1A - Ethics, Professional Responsibilities, and General Principles

Question 1

What is the Public Company Accounting Oversight Board (PCAOB) and who established it?

Answer 1

Established by congress to oversee PUBLIC company audits. Group was formed to protect the interests of investors and further the public interest in the prep of audit reports.

Question 2

The term “Member” is used for which two governing bodies?

Answer 2

1.) AICPA Code of Professional Conduct
2.) IESBA Code of Ethics for Professional Accountants.

For AICPA, a firm may only designate itself as “Members of the AICPA” if all CPA Owners are members.

Question 3

Independence Rules for Employee Benefit Plan Auditors.
Who are the three bodies involved and what are each of their guidelines?

Answer 3

Department of Labor (DOL) - rules apply to all employee benefit plan auditors.
AICPA - AICPA Rules apply if employee is member of AICPA.
SEC - SEC rules only apply if Form 11-K is filed with SEC.

Question 4

Government Accountability Office (GAO) - What are the 7 Threats to Independence?

Answer 4

1.) Self-Interest : Threat that a financial or other interest will inappropriately influence judgement.
2.) Self-Review : Threat an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of PREVIOUS judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.
3.) Bias : the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.
4.) Familiarity : Threat that close relationship will impact objectivity.
5.) Undue Influence Threat : Threat that external influences or pressures will impact an auditor’s ability to make independent and objective judgements.
6.) Mgmt. Participation Threat: Threat that results from an auditor taking on the role of management or otherwise performing management functions on behalf of the entity undergoing the audit.
7.) Structural Threat : Threat that an audit organization’s placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization’s ability to perform work and report results objectively.

Question 5

Due Care - Auditor must perform professional services with which two principles?

Answer 5

Principle in the AICPA Code of Professional Conduct, member’s responsibility to perform professional services with COMPETENCE and DILIGENCE.

Question 6

SECTION 403 (SOX) - Disclosures of Transactions Involving Mgmt. and Principal Stockholders

Answer 6

Requires every person who is directly or indirectly the beneficial owner of more than 10% of any class of equity shall file their statements within 10 days after individual becomes beneficial owner, director, or officer.

Question 7

SECTION 404 (SOX) - Management Assessment of Internal Controls

Answer 7

Audit report must attest and report on the INTERNAL CONTROL assessment made by management.

Question 8

SECTION 402 (SOX) - Enhanced Conflict of Interest Provisions

Answer 8

Issuer can’t extend or maintain credit in form of personal loan to any director or executive officer of that issuer.

Question 9

SECTION 406 (SOX) - Code of Ethics for Senior Financial Officers

Answer 9

Disclose whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not). Any change in or waiver of this code requires disclosure as well.

Question 10

SECTION 18 Securities and Exchange Act (SEA) of 1934 - LIABILITY FOR MISLEADING STATEMENTS

Answer 10

CPA can incur liability for filing any false or misleading statement in any document required to be filed. The third party must prove INTENT in order to hold the CPA liable. Negligence on the part of the CPA is not enough.

Question 11

Attest Engagements include reports on the following:

Answer 11

1.) Internal Control Structure
2.) Compliance w/ Statutory, Regulatory, and Contractual Requirements
3.) Investment Performance Statistics
4.) Information Supplementary to the Financial Statements

Question 12

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Answer 12

Requires employers to offer former employees continued benefits after they leave a position for a certain period of time. However, employees are normally responsible for the insurance premiums.

Question 13

SECTION 105 (SOX) - Investigations and Disciplinary Proceedings

Answer 13

PCAOB may investigate any act or practice, or omission to act, by a registered public accounting firm, any associated person of such firm, or both.

Question 14

SECTION 11A - Securities Act of 1933

Answer 14

CPA who audits the financial statements associated with a registration statement may be sued by anyone who acquires the securities. The CPA must show that the misstatement in the financial statements was immaterial, that the financial statements were not misleading, or that he exercised due diligence in the audit. The burden of proof is shifted to the CPA.

Question 15

SECTION 206 (SOX) - Conflicts of Interest

Answer 15

Member of an audit engagement team CANNOT accept employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the SEC during the 1-year period preceding the date of the start of the audit.

Question 16

What is the purpose of the Audit Committee?

Answer 16

SUB GROUP of the Board of Directors. Audit committee’s function is to set up means of direct communication between outside directors and the independent auditor. The committee typically:

1.) selects and appoints the independent auditor,
2.) assures that the auditor is independent,
3.) reviews the nature and details of the engagement,
4.) reviews the quality of the auditor’s work,
5.) reviews the scope of the audit,
6.) maintains lines of communication, and
7.) helps solve any disagreements.

Question 17

Occupational Safety and Health Act (OSH Act)

Answer 17

Regulates safety and health conditions in most PRIVATE companies. Employers have a duty under the OSH Act to provide their employees with work/workplace free from hazards. Violations of the OSH Act include both civil and criminal penalties.

Question 18

Family and Medical Leave Act (FMLA)

Answer 18

Requires employers of 50 or more employees to give up to 12 weeks of unpaid, job-protected leave to eligible employees for the birth or adoption of a child or for the serious illness of the employee, spouse, or parent.

Question 19

Government Accountability Office (GAO) - What are the Four Sections of Independence?

Answer 19

1.) A conceptual framework
2.) Guidance for audit organizations that are structurally located within the entities they audit
3.) Requirements when performing non-audit services
4.) Guidance on documentation

Question 20

Health Insurance Portability and Accountability Act

Answer 20

Promotes the privacy of individually identifiable health information and sets national standards for the security of electronic protected health information.

Question 21

Fair Labor Standards Act

Answer 21

Employers must pay covered employees at least the federal minimum wage and overtime pay of 1.5 times the regular rate of pay. This act also restricts the hours that children under the age of 16 may work and forbids the employment of children in jobs deemed to be dangerous.

Question 22

Gov’t Auditing Standards - What to do when threats to independence are identified?

Answer 22

Auditors must apply safeguards to eliminate or reduce threats to an acceptable level.

Question 23

Gov’t Auditing Standards - What could result in impairment of CPA’s Independence?

Answer 23

Developing entity program policies are considered a management function. As such, developing such policies would impair a CPA’s independence.

Question 24

Employee Retirement Income Security Act (ERISA)

Answer 24

Regulates employers who offer pension or welfare benefit plans. Federal law requires that employee benefit plans with 100 or more participants must have an audit annually as part of their obligation to file Form 5500. Auditors of employee benefit plans must be independent.

Question 25

Contingent Fees

Answer 25

Public Acct. Firm CANNOT provide services for Contingent Fees or Commission during the audit and professional engagement period. Even if the fee arrangement is approved by the client’s audit committee, the auditor’s independence is still impaired.

Question 26

PCAOB Rule 3524 - Audit Committee Pre Approval of Tax Services

Answer 26

Requires registered public accounting firm to describe in writing the scope and fee structure of the services, discuss potential effects on independence, and document the substance of the discussion with the audit committee.

Question 27

SECTION 208 (SOX) - Commission Authority

Answer 27

Prevents public accounting firms in violation of SEC or PCAOB rules from preparing or issuing any audit report with respect to that issuer.

Question 28

Disclosure of Audit Clients

Answer 28

IRS has rules against a CPA or other preparer disclosing a tax return client’s name. Since auditing and tax preparation have been separated by SOX, audit clients could be disclosed. Disclosures that suggest a company has financial problems are prohibited.

Question 29

Code of Professional Conduct - AICPA

Answer 29

Consists of the principles, rules, and interpretations and other guidance. The principles provide the framework for the rules, which govern the performance of professional services by members of the AICPA.

Question 30

Professional Skepticism

Answer 30

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.

Question 31

Objectivity

Answer 31

Objectivity is the ability to maintain an impartial attitude in both fact and appearance based on one’s actions and relationships. (Intellectually honest and free of conflicts of interest).
Objectivity is required by all CPA’s, not just those in Public Practice.

Question 32

What is the difference between Independence in Fact and Appearance?

Answer 32

The CPA must be independent not only in fact but also in appearance.
FACT - Means true conflict must not exist.
APPEARANCE - appearance, or impression, of conflict must not exist.

Question 33

AICPA Code of Conduct - Client Records

Answer 33

Client-prepared records are required to be returned to the client per the AICPA’s Code of Professional Conduct. This is true regardless of whether the client is in arrears on fees. In general, any client-owned property is required to be returned to the client. Anything prepared by the Auditor are property of the Audit Firm.

Question 34

Attest Client

Answer 34

Company, Organization, or Individual that engages an external accounting firm to perform audits, reviews, or examinations of financial statements or other financial information.

Question 35

SECTION 103 (SOX) - PCAOB Has Authority to do what?

Answer 35

Set, amend, update, and modify auditing, quality control, and ethics standards.

Question 36

In order to participate on the PCAOB Board, members must?

Answer 36

Demonstrate commitment to the interests of investors and the public.

Question 37

SECTION 204 (SOX) - AUDITOR REPORTS TO AUDIT COMMITTEE.
What three things must the Acct. Firm communicate with Audit Committee?

Answer 37

1.) all critical accounting policies and practices,
2.) all alternative accounting treatments,
3.) all material written communications with management.

Question 38

When can a CPA in Public Practice disclose confidential client information regarding Audit Services?

Answer 38

1.) Client’s Consent
2.) Peer review by a state CPA society or state board of accountancy.
3.) Subpoena or court summons to release confidential information.
4.) Inquiry that is made by a recognized investigatory body.

Question 39

Non-Attest Engagements

Answer 39

1.) Management consulting engagements in which the accountant provides advice or recommendations
2.) Engagements in which the accountant is engaged to advocate the client’s position (e.g., IRS review of tax returns)
3.) Tax engagements to prepare tax returns or provide tax advice
4.) Engagements solely to assist the client
5.) Testifying as an expert witness

Question 40

SECTION 102 (SOX) - Registration with the PCAOB.
What is included in the registration?

Answer 40

1.) a statement of the firm’s quality control policies,
2.) a list of the names and license numbers of all accountants associated with the firm,
3.) information regarding criminal, civil, or administrative actions or disciplinary proceedings against the firm (or any person in the firm),
4.) consent from the firm to cooperate and comply with any request made by the PCAOB in furtherance of its authority and responsibilities.
5.) Once registered, the firm must submit annual reports along with registration and annual fees to the PCAOB.

Question 41

SECTION 409 (SOX) - Real Time Disclosures.
What must issuers disclose in real time?

Answer 41

Material changes in the financial condition or operations.

Question 42

What agency approved PCAOB rules before they become effective?

Answer 42

SEC (Securities and Exchange Commission)

Question 43

What are workpapers and who owns them?

Answer 43

Unlike Audit Reports, Workpapers are the property of the Auditor.
Workpapers document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached.

Question 44

Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?

Answer 44

Both an audit and an attest engagement require that the auditor be independent in mental attitude.

Question 45

SECTION 407 (SOX) - Disclosures of Audit Committee Financial Expert.
What is considered a financial expert and what must issuer disclose?

Answer 45

Issuer must disclose whether or not the audit committee is comprised of at least one member who is a financial expert.

Financial experts are persons who:
1.) have an understanding of GAAP and financial statements.
2.) are experienced in the preparation or auditing of financial statements and the application of accounting principles.
3.) are experienced with internal accounting controls, and
have an understanding of audit committee functions.

Question 46

Professional Judgement Factors

Answer 46

1.) Accumulate Knowledge through training and experience
2.) Enables objective, critical judgements
3.) Results in ability to make informed decisions

Question 47

Audit Documentation - What is it and what does it support?

Answer 47

Audit documentation is prepared and maintained to support the basis for opinion reached by the auditor and support that the audit was performed in accordance in GAAS.
Audit documentation, if properly supported, may reduce legal liability.

Question 48

What is Reasonable Assurance and what are it’s limitations?

Answer 48

Obtained when the auditor has sufficient appropriate audit evidence to reduce audit risk to an acceptably low level; reasonable assurance is not an absolute level of assurance. The likelihood that those objectives will be achieved is affected by limitations inherent to internal control. These limitations include the following:
1.) Human judgment in decision making can be faulty.
2.) Breakdowns in internal control can occur because of human failures such as simple errors or mistakes.
3.) Errors may occur in the use of information produced by IT.
4.) Individuals may not understand the purpose of automated controls or the use of information produced by IT.

Question 49

Audit Evidence

Answer 49

The reliability of audit evidence depends on the nature and source of the audit evidence and the circumstances under which it is obtained. Generally, the reliability of audit evidence increases when it is obtained from external parties because the information is less susceptible to management bias. Consideration of the sources of information to be used as audit evidence includes the possibility that the information source may not be reliable.

Question 50

What situation would call for Contingent Fees?

Answer 50

Fees charged by a CPA may be contingent if a specified finding or result is attained.

Question 51

Presumptively Mandatory Requirement

Answer 51

The GAO (U.S. Government Accountability Office) Yellow Book, containing the generally accepted government auditing standards, requires auditors to document justification of deviations from presumptively mandatory procedures.

Question 52

Government Auditing Standards (GAO)

Answer 52

The Government Auditing Standards are issued by the comptroller general of the United States, Government Accountability Office (GAO). They are often called the “Yellow Book.”

GAO standards incorporate AICPA GAAS but go further, requiring:

1.) review for compliance with applicable laws and regulations,
2.) external reporting of instances or indication of fraud, and
3.) reports on the entity’s internal control structure.

These standards also contain guidelines for economy, efficiency, and program results audits.

Question 53

Accounting and Review Services Committee (ARSC)

Answer 53

Designated by the AICPA Council to promulgate standards in connection with unaudited financial statements of nonpublic entities.

Question 54

Financial Statement Review - Nonpublic Company

Answer 54

Smaller in scope than an audit. Review Procedures are limited to:

1.) analytical procedures, such as:
comparing the financial statements with anticipated results in budgets and forecasts, or
studying the relationship of financial statement elements expected to conform to predictable patterns.
2.) inquiry, such as inquiring of management about actions taken at the board of directors’ meetings.

The review specifically relieves the accountant from obtaining an understanding of the entity’s internal control, including the safeguards over access to and use of assets and records.

Question 55

Matters to Consider for Accepting or Continuing Client Engagement

Answer 55

1.) firm personnel have experience with relevant industries or underlying subject matter or the ability to effectively gain the necessary knowledge;
2.) firm personnel have experience with relevant regulatory or reporting requirements, or the ability to effectively gain the necessary competencies;
3.) the firm has sufficient personnel with the necessary competence and capabilities;
4.) specialists are available, if needed;
individuals meeting the criteria and eligibility requirements to
5.) perform an engagement quality control review are available, where applicable; and
6.) the firm is able to complete the engagement within the reporting deadline.

Question 56

Primary Supervisor

Answer 56

The primary supervisory responsibility of the auditor with final responsibility is to explain to the staff assistants how the results of various auditing procedures performed by the assistants should be evaluated. This is most in keeping with directing the efforts of the assistants regarding their responsibilities and the objectives of the audit procedures.

Question 57

Agreement on Audit Engagement Terms

Answer 57

The letter must address the objectives of the engagement, the responsibilities of management, the responsibilities of the practitioner, the limitations of the engagement, identification of the applicable financial reporting framework, and reference to the expected form and content of any reports to be issued by the auditor. In addition, information about fees and billing may be included but is not required.

Question 58

Limited Assurance

Answer 58

Limited assurance is a statement that “there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.” It is issued in relation to a review of financial statements (AR-C 90.24) and in certain reports on a review of interim financial information.

Question 59

Compilation

Answer 59

Compilation is a service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. Although a compilation is not an assurance engagement, it is an engagement where the accountant must determine whether he or she is independent of the entity.

Question 60

Audits of Entities Receiving Federal Financial Assistance

Answer 60

1.) Auditors must follow generally accepted auditing standards and government auditing standards.
2.) The auditor’s consideration of internal control is to include obtaining and documenting an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance.
3.) The auditor issues a report on the consideration of internal control.
4.) The auditor is to determine and report on whether funds are administered in accordance with applicable laws and regulations.

Question 61

OMB’s “Percentage of Coverage”

Answer 61

If the auditee meets the criteria for a low-risk auditee, the auditor only needs to audit the major programs that, in aggregate, encompass at least 20% of total federal awards expended. Otherwise, the auditor must audit the major programs that, in aggregate, encompass at least 40% of total federal awards expended.

Question 62

Review Engagement

Answer 62

A review engagement is an attestation engagement in which the practitioner obtains limited assurance by obtaining sufficient appropriate review evidence about the measurement or evaluation of subject matter against criteria in order to express a conclusion about whether any material modification should be made to the subject matter in order for it be in accordance with (or based on) the criteria or to the assertion in order for it to be fairly stated. (AT-C 105.10)

Question 63

Assurance Engagement

Answer 63

An assurance engagement is when a CPA undertakes to provide assurance regarding financial statements. (A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. An audit provides reasonable assurance about whether the financial statements are free of material misstatement.)

Question 64

Attest Engagement

Answer 64

An attest engagement is an engagement that requires independence, as set forth in the AICPA Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARS), and Statements on Standards for Attestation Engagements (SSAEs) (ET 0.400.04). A review engagement is both an assurance and an attest engagement. A compilation is an attest engagement only, not an assurance engagement.

Question 65

Review Engagement

Answer 65

Both an Attest and Assurance Engagement. In a review engagement, the accountant should accumulate review evidence to obtain a limited level of assurance. At the conclusion of the engagement, the accountant should express a conclusion in a written report about whether, based on the procedures performed and the review evidence obtained, the accountant is aware of any material modifications that should be made to (1) the subject matter in order for it to be in accordance with (or based on) the criteria or (2) the responsible party’s assertion for it to be fairly stated.

Question 66

Compilation Engagement

Answer 66

Attest Engagement Only. Not an assurance Engagement. Although a compilation is not an assurance engagement, it is an attest engagement (because a report is issued).

Question 67

For a Preparation of Financial Statements Engagement, what level of assurance is provided and is there a report is issued?

Answer 67

In a preparation of financial statements engagement, there is no assurance provided and no report issued.

Question 68

Statements on Auditing Standards (SAS)

Answer 68

The 10 generally accepted auditing standards (GAAS) are interpreted and expanded upon in Statements on Auditing Standards (SAS), issued periodically by the Auditing Standards Board of the AICPA. They provide the detail and guidance needed to meet the 10 GAAS standards.

The 10 standards have changed to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards. The Auditing Standards Board (ASB) believes that if an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the auditor will have fulfilled the requirements currently stated in the 10 standards.

Question 69

Statements on Standards for Accounting and Review Services (SSARS)

Answer 69

FOR NON-ISSUERS.
Statements on Standards for Accounting and Review Services are standards concerning the accounting (compilation) and review services rendered in connection with unaudited financial statements or other unaudited financial information of an entity that is not required to file financial statements with a regulatory agency.

Question 70

What does the Director of the OMB (Office of Management and Budget) have the authority to do?

Answer 70

Develop Government wide guidelines and policy on performing audits to comply with the Single Audit Act.

Question 71

Those Charged with Governance.
Who is typically charged with Governance and what is their responsibility?

Answer 71

Those charged with governance include the person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing the strategic direction of the entity, the financial reporting process, and the obligations related to the accountability of the entity. In some entities, this is the board of directors or the audit committee. In other entities, “those charged with governance” also have management responsibilities.

Question 72

Statements on Quality Control Standards (SQCS)

Answer 72

AICPA members who perform compilation and review engagements are governed by the AICPA’s Code of Professional Conduct and the Statements of Quality Control Standards (SQCSs), which establish standards and provide guidance on a firm’s system of quality control.

Question 73

Statements on Standards for Attestation Engagements (SSAE)

Answer 73

Issues by senior technical bodies of the AICPA. They apply to practitioners engaged to perform an assertion-based examination, direct examination, or review; or issue an agreed-upon procedure report on underlying subject matter about the subject matter information (or an assertion) that is the responsibility of another party (these are called “attest engagements”).

Question 74

Consulting Services

Answer 74

Consulting services do not fall within the definition of accounting and audit practice. Standards for consulting services are established by the AICPA Management Consulting Services Executive Committee.

Question 75

Pass-Through Entity (Governmental) - What is a pass through Entity?

Answer 75

Entity that receives an award from a grantor or other entity and distributes all or part of it to another entity to administer a government program.

Question 76

What is a Subreceiptant?

Answer 76

Nonfederal entity that receives a subaward from a pass-through entity to carry out part of a federal program; it does not include an individual that is a beneficiary of such a program. A recipient of other federal awards directly from a federal awarding agency also qualifies as a subrecipient.

Question 77

Attestation Standards

Answer 77

Attestation standards apply to four levels of service—assertion-based examination, direct examination, review, and agreed-upon procedures; applicability of the specific AT-C section(s) depends on both the level of service provided and the underlying subject matter or subject matter information (or assertion). The purpose of the attestation engagement is to provide users of information, generally third parties, with an opinion, conclusion, or findings regarding the reliability of subject matter information (or an assertion) about the underlying subject matter or subject matter information, as measured against suitable and available criteria.

Question 78

What is a Re-Audit?

Answer 78

Initial audit engagement to audit financial statements that have been previously audited by a predecessor auditor.

Question 79

Disclaimer of Opinion

Answer 79

A disclaimer of opinion is an expression of no opinion.
A disclaimer of opinion is warranted when restrictions on the scope of the audit are so severe, whether client imposed or due to other reasons, that the auditors are unable to obtain sufficient appropriate audit evidence to enable them to form an opinion.

Example: Instances of limitations on scope include the client’s refusal to allow the confirmation of receivables or the lack of a beginning inventory physical count (i.e., when the auditor is hired after the beginning of the fiscal year).

It is only when the auditors are unable to overcome these limitations by other audit procedures that a disclaimer of opinion is warranted.

A disclaimer of opinion because of a scope limitation requires modification of the standard auditor’s responsibility paragraph and, in all cases, the substantive reasons for the disclaimer should be explained in a separate emphasis-of-matter or other-matter paragraph.

Question 80

What inquires can be made to the predecessor Auditor BEFORE the accepting the Audit Engagement?

Answer 80

1.) Reason for change of Auditors
2.) Disagreements with mgmt. about accounting policies, auditing procedures, or other significant matters.
3.) Integrity of Management
4.) Communication regarding Fraud and Noncompliance with laws or regulations.
5.) Communications regarding significant deficiencies and material weakness of internal control

Question 81

What is the meaning of “Going Concern”?

Answer 81

Business entity that is expected to continue in operation indefinitely. An enterprise that is no longer considered a going concern is assumed to be approaching, or in the process of, dissolution.

Question 82

When is a Qualified Opinion expressed?

Answer 82

Qualified opinion is expressed when there is one of the following:
1.) Lack of sufficient appropriate evidence that does not warrant a disclaimer of opinion
2.) Restriction of scope that does not warrant a disclaimer of opinion
3.) Departure from GAAP that does not warrant an adverse opinion

Question 83

Acceptance of a Client

Answer 83

CPA firms should establish policies and procedures for determining the acceptance of a client to minimize the risk of being associated with a client whose management lacks integrity.

Question 84

Before accepting a new engagement, the successor auditor should request mgmt. do what?

Answer 84

Request Management to authorize the predecessor auditor to respond fully to the successor auditor’s inquires about matters that will assist in determining whether to accept the engagement.

Question 85

Opening Balances - Sufficient Appropriate Evidence

Answer 85

1.) Determine whether prior period’s closing balances correctly brought forward to current period.
2.) Determine whether opening balances reflect application of appropriate accounting polices

Question 86

What should the Successor Auditor do if Material Misstatement is found on Predecessor Auditor’s report.

Answer 86

1.) Inform predecessor and arrange for discussion amongst relevant parties to resolve matter.
2.) If mgmt. refuses or if successor is not satisfied, consider whether withdrawal or a disclaimer of opinion is appropriate.

Question 87

Inquires to the Predecessor Auditor

Answer 87

An auditor may make a proposal for an engagement before communicating with the predecessor auditor and can tentatively accept the engagement as long as the client is aware that acceptance cannot be finalized until the inquiries of the predecessor have been completed.

Question 88

Compilation

Answer 88

An accountant does not have to be independent when performing a compilation engagement but must be when performing a review or attestation engagement.
If the accountant performing a compilation is not independent, the accountant’s report should be modified to state, “I am not independent with respect to XYZ company.”

Question 89

SSARS Engagement Letter Requirements

Answer 89

1.) Terms should be documents in an engagement letter or other suitable written agreement.
2.) Should be signed by the Accountant and Management

Question 90

SSARS Common Engagement Letter Requirements

Answer 90

1.) Objective of Engagement
2.) Identification of the applicable financial reporting framework
3.) Responsibilities of Mgmt.
4.) Responsibilities of Accountant
5.) Limitations of Engagement
6.) Whether the financial statements contain a know departure(s) from the applicable framework

Question 91

Reason for Request to Change - Scope of Engagement

Answer 91

1.) Change in circumstances affecting the need for an audit review
2.) Initial misunderstanding of the nature of engaged service
3.) Restriction on scope

Question 92

Audit Engagement Documentation

Answer 92

1.) Prepare documents on a timely basis
2.) Documents detailed in nature, timing, and extent of audit procedures.
3.) Identify Following Characteristics
- Specific Items Tested
- Who performed Audit Work
- Who reviewed the work
- Date Completed

Question 93

Preparation Engagement Documentation

Answer 93

Prepare documents in sufficient detail to clearly understand the work performed. This includes, Engagement Letter, Copy of Financial Statements.

Question 94

Compilation Engagement Documentation

Answer 94

1.) Engagement Letter
2.) Copy of Financial Statements
3.) Copy of Accountant’s Report.

Question 95

Pro Forma Financials Engagement Documentation

Answer 95

1.) Engagement Letter
2.) Results of procedures performed
3.) Copy of Pro Forma financial information
4.) Copy of Accountants compilation report.

Question 96

Review Engagement Documentation

Answer 96

1.) Engagement Letter
2.) Communication with Mgmt. regarding fraud or non-compliance laws or regulations.
3.) Communications with Mgmt. regarding expectations of the review report.
4.) Written Representation Letter
5.) Copy of reviewed financial statements and accountants review report

Question 97

Review of Interim Financial Information - Issuer

Answer 97

1.) Prepare documents in which the form and content match the circumstances of the particular engagement.
2.) Should include any findings or issues found significant under auditors judgement.

Question 98

How many days does the auditor have to complete the assembly of the final audit file after the report release date?

Answer 98

Auditor should complete the assembly of the final audit file on a timely basis, but within 60 days following the report release date (documentation completion date). Nonissuer

Question 99

Permanent Files

Answer 99

The permanent workpaper file of the auditor should contain items that remain relatively unchanged from year to year. Analysis of capital stock and other owner’s equity accounts represent accounts which have very few transactions each year and would be appropriate for the permanent file.

Question 100

PCAOB Auditing Standard 1215

Answer 100

A complete and final set of audit documentation should be assembled for retention as of a date not more than 45 days after the report release date (documentation completion date). Issuers

Question 101

Matters to be communicated from Auditor to Audit Committee/Board of Directors.

Answer 101

1.) Auditors views about qualitative aspects of significant acct. practices. (i.e. Acct. Policies, Estimates, Disclosures)
2.) All know and Potential Fraud and other inconsequential illegal acts.
- If Senior Mgmt. is involved, communicate to those charged with Governance.
- If oral communication, ensure documented workpapers
3.) Significant matters related to internal control.
4.) Uncorrected adjustments\
5.) Material, corrected misstatements that were brought to attention of mgmt. as result of audit procedures.
6.) Any disagreements with management
7.) Any consultation management had with other accountants about accounting and auditing matters.
8.) Representation requested from management.

Question 102

Auditors Response to inadequate communication

Answer 102

1.) Modifying the Auditors opinion on the basis of scope limitation
2.) Obtaining legal advice about consequences
3.) Communicating with 3rd parties or responsible govt. agency.
4.) Withdrawing from engagement.

Question 103

What the Auditor can’t communicate in statement on Internal Controls?

Answer 103

Auditor may communicate there were no material weaknesses identified during the audit, they can’t have written communication stating that no significant deficiencies were identified during the audit.

Question 104

Written Communication regarding significant Deficiencies and material weakness identified during audit of financial statements should include?

Answer 104

1.) Definition of the term “material weakness” and, when relevant, the definition of the term “significant deficiency.”
2.) Description of the significant deficiencies and material weaknesses and an explanation of their potential effects.
3.) Sufficient information to enable those charged with governance and management to understand the context of the communication.

Question 105

Auditor should include in the communication the following elements that explain that the purpose of the audit was for the auditor to express an opinion on the financial statements:

Answer 105

1.) Audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control.
2.) Auditor is not expressing an opinion on the effectiveness of internal control.
3.) Auditor’s consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified.

Question 106

Procedures for adequate planning (prior to start of Fieldwork)

Answer 106

1.) Reviewing correspondence files, prior year’s working papers, permanent files, financial statements, and auditor’s reports;
2.) Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity;
3.) Inquiring about current business developments affecting the entity;
4.) Reading the current year’s interim financial statements;
5.) Discussing the type, scope, and timing of the audit with management of the entity, the board of directors, or its audit committee;
6.) Considering the effects of applicable accounting and auditing pronouncements, particularly new ones;
7.) Coordinating the assistance of entity personnel in data preparation;
8.) Determining the extent of involvement, if any, of consultants, specialists, and internal auditors;
9.) Establishing the timing of the audit work; and
10.) Establishing and coordinating staffing requirements.

Question 107

What is the Auditor’s responsibility related to internal control related matters of a NON-ISSUER?

Answer 107

Auditor is required to determine whether, on the basis of the audit work performed, the auditor has identified one or more deficiencies in internal control.

Question 108

Significant Defieicens

Answer 108

A significant deficiency is a matter that comes to an auditor’s attention that represents a significant deficiency in the design or operation of internal control and that merits attention by those charged with governance.

Generally, significant deficiencies are reported at the conclusion of the audit. However, because timely communication may be important, the auditor may choose to communicate significant matters during the course of the audit. Therefore, an auditor may communicate significant deficiencies during an audit or after the audit’s completion.

Question 109

Misstatements

Answer 109

The auditor should request management to correct all known misstatements, including the effect of prior-period misstatement. The auditor may request management to further review the impact of likely misstatements. If management decides not to correct some or all of the known and likely misstatements communicated to it by the auditor, the auditor should obtain an understanding of management’s reasons for not making the corrections and should take that into account when considering the qualitative aspects of the entity’s accounting practices.

Question 110

Engagement Quality Control Review

Answer 110

An engagement quality control review is required for financial statement and integrated internal control audits of issuers. The engagement quality control reviewer should evaluate significant judgments made by the engagement team and the related conclusions reached.

Question 111

Review Report - Independence

Answer 111

To issue a review report, an accountant must be independent. Independence will be impaired if, during the period of the professional engagement or at the time of expressing an opinion, the CPA or firm had or was committed to acquire any direct or material indirect financial interest in the client. The fact that the client was a nonpublic entity is irrelevant. The immaterial nature of the interest is also irrelevant.

Question 112

Policies and procedures for engagement supervision might include the following:

Answer 112

1.) Tracking the progress of the engagement
2.) Considering the capabilities and competence of individual members of the engagement team, whether they have sufficient time to carry out their work, whether they understand their instructions, and whether the work is being carried out in accordance with the planned approach to the engagement
3.) Addressing significant findings and issues arising during the engagement, considering their significance, and modifying the planned approach appropriately
Identifying matters for consultation or consideration by more experienced engagement team members during the engagement

QC 10.A34
Hiring and advancement are under the quality control element of human resources, not engagement performance.

Question 113

A review may include consideration of whether, for example:

Answer 113

1.) Work has been performed in accordance with professional standards and applicable regulatory and legal requirements,
2.) Significant findings and issues have been raised for further consideration,
3.) Appropriate consultations have taken place and the resulting conclusions have been documented and implemented,
4.) The nature, timing, and extent of work performed is appropriate and without need for revision,
5.) The work performed supports the conclusions reached and is appropriately documented,
6.) The evidence obtained is sufficient and appropriate to support the report, and
7.) The objectives of the engagement procedures have been achieved.

Question 114

A Firm’s System of Quality Control should encompass the following elements.

Answer 114

1.) Leadership responsibilities for quality within the firm
2.) Relevant ethical requirements
3.) Acceptance and continuance of client relationships and specific engagements
4.) Human resources
5.) Engagement performance
6.) Monitoring

Question 115

Ethical Principles that should guide the work of Auditors under Gov’t Auditing Standards

Answer 115

1.) Public Interest
2.) Integrity
3.) Objectivity
4.) Proper use of Gov’t Info
5.) Resources and Positions
6.) Pro Behavior

Question 116

What attributes must a Financial Expert of an Audit Committee for Public company typically posses?

Answer 116

1.) Understanding of GAAP and financial statements;
2.) experience in the preparation or auditing of financial statements of generally comparable issuers and the application of such principles in connection with the accounting for estimates, accruals, and reserves.
3.) Experience with internal accounting controls.
4.) Understanding of audit committee functions.

DOES NOT NEED TO SERVE ON PRIOR AUDIT COMMITTEE

Question 117

Membership in the AICPA (American Institute of CPA’s) is:

Answer 117

Voluntary

Question 118

SECTION 303 (SOX) - Improper Influence on Conduct of Audits.
What would violate this rule?

Answer 118

Any action taken to fraudulently coerce, manipulate, or mislead the auditor. It prohibits any director or officer from acting in this manner, as well as anyone acting under their direction. Refusal to answer auditor questions honestly could be considered an attempt to mislead the auditor.

Question 119

When can a CPA disclose confidential Client information?

Answer 119

1.) compliance with a validly issued and enforceable subpoena or summons,
2.) review of CPA’s professional practice under the AICPA or state CPA society authorization review,
3.) responding from inquiry by a recognized investigative or disciplinary body, and
4.) compliance with the Compliance with Standards Rule and Accounting Principles Rule.

Question 120

SECTION 104 (SOX) - Inspections of Registered Public Accounting Firms.

Question 121

What is FASB?

Answer 121

The Financial Accounting Standards Board is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles within the United States in the public’s interest

Question 122

What could lead to a departure from FASB? Think GAAP

Answer 122

1.) New Legislation
2.) New form of Business Transaction