AUD 1 Flashcards
Adverse
Material and pervasive departure from GAAP
Emphasis of Matter para.
Does not change opinion. Should state “Our opinion is not modified with respect to this matter”
May, might, could
indicate that auditor exercisies professional judgment in the circumstances
auditor should not report opinion on whether the basis of accounting used is appropriate
would report that they are presented fairly in conformity with GAAP or other comprehensive basis of accounting, would reference the notes of f/s that describe basis, would state that the basis of presentation of accounting other than GAAP
expressed adverse opinion prior year f/s bc of lack of adequate disclosure. this year everything is stated correctly. auditor should
express unmodified opinion with emphasis of matter paragraph added to the report
Emphasis of matter para is required when
an entity appropriately changed the accounting for investments from the cost method to the equity method. This change had a material effect on the f/s. emphasis of matter para. is required when there is a justified change in accounting principle that has a material effect on the entity’s financial statements
Contingency
an existing condition, situation or set of circumstances involving uncertainty as to possible gain or loss that will be ultimately determined when a future event occurs or fails to occur
SSARS
Preparations, compilations, and reviews
Preparation
SSARS, a nonattest engagement
Management participation threat
results from an auditor taking on the role of management
self interest threat
that a financial or other interest will inappropriately influence auditors behavior or judgement
familiarity threat
aspects of the relationship with management or other key personnel, such as a close or long relationship, or that of an immediate family member, will lead an auditor to take a position that is not objective.
self review threat
an auditor that has provided nonaudit services will not appropriately evaluate the results of previous judgements made as part of the nonaudit services when performing audit services
attest engagement
SSAEs
objective of a review
to provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the f/s
financial statements reviewed by an auditor
should be accompanied with a report stating that a review is substantially less in scope than an audit
the DOL requires
auditor independence when auditing and providing an opinion on the f/s
In a review
auditor should inquire about actions taken at board of directors meetings
A contingent fee is permitted
when representing a non-attest client in an IRS examination
ssae
agreed upon procedures,
Cognizant agency
is typically the federal awarding agency that provides the most amount of direct funding to an nonfederal agency
a report on proforma financial statements
is not required to contain a restricted use paragraph
Reports that are required to have restricted use paragraphs
financial projection, comfort letter, and auditors report on compliance with aspects of regulatory requirements in connection with audited financial statements
prior to the issuance of the practiioners report
the client must acknowledge and agree to the procedures that were performed were appropriate to meet the intended purpose
examination engagements provide
positive assurance
review engagements provide
limited or negative assurance
compilations and agreed upon procedures provide
no assurance
compilation report on a financial forecast
should include a statement that says there will usually be differences between forecasted and actual results
Attest engagements specifically exclude
consulting, advocacy, and return prep
Agreed upon procedures report should include
ALL findings from the application of the agreed upon procedure
risk of material noncompliance is inversely related to
detection risk of noncompliance
SAS-
issued by ASB for nonissuers’ f/s
SSARS
issues by AICPA ARSC committee, for preps, comps, reviews of f/s
SSAEs
issued by AICPA ASB or other designated body, apply to exams, reviews and agree-upon procedures of other than f/s
Assertions about transactions and events and related disclosures
Occurrence, completeness, accuracy, cutoff, classification, presentation
CPA COC
occurrence
transactions and events that have been recorded or disclosed have occurred
completeness
all transactions and events that should be recorded were recorded and all related disclosures that should be included in the f/s were included
accuracy
amounts and other data were recorded appropriatedly and related disclosures were appropriately measured and described
cutoff
transactions and events were recorded in the correct accounting period
classification
transactions and events were recorded in the proper accounts
presentation
transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable
Assertions about account balanced and related disclosures
Existence, right and obligations, completeness,- accuracy, valuation, and allocation, - classification, presentation
CPA REC
PCAOB audit evidence has 5 assertions
existence or occurrence, completeness, valuation or allocation, -rights and obligations,- presentation and disclosure
objective of a compilation
apply accounting and financial reporting expertise to assist management in the presentation of f/s without undertaking to obtain or provide assurance on them.
must: determine independence, report on the statements, disclaim any assurance, disclose any lack of independence, and associate name with the statements, which is included with the report
objective of a review of f/s
to obtain limited assurance as a baisis of reporting whether the accountant is aware of any material modifications that should be made to the statements for them to be in accordance with the reporting framework. Must be independent. limited assurance is aka negative assurance. review is performed primarily through inquiry and analytical procedures
3 types of attestation engagements
exams, reviews, and agreed-upon procedures
assurance services
focus on improving information rather than providing advice
usually involve one party’s intention to monitor another
Consulting services
SSCS issued by the AICPA, no independence, uses skills, education, knowledge, etc in the consulting process. Client interest, understanding the client, and communication with the client is important
Consulting services include of or more
consultations: short time counsel;, advisory services: develops findings, conclusions and recommendations for client consideration and decision making; implementation services: puts action plan into effect;, transaction services: relates to specific client transaction usually with 3rd party;, staff and other support services: provides staff and other support to perform tasks;, product services: client provides product in support of the installation, use or maintenance of the product.
Statements on Quality control standards: 6 elements
Leadership responsibiltities (tone at the top)
relevant ethical requirements
acceptance and continuance of client relationships and specific engagement
human resources
engagement performance
monitoring
AICPA code of professional conduct
responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services
audit risk
risk that an auditor expresses an inappropriate opinion on materiality misstated f/s
inherent risk
the susceptibility of an assertion that could be materials, individually or combined with other misstatements, before consideration of related controls
control risk
risk that internal control will not timely prevent or detect and correct a material misstatement that could occur ina n assertion
detection risk
risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a material misstatement. Detection risk is the only component of audit risk that can be changed at the auditor’s discretion. (inherent risk and control risk exist independently of the audit and cannot be changed by the auditor)
The acceptable level of detection risk for a given audit risk is inversely related to the assessed RRMs at the assertion level.
audit risk =
inherent risk x control risk x detection risk
risk of material misstatement x detection risk
performance materiality
amount set by auditor at less than the materiality for the statements as a whole or particular classes of transactions, balances, or disclosures
judgemental misstatements
results from management’s unreasonable f/s recognition, measurement, presentation, etc. of inappropriate accounting policies
projected misstatements
auditor’s best estimates of the misstatements in populations based on audit samples
analtical procedures
evaluations of financial information made by a study of plausible relationships amount financial and nonfinancial data
substantive procedures
tests of details and analytical procedures designed to detect materials misstatements at the assertion level
current ratio
current assets/current liabilities
quick ratio
current assets - inventory - prepaids/current liabilties
receivables turnover
net sales/average net receivables
days sales in receivables
of days in year/receivables turnover
inventory turnover
COGS/average inventory
days sales in inventory
365/inventory turnover
total asset turnover
net sales/total assets
debt-to-equity ratio
total debt/total equity
times interest earned
net income + interest expe + income tax exp/interest exp
COGS ratio
COGS/net sales
gross margin percentage
net sales - COGS/average inventory
net operating margin percent
operating income / net sales
return on equity
net income/total equity
objectivity
the ability ot perform tasks without bias
petence
the attainment and maintenance of knowledge and skills of the function as a whole at the level required to enable assigned tasks to be performed diligently and with appropriate level of quiality
application of systematic and disciplined approach
to planning, performing, supervising, reviewing and documenting internal audit activities
external auditor
should reperform some of the body of work of the internal audit function
the external auditor should communicate to those charged with governance
how they plan to use the work of the internal audit function to obtain audit evidence and provide direct assistance
auditor’s specialist
an individual or organization with expertise in a field other than accounting or auditing. can be either an internal specialist (staff member of audit firm) or an external specialist
The auditor should obtain an understanding of the expertise of the auditor’s specialists sufficient to
determine the nature, scope, and objectives of the work and
evaluate the adequacy of that work for the auditor’s purposes
the autior should not refer to the work or findings of the auditor specialist when expressing
and unmodified opinion
the auditor May refer to the work of an auditor’s specialtist if the reference is relevant to the understanding
a modified opinion. the report should state that the reference does not reduce the auditor’s responsibilitiy
The auditor does not refer to a management’s specialist (the company being audited)
in an auditor’s report
components of internal control
CRIME
control activities,
risk assessment process
information system
monitoring of controls
control environment
control activities
policies and procedures that help ensure that management directives are carried out
assessment process
the entity’s identification and analysis of relevant risks
information system
including related and relevant business processes, supplorts the identification, capture and exchange of information ina form and time fram that enable people to carry out their responsibilities
monitoring of controls
assesses the effectiveness of internal control over time
control environment
set the tone of an organization, influencing the control consciousness of its members
hot site
service facility that is fullly operationals and is promptly available
cold site
a shall facility suitable for quick installation of computer equipment
warm site
provided an intermediate level of back up and causes more downtime than a hot site
slaes department
preparies sales orders based on customer orders
credit reports to the treaurer
authorizes credit for all new customers and initieate write off of credit losses
inventory warehouse
maintains physical custody of products
inventory control
maintains records of quantities of products in the inventory warehouse
shipping department
preparies shipping documents and hsips prodcuts based on authorized sales orders
billing department
prepares cuomster invoices based on goods shipped
A/R department
maintains the a/r subsidiary ledger
mail room
received mail and prepared initial cash receipts records
cash receipts department
safeguards and promptly deposists cash receipts
general ledger department
maintains the a/r control account and records sales. daily summaries of sales are recorded in a sales journal
receiving department
prepares receiving reports and handles all receipts of goods or materials including sales returns
two types of service auditor reports
Type 1 and type 2:
type 1: report of design and implementation of controls at a service organization
type 2: reports on design, implementation, and operating effectivesness of controls at a service organization
