonattest services - Correct Answer-- Bookkeeping - Financial info system design and implementation - Appraisal or valuation series, fairness opinions, or contribution-in-kind reports - Actuarial services - Internal audit outsourcing services - Management functions or human resource functions - Broker-dealers, investment advisor, or investment banking services - Legal services and expert services unrelated to the audit SEC prohibited client/audit firm relationships includes: - Correct Answer-Employment relationships (one-year "cooling off" period before former employed by audit firm hired to financial reporting oversight roles) Contingent fee or commission basis (also forbade by AICPA) Direct or material indirect business relationships pg. 30 professoraxe l Certain financial relationships including creditor/debtor, banking, broker-dealer, futures commission merchant account, insurance product, and joint interests in investment companies SEC requires audit firms to disclose to the audit committee - Correct Answer-All relationships between audit firm and the company that may bear on independence and confirm and discuss audit firm's independence with the audit committee including: process used to ensure complete disclosure with company and affiliates relationships with officers, board members, and significant s/h relationships not included because deemed immaterial General standards apply to ________ and include - Correct Answer-Apply to any CPA performing any professional service for a client. Includes Professional Competence, Due Professional Care, Planning and Supervision, and Sufficient Relevant Data Should be well documented for all audits (& other attestation work) pg. 31 professoraxe l Professional Competence - Correct Answer-Undertaking on those professional services that a CPA or a CPA's firm can reasonable expect to complete with professional competence Due Professional Care - Correct Answer-Exercising professional care expected of other CPAs in the performance of professional services Planning and Supervision - Correct Answer-Adequately plan and supervise the performance of professional services Sufficient Relevant Data - Correct Answer-Obtain sufficient relevant data to afford a reasonable basis for conclusion or recommendation in relation to any professional services performed In the performance of nonattest services, CPAs should ________ which is different than the expectation of the audit which is ________ - Correct Answer-Nonattest: obtain sufficient, relevant data to afford a reasonable basis for a conclusion or recommendation Audit: obtain sufficient, appropriate evidence, which is a higher standard pg. 32 professoraxe l Factors that influence client acceptance and retention - Correct Answer-- Integrity of management - Competence issues - Independence issues - Special circumstance and unusual risks When assessing management's integrity, auditor should consider - Correct Answer-- Reputation of the client, its management, directors, and key stakeholders - Client's reason for switch audit firms, if previously audited - Management's attitude to risk exposure - Management's attitude to implementation and maintenance of adequate IC - Appropriateness of management's interpretation of accounting rules - Management's willingness to allow auditor's full access to client personnel, records, and information required to form an opinion Key communications auditors should conduct: - Correct Answer-- Communication with previous auditor (must obtain permission from client) pg. 35 professoraxe l - Communication with client personnel - Communication with third parties (i.e., banks and lawyers) - Communication with client's industry peers - Review of newspaper and magazine articles about the client Inquiries of the predecessor auditor may be oral or written and should include: - Correct Answer-1. Info that might bear on the integrity of mgmt 2. Disagreements with management about acct policies, auditing procedures, or other significant matters 3. Communications to those charged with governance re: fraud and noncompliance with laws or regulations by the entity 4. Communications to mgmt and those charged with governance re: significant deficiencies and material weaknesses to IC 5. Predecessor auditor's understanding about the reasons for the change of auditors Engagement letter - Correct Answer-Sets out the terms of the audit engagement, to avoid any misunderstandings between the auditor and the client pg. 36 professoraxe l Engagement letter should include - Correct Answer-Scope of the audit Timing of the completion of various aspects of the audit Overview of the client's responsibility for prep of F/S Requirement that auditor have access to all info required to perform the audit Independence considerations and fees Objective of engagement - Correct Answer-Express opinion of F/S Auditor's responsiblitites - Correct Answer-Conduct audit in accordance with stds (ASB/PCAOB) Mgmt's responsibilities - Correct Answer-FC, IC, following laws, making records available to auditors, making adjustments Limitations of audit - Correct Answer-reasonable assurance fees/timing other matters pg. 37 professoraxe l Materiality definition - Correct Answer-The ability of information to influence decisions that users make on the basis of the financial information of a specific reporting entity PCAOB AS 2105 on materiality includes - Correct Answer- information is material if there is substantial likelihood that the ... fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available Overall or planning materiality guides audit planning - Correct Answer-and testing for the F/S as a whole Qualitative materiality - Correct Answer-Information or misstatements that impact a user's decision-making process for a reason other than the magnitude - nature of misstatement (i.e., fraud) Quantitative Materiality - Correct Answer-Information or misstatements that exceed the magnitude of an auditor's preliminary materiality assessment, which is a percentage of an appropriate benchmark - magnitude of misstatement (i.e., car payment example) pg. 40 professoraxe l When determining planning materiality, auditors will use - Correct Answer-professional judgment and are mindful of the primary users of the financial statements (% of a benchmark) Materiality benchmarks - Correct Answer-Auditors can choose an item from BS or IS. BS usually total assets or equity. IS usually profit before tax or total revenue. Auditing standards mention benchmarks, but - Correct Answer-the standards do not recommend any specific percentages. Auditors rely heavily on professional judgment Most common materiality benchmark - Correct Answer-5% of income before taxes Performance materiality - Correct Answer-Amount or amounts set by the auditors at less than the materiality level for particular classes of transactions, account balances, or disclosures - breakdown planning materiality for each account The use of performance materiality should - Correct Answer- reduce the probability that the sum of immaterial and/or undetected misstatements in the F/S is greater than pg. 41 professoraxe l materiality for the F/S as a whole. Requires professional judgment not a simple mechanical calculation Materiality level is a starting point for auditors to: - Correct Answer-1. Determine the type and extent of risk assessment procedures to be performed 2. ID and assess the risk of material misstatements occurring in the F/S level and the account balance level 3. Begin development of an audit strategy Higher $ materiality = - Correct Answer-Less audit evidence (less work) Lower $ materiality = - Correct Answer-more audit evidence (more work) AU-C 200.A22 states auditors should be skeptical if the following arise: - Correct Answer-- Audit evidence recently gathered that is contradictory to other evidence previously gathered - New info that brings into question the reliability of client documents or responses to auditor inquiries - Conditions that may provide evidence of possible fraud pg. 42 professoraxe l of material misstatement for each account and related assertion identified as being high risk by the auditors Risk of Material Misstatement (RMM) - Correct Answer-The risk that the financial statements are materially misstated prior to the audit; a combination of inherent risk and control risk Inherent Risk X Control Risk Detection Risk - Correct Answer-The risk that the auditor's testing procedures will not be effective in detecting a material misstatement __________ is the only component of audit risk that can be controlled by the auditor - Correct Answer-Detection Risk Auditors must identify client characteristics that place its financial statements at risk of - Correct Answer-Material misstatement (inherent risk) and determine whether controls designed to limit such a risk exist and are effective (control risk) pg. 45 professoraxe l It is _______ any of these risks to zero - Correct Answer- Impossible to reduce any of these risks to zero Financial Statements are - Correct Answer-claims and assertions made by mgmt Including recognition, measurement, presentation/disclosure (ex. completeness and existence of F/S items) All risk will fall between ____ and ____% never ____ - Correct Answer-fall between 1-100% NEVER 0% Auditors plan and perform their audit to keep - Correct Answer-audit risk at an acceptably low level A low detection risk means - Correct Answer-auditors increase the amount of detailed audit procedures used to test the year- end account balances and transactions from throughout the year Inherent risk = High X Control Risk = High Detection Risk = - Correct Answer-Low pg. 46 professoraxe l Inherent Risk = Low X Control Risk = Low Detection Risk = - Correct Answer-High Lower the detection risk means - Correct Answer-More work/evidence gathering for the auditor Higher the detection risk means - Correct Answer-less work/evidence gathering for auditor AKA relying more on client's ICs, less detail testing by auditor Detection Risk and Inherent Risk/Control Risk have an - Correct Answer-Inverse Relationship Audit Risk Model relies heavily on - Correct Answer-Relies heavily on Professional judgment Audit risk model can be quantitatively or qualitatively Real life is ALWAYS ____ analysis - Correct Answer-Qualitative "N-E-T" of the audit - Correct Answer-Nature Extent Timing pg. 47 professoraxe l Only difference with error is intent Examples of fraud red flags - Correct Answer-A high turnover of key employees Key employees with accounting or IC responsibilities refusing to take leave Overly dominant mgmt Poor compensation practices Inadequate training programs Complex business structure No, or ineffective, internal audit staff High turnover of auditors Unusual transactions, like large adjusting entries, at the period end Weak IC Fradulent Financial Reporting - Correct Answer-Intentional misstatements, including omissions of amounts and disclosures in FS, to deceive FS users (lying, cooking the books, not applying GAAP properly or not disclosing) pg. 50 professoraxe l Misappropriation of Assets - Correct Answer-Intentional theft of a company's assets by employees (stealing i.e., embezzlement, causes the company to pay for something not received (i.e., A/P fraud)) Fraud risk factors - Correct Answer-Conditions that indicate an incentive or pressure to commit fraud, provide an opportunity to commit fraud, or indicate rationalizations to justify fraudulent actions Responsibility for preventing and detecting fraud rests with - Correct Answer-Client management and those charged with governance Fraud prevention refers to - Correct Answer-use of controls and procedures aimed at avoiding a fraud. Fraud detection refers to - Correct Answer-use of controls and procedures aimed at uncovering a fraud should one occur Auditor's fraud responsibility is - Correct Answer-to assess the risk of fraud and the effectiveness of the client's attempts to prevent and detect fraud via its internal control system pg. 51 professoraxe l Same as w/ error: reasonable assurance F/S free of material misstmts Fraud Triangle - Correct Answer-Pressure (i.e., meeting wall st's expectations), Opportunity (i.e., IC weanesses - segregation of duties), Rationalization (i.e., ability to justify "just this once") Just this once - run Fraud Risk Assessment Process - Correct Answer-Auditors are required to discuss among the audit team members the susceptibility of the client's financial statements to material fraud, usually taking place in brainstorming session where team encouraged to share ideas about how fraud might be conducted and concealed. Also, includes topics related to gaining an understanding of the entity and its environment. Auditors inquire of management and other client personnel about any knowledge of fraud that has occurred. Inquire about specific IC mgmt has in place to prevent and detect fraud and how often these IC are monitored and modified as needed. pg. 52 professoraxe l Industry and Business Environment Factors that influence Inherent Risk - Correct Answer-1. Level of Competition 2. Reputation 3. Government Support and Regulation 4. Demand 5. Economy Illegal acts - Correct Answer-Violations of laws or governmental regulations Direct and Material Effect - Correct Answer-A situation in which noncompliance with laws and regulations impacts amounts and disclosures already included in the F/S Same as detecting material misstmts (i.e., fraud) Indirect effect - Correct Answer-A situation in which noncompliance with laws and regulations does not have a direct impact on amounts and disclosures in the F/S, but could require the creation of a contingent liability or an additional disclosure pg. 55 professoraxe l Many of the laws and regulations that would have a direct and material effect on F/S - Correct Answer-are already familiar to the auditors. I.e., tax law as well as pension laws and disclosures For illegal acts that have a material but indirect effect on the F/S - Correct Answer-Auditor's responsibility is limited to performing specified audit procedures that may identify noncompliance An audit provides no assurance that illegal acts that have an indirect effect on F/S will be detected or any contingent liabilities that may result will be disclosed BUT - Correct Answer-if auditors discover or suspect that an illegal act has occurred, they should gain an understanding of the nature of the act, gather info to determine possible effect on F/S, and document all of their work in the audit documentation. Auditors should discuss with mgmt at a level above those involved with noncompliance and discuss with those in charge of governance and consider implication on other areas of audit (i.e., how does this affect audit strategy) Key performance indicators (KPIs) - Correct Answer- Measurements, agreed to beforehand, that can be quantified and reflect the success factors of an organization pg. 56 professoraxe l How does a client measure its own performance Price-earnings (PE) ratio - Correct Answer-market price per share/earnings per share Earnings per Share (EPS) ratio - Correct Answer-Profit to weighted average common stock shares issued Profitability - Correct Answer-Ability of a company to earn a profit Using EPS, profit margin, GP margin, etc. Cash earnings per share (CEPS) ratio - Correct Answer-cash to issued shares Liquidity - Correct Answer-Ability of a company to pay its debt when they fall due Using Current ration (CA/CL) and turnover ratios (inventory, A/R, etc.) etc. pg. 57 professoraxe l Risk reporting - analytical required Trend analysis - Correct Answer-A comparison of account balances over time When conducting trend analysis, it is important for auditors to - Correct Answer-consider significant changes in economy- wide factors, such as recession, which may affect their interpretation of the trend A trend analysis allows auditors to - Correct Answer-assess movements in the accounts over time and determine whether the underlying trends match their understanding of the client and its operations over the period under review Common-size analysis - Correct Answer-A comparison of account balances to a single line item. BS is usually total assets IS is usually general sales or revenue pg. 60 professoraxe l A common-size anaysis allows auditors to - Correct Answer- gain a deeper appreciation of how much each account contributes to the totals presented in the F/S. Auditors can trace the relative contribution of various accounts through time. Auditors perform ratio analysis to - Correct Answer-assess the relationship between various financial statement account balances. Auditors will calculate profitability, liquidity, and solvency ratios Gross profit margin - Correct Answer-Gross Profit/Net Sales Indicates if seller has sufficient markup to cover other expenses. Decline may be paying more for inventory or charging less to customers. If continues to decline may have a loss or unable to cover operating expenses Profit Margin - Correct Answer-Net Income/Net Sales Profitability after all operating expenses. If steadily falling may affect future viability of the client, or varying wildly from year to year indicates volatility and uncertainty which makes it difficult to assess fair presentation of earnings without further investigation pg. 61 professoraxe l Return on assets (ROA) ratio - Correct Answer-Net Income/Average Assets Ability to generate income from average investment in total assets Return on Stockholders' Equity (ROE) ratio - Correct Answer- Net Income to average equity Generate income from funds invested by common stockholders May be unable to pay dividends and invest in future growth if unable to generate a sufficient return When comparing actual results with the budget, auditors assess - Correct Answer-how profitable the client is compared to management's expectations, significant variance should be discussed with management. When comparing their client with competitors, auditors assess - Correct Answer-their client's profitability relative to companies of a similar size operating in the same industry. pg. 62 professoraxe l including the accounts ID's as being at risk of material misstatement Related party - Correct Answer-an affiliate, principle owner, manager, or other party that is not independent of the entity Financial reporting frameworks, such as GAAP, require - Correct Answer-disclosure of related party relationships, transactions, and accounts so F/S users can understand their potential effects on the F/S Companies can have transactions with related parties frequently, but there is - Correct Answer-a risk that some of the transactions may not be accounted for according to their true substance. I.e., transactions may not be the same as "arms-length" transactions (cutting deals or fraud possible) During planning, in regards to related party, auditors should - Correct Answer-- Request a list from mgmt - Inspect SEC filings - Inspect BOD minutes - Read contracts, insurance policies, loan docs pg. 65 professoraxe l Throughout audit, regarding related parties, auditors should - Correct Answer-- Scan transactions with major customers/suppliers - Scan for unusual/large transactions Corporate Governance - Correct Answer-Refers to the people, systems, and processes within companies used to ensure that companies are well-managed and that risks are identified and controlled by management and entity personnel (BOD) Board of Directors (BOD) - Correct Answer-A group that represents the shareholders and is responsible for ensuring the company is being run to benefit the shareholders Executive Diretors - Correct Answer-Employees of the company who also hold a position on the BOD Non-Executive Directors - Correct Answer-board members who are not employees of the company. Their involvement on the board is limited to preparing for and attending board meetings and relevant board committee meetings pg. 66 professoraxe l Audit partner will meet with - Correct Answer-members of the board when necessary throughout the audit Auditors meet with executive directors - Correct Answer- throughout the audit Audit Committee - Correct Answer-A committee of the board of directors responsible for oversight of: internal controls, financial reporting, and disclosure in the financial statements, regulatory compliance, and the company's independent auditors "outside" of the client Enhances IC by creating communication w/ auditors (external and internal) Hires/Fires external auditors Approves external auditor's service In direct communication with external auditors SOX Sec. 301 requirements and duties for audit committees of public companies - Correct Answer-Usually 3-5 members of BOD who are "independent directors" pg. 67 professoraxe l