Audit Fundamentals and Procedures, Exams of Nursing

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ACCT 3222-3, WILEY, LSU, EXAM 1 NEWEST 2024 ACTUAL EXAM 270 QUESTIONS AND CORRECT DETAILED ANSWERS (VERIFIED ANSWERS) ALREADY GRADED A+ Audit Services - 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 - 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) - 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) Assurance - lowest quality (i.e., compilation of historical financial statements, website security, IT operations, non-financial information) Assurance Services - ANSWER>>independent professional services that improve the quality of information, or its context, for decision makers Applicable financial reporting framework refers to - 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 - 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 - ANSWER>>the relevance and realiability of the information Information refers to - ANSWER>>subject matter that can be financial or nonfinancial, historical or prospective, standalone data or entire systems of data, internal or external to a company CPAs are the only _________ accounting professionals in the US and the ________ are issued at the ____________ level - ANSWER>>Licensed accounting professionals in the US. Licenses are issued at the state level, not federal A state board of accountancy will only issue - ANSWER>>a licence to practice after all three Es have been earned CPA Es - ANSWER>>Education, Exam, and Experience Public companies, or issuers, in the US are required by federal government to have - ANSWER>>an annual financial statement audit and an ICFR audit Private companies, or non-issuers, are _______ to have an annual audit by federal government, but - ANSWER>>Not required by law, other interested users may request audited financial statements (i.e., lenders) ICFR - ANSWER>>Internal Control over Financial Reporting Integrated Audit - ANSWER>>An audit that combines the financial statement audit with an audit of the effectiveness of ICFR 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 - 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 Professional Skepticism - ANSWER>>An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence Professional judgment - ANSWER>>The application of relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement PCAOB - ANSWER>>Public Company Accounting Oversight Board Oversees the audits of public companies PCAOB is a - ANSWER>>non-profit corporation established through the SOX legislation in 2002. Auditing Standards - ANSWER>>(AS) Standards issued by the PCAOB which provide minimum requirements and guidance for auditing services AICPA is - ANSWER>>American Institute of Certified Public Accountants A private professional membership organization of CPAs representing the accounting profession Also, responsible for creating and grading the Uniform CPA exam Auditing Standards Board - ANSWER>>(ASB) a standing committee of AICPA Issues audit standards for the audits of private companies and not-for-profit organizations since 2003 SOX (before SOX included public companies) Statements on Auditing Standards - ANSWER>>(SAS) are standards issued by the ASB (Auditing Standards Board) GAAS - ANSWER>>Generally Accepted Auditing Standards is developed by ASB to make sure company followed GAAP Purpose of an audit - ANSWER>>Provide an opinion by the auditor on whether the F/S are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (GAAP) Premise Upon Which an Audit Is Conducted - 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 - 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 - 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 Inherent limitations of an Audit - ANSWER>>Nature of financial reporting (complex) Nature of audit procedures (sampling; audit data analytics (ADA)) Time & Cost constraints Reporting the results of an audit - 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 - ANSWER>>Statements on Standards for Attestation Engagements (SSAE) Statements on Quality Control Standards (SQCS) AICPA is the _________ Committee - ANSWER>>Accounting and Review Services Committee Tasked with issuing Statements on Standards for Accounting and Review Services (SSARS) ASB members are - ANSWER>>Volunteers on the board from AICPA peers There are _____ state boards - ANSWER>>55 Why audit standards? - ANSWER>>1. Uniformity 2. Guidelines to measure quality of audit work FASB makes - ANSWER>>GAAP State boards of Accountancy - ANSWER>>Controls licensing. There are 55 boards NASBA - ANSWER>>Admin of CPA application and grade viewing Sections of Unqualified audit report of public company - 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? - 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 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 - ANSWER>>Material departures and client refuses to make corrections Qualified or Disclaimer of Opinion - ANSWER>>Material limitation known as "Scope Limitation" on auditor's ability to gather sufficient appropriate evidence Disclaimer of Opinion - ANSWER>>Auditor is not independent PCAOB Auditing Standard 2201 states_____ - 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 AS 2201 requires - ANSWER>>a standard format of the audit report be used for all audits of effectiveness of ICFR Components of the unqualified report on ICFR - ANSWER>>1. Title - independent is also in the title of this report and registered with PCAOB 2. Address - addressed to S/H and Board of Directors of company 3. Opinion paragraph - explains an audit of ICFR was conducted references the COSO IC - Integrated Framework as criteria. Second sentence states auditor's opinion 4. Paragraph referencing the F/S audit and the opinion given 5. Basis for opinion paragraph - states different responsibilities of mgmt and auditors. References registration with PCAOB and independence requirements of SEC and other fed. security laws 6. Scope paragraph - explains auditor's used PCAOB standards. Auditors only required to obtain reasonable assurance and did so as basis for opinion 7. Definition and inherent limitations paragraph - definition of ICFR directly from AS 2201. Final sentence not to use CY opinion to assume future IC will be effective and circumstances may change 8. Signature - audit firm's 9. Date - end of fieldwork date Material Weakness - ANSWER>>A deficiency, or combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the F/S will not be prevented or detected on a timely basis If one or more material weaknesses are discovered auditors issue - ANSWER>>Adverse opinion on the effectiveness of ICFR that explicitly states company did not maintain effective ICFR during period under audit If auditors encounter a material limitation in the scope of their work - ANSWER>>May consider disclaiming an opinion Audit expectation Gap can be reduced by - ANSWER>>Auditors performing duties appropriately, complying with standards, and meeting minimum standards of performance Inspections of audits that standards applied correctly Auditing standards reviewed and updated on regular basis to enhance work 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 - 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 - ANSWER>>Establish minimum standards of acceptable conduct in the performance of professional services Interpretations - ANSWER>>Provide additional guidance regarding the scope and applicability of the rules of conduct AICPA enforceability - 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 Independent in Fact - ANSWER>>Acting with integrity and objectivity, being honest, and not subordinating the public trust to personal gain and advantages Auditor's state of mind* independent in appearance - ANSWER>>Avoiding potential conflicts of interest that can be observed by others *what would the public think? *** MORE IMPORTANT*** Covered member - ANSWER>>A person in a position to potentially influence attest decisions or the outcome of an attest engagement Covered members include - 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. 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 - 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 - ANSWER>>A covered member's spouse, spouse equivalent, or dependent Close relative - ANSWER>>A covered member's parents, nondependent children, brothers and sisters, or stepbrothers or stepsisters Key position - ANSWER>>A position with an attest client where an individual can exercise influence over the financial statement Prohibited Activities of Covered Members' Immediate Family - 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 - 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 - 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: - ANSWER>>A. Promptly reports such consideration or offer to appropriate person in the firm, and B. Removed him/herself from engagement until employment is rejected or no longer being sought Nonattest Services of Attest Clients - ANSWER>>AICPA allows and client must agree to: Make all mgmt decisions and perform all mgmt functions designate a competent employee, preferably of sr mgmt, to oversee the services Evaluate the adequacy and results of services performed Accept responsibility for results of the the services Establish and maintain IC, including monitoring ongoing activities i.e., Client must be heavily involved to prevent auditing own mgmt decisions When performing nonattest services CPA should - ANSWER>>establish and document, in writing, an understanding with the client regarding 1. objectives of engagement, 2. services to be performed, 3. client's acceptance of its responsibilities, 4. CPA's responsibilities, and 5. any limitations of the engagement Preferably all documented in an engagement letter and that CPA is satisfied that the client has informed judgment and understands mgmt's responsibilties Audit committee - 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 ... If, however, the statements or data contain such a departure (from GAAP) and the member can demonstrate that ... - ANSWER>>due to unusual circumstances the F/S or data would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement Bodies that are designated by the AICPA Council to promulgate accounting principles are: - ANSWER>>1. FASB 2. FASAB 3. GASB 4. IASB When departing from GAAP, a CPA must use _________ and a CPA must ______ - ANSWER>>Must use professional judgment and must consider whether a reasonable person reading the F/S would consider the adherence to the promulgated accounting principle to be misleading. In practice, circumstances are rare. Contingent Fee Arrangment or Accepting a Commission or Referral Fee with an attest client - ANSWER>>In general impairs independence due to the advocacy threat. It is particularly important that commission arrangements be disclosed to the client (i.e., accounting software commissions). OK on both for nonattest clients. CPA in public practice shall not __________ without specific client consent - ANSWER>>confidential client information Exceptions to Client Confidentiality - ANSWER>>1. Should not be construed as relieving a CPA of professional obligation to comply with accounting principles 2. A CPA must comply with a validly issued and enforceable subpoena or summons and comply with laws and government regulations 3. Does not prohibit a review of a CPA's professional practice under the AICPA, state society, or state board of accountancy authorization (i.e., peer reviews) 4. Does not preclude a CPA from initiating a complaint or responding to any inquiry made by ethics division of AICPA, duly constitute investigative or disciplinary body of a state CPA society, or a state board of accountancy. Factors that influence client acceptance and retention - ANSWER>>- Integrity of management - Competence issues - Independence issues - Special circumstance and unusual risks When assessing management's integrity, auditor should consider - 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: - ANSWER>>- Communication with previous auditor (must obtain permission from client) - 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: - 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 - ANSWER>>Sets out the terms of the audit engagement, to avoid any misunderstandings between the auditor and the client Engagement letter should include - 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 - ANSWER>>Express opinion of F/S Auditor's responsiblitites - ANSWER>>Conduct audit in accordance with stds (ASB/PCAOB) Mgmt's responsibilities - ANSWER>>FC, IC, following laws, making records available to auditors, making adjustments Limitations of audit - ANSWER>>reasonable assurance fees/timing other matters Phases of an audit - ANSWER>>Risk Assessment Phase Risk Response Phase Most common materiality benchmark - ANSWER>>5% of income before taxes Performance materiality - 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 - ANSWER>>reduce the probability that the sum of immaterial and/or undetected misstatements in the F/S is greater than 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: - 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 = - ANSWER>>Less audit evidence (less work) Lower $ materiality = - ANSWER>>more audit evidence (more work) AU-C 200.A22 states auditors should be skeptical if the following arise: - 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 - Situations that indicate the need for additional audit procedures beyond what is required by GAAS Professional Skepticism means that auditors should - ANSWER>>gather reliable evidence to support management's responses and to support amounts and disclosures in the F/S. What questions should auditors keep in mind throughout all phases of the audit? - ANSWER>>Is this information reliable? Do we need to perform more audit procedures? Inherent Risk - ANSWER>>The susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls Assertions - ANSWER>>Statements or representations, explicit or implied, made by management regarding the recognition, measurement, presentation, and disclosure of items included in the financial statements. Assertions help guide the procedures conducted by auditors Significant risk - ANSWER>>An identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration When classifying risks as being significant, consideration is given to whether the risk - ANSWER>>- Involves fraud - Is related to significant economic or accounting developments - Involves complex transactions - Involves significant related-party transactions - Involves significant subjectivity in measurement of financial information - Involves significant transactions outside the client's normal course of business Control Risk - ANSWER>>The Risk that a client's system of internal controls will not prevent or detect a material misstatement on a timely basis Auditors are interested in whether the client has controls in place that - ANSWER>>are designed to minimize the risk of material misstatement for each account and related assertion identified as being high risk by the auditors Risk of Material Misstatement (RMM) - 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 - 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 - ANSWER>>Detection Risk Auditors must identify client characteristics that place its financial statements at risk of - ANSWER>>Material misstatement (inherent risk) and determine whether controls designed to limit such a risk exist and are effective (control risk) It is _______ any of these risks to zero - ANSWER>>Impossible to reduce any of these risks to zero Financial Statements are - 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 ____ - ANSWER>>fall between 1-100% NEVER 0% If RMM is high - ANSWER>>Perform extensive detailed substantive procedures and place little or no reliance on the client's internal controls Fraud - ANSWER>>An intentional act through the use of deception that results in a misstatement (or omission) in F/S that are the subject of an audit Only difference with error is intent Examples of fraud red flags - 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 - 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) Misappropriation of Assets - 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 - 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 - ANSWER>>Client management and those charged with governance Fraud prevention refers to - ANSWER>>use of controls and procedures aimed at avoiding a fraud. Fraud detection refers to - ANSWER>>use of controls and procedures aimed at uncovering a fraud should one occur Auditor's fraud responsibility is - 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 Same as w/ error: reasonable assurance F/S free of material misstmts Fraud Triangle - 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 - 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. Client's audit committee should also be involved and inquired their role in prevention and detection. Fraud Risk Assessment Process Documentation - ANSWER>>DOCUMENT EXTENSIVELY Documentation should provide details of the brainstorming session, including when it took place and the audit team members who participated. Significant risks identified by auditors and the planned audit response to those risks are also documented. Nature of the entity, strategies, internal control: - ANSWER>>Ownership Structure Customer/Supplier Relationships Importer/Exporter Employee Relationships Sources of Financing Procedures for nature of entity - ANSWER>>1. Inquiries - of mgmt, client personnel, IA, outsiders 2. Analytical procedures - ratio analysis/trend analysis 3. Observation and inspection - tour and documents (BOD minutes, IA reports, other records) 4. Discussion among audit team members "Brainstorm" - application of GAAP, Unique/Unusual transactions, "Good training for new audit staff time" Factors that Influence Inherent Risk - ANSWER>>1. Major customers 2. Major suppliers 3. Importer or Exporter 4. Changes in Tech 5. Warranties 6. Discounts 7. Client reputation Debt covenants - ANSWER>>Conditions companies agree to written into the contract that restrict a company's activities. If a company breaches a debt covenant, it may need to renegotiate or repay the loan immediately. Auditors may use these to gain a deeper understanding of the accounts potentially at risk of material misstatement Analytical procedures - ANSWER>>An evaluation of financial information by studying plausible relationships among financial and non-financial data CPA exam loves to test on this Analytical procedures involve - ANSWER>>the ID of fluctuations in accounts inconsistent with auditors' expectations based upon their understanding of the client. Auditors must have a clear expectations about their client's results so that unexpected fluctuations can be correctly ID'd and investigated Analytical Procedures are conducted during the risk assessment phase of the audit to: - ANSWER>>- Highlight unusual fluctuations in accounts - Aid in ID of risk - Enhance the understanding of a client and its industry - ID accounts at risk of material misstatement - Minimize audit risk by concentrating audit effort where risk of material misstatement is greatest AU-C 315 and AS 2110 require auditors to perform analytical procedures as - ANSWER>>part of their risk identification process (6 mo. before the audit). Includes simple comparisons, trend analysis, common-size analysis, and ratio analysis. Comparisons are often made between - ANSWER>>CY and PY, CY and budget, or CY and Industry data Requirements of analytical procedures during audit phases - ANSWER>>Planning/Risk assessment - analytical required Risk response - analytical not required, evidence gathering Risk reporting - analytical required Trend analysis - ANSWER>>A comparison of account balances over time When conducting trend analysis, it is important for auditors to - 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 - 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 - ANSWER>>A comparison of account balances to a single line item. BS is usually total assets IS is usually general sales or revenue A common-size anaysis allows auditors to - 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 - ANSWER>>assess the relationship between various financial statement account balances. Auditors will calculate profitability, liquidity, and solvency ratios Gross profit margin - 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 - 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 Return on assets (ROA) ratio - ANSWER>>Net Income/Average Assets Ability to generate income from average investment in total assets Return on Stockholders' Equity (ROE) ratio - 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 - 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 - ANSWER>>their client's profitability relative to companies of a similar size operating in the same industry. Significant trends are investigated further by the audit team as they indicate there may be a risk of material misstatement Auditors are concerned with client's liquidity situation to - ANSWER>>alert them to any potential going-concern issues Acid-test (Quick) Ratio - ANSWER>>Liquid Assets/ Current Liabilities Executive Diretors - ANSWER>>Employees of the company who also hold a position on the BOD Non-Executive Directors - 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 Audit partner will meet with - ANSWER>>members of the board when necessary throughout the audit Auditors meet with executive directors - ANSWER>>throughout the audit Audit Committee - 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 - ANSWER>>Usually 3-5 members of BOD who are "independent directors" - *Members must be independent members of the BOD NOT executive directors or otherwise affiliated with issuer (mgmt, employee, or financial interest) - Cannot accept consulting or advisory fees from the issuer - *Responsible for the appointment, compensation, and oversight of the auditors - *Auditors directly report to audit committee, responsible for resolving any disagreements between mgmt and auditors - *Establishes procedures for receiving complaints including receipt of anonymous complaints from employees (i.e., whistleblower hotline) - Authority to engage legal counsel if necessary Information Technology - ANSWER>>Use of computers to process, record, and store financial reporting data and other information AU-C 315 and AS 2110 require that auditors gain - ANSWER>>an understanding of the client's IT system, associated risks, and related controls At risk assessment phase, it is important for auditors to ID significant risks and controls to mitigate those risks then decide if test IC Closing Procedures - ANSWER>>Processes used by a client when finalizing the accounts for an accounting period Auditors are concerned with closing procedure transactions and events - ANSWER>>have been recorded in the correct accounting period. Client should have controls in place. Oversight of this process is the responsibility of those charged with governance. Auditors, with regards to closing procedures, check the - ANSWER>>accuracy of accrual and deferral calculations around year end and look at earnings trends to assess whether the reported income is in line with similar PY periods.