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FINANCIAL AUDITING EXAM 1 2024/2025
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FINANCIAL AUDITING EXAM 1 FINANCIAL AUDITING EXAM 1 FINANCIAL AUDITING EXAM 1
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FINANCIAL AUDITING EXAM 1the Sarbanes-Oxley ActIncluded a set of reforms that toughened penalties for corporate fraud,
restricted the types of consulting CPAs may perform for public company audit clients, and created
the Public Company Accounting Oversight Board (PCAOB) to oversee the accounting profession.
What act makes audit committees directly responsible for appointing, compensating, and overseeing
the public accounting firm?Sarbanes-Oxley Act
What act wants the members of the audit committee to be financially literate, and for at least one
member (usually chairman) tobe a financial expert?Sarbanes-Oxley Act
What should Audit Committee members not receive?any counseling, advisory, or other
compensatory fee from the company, or be in any way affiliated with the company
This act requires that one year pass before a member of the audit team may accept employment
with an SEC registrant in certain designated positions like chief executive officer, controller, chief
financial or accounting officer.Sarbanes-Oxley Act
This act requires that auditors maintain documentation for seven years for public clients. These
working papers must be retained regardless of whether they support or are inconsistent with the
auditors' final conclusion relating to significant matter.Sarbanes-Oxley Act
The Sarbanes-Oxley Act does not allow a registered public accounting firm that audits a public
company to provide the following Nonattest Services to audit clients:Bookkeeping or other services
related to the accounting records or financial statements
Financial information systems design and implementation
Appraisal, valuation, and actuarial services
Internal audit outsourcing services
Management functions or human resources
Various investment services
Legal services and expert services unrelating to auditing
Certain tax services, such as tax planning for potentially abusive tax transactions and providing
individual tax services to client officers who play a significant role in financial reporting
,The auditors should plan and perform the audit to obtain reasonable assurance that this, whether
caused by errors or fraud, are detected.material misstatements which are a combination of inherent
and control risk.
It is important that auditors recognize that risks of material misstatement occur at both thefinancial
statement level and the relevant assertion level for account balances, transaction classes, and
disclosures.
The general approach followed during risk assessment is to use all the evidence obtained about the
client and its environment to:o Identify risks
o Relate the identified risks to what can go wrong at the relevant assertion level
o Consider whether the risks are of a magnitude that could result in a material misstatement
o Consider the likelihood that the risks could result in a material misstatement
The following are some examples of Financial Statement Level Risks:Risks related to an ineffective
control environment and weakness in general information technology controls
A lack of sufficient capital to continue operations
A declining industry
Risks related to the selection and application of significant accounting policies
Financial Statement Level Risks areRisks at the financial statement level that relate to the overall
financial statements and potentially affect many individual assertions.
The following are overall responses by the auditors to address financial statement level
risks:Assigning to the audit more experienced staff or individuals with specialized skills
Providing more supervison for the audit staff and emphasizing the need for them to maintain
professional skepticism
Incorporating additional elements of unpredictability in the selection of further audit procedures to
be performed
Increasing the overall scope of audit procedures
Relevant Assertion Level Risks areMost risks of misstatements that relate to one or a few relevant
assertions that relate to one or more significant accounts or disclosures. This assertion is one that
has a reasonable possibility of containing material misstatement (without regard to controls over it).
, A summary of relevant assertion level risks are:-Existence or occurrence
-Rights and obligations
-Completeness
-Cutoff
-Valuation or allocation
-Presentation and disclosure
What are the auditor's responsibilities when planning an audit?• To express an opinion on the
financial statements based on having conducted an audit following Generally Accepted Auditing
Standards of the U.S.
• Underlying this opinion is the auditors' belief that they have obtained reasonable assurance that
the financial statements are free of material misstatement.
• To obtain reasonable assurance, they obtain audit evidence by performing various audit
procedures
• Auditors cannot issue an unmodified opinion on financial statements that contain material
deficiencies. Materiality depends upon both the dollar amount and the nature of the item.
• Auditors cannot guarantee the correctness of the financial statements because the statements
include many estimates, not absolute facts.
Explain audit risksThe possibility that the auditors may unknowingly fail to appropriately modify their
opinion on financial statements that are materially misstated. This is the risk that the auditors will
issue an unqualified opinion on financial statements that contain a material departure from GAAP.
What is the Audit Risk formula?Audit Risk = IR (Inherent Risk) * CR (Control Risk) * DR (Detection
Risk)
Risk of Material Misstatement isInherent Risk and Control Risk
When Auditors Fail to Detect a risk of Material MisstatementDetection Risk
Inherent RiskRisk of a material misstatement occurring in an assertion assuming no related internal
controls.
Control RiskRisk that a material misstatement in an assertion will not be prevented or detected on a
timely basis by the company's internal control.
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