AUDIT EXAM

Term Definition
QUALIFIED 1. Intro
2. Scope
3. Explanatory
4. Opinion

“except for” in opinion paragraph.-usually because of

GAAP violations or scope issues. If it’s a scope issues,
mention it in the scope paragraph. If it isn’t, don’t
mention it. It has an extra explanatory paragraph from
the standard unqualified.
Industry Forces-External Threats(Porter's 5 Forces) -Competitors-Potential Entrants-Substitutes-Suppliers-
Customers
Root Administrative or superuser account within UNIX-based
operating systems
CPA examination covers accounting and reporting, auditing, business
environment, regulations, and professional
responsibilities
Analytical Procedures Evaluatioins of Financial information made by a study
of plausible relationships among both financial and non-
financial data
3 methods of variables sampling 1-mean-per-unit estimation2-controlling sample risk3-
determination of sampling risk
Sacn A less-detailed examination of a document or record to
determine whether there is comething unusual
warranting further investigation
Complementary controls controls Controls that function together to achieve the
same control objective.
Qualified Audit Report Financial statements - good
Material Portion - not good
Add "except for" in opinion paragraph + discuss
problem
MATERIAL WEAKNESS DEFICIENCY IN INTERNAL CONTROLS SO
THERE IS POSSIBILITY OF MMS NOT BEING
PREVENTED
Malware Short for "malicious software." A catchall term for any
software that causes intentional damage to computer
systems.
haphazard selection -physical random selection -can't be used with statistical
plans
7 Tools of Evidence 1. Physical Exam/Inspection2. Confirmation3.
Inspection of Documents4. Obeservation5.
Recalulation6. Analytical Evidence7. Client Inquiry
Compare A comparison of information in two different locations.
The instruction should state which information is being
compared in as m uch detail as practical
Which of the following parties is responsible for Management.
establishing an entity’s internal controls?
Preventive controls Controls that deter control problems before they occur.
inner ear the innermost part of the ear, containing the cochlea,
semicircular canals, and vestibular sacs
Factors of Competency 1) Independence of the Provider
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2) Knowledge of the Provider
3) Direct Knowledge of the Auditor
4) Effectiveness of Internal Control
5) Objectivity of Measurement Instrument
reporting the end product of the auditor's work, indicating the
auditing standards followed, and expressing an opinion
as to whether an entity's financial statements are fairly
presented in accordance with agreed-upon criteria (e.g.,
GAAP)
Plaintext A text is humanly readable form. Refers to the original
message that is enrypted for secrure transmission or
storage. Also called clear-text.
modified all-inclusive concept companies record most items, including irregular ones,
as part of net income and highlight irregular items in the
financial statements
tests of controls designed to test the operating effectiveness of controls in
preventing or detecting material misstatement
conservatism when in doubt, chose the solution that will be least likely
to overstate assets and income
Three magnitudes of Internal Control Deficiency Material Weakness
Significant Defiiciency
Control Deficiency
Transaction related audit objectives-Occurance Whether recorded transactions have acutally occured. 
Violation: Inclusion of a sale in the slaes
What is earning management purposeful intervention in the external financial
reporting process, with the intent of obtaining some
private gain.
Achieved upper deviation rate Sample deviation rate (# of deviations/ sample size) +
Allowance for sampling risk
Substantive Strategy Auditor has decided NOT to rely on controls, and use
substantive procedures to test numbers
8 elements of an unqualified audit report Report title
the addressee
introductory paragraph
scope paragraph
opinion paragraph
explanatory paragraph referring to the audit of internal
control
name of auditor
date of report
Steps in Applying Materiality 1) Set preliminary judgment about materiality
2) Allocate preliminary judgment about materiality to
segments
3) Estimate total misstatement in segment
4) Estimate the combined misstatement
5) Compare combined estimate with preliminary or
revised judgment about materiality
 
Steps 1-2 = Planning extent of tests
Steps 3-5 = Evaluating Results
Negative Confirmations request a reply only if the confirmed balance is
incorrect.
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Quantitative Materiality The magnitude of an error that would make the financial
statements materially misstated
Examine a sample of shipping documents to determine Test of control
whether each has a sales invoice number included on it.
(analytical procedure, test of control, substantive test of completeness
transactions, or test of detail account balances.....2.
general audit or control object
comparative negligence A concept used by certain courts to allocate damages
between negligent parties based on the degree to which
each party is at fault. the allocation of damages is
referred to as proprtionate liability.
Standard Unqualified Report A report when all auditing conditions have been met.
(The best opinion)
Consideration of internal auditor's work External auditors must obtain an understanding first
about the work of the internal auditors in order to
determine its relevance to the audit. Then they must
consider the competence (education and certifications)
and objectivity (internal auditors' reporting requirements
to board of directors) of the internal auditors before
relying on their help in the planning and conducting of
an audit. If the internal auditors are considered
competent and objective then they may assist the
external auditor in understanding internal controls,
assessing risk, preparing workpapers, and performing
certain audit procedures (270). Ultimately, however, the
internal auditor's judgement should not be relied on in
assessing inherent and control risks, materiality,
sufficiency of tests performed, accounting estimates and
other matters affecting the auditor's opinion (271).
SOX 404 says that MGMT's responsibilities are... 1) accept responsibility for effectiveness of ICFR
2) Evaluate effectiveness using control criteria
3) Support evaluation with evidence and documentation
4) Present written assessment at end year
Business process risk An internal risk of mismanagement of a critical process
Factors to consider before accepting audit client Financial stability
Reason for leaving previous auditor
Standing in the business community
Major Phases of an Audit Client acceptance / continuance and establishing
engagement termsPreplanningEstablish materiality and
assess risksPlan the auditConsider and audit internal
controlAudit business processes and related
accountsComplete the auditEvaluate results and issue
audit report
Which of the following is not typically included in initial Perform preliminary analytical procedures.
audit planning?
What Does Processing and Recording Cash Receipts Includes receiving, depositing, and recording cash. 
Involve, and Why Must Cash Receipts Be Deposited and
Recorded On a Timely Basis? To Prevent Theft.
[Types of Audit Procedures]  are evaluations of finanicla data made by a study of
Analytical Procedures - Define plausible relationships among both financial and
nonfinancial data. (Ex. Expected vs. actual, on F/S)
Positive vs. Negative Confirmations Negative return IF and ONLY if there is an error.
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Positive is a stronger audit test b/c you receive the
answer regardless.
account form of balance sheet assets on left, liabilities and o.e. on right
6 Elements of AICPA's Quality Control Standards 1. Leadership2. Relevant Ethical Requirments3.
Acceptances/Continuatance of clients4. Human
Resouces5. Engagement Performance6. Monitoring
The auditor is likely to accumulate more evidence when All three of the above.
the audit is for a company
What is a sig def? Matters representing sig def in the design and/or
operation of an entity's ICS that could adversley affect
the entity's ability to support its f/s assertions. Should be
communicated to audit committee.
determinants of sample size (confidence level, tolerable confidence lvl - desired level of assurance
error, est. error, population size) tolerable error - acceptable defect rate
estimated error - historical defect rate
population size - minimal effect
(4-15) What is the purpose of the AICPA's Code of Prohibiting paying commissions to obtain clients who
Professional Conduct restriction on commissions as receive attestation services in Rule 503 is intended to
stated in Rule 503? discourage overly aggressive obtaining of clients by
giving "finders fees" to banks and others in a position to
give business rather than on the basis of competitive and
other qualifications. Prohibiting receiving commissions
for referrals to other CPAs or other providers of services
where attestation services are provided is inteded to
discourage referrals to others on the basis of a "sales
commision" rather than the competition of those offering
services. Commisions when attestations services are not
provided are permitted to encourage competition for
these types of services.
The degree to which external users rely on the When external users place heavy reliance on the F/S it is
statements appropriate to decrease acceptable audit risk
 
Indicators of F/S reliance:
-Client's size
-Distribution of ownership
-Nature and amount of liabilities
What type of head movement is sensed by hair cells in *utricle: side to side movement*saccule: up and down
the utricle? By those in the saccule? movement
The SEC prohibits U.S. stock exchanges from listing All of the above are correct.
securities if a company’s audit committee is
6-6) Why must the auditor obtain an understanding of The auditor should obtain an understanding of each of
internal control? the five components of internal control in order to plan
the audit. This understanding includes knowledge about
the design of relevant controls and whether they have
been placed in operation by the entity. The auditor uses
this knowledge to
o Identify the types of potential misstatement 
o Pinpoint the factors that affect the risk of material
misstatement
o Design tests of controls and substantive procedures
Timeline of detecting fraud in audits Before 2002 - the AICPA's position was that auditors
should follow up when they suspect fraud BUT that
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otherwise did not need to be designed to detect fraud.
2002 - AICPA SAS 99 set forth standards requiring
auditors to provide reasonable assurance that material
fraud WILL be detected.Since then - SOX and PCAOB
have reinforced this responsibilitymovement towards
auditors being more proactive
Which of the following is not correct regarding the The burden of initiating the communication rests with
communications between successor and predecessor the predecessor auditor.
auditors?
Balance Related Audit Objectives Rights and most assets must be owned before it si accpetable to
Obligations include on the financial statements..
IFAC Code of Ethics for Professional Accountants The IESBA, a standard setting board of the IFAC,
established the IFAC Code of Ethics.
Which of the following might not be a signal of a lack of Prior criminal conviction of an assembly line foreman.
integrity in management?
Which of the following is not a test primarily used to test a. Investigation of reductions in insurance coverage.
property, plant and equipment accounts for b. Review of property tax bills.
overstatement? c. Examination of retirement work orders prepar
d. Vouching retirements of plant and equipment.