AUD Flashcards
TF: A qualified opinion due to insufficient evidence is in the notes to FS
False; it is included in the auditors responsibility paragraph
Inadequate disclosure of a firm’s ability to continue as a going concern may lead to a ___ or ___ opinion
qualified; adverse
Mitigating factors for firm’s with going concern issues:
1: postpone expenditures 2: dispose of assets 3: borrow money or restructure debt 4: increase ownership equity (sell stock)
Lack of independence requires a ____ opinion
No opinion; DISCLAIMER
TF: If mgt does not provide reasonable justification for a change in acct. principle, there is a disclaimer issued
False
Illegal activity warrants a ____ or ____ opinion
qualified; adverse
TF: GAAP is mentioned in the opinion paragraph and GAAS is mentioned in the auditor responsibility paragraph
True
When disclaiming an opinion, the auditor responsibility and opinion paragraphs are omitted
False; the opinion paragraph does specify that NO opinion is issued
TF: Departures from GAAP result in a qualified or unqualified opinion
False: qualified or adverse opinion
When an emphasis of matter paragraph for going concern is present, it comes before the opinion paragraph
False: the paragraph follows the opinion paragraph
Client imposed restrictions warrant a _____ or _____ opinion
Qualified; disclaimer
TF: A qualified opinion resulting from a scope limitation results in a “Basis for a Qualified Opinion” paragraph
True; the paragraph comes BEFORE the opinion paragraph; the opinion paragraph has the heading ““Qualified Opinion”
A disclaimer of opinion is issued when:
significant scope limitation, auditor is not independent, and the FS are not audited
TF: Auditor has the responsbility to make inquiries about subsequent events between the date of the auditor’s report and the date on which the report is submitted
True
TF: in obtaining evidence about subsequent events, the auditor should examine the latest available interim information and compare them with the FS under audit
True
TF: An auditor would not perform a review or express negative assurance on supplementary information required by GAAP
True
If mgt declines to present supplementary information required by GASB, the auditor should issue an _______ opinion with an ________ paragraph
unmodified; other matter
For supplementary information, limited procedures should be performed and an other matter paragraph added following the opinion paragraph
True
Disclaiming an opinion on FS as a whole but including a stmt that the current asset portion of the entity’s balance sheet was fairly stated is appropriate
NOT appropriate; it might overshadow the disclaimer of opinion
TF: An auditor may report on summary FS that are derived from a complete set of FS but the auditor may not indicate whether the information is consistent in all material respects with the complete set of FS
False; the auditor must indicate so
TF: A description of how the income tax basis differs from the GAAP should be included in the management representation letter
False; notes to the FS
TF: Modifications are made to the auditor’s standard report only when there is a departure from GAAP
True
TF: An accountant is required to comply with Statements on Standards for Accounting and Review Services when preparing standard monthly JE’s
False; only when submitting unaudited financial statements
TF: An accountant with an immaterial direct financial interest in a client is independent with respect to that client
False; NOT independent
______ analysis is used to examine relationships between balance sheet accounts
Ratio
TF: Compiled FS should be prepared in accordance with Statements on Standards for Accounting and Review Services
True
TF: An accountant performing a review is required to obtain a client rep letter from the owner, manager, CEO, or CFO
True
TF: The following procedures are performed in a review engagement:
1: tests of the accounting records
2: tests of mgt’s assertions regarding continued existence
3: inquiries of the entity’s attorney concerning contingent liabilities
False; NOT performed
Obtaining a _____ _____ from the CEO will be performed in a review engagement of a nonissuer
representation letter
A review is substantially less in scope than an ______
audit
A review engagement provides _____ assurance but a compilation expresses _____ assurance
limited; no
Independence is not required by which of the following engagements: review, compilation, agreed upon procedures, or audit
compilation
An auditor should withdraw from an engagement when:
The client refuses to provide the auditor with a signed representation letter
TF: In order to compile a nonissuer’s FS, the accountant should identify material misstatements in the FS
False; obtain a general understanding of the client’s business transactions
TF: A review of the interim financial information of a publicly held company is conducted in accordance with PCAOB standards and SSARS
False; only PCAOB
A comfort letter contains an opinion as to whether the ______ _______ _______comply in form with the accounting requirements of the SEC.
audited financial statements
TF: When reviewing management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC, the auditor is required to comply with SSAE
True
TF: SSAE addresses services such as testifying as an expert witness
False
TF: A sufficient understanding of internal control is required to be obtained in an attestation engagement
False; NOT required
TF: Negative assurance may be expressed when an accountant is requested to report on the audit of historical financial statements
False; report on the results of performing a review of management’s assertion
TF: Attest engagements may not result in reports related to compliance with laws and regulations.
False; they may
TF: A financial projection is appropriate for general use
False; a financial forecast only is
TF: Mgt is responsible for the fair presentation of FS
True
TF: It is appropriate for the auditor to request a review of the predecessor auditor’s engagement letter.
False; it is NOT; reviewing working papers is appropriate
TF: Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years would be asked of the predecessor auditor before accepting the engagement
False; AFTER accepting
TF: An internal auditor may assist the auditor in obtaining an understanding of internal control and in performing tests of controls and substantive tests.
True
TF: A pre-audit conference is scheduled in order to discuss staff suggestions concerning the establishment and maintenance of time budgets
False; it is used to give guidance to the staff regarding technical and personnel aspects of the audit
Selecting a sample of vendors’ invoices for comparison to receiving reports is performed during the __________
fieldwork
TF: “Fairness and accuracy” is a type of financial statement assertion.
False; the assertions are: Rights and obligations, Valuation and allocation, Understandability and classification
________ is reflected by the organizational level to which the internal auditor reports
Objectivity
TF: The size of the auditing firm and the number of auditors assigned to the audit should influence the nature and extent of necessary planning activities.
False; should NOT
According to PCAOB standards, a ________ accounting function is indicative of less complex operations.
centralized
TF: The work of an internal auditor may aid the external auditor in obtaining an understanding of internal control, assessing risk, and performing substantive tests, including tests of controls
True
TF: When an auditor increases the assessed level of control risk, the extent of tests of details increases
True
The acceptable level of detection risk is inversely related to the ____________
assurance provided by substantive tests
TF: As the acceptable level of detection risk increases, the assurance (effectiveness) that must be provided from substantive tests can increase
False; decrease
TF: Detection risk should bear an inverse relationship to control risk
True
Audit risk is made up of the risk of material misstatement and ________ ______
detection risk
Risk of material misstatement is comprised of inherent and _______ risk
control
________ ________ is the risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity’s internal control.
control risk
A _____ misstatement is a specific misstatement identified during the audit.
known
TF: Inherent risk and control risk do not exist independently of the audit.
False; they do
______ _______ increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date.
Detection risk
TF: During planning, the audit team is not required to discuss the fraud risk factors
False; they are required
TF: A lack of independent checks is a fraud risk factor that provides an opportunity for misappropriation of assets
True
______ ______ performed during planning often use data aggregated at a high level.
analytical procedures
TF: The auditor provides reasonable assurance to find direct and indirect effects of noncompliance
False; reasonable assurance for direct and NONE for indirect
TF: The audit plan usually cannot be finalized until the representation letter has been signed by the client
False; it cannot be finalized until the consideration of the entity’s internal control has been completed
A requirement during planning is to perform ______ ______ which involve comparisons of recorded amounts to expectations
analytical procedures
Why should an auditor should concentrate on the substance of the controls rather than their form because?
Management may establish appropriate procedures but not enforce compliance with them
The _____ _____ element of an entity’s internal control relates to the tone of the organization, which includes human resource policies and practices.
control environment
TF: The auditor’s ultimate purpose of assessing control risk is to evaluate the risk of financial statement misstatement.
True
Inherent limitations of internal control are human error, _____ _____, and collusion.
Management override
Tests of controls include such procedures as inspecting documentation, inquiry, observation, and ________.
reperformance
TF: Inquiry alone generally will support a conclusion for a lower assessed level of control risk
False; will NOT
TF: As part of understanding internal control, an auditor is required to obtain knowledge about the operating effectiveness of controls.
False; NOT required; only those controls that are relied on are tested for operating effectiveness
__________ are among the most reliable types of evidence, as they constitute external evidence sent directly to the auditor
confirmations
TF: When the A/R doubled and the AFDA has remained the same that may indicate that the client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet
True
______ ______ accounts tend to be more predictable than ______ ______ accounts
income statement; balance sheet
To test for completeness, the auditor should trace from the general ledger to the original source documents
False; from document to the general ledger
TF: The auditor’s risk assessment affects the nature, extent, and timing of audit procedures, but does not determine the relevance of audit evidence
True
TF: For some assertions, analytical procedures are not more effective and efficient at providing an appropriate level of assurance than are tests of details
False; are
Prenumbered receiving reports completed by the client’s employees are considered ______ ______ and are the least reliable of the items listed
internal evidence
TF: Accounting for unused prenumbered purchase orders and receiving reports is performed in the vouchers payable department
False; it is not
The revenue cycle includes sales, receivables, and _____ ______
cash receipts
The auditor often traces a sample of shipping documents to sales invoices to test __________ of sales.
completeness
TF: An auditor should trace from the shipping documents to the sales invoices to check for understatement of sales (i.e. completeness)
True
TF: Failure to record purchase returns would result in actual inventory quantities being greater than those recorded in the perpetual inventory records
False; sales returns
_______ confirmation is used when the combined assessed level of inherent and control risk relative to accounts receivable is low
negative
What account is relatively difficult to predict because it may fluctuate at management’s discretion?
Accounts payable; this account will not be tested prior to the balance sheet date
When inventory observation test counts are traced to the client’s inventory listing, the financial statement assertion is _________
completeness
By vouching to time card data, the auditor is testing the _________ assertion for hours worked
occurrence
TF: A copy of the remittance listing is sent to the accounts receivable clerk and used to update the subsidiary accounts receivable records.
True
A larger tolerable misstatement results in a ________ sample size
smaller
A higher risk of incorrect acceptance results in a _______ in sample size
decrease
The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the _____ _____ ____
expected deviation rate
_________ sampling is used to test controls
attribute
The risk of incorrect acceptance and the risk of assessing control risk too low relate to the _________ of an audit in detecting an existing material misstatement
effectiveness
TF: The upper deviation rate consists of the sample deviation rate plus an allowance for sampling risk
True; when this exceeds the tolerable rate, the planned reliance on a control should be reduced
________ estimation is most effective if there is a correlation between book values and audit amounts.
ratio
______ sampling is normally used to estimate a numerical measurement of a population
variables
TF: Materiality limits do apply to client representations involving management fraud
False; do NOT
TF: Management acknowledges its responsibility for the design of controls to detect and prevent fraud in its management representation letter.
True
TF: Providing extensive advisory services for a client impairs an auditor’s independence
False; it does not; the auditor is simply an advisor
TF: Under Rule 302, contingent fees are permitted when they involve a legal proceeding or ruling
True
TF: If a covered member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth independence is NOT impaired
False; it is because it is a direct financial interest
TF: Audit documentation should demonstrate compliance with quality control standards.
False; it is not required
TF: Debt agreements are included in the permanent file
True
TF: The permanent file does not include a working trial balance
True
TF: The content of the representation letter will generally not affect the nature and extent of audit documentation
True
TF: The report release date is the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
False; the documentation completion date
TF: According to PCAOB standards, the documentation completion date is sixty days following the report release date.
False; forty-five
TF: The audit documentation that makes up the current file would include a copy of the bank reconciliation.
True
TF: The test data must consist of all possible valid and invalid conditions
False
An ____ ____ ____ utilizes dummy accounts
integrated test facility
TF:Generally Accepted Government Auditing Standards primarily apply to audits of federal financial assistance and government organizations
True
TF: A concurrent opinion on the financial statements taken as a whole is not a required part of the auditor’s report.
True
TF: The auditor will express an opinion on the effectiveness of internal control over compliance
False; will NOT
TF: Under the Single Audit Act, materiality is calculated in relation to the FS as a whole
False; determined separately for each major federal financial assistance program.
TF: Risk of material noncompliance is inversely related to detection risk
True
TF: Government Audit Standards define three types of engagements: financial audits, attest engagements, and performance audits.
True
TF: A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization is not accountable to those charged with governance
False; when he is removed from political pressures to conduct audits objectively, without fear of political reprisal
TF: Professional behavior includes independence of mind and appearance when providing audits under GAGAS
False; objectivity
TF: Serving the public interest includes an auditor’s honest effort in the performance of professional services
False; professional behavior
TF: The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior.
True
TF: Management participation threat is the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.
True
TF: Professional skepticism is one of the six interrelated elements of quality control.
False; engagement performance
The six interrelated elements of quality control are: human resources, engagement/client acceptance and continuance, leadership responsibilities, performance of the engagement, monitoring, and ___________ _______
ethical requirements
The _____ should approve the authorization of the write off of uncollectible accounts
treasurer
TF: An adverse opinion results when there is a departure from GAAP
True
A ________ opinion results from scope limitations, such as management’s refusal to furnish a client representation letter.
disclaimer
TF: Sampling interval is the tolerable misstatement divided by the reliability factor
True
Sample size is calculated by taking the _______ and dividing by the sampling interval
population
TF: The PCAOB consists of at least one auditor
False; exactly two CPAs
TF: It is acceptable to use the names of one or more past owners in a CPA partnership
True
Mgt is responsible for:
financial statements and internal control
When preparing financial statements an auditor must:
identify the framework, describe the framework and present the financials in accordance to the framework standards
Inherent limitations of an audit include: intangibles, impairment, bad debts,warranties, asset life/salvage, and _____
lawsuits
PCAOB is required when:
auditing an issuer (PUBLIC COMPANY)
PCAOB establishes ____________ to be used in the preparation and issuance of audit reports for issuers
auditing and related professional practice standards
TF: Public accounting firms do not have to register with the PCAOB to audit public companies
False; DO have to register
The International Auditing and Assurance Standards Board (IAASB) sets standards for:
IFAC (Intl Federation of Accountants)
Statements on Standards for Auditing and Attestation Engagements are issued by the ______
AICPA
The International Ethics Standards Board sets the code of ethics for:
IFAC
3 conditions of fraud:
pressure, opportunity, rationalization
An auditor must be independent of an entity UNLESS:
GAAS requires otherwise or the auditor is required by law to accept the engagement and report on the F/S
NET of auditing procedures stands for:
nature, extent (a lot, a little or something in between), and timing (EOY, in the middle of the year, etc.)
Sufficient, ______ evidence
appropriate
Weak internal controls =/=
adverse opinion
F/S should be:
adequate, reasonable estimates, consistent, relevant, reliable, comparable, and understandable; they should also represent underlying transaction
TF: Opinions are addressed to mgmt
False; NOT
DIM: managements responsibility
Design, Implementation, Maintenance of I/C
REPPORTS CRIME: auditors responsibility
responsibility, express opinion, plans and performs audit, performing procedures, obtain audit evidence, risk assmt of material misstmt, test I/C (consider them), stmt prep and fair presentation, controls are not being issued an opinion, reasonableness of estimates, estimates made by management, evaluating presentation of FS
Audit report should not be dated before:
date the audit obtained sufficient appropriate audit evidence
Auditors report date shows:
final date of responsibility for the auditor
There should be an explicit stmt that shows that the F/S are presented _____ and are ________ with GAAP (or financial reporting framework)
fairly; in accordance
For comparative stmt, the date for the __________ audit should be used
most recent
An auditor does or does NOT issue an opinion on the effectiveness of internal controls
DOES NOT
GAAS is in the ______ paragraph
scope
GAAP is in the ______ paragraph
opinion
GAAS requires DIM but ______ do not
ISA
No reference to component auditor unless:
component auditor performed in accordance with GAAS, use of different financial reporting framework,
TF: A reference is made to the component auditor when the other auditor assumes responsbility
False
If F/S are false, frauduluent, deceptive or misleadinf the auditor should
withdraw from the engagement
If there is a MATERIAL GAAP problem, then there’s a _____ opinion
qualified
Very material (pervasive) there’s a _____ opinion
adverse
If there’s a MATERIAL GAAS problem, then there’s a _____ opinion
qualified; insufficient evidence problem
Very materials (pervasive; significant) warrants a ______ under GAAS
disclaimer
Qualified opinion (aka “except for”) results when there’s:
lack of disclosures, improper presentation, etc.
Emphasis of matter paragraph ______ modify the opinion paragraph
does NOT
Materially misstated F/S is a ____ issue
GAAP
Insufficient appropriate audit evidence is a ______ issue
audit evidence
Qualified:
GAAP or GAAS material issue
Adverse:
GAAP very material issue
Disclaimer:
GAAS very material issue
TF: Piece meal opinions are allowed
False
Emphasis of matter and ______ paragraph do not affect unmodified opinion
other matter
Emphasis of matter is included when:
required or included due to auditor’s judgment
Emphasis of matter paragraph goes _____ the opinion paragraph
AFTER; goes before other matter paragraph
Emphasis paragraph must have:
heading “Emphasis of Matter”, describe the matter and explain that it does not affect auditor’s opinion
Emphasis of matter paragraph required when:
auditor concludes that there’s a going concern issue, justified change in accounting principle, subsequent discoveries that lead to change in auditor opinion, and F/S prepped in accordance with an applicable special purpose framework
EOM paragraph may be used when there’s:
a catastrophe, uncertainty, related party transaction and subsequent events that are unusually important
TF: Other Matters Paragraph include info other than those disclosed in financial stmt that is deemed to important to the users
True
Other Matters Paragraph is AFTER:
Emphasis of Matter paragraph
OM paragraph requirements:
heading “Other Matters”, describe the matter and the location
OM paragraph is required when:
audit report use is restricted, change in audit opinion, predecessor auditor report not reissued, comparative or compiled and reviewed were not audited or reviewed and compiled, material inconsistency in other info and reports on supplementary information, referring to required supplementary info, restrict use of special purpose financials, report on compliance included in report
OM paragraph may be necessary when:
describing the reasons an auditor can withdraw from an engagement, required by law to provide further explanation, reporting on more than one set of financial statements
Going concern procedures: ADMITS
analytical procedures, debt compliance, meeting minutes, inquiries of legal counsel, talk to third parties, subsequent events
Intl standards want an auditor to determine a going concern condition:
throughout the engagement
Events that indicate financial doubt: FINE
financial difficulties, internal matters, negative trends and external matters
TF: Unmodified opinion does equal a good investment
False
Borrowing money and increasing ownership equity are _____ events
mitigating; also includes selling assets and delaying or reducing expenditures
TF: An auditor may issue a disclaimer due to going concern uncertainty
True
Emphasis of matter paragraph for going concern must include words
“substantial doubt and “going concern” do NOT say “ for one year” in the paragraph
Intl standards use _____ doubt instead of substantial doubt
significant
Going concern is a _____ issue
GAAS
Inadequate disclosure is a _____ issue
GAAP
If there’s a failure to be consistent, there a ______ statement
explicit
An emphasis of matter paragraph included in year of change in accounting principle needed in year of change AND
in the years going forth until the new accounting principle has been implemented consistently
Immaterial change:
NO revision
If there’s a retroactive restatement, then the emphasis of matter paragraph is:
required only in the period of change
Estimates and correction of errors ______ affect consistency standards
do NOT; correction of error example would include moving from cash to accrual
Restriction of use of auditors communication requires a _______ paragraph
other matters
Identification of specified parties and communication that auditors communication is restricted is included in an __________ paragraph
other matters
If there are specified parties added to the list when an auditor’s communication is restricted, the ____________ paragraph should be revised
other matters
GAAP consistency change unjustified =
auditor disagrees
TF: Not all disclosures aare required
True; however, make sure omission does not make financials false, fraudulent, deceptive or misleading
An adverse or qualified opinion requires the auditor to modify the _______paragraph
auditor’s responsbility
Basis for Modification paragraph is ______ the opinion paragraph AND should use the headings ____________ or _________
BEFORE; basis for adverse opinion; basis for qualified opinion
Lack of indepedences causes a _______
disclaimer
TF: If a client does not allow an auditor to review something, an adverse opinion is NOT allowed
True
Undetected material misstatement requires a ________ or _______
disclaimer or withdraw
No audit work =
no opinion (not even a bad opinion)
Scope limitation is a _____ issue
GAAS
Material misstatement uncertainty is a _____ issue
GAAP
Insufficient evidence problem is a ____ issue
GAAS
When disclaiming an opinion, the ______ opinion should be modified
auditor responsibility; a basis for disclaimer of opinion paragraph should be included
TF: GAAP allows a company to use different inventories even if the methods are not disclosed
False; METHODS MUST BE DISCLOSED
The audit report is addressed to:
the client that ENGAGED them
Related party transactions are included in a:
emphasis of matter paragraph
In a report qualified for inadequate disclosure, the auditor should add ____________ and modify_______
a paragraph titled “basis for qualified opinion”; opinion paragraph
When PY F/S have not been audited and CY F/S have been, there is a ______ _______ resulting in a _____ issue so a ___________ opinion is issued
scope limitation; GAAS; disclaimer of
Updating an opinion requires DORCS in an emphasis of matte or other matter paragraph: DORCS is
date of auditor report, opinion previously issued, reason for prior opinion, changes that have occurred, statement that the “opinion….is different”
Updating an opinion will cause a company to be __________ with GAAP
in conformity
Old/predecessor CPA’s should:
read the statements for the current period, compare the statements audited with the current period statements, obtain a letter of representation from the successor auditor, inquire of and obtain a letter of representation from MANAGEMENT
Dating predecessor report: Unrevised - use__________, Revised - use _______
use the original report date in any reissue of a previous report, dual date
When the report of the predecessor auditor is NOT reissued:
auditor expresses an opinion on CY financials and indicate a few matters in a other matter paragraph
The other matter paragraph points noted when a predecessor auditor’s report is not reissued are:
PY F/S were audited by a predecessor auditor, predecessor auditor should not be named unless practice was acquired or merged by successor, type of opinion expressed and any modifications, the nature of the emphasis of matter or other matter paragraph in predecessor report, and date of predecessor auditor’s report
If PY financials were NOT audited, an other matter paragraph is included stating the service performed in the PY, the date of the PY period, a stmt that the service was less in scope than an audit and _______
a description of any material modifications described in the report
Recognized event (looking back) requires a _______
financial statement adjustment
Unrecognized event (looking forward) may require a _______
footnote disclosure
The CPA is responsible up to _________
date of report
During fieldwork, the CPA has an active responsibility to investigate certain _______ events
subsequent
Subsequent event procedures: PRIME
post balance sheet transactions, representation letter should be obtained from mgmt., inquiry, minutes of stockholders directors and other committee meetings, examine latest available interim financial information
After the original date of the auditor’s report, the auditor has ____________
no active responsibility; if the auditor is aware of any information relating to subsequent events before the report release date then they should consider adjusting the financials or the disclosures
Adjusting financials to reflect a subsequent event, that is a ______issue
GAAP
An auditor dual dates to extend responsibility for _______
the particular subsequent event ONLY
Using a later date extends responsibility for ________ subsequent events
ALL
Subsequent discovery of facts AFTER report release date would require the auditor to: advise the client to reissue revised F/S along with a NEW auditor report, advise the client to make the necessary disclosures and revisions to any imminent F/S, and ___________
if the effect cannot determined on a timely basis, provide notification that the F/S should not be relied upon
If the client refuses to revise F/S after a subsequent discovery of facts, the auditor should notify the B.O.D and ________
prevent further reliance on the F/S
Steps to prevents further reliance are : DAR
Dissociate, Alert agencies, Relying parties
Checking for other adequate procedures is a mitigating action for a ____________audit procedure
omitted; if there is no alternative then the auditor should promptly apply the procedure
When other information requires revision, there is a ______paragraph describing the material inconsistency
other matter; also withhold the use of the report OR withdraw from the engmt and consult with legal counsel
When mgmt. refuses to correct, the auditor should
notify those charged with governance
PCAOB standards audit procedures:
evaluate the appropriateness of methods, reconcile to the underlying accounts and other records, use the same materiality considerations
Evaluation of audit results for supplementary information include: making sure supplemental information is fairly stated, accumulate misstatement and these should be communicated to management,
evaluate whether the uncorrected misstatements are material either individually or in combination
An auditor’s report on supplementary information can be either a other matters paragraph OR ____________
a separate report including reference to the report on the F/S, the date of report, nature of opinion and on the F/S and report modifications
For nonissuers, when an auditor issues a qualified opinion on the F/S, a _______ opinion is issued on the supplemental information
qualified
For nonissuers, when the auditor issues an adverse or disclaimer of opinion,
_____________
no opinion is issued
For issuers, the auditor’s report on supplemental information can be on the F/S or ____________
in a separate report; the separate report should identify the auditor’s report on the financial statements
For issuers, the auditor’s report on the supplemental information should not be dated earlier than:
the date of the auditor’s report on the F/S OR the date on which the auditor obtained sufficient appropriate audit evidence
When there’s a material misstmt on supplemental information, describe the misstmt and express a ______ or _____ opinion
qualified; adverse; GAAP problem!
When there’s not sufficient appropriate audit evidence for supplemental information, issue a ___________ and describe the reason for the disclaimer
disclaimer of opinion; GAAS problem!
For issuers, when an auditor expresses an adverse or disclaimer of opinion,
express an adverse or disclaimer of opinion
Required procedures for supplementary information:
inquiries of mgmt., determine if supplementary info is consistent with mgmt.’s responses audited F/S and other knowledge, obtain written mgmt. representations regarding the required supplementary info
TF: An auditor is required to audit supplementary information
False
An other matter paragraph should be included for supplemental information with the following info:
the required suppl. info is included and the auditor has applied the required procedures; the req. suppl. info is omitted, some req suppl info is missing, the auditor has identified material departures from the guidelines, auditor is not able to complete the procedures OR unresolved doubts about conformance of req. suppl. info
The other matter paragraph for suppl. info should have a ___________
disclaimer of opinion
The reporting accountant’s report should include:
a brief description of the nature of the engmt, stmt that the engmt was performed in accordance with AICPA standards, ID of the specific entity, stmt describing the appropriate application of the req’s of the applicable reporting framework, stmt that preparers of F/S are responsible for proper accounting trmt, stmt that any differences in facts or circumstances could change report, stmt restricting use of report, and stmt saying that accountant lacks independence if not indpt.
Restriction of use of an auditor’s report is to:
mgmt., B.O.D., and specific parties (prior and current auditors)
Distribution of a report outside the US, the auditor may use either:
the report of the other country or the report set out in the ISAs or a U.S. form of report that reflects that the F/S being reported on have been prepared in accordance with a financial reporting framework generally accepted in another country
Distribution in the U.S. requires the auditor to have a _________ paragraph that identifies the financial reporting framework, refers to the note in the FS that describes the framework, and __________
emphasis of matter; indicates that the framework differs from accounting principles generally accepted in the US
TF: The auditor should apply ________ procedures to the supplementary information
limited
When auditing a specific element, determine the materiality _________ instead of _________
separately for each element; as a whole with the FS
A ________ opinion is issued when there’s a material modification to the F/S that affects the specific element
adverse
A __________ opinion is issued when there’s a scope limitation on the F/S that affects the specific element
disclaimer of
Negative assurance:
no identified instances of NONcompliance
When instances of noncompliance are identified, a ________ of the instances is recorded
description
An adverse or disclaimer of opinion on audited FS , would cause an auditor to _________ when engaged to report on summary statements
withdraw
________ is responsible for the preparing of summary financial statements
management
Compilation and review =
unaudited/disclaimer; there is NO assurance
Issue a report that is applicable to the __________
highest level of service rendered
SARS provides standards for ______ and _____ for NONISSUERS (private/nonpiblic co.’s)
compilations; reviews
TF: Manangement is responsible for the applicable reporting framework
True
Understanding the client for compilations:
staff qualif., transac. types and frequency, acct basis, form of financial statements and content, form of accounting records
TF: Independence is required for a compilation
FALSE; NOT required; lack of independence however must be DISCLOSED
Statements on Auditing Standards applies to:
reviews
Inquiries, analytical procedures and letter of representation from management are very important for :
review engagements; review engagement standards are the same for public and non-public companies
Letter of engagement is ______for a review
mandatory
Testing of I/C, audit rest work and assessing fraud risk are__________ for a review
NOT required
Failure to obtain a letter of representation from mgmt in a review results in __________
consideration of withdrawal from engagement
A letter of representation of rep from mgmt is or is not required for a compilation
NOT required
TF: A review should have a document of significant findings
True
Reviews express ______assurance
LIMITED
Each page of review documentation should have
“see independent accountant’s review report”
TF: Quarterly reports are audited
FALSE; unaudited
TF:A comfort letter is intended for general use
False; it is intended for the addressees
TF: If a comfort letter is to be issued, a review of interim information must be performed
True
TF: An audit of a single financial statement is NOT allowed under GAAS
False; IS allowed
Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP that are NOT suitably titled require a _______ opinion with a ______________ paragraph
qualified; basis for modification
A report on compliance in connection with audited financial statements provides only _______ assurance on compliance
negative
Testing of internal controls is NOT a requirement for a(n) ________
review
Compliance with Statements on Standards for Accounting and Review Services is required when:
submitting unaudited financial statements
An accountant with an immaterial direct interest is considered _____________
NOT independent
______ analysis is used to examine relationships between balance sheet accounts
Ratio
For a compilation, independence is _______
implied
TF: Inquiry about a related party transaction is performed in a review engagement
True
Five GENERAL standards for attestation: TIPPY
training and proficiency, independence, performance/due professional care in planning and performance, professional adequate knowledge of subject matter, and your belief that the subject matter is capable of evaluation against criteria that are suitable and available to users
Fieldwork standards: PA
planning and supervision, appropriate sufficient evidence; NO internal control
Reporting standards: SSER
identify SUBJECT matter, disclose SIGNIFICANT reservations about the engagement, EXPRESS conclusions about the subject matter, and RESTRICT use of the report to specific parties
TF: When reporting on an assertion, no restriction of the use is required
True
Consider withdrawing if there’s a _______ on an examination or review
scope limitation
Negative assurance is provided with a(n) _____
review
Positive assurance is provided with a(n) ______
examination
______ assurance is provided with agreed upon procedures
NO
If the client is the responsible party and fails to provide a written assertion, it is a _______ and the auditor should _______
scope limitation; withdraw
If the client is not the responsible party to provide a written assertion, the report should be _____
restricted
TF: An agreed upon procedures report does NOT include significant findings
False; it DOES
TF: A review of prospective financial statements is allowed
False
A _______ opinion is needed for agreed upon procedures
disclaimer of
Financial projection is _____ use and a financial forecast is _____ use
limited; general
For a financial projection, there should be a stmt on the purpose of the projection and a ________
restricted use paragraph
TF: Pro forma may not be examined or reviewed
FALSE; they may; proforma financials are NOT the same as prospective financials
TF: MD&A is not required by the SEC for issuers
FALSE; it IS REQUIRED
The MD&A may be examined and ______
reviewed
TF: A review of interim financial information for a public company requires evaluation of its internal controls
True
Letters for underwriters provide _____assurance on unaudited interim financial information
negative
An examination of a __________ would include an evaluation of the support of the assumptions underlying the forecase but a _____ would NOT
financial forecast; compilation
An attest engagement is when the accountant is issuing an examination, review or ____________ report on another party’s assertion
agreed upon procedures
Preconditions for an audit:
applicable financial reporting framework, mgmt responsibilities, mgmt scope limitations
MGMT is responsible for:
F/S, internal controls, and providing accountant with financial information
Lack of records is a __________
scope limitation
3 types of fraud:
corruption (cheating), asset misappropriation (stealing), financial stmt fraud (lying)
Audit is subject to inherent limitations/risks that _______ and _____ will not be detected
errors; fraud / if either of them are discovered, they CPA must report
With an initial audit, communication with the predecessor auditor should be ________ acceptance
BEFORE; this is mandatory
Materiality for financial statements as a whole should use the ________ level of misstatement that could affect the F/s
smallest
You should consider _______ and ______ when assessing materiality
quantitative; qualitative
Cycles:
Revenue, inventory, investment, payroll, financing, PP&E, expenditure
Transaction, balances, and ______ are the three categories of cycles
disclosures
TF: Risk assessment procedures are not required by all F/S audits
FALSE; ARE REQUIRED
Substantive procedures are tests of the ______ balances
DOLLAR; test of details, test of dollars balance, and analytical procedures are all substantive procedures
PCAOB standards state that financial statement assertions are CEO APROVeD
completeness, existence, occurence, allocation, presentation, rights, obligations, valuation and disclosure
A ______ audit plan is required for every audit
written
IR*CR =
Risk of material misstatement; exist INDEPENDENT of financial statement audit
IRCR____
DR - detection risk
TF: Detection risk is not controlled by the auditor
FALSE; it is
Control risk deals with a material misstatement that will not be _______ in a timely manner
detected
Inherent risk assumes there are no _______ controls
related
Detection risk is when the auditor ______the mistake and thereby gives the ____opinion
misses; WRONG
LESS detection risk work means _______ work for us
MORE
MORE detection risk means _____ works for us
LESS
LESS risk of material misstatement leads to ______ detection risk
LESS
MORE risk of material misstatement leads to _______detection risk
MORE
There’s a(n) ______ relationship between risk of material misstatement and detection risk
inverse
Internal auditors may assist an independent CPA in obtaining an understanding of internal control, performing substantive tests and ___________
performing tests of controls
If a specialist’s findings makes an independent auditor modify its opinion, then the auditor of a nonissuer may____________
refer to the specialist in the auditor’s report
The extent of involvement of a client’s internal auditors happens in the _______ stage of an audit
planning
The indpt auditor may NOT share the assessment of inherent or _____risk with the internal auditor
control
TF: A change in the tolerable misstatement does NOT have an effect on the control risk
True
TF: Fairness and accuracy is a financial statement assertion
FALSE
What are the financial statement assertions?
valuation and allocation, rights and obligations, and understandability and classification
Objectivity is reflected by the organizational level to which an internal auditor reports as well as policies ___________
that prohibit the areas of audit
Inherent, control, and ______ risk may be assessed in non-quantitative terms
detection
Increasing the ___________ results when there is a decrease in detection risk
tests of details
Control risk should assessed in terms of _____________
financial statement assertions
As detection risk increases, the level of assurance provided by ______________ can decrease
substantive tests
Tests of details is associated with ______ risk
detection
Factual misstatements refer to:
misstatements about which there is no doubt
Analytical procedures performed during planning often use data aggregated at a _______ level
high
TF: The auditor provides no assurance that indirect effects of noncompliance will be detected
True
A requirement during planning is to perform _______________
analytical procedures
Observation and ______ are used to evaluate the design of controls
inspection
Human resource procedures and policies is included in the ______________________________ element of an entity’s internal control
control environment
In obtaining an understanding of internal controls, an auditor is required to obtain knowledge about the ______________
design of controls AND whether they have been implemented
TF: As part of audit planning, an understanding of internal control is relevant to the financial reporting objective
True
Valid and relevant are factors of:
sufficiency
Sufficiency is impacted by quality and ________
risk of material misstatement
TF: Evidence must relate to the financial statement assertions
True
Analytical procedures used in the final review stage is to help ___________
see if ending balances are reasonable
Analytical procedures should be used on ______accounts
predictable
Positive confirmation:
demand for a response
Negative confirmation:
response by third party if he/she disagrees
FIVE CARROT CARS
Footing,crossfooting and recalculation; inquiry (internal and external); vouching (directional testing for support for what’s reported in RECORDS - existence or occurence); examination or inspection (existence assertion); confirmation; analytical procedures; reperformance; reconciliation; observation; cutoff review; auditing related accounts simultaneously; ; representation letter; subsequent events review
Assertions: CoVERU
complete; valuation; rights and obligations; existence
Asset balances test the ______ assertion
existence
Liability balances test the ______ assertion
completeness
The biggest audit concern is:
overstatement
Segregation of duties: ARC
authority, recordkeeping, and custody
Auditor can prepare __________ to support lower control risk
aging schedule
Lockboxes are ideal safeguards for _____
cash
If NO cashier, _____ makes deposit
treasurer
TF: An auditor is NOT required to obtain information about the operating effectiveness of internal controls
TRUE
TF: Substantive testing can be entirely eliminated for significant transaction classes
FALSE
TF: Analytical procedures and risk assessment procedures are always necessary in a financial statement audit
TRUE
Analytical procedures are used on ________ accounts, which are more predictable
income statement
Positive confirmations is used when there are: large amounts, expect errors/disputes, and when there’s ____________
weak IC
Confirmations provide evidence about rights and obligations and________
existence; may provide a little info on valuation
TF: If there’s no response for a confirmation, send out a second and third request
True
With tracing, the biggest concern is an understatement of expenses and _______
liabilities
Accounting department functions:
approve invoice, approve invoice for payment, and record payment after TREASURER pays
Payments after year end from a customer will help you find an unrecorded ______
liability
Lapping:
use today’s receipts to cover yesterday’s fraud
Analytical procedures are required during the ______ and _______
planning; final review
Ensuring that credit approval is obtained before goods are shipped supports the ________ assertion
allocation and valuation
_______ confirmations are used when the combined assessed level of inherent and control risk is low
negative
NO letter of inquiry of legal counsel would result in a ________ opinion
disclaimer of
TF: An attorney would NOT make an evaluation about a client’s ability to continue as a going concern
True
In auditing contingent liabilities, an auditor would want to ______________
review the minutes of meetings of stockholders
Inventory turnover: COGS/
average inventory
Average number of days sales in inventory is:
365/inventory turnover
A company’s liquidity is assessed by the ___________
balance sheet
Acid test ratio: cash + __________+ accounts receivables/current liabilities
marketable securities
Total asset turnover:
Net sales/ average total assets
Accounts payable:
purchases/average accounts payable
Net profit margin:
net income/net sales
Return on total assets:
net income/average total assets
Return on assets (alternate):
net income/net sales * net sales/average total assets
Return on investment:
net income+interest expense (1-tax rate)/average (LT liab. + equity)
Return on common equity:
net income- preferred dividends/average common equity
Book value per share:
total SE-preferred stock/ number of common shares outstanding
Out of A.R.C, sales order and credit and the treasurer are _________
authorization ( the “a” in ARC)
Out of A.R.C., billing/AR/accounting are _________
recordkeeping (the “r” in ARC)
Out of A.R.C., warehouse and shipping are ______
custody (the “c” in ARC)
When there is a higher risk of incorrect acceptance, the sample size________
decreases
The variables sampling application is affected by the variability in the population, the acceptable level of risk, the tolerable misstatement, and ________
the expected misstatement
Attribute sampling is used to __________
test controls
The risk of acceptance and the likelihood assessing control risk too low affects the _____________ of the audit
effectiveness
An increase in tolerable misstatement results in a _________ sample size
smaller
________ sampling is normally used to estimate a numerical measurement of a population
variable
Upper deviation rate: sample deviation rate+ _________
allowance for sampling risk
Probability proportional to size sampling is designed to estimate ____________
overstatement errors
When planning an auditor’s sample for a test of control, an auditor should take into account the allowable risk of ____________
assessing control risk too low
The _______deviate rate is compared to the _______ deviation rate when making decisions about reliance on controls
upper; tolerable
Examples of nonsampling risk include failure to recognize misstatements in documents examined, using inappropriate audit evidence and ____________________________
selecting inappropriate audit procedures
TF: Objectivity applies to attestation services only
FALSE; independence applies to attestation only; objectivity applies to ALL
TF: Any direct material interest impairs independence regardless of materiality
True
A passbook loan and a credit card balance under $10K __________ impair independence
does NOT
Impairment of independence if a client is more than _______ year(s) overdue in the payment of professional fees
one
SOAP:
Summary of adjustments past
TF: A direct financial interest in a client impairs independence regardless of materiality
True
The lead and concurring partners are subject to a ____ year time out while other partners are subject to ____ years
5;2
TF: Under IFAC, internal audit outsourcing services are allowed but are not allowed under U.S ethics standards
True
TF: Contingent fees are not allowed when representing a client in an examination before the IRS
FALSE; are allowed; contingent fees are NOT allowed when preparing a tax return
TF: Independence is required for the preparation of a tax return
FALSE
Contingent fees are permitted when they involve a _____________ or ruling
legal proceeding
______ include the procedures that are applied and the conclusions reached in an audit engagement
working papers
TF: During a test data approach, all valid and invalid conditions must be tested
FALSE
__________ is when the auditor reprocesses the client’s data using the auditor’s own software
Parallel simulation
_________ uses test data commingled with actual data to test transactions
integrated test facility
Only a __________ would result in an unmodified paragraph with an emphasis of matter paragraph included
justified change in accounting principle
TF: When there’s a material departure for GAAP in order to avoid the financial statements from being misleading, an emphasis of matter paragraph is included
True
The fundamental principles of professional ethics: integrity, objectivity, professional competence and due care and _________
professional behavior
TF: A purchase order is an external piece of evidence
FALSE; internal
The organizational status of an internal auditor assesses the internal auditor’s________
objectivity
If population variability increases, the sample size______
increases
Comparing deviation rates to tolerable rates helps an auditor determine whether or not to __________
rely on a control
If there’s a material weakness in the operating effectiveness of internal controls then a(n) _____ opinion is issued
adverse
______ sampling examines the rate of occurrence
attribute
TF: In Government Auditing Standards, the scope of the auditor’s testing of internal controls is required to be included in the auditor’s report on internal controls
True
TF: Negative assurance is expressed on supplementary information
False
TF: To obtain reasonable assurance, an auditor should plan the work and properly supervise assistants
True
TF: An understanding of internal control is required in a review
FALSE; NOT required
To detect kiting, the receipt per bank is recorded _______ the disbursement date per bank
BEFORE
When the combined level of control and inherent risk is low, ______ confirmations are used
positive
When there’s a large number of SMALL BALANCES, ________ confirmation is used
negative
