2nd Half of Aud

Question 1

Revenue Cycle segregation of duties: Sales

Answer 1

Authorization: Sales order and credit, Treasurer
Record keeping: Billing/AR and Accounting
Custody: Warehouse and shipping

Question 2

Revenue Cycle segregation of duties: Cash Receipts

Answer 2

Record keeping: AR and Accounting

Custody: Mailroom and cashier, Treasurer

Question 3

Expenditure Cycle segregation of duties

Answer 3

Authorization: Purchasing dept
Record keeping: AP/Accounting
Custody: Receiving dept

Question 4

Lapping

Answer 4

Today’s cash receipts cover yesterday’s theft

Question 5

Kiting

Answer 5

Cash recorded in two places at once

To detect:

• A bank transfer schedule should be prepared
• Take a look at bank cutoff statement

Question 6

Reason for reviewing the repairs and maintenance account

Answer 6

In order to locate items that should have been capitalized

Question 7

Role of the payroll department

Answer 7

Record keeping department
They should NOT:
- Initiate changes in hours or rates
- Sign checks

Question 8

Purpose of letter of audit inquiry to attorney

Answer 8

Simply a means of corroborating information provided by management as they are the primary source of information regarding contigencies

Question 9

Required wording for a going concern

Answer 9

“going concern”

“substantial doubt”

Question 10

Communication of deficiencies in internal control: Nonissuer

Answer 10

Control deficiency: Communicate to management only orally or in writing within 60 days of the report release date

Significant deficiency & Material weakness: Communicate to management in writing and those charged with governance in writing within 60 days of the report release date

Question 11

Test of Controls

Answer 11

1) Evaluate design effectiveness of controls to determine if they can effectively prevent or detect material misstatements
- Walkthroughs are often used to evaluate effectiveness

2) Test and evaluate the operating effectiveness of the controls
- Inquiry, inspection of documentation, observation, recalculation and reperformance are commonly used
- Inquiry alone is not sufficient to support a conclusion about operating effectiveness

Question 12

Communication of deficiencies in internal control: Issuer

Answer 12

Control deficiency: Communicate the deficiency to management in writing and inform the audit committee that this communication has been made prior to the issuance of the auditors report

Significant deficiency & Material weakness: Communicate the deficiency to management in writing and inform the audit committee that this communication has been made while also communicating the deficiency to the audit committee in writing prior to the issuance of the auditors report

Question 13

Report on Internal Controls: Inherent Limitations paragraph

Answer 13

Because of inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate

Question 14

Material Weakness in Internal Control warrants what type of opinion

Answer 14

Adverse opinion

Question 15

Attestation Services and what type of report is allowed

Answer 15

1) Agreed-upon procedures (AUP)
2) Prospective financial statements (E or AUP)
3) Pro forma financial statements (E or R)
4) Compliance (E or AUP)
5) MD&A (E or R)
6) Service organizations (E only)

*SSAE are the applicable standards

Question 16

How do Attestation standards differ from GAAS

Answer 16

1) No reference is made to the historical FS

2) No reference is made to GAAP

Question 17

Conditions for agreed upon procedures attestation engagements (I AM SURE)

Answer 17

I - Independence
A - Agreement of the parties
M - Measurability and consistency
S - Sufficiency of the procedures
U - Use of the report is RESTRICTED
R - Responsibility for the subject matter is taken by client
E - Engagements to perform AUP on prospective financial statements

Question 18

Types of Prospective FS and their uses

Answer 18

1) Financial forecast - The expected results (General or Limited Use)
2) Financial projection - Hypothetical results (Limited Use only)

Question 19

Pro Forma Financial Statements

Answer 19

Demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical financial statements

Question 20

Type 1 vs Type 2 reports a service auditor may provide

Answer 20

Type 1 - a report on the design and implementation of controls
Type 2 - a report on the design, implementation AND operating effectiveness of controls

Question 21

Compliance reports in connection with audited financial statements

Answer 21

The auditor must have audited the clients FS and may only issue negative assurance on compliance.

Question 22

3 instances reporting on compliance will occur

Answer 22

1) In connection with a FS audit
2) An Attestation engagement (AUP or E)
3) Single Audit engagement

Question 23

Reporting: Internal Control under GAGAS

Answer 23

Like GAAS:
-Obtain an understanding of the design
-Communicate all significant deficiencies
Unique to GAGAS:
-Requires a written report on the auditor’s understanding of internal control

Question 24

Content of GAGAS written internal control report

Answer 24

1) The assertion that evaluating compliance with laws with a direct material effect on the FS is part of developing an opinion on FS
2) The assertion that specific controls relating to the financial reporting are considered
3) An indication that either no weaknesses were found or that significant deficiencies were found and an indication whether those deficiencies were material

Question 25

Entities subject to the single audit act

Answer 25

Entities that expend total federal assistance greater than or equal to $750,000

Question 26

Materiality determination in a single audit

Answer 26

Considered separately in relation to each major program.

Major program:

• 750,000+ in assistance
• Classified as high risk

Question 27

Report submission requirements of a single audit

Answer 27

The earlier of:

1) within 30 days of receipt of the auditors report
2) 9 months after the end of the audit period

Question 28

Single audit 5 reports

Answer 28

1) FS report (GAAS)
2) SEFA Report
3) GAGAS (Yellow Book) Report
4) Single Audit Report
5) Schedule of findings and questioned costs

Question 29

Preparation

Answer 29

No assurance, non attest, no independence required

Question 30

Compilation

Answer 30

No assurance, attest, independence not required but need to disclose if so

Question 31

Review

Answer 31

Limited assurance, attest, independence required

Question 32

Review requirements (ULIARCPA)

Answer 32

U - Understanding with the client (engagement letter)
L - Learn and obtain sufficient knowledge of the entity’s business
I - Inquiries (inside company, not outside)
A - Analytical Procedures
R - Review - other procedures
C - Client rep letter
P - Professional judgment used to evaluate results
A - Accountants report

Question 33

In a review, the accountant is NOT required to

Answer 33

• Test internal control
• Perform audit tests
• assess fraud risk
• communicate with the predecessor accountant

Question 34

Exceptions to the confidential client information rule

Answer 34

1) To comply with a court subpoena or summons
2) Quality/Peer review
3) Trial board of the AICPA requests
4) Your own legal defense team (when client is suing you)

Question 35

PCAOB inspection requirements

Answer 35

1) Annual if firm is regularly providing audit reports for more than 100 issuers
2) Every 3 years if less than 100

Question 36

Public firm partner rotations

Answer 36

Partner rotation:

• Lead partner: 5 years
• Other audit partners: 7 years

Question 37

Accounting principal vs estimate opinion

Answer 37

A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in estimate, not a change in principle. Departure from GAAP if otherwise

Question 38

If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter (explanatory) paragraph of the audit report

Answer 38

(1) that the financial statements of the prior period were audited by a predecessor auditor,
(2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification,
(3) the nature of any emphasis-of-matter or other-matter (explanatory) paragraph included in the predecessor auditor’s report, and
(4) the date of the predecessor auditor’s report.

Question 39

Use of a specialist who is related to the client is acceptable, but

Answer 39

the auditor must consider the risk that the specialist’s objectivity might be impaired, in which case the auditor may need to perform additional procedures.

Question 40

Can you compare complied FS if the prior year omits all required disclosures?

Answer 40

No. Compiled financial statements that omit substantially all GAAP disclosures are not comparable to financial statements including such disclosures. The accountant should not issue a report in this situation