12.27.18 Flashcards
Notes that are included with financial statements are the responsibility of the
Company’s management.
The notes are considered part of the basic financial statements. Because management has the primary responsibility for the financial statements, it also has the primary responsibility for the fairness of information included in notes.
Based on past experience with a client, an auditor determined performance materiality for current assets should be calculated at 1/4 of total materiality (7% of total current assets) and noncurrent assets should be calculated at 1/3 of total materiality (4% of total noncurrent assets). Calculate performance materiality for current assets based on the following: Cash and cash equivalents: $900,000 Land: 200,000 Accounts receivable: 150,000 Prepaids: 150,000 Building: 400,000 Fixtures and equipment: 500,000 Inventory: 100,000 Leasehold improvements; 100,000
$22,750.
Materiality is a matter of professional judgment about whether misstatements could reasonably influence the economic decisions of users as a group, given their common informational needs. Performance materiality is the amount(s) set by the auditor at less than the materiality for (1) the statements as a whole or (2) particular classes of transactions, balances, or disclosures. Performance materiality is an adjustment to reduce to an appropriately low level the probability that the sum of (1) uncorrected and (2) undetected misstatements (whether or not individually material) exceeds the applicable materiality.
$22,750 = [$900,000 + $150,000 + $150,000 + $100,000] × [7% (total materiality %) × 1/4 (performance materiality)].
Inherent risk and control risk differ from detection risk in that they
Exist independently of the financial statement audit.
Inherent risk is the susceptibility of a relevant assertion to a material misstatement before considering related controls. Control risk is the risk that internal control will not timely prevent, or detect and correct, a material misstatement of a relevant assertion that could occur. Inherent risk and control risk are the entity’s risks. They exist independently of the audit and cannot be changed by the auditor. GAAS ordinarily do not refer to inherent risk and control risk separately but instead to a combined assessment of the risks of material misstatement. This assessment may change as more evidence is collected, but the entity’s risks do not. Detection risk is the risk that the auditor’s procedures performed to reduce audit risk to an acceptably low level will not detect a material misstatement that exists in a relevant assertion. It can be changed at the auditor’s discretion by altering the nature, timing, or extent of the audit procedures.
An auditor may be able to reduce audit risk to an acceptably low level for some relevant assertions by
Performing analytical procedures.
For some relevant assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor’s risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor’s professional judgment about the expected effectiveness and efficiency of the available procedures.
A CPA is engaged to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of
Statements on Standards for Attestation Engagements (SSAEs).
The AICPA’s Statements on Standards for Attestation Engagements (SSAEs) cover attest engagements. Examining management’s assertion that the entity’s schedule of investment returns is an example of an examination engagement that falls under the guidelines of the SSAEs.
Which of the following matters generally is included in an auditor’s engagement letter?
Management’s responsibility for the entity’s compliance with laws and regulations.
The primary purpose of an engagement letter is to provide written record of the agreement with the client as to the services to be provided by the auditor. The terms of the engagement should be documented in an engagement letter that states the following: (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) the financial reporting framework, and (5) the expected form and content of audit reports. Management’s responsibility for compliance with laws and regulations applicable to its activities should be included in the agreement.
A cooling-off period of how many years is required before a member of an issuer’s audit engagement team may begin working for the registrant in a key position?
One year.
The SEC prohibits a member of an issuer’s audit engagement team from working for the registrant (the issuer) in a key position within 1 year of participating in the audit of that issuer.
For which of the SSARS services will the practitioner issue a report?
Preparation:
Compilation:
Review:
No
Yes
Yes
The practitioner does not issue a report for a preparation service for a nonissuer. This service does not (1) provide assurance or (2) require a determination of whether the practitioner is independent. However, reports are issued for a compilation and a review service. A compilation provides no assurance but requires a determination of independence. A review requires independence.
Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be
Considered in the evaluation of audit findings in the current year.
The cumulative effect of immaterial uncorrected misstatements related to prior periods may have a material effect on the current period’s financial statements.
Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?
Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
An objective of an initial audit is to obtain sufficient appropriate evidence regarding opening balances. The auditor should determine whether they (1) contain misstatements materially affecting the current statements and (2) reflect appropriate accounting policies consistently applied in the current statements. Relevant audit evidence about these matters may include (1) the most recent audited statements, (2) the predecessor’s report on them, (3) the results of inquiry of the predecessor, and (4) a review of the predecessor’s audit documentation (AU-C 510).
Williams & Co. is a medium-sized CPA firm enrolled in the Private Companies Practice Section (PCPS). The firm is to have a peer review under the AICPA Peer Review program. The review will most likely be performed by
Another CPA firm.
Peer review is a necessary part of the practice-monitoring requirement for AICPA membership. A peer review of a firm enrolled in the AICPA Peer Review program may be performed by a review team organized by (1) a firm engaged by the reviewed firm or (2) a state CPA society. Also, an association of firms may be authorized to aid its members by organizing review teams (PR 100). Furthermore, a PCPS firm need not perform the peer review of a PCPS firm, and the team captain need not be a PCPS member.
An auditor must obtain professional experience primarily to
Exercise professional judgment.
Professional judgment is essential to perform an audit properly. An auditor must interpret relevant ethical requirements and GAAS and make informed decisions during the audit. Such interpretations and decisions require competencies developed through relevant training, knowledge, and experience (AU-C 200).
A precondition for an audit most likely is not present when management
Refuses to acknowledge its responsibility for the fair presentation of the financial statements in accordance with the applicable reporting framework.
A precondition for an audit is management’s agreement that it acknowledges and understands its responsibilities. These include the preparation and fair presentation of the financial statements in accordance with the applicable reporting framework. If this agreement is not obtained, the auditor should not accept the engagement (AU-C 210).
Based on past experience with a client, an auditor determined performance materiality for fixed assets should be calculated at 1/4 of total materiality (3% of total net fixed assets). Calculate performance materiality based on the following:
Fixed assets (gross) at 1/1/2017: $2,000,000
Capital expenditures: 250,000
Dispositions: 200,000
Accumulated depreciation at 1/1/2017: 800,000
Accumulated depreciation at 12/31/2017: 770,000
$9,600
Materiality is a matter of professional judgment about whether misstatements could reasonably influence the economic decisions of users as a group, given their common informational needs. Performance materiality is the amount(s) set by the auditor at less than the materiality for (1) the statements as a whole or (2) particular classes of transactions, balances, or disclosures. Performance materiality is an adjustment to reduce to an appropriately low level the probability that the sum of (1) uncorrected and (2) undetected misstatements (whether or not individually material) exceeds the applicable materiality.
$9,600 = [$2,000,000 (fixed assets (gross) at 1/1/2017) + $250,000 (capital expenditures) – $200,000 (dispositions) – $770,000 (accumulated depreciation at 12/31/2017] × [3% (total materiality %) × 1/4 (performance materiality)].
Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely will significantly increase opportunities for fraudulent financial reporting when
Management is dominated by one individual who is also a shareholder.
One set of opportunity risk factors for misstatements arising from fraudulent financial reporting involves ineffective monitoring of management. One such risk factor is domination of management by a single person or small group (in a non-owner managed business) without compensating controls (Appendix to AU-C 240). A compensating control in that circumstance is effective oversight by the board or audit committee of the financial reporting process and internal control.
