AUD Flashcards
What does TID stand for in the GAAS general standards?
Training, Independence, and Due professional care
What does PIE stand for in the standards of field work?
Planning and supervision, Internal Control, and Evidence
What does GCDO stand for in the standards of reporting?
GAAP, Consistency, Disclosure, and Opinion
When is an adverse opinion rendered?
When a severe GAAP departure is present in the financial statements.
What are the two main differences between the standards of attestation and the auditing standards?
The attestation standards and generally accepted auditing standards differ conceptually in two main areas: 1) the attestation standards provide a framework for the attest function beyond historical financial statements; and 2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.
Formula for days sales in acc receivable?
Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.
Adj entry for wages at end of year that weren’t recorded:
DR: Operating expensesCR: Accrued wages payable(accrued liab)
Why would an auditor modify the auditor’s report based on the work of a specialist?
If there is a difference between the specialist’s valuation of an asset and the client’s.
who should make up the audit committee?
members of the board or directors who are not officers or employees
what are the 3 general standards?
adequete training, independence of mental attitude, and due professional care
3 fieldwork standards?
adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence
the auditors judgment of the overall fairness of the financial statements is applied within the framework of?
generally accepted audit principles
what does the auditor primarily use to come up with materiality?
the prior year financial statements
basics of independence concerning a close relative?
CR can have a financial interest in the audit client as long as the amount is immaterial to them. CR can work for the audit client as long as its not in accounting or financial reporting. CR can work for audit firm, and is not a covered member unless the person works on the engagement team or can influence the members of the engagement team or the audit itself
when planning a new audit, why would the auditor consider the methods used to process accounting information?
Because the methods influence the design of internal control
who appoints the PCAOB?
SOX created the PCAOB and it is overseen by the SEC
under securities act of 1934 what organizations are required to submit audited financial statements?
every company traded on national and over the counter exchanges
primary purpose of establishing quality control procedures for deciding whether to accept a new client?
minimize likelihood of association with clients whose management lack integrity
to succeed in legal action against the auditor, the client must be able to show that?
the CPA had duty to perform, the CPA breached the contract, the client suffered losses, and that there is a close causal connection between the auditor’s behavior and the damages suffered by the client
detection risk?
risk that auditor concludes no material misstatement exists when there actually is one
3 components of audit risk?
inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk
if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?
increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk
why are inherent risk and control risk different than detection risk?
inherent risk is the possibility of a material mistatement due to lack of human and system technology. Control risk is risk of material error that is not prevented or detected on a timely basis by the client’s internal controls. Detection risk is risk that the auditor misses a material error. Thus, inherent risk and control risk are functions of the client and its environment while detection risk is not
the risk of material misstatement refers to:
the combination of inherent & control risk. Multiplying IR by CR results in the ‘risk of material misstatement’
the level of detection risk is inversely related to:
the assurance provided by substantive tests. As the auditor performs substantive procedures he becomes more and more sure there are no material errors exist, and detection risk goes down
the audit program should be designed so that sufficient evidence is gathered to:
support the auditor’s conclusions
Do most illegal acts affect the fin statements directly or indirectly?
indirectly.
if you uncover an illegal act at a public company, the auditor is required to notify:
the SEC
when auditor has reason to believe an illegal act has ocurred, he should do what?
consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client’s legal counsel
what is lapping fraud?
you steal customer A’s money, then you get customer B’s money and apply it to A’s account, then get C’s money and apply it to B’s account, and so on
what is kiting?
money is moved from one account to the other but in different time periods to inflate the amount being reported
does the PCAOB make auditing standards that must be followed by all CPAs?
it only makes auditing standards for public companies
is the PCAOB a gov agency?
no
what is an S-1 form?
a form that must be filed with the SEC whenever a company plans to issue new securities to the public
what is auditors responsibility for supplementary information such as segment info?
auditor should apply limited procedures to the required info and report deficiencies in or omission of such info
who creates auditing standards for private companies?
the AICPA
what is form 8-K?
the form filed with SEC to report a significant event
how long do you have to dispose of stock in a client if you inherited some unsolicited?
30 days
do operating leases and claims against clients for immaterial amounts impair indedpence?
no
are statements in the standards that include the word “should” mandatory?
they are considered presumptively mandatory- the auditor can depart from them if justification is documented
what is the completeness assertion concerned with?
determining that all transactions are recorded
in testing the existence assertion for an asset, the auditor normally works from the ______ to the _______
accounting records to the supporting evidence
according to SOX how long does a firm keep audit documentation?
have to keep it 7 years
what is the best place to put in writing the understanding between client and firm about what will take place during the audit?
the engagement letter
to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:
canceled checks
what does tracing shipping docs to sales invoices accomplish?
that all items shipments have been invoiced
most effective control over recorded purchases?
supporting forms such as purchases orders and receiving reports are independently compared for agreement
if trying to detect overstatement of sales, you start with the:
accounting records and trace to the source documents
what is pervasiveness?
the extent to which an exception affects different parts of the financial statements
difference between adverse opinion and disclaimer of opinion?
adverse opinion is stating that the financials do not fairly present the position of company in accordance to GAAP. Disclaimer of opinion is when a material uncertainty affects the financials
what paragraph explicitly states the auditors responsibility to express an opinion?
the opening paragraph of the standard audit report
when would a lack of independence cause a disclaimer of opinion?
in all cases
if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?
adverse or qualified. if qualified, an extra paragraph would be added that describes the nature of the missing info, and the opinion paragraph would have an extra sentence “except for the information discussed in previous paragraph”
on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?
it can be either
what are the 2 situations which result in a qualified opinion?
1) when the statements are materially misstated due to one account balance or class of transaction that does not have a pervasive effect on the statements2)when the auditor is unable to obtain audit evidence regarding a particular account balance that does not pervasively affect the statementsEssentially either a single deviation from GAAP or a scope limitation. The report itself is very similar to an unqualified opinion but an extra paragraph is added to explain the qualification after the scope paragraph but before the opinion paragraph
how many paragraphs does a standard unqualified report have and what are they?
- The introductory paragraph states the audit work performed and states the responsibility of the auditor and auditee in relation to the financial statements, the scope paragraph details the scope of the audit work, and the opinion paragraph simply states the unqualified opinion
when is an adverse opinion issued and how does the report change?
Adverse is the opposite of an unqualified opinion. It means that the financial statements as a whole are materially misstated and do not conform with GAAP. or the “differ pervasively” from GAAP. On the report, the scope paragraph is modified accordingly and an explanatory paragraph is added after the scope paragraph but before the opinion paragraph. In the opinion paragraph, the auditor specifically states that the statements are not in accordance with GAAP.
What situations would result in a disclaimer of opinion?
When the auditor is not independent or there is a conflict of interest.When a limitation on scope is imposed by the client and the auditor cant gather sufficient audit evidence.When there is a substantial going concern issue.When there are significant uncertainties in the business of the client.
when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?
a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction
which section of SOX requires mgmt to issue an internal control report?
Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting
what is the definition of incompatible functions?
those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of their duties. well designed controls should separate the duties of authorization, record keeping and custody of assets
what is the primary purpose of the auditors consideration of internal controls?
to determine the nature, extent, and timing of audit tests to be applied
if the auditor finds a reportable condition in internal controls, who should they tell first?
the audit commitee
if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:
it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests
what is the concept of reasonable assurance?
recognizes that the cost of internal controls should not exceed the benefits derived
7 factors of the control environment: (I see ham bone)
I- integrity and ethical valuesC- commitment to competenceH- human resource policies and practicesA- assignment of authority and responsibilityM- management’s philosophy and operating styleB- board of directors or audit committee participationO- organization
even the best designed IC can fail due to:
human error, faulty judgement, collusion, management override
what are the five components of internal control? (clowns run cartels in mexico)
1) control environment2) risk assessment3) control activities4) information and communication5) monitoring
***What is the process of assessing risk in general?
You assess inherent risk and control risk to determine the amount of substantive testing that must be carried out to reduce detection risk to a level so that overall risk will still achieve an acceptably low level. Acceptable audit risk is not changed.
what is the audit risk formula?
inherent risk X control risk X detection risk = overall audit risk
the auditor uses the assessed level of control risk to determine the acceptable level of
detection risk for financial statement assertions
if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the
extent of tests of details
what do assertions about existence or occurrence deal with?
whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period
when an auditor assesses control risk as low, he must:
identify specific policies and procedures that are likely to prevent or detect material misstatements, and he must perform tests of controls to evaluate the effectiveness of such policies and procedures. if the tests of controls result in the control risk being assessed as low, then the auditor may limit the extent of substantive testing
what does ‘information and communication’ refer to as far as internal control within an organization?
the ability of the accounting system to generate reliable info and convey it in a timely manner to the parties in the organization that need it
What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners
Accuracy- amounts and other data have been recorded appropriatelyOccurrence- transactions and events that have been recorded have occurredCompleteness- all transactions and events that should have been recorded have been recordedCutoff- transactions and events have been recorded in the correct accounting periodClassification- transactions and events have been recorded in the proper accounts
4 assertions about account balances at end of period?Even Cain Realizes Value
Existence- assets, liabilities, and equity interests existCompleteness- all assets, liabilities, and equity that should have been recorded have been recordedrights and obligations- the entity holds or controls the rights to assets, and liabilities are the obligations of the entityValuation and allocation- assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
4 assertions about presentation and disclosure:Overeem Can’t Complain Anymore
Occurrence & rights and obligations- disclosed events and transactions have occurred and pertain to the entityCompleteness- all disclosures that should have been included have been includedClassification and understandability- financial information is appropriately presented, described, and clearly expressedAccuracy and valuation- financial and other info are disclosed fairly and at appropriate amounts
why is it best to have “blind” invoices received by the receiving department?
to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received
what is the purpose of purchase cutoff testing?
to determine that items actually received in inventory have been included in the proper period
what is an integrated test facility?
it puts fake transactions in with real transactions which are processed together without client employees knowing it
a person who mails signed checks can also:
cancel the supporting documents
an effective control over purchases would be to have the purchasing department authorized to:
purchase, but not initiate purchases
an increased extent of tests of controls is most likely to occur when:
controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.
are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?
AU 325 says that sig def and material weaknesses in a public company must be communicated in writing to the audit committee of the board of directors
when should control deficiencies be reported?
either during the audit or after the audit’s completion, within 60 days of the report release date
management must disclose material weaknesses in internal control if the weakness exists:
at the end of the year
what are the 2 types of control deficiency?
design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently
what is ratio estimation used for?
to measure the total estimated error amount within a population
there is an inverse relationship between sample size and:
tolerable error. as the tolerable error decreases the sample size would increase
what is sampling risk?
the risk that the sample chosen doesn’t accurately represent the population
How is the allowance for sampling risk calculated?
It’s the difference between the upper limit and the deviation rate of the sample.
what are embedded audit modules?
coded into the clients system to collect data for the auditor
purpose of test data approach?
test data is entered with a known outcome into client’s system to see if it produces same result
under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:
a disclaimer of opinion.
if a control deficiency is discovered, what is the next step?
determine if it is a material weakness by gathering additional evidence
what opinion is rendered if there is one or more material weakness in internal control over fin reporting?
an adverse opinion
“if this statement is not correct… give details of difference directly to our auditors
acc rec confirmation
“in our opinion, these statements audited by us comply in all material respects”
comfort letter to underwriters
“no claims that OUR lawyer…”
management rep letter
“which raises substantial doubt about its ability to continue as a going concrern”
auditors report
CPA is associated with the financial statements, but is NOT independent
Compilation report
providing NEGATIVE assurance on a company’s financials
review report
material departure from GAAP but NOT materially misstated
qualified report for GAAP departure
The PCAOB was established by:
The Sarbanes Oxley Act of 2002
TF: GAAP does not allow a company to use different methods for costing different inventories
FALSE; GAAP does allow it as long as the methods are disclosed
An auditor’s active responsibility stops on:
the date of the auditor’s report
A division of responsibility affects the _____ and _____ paragraphs
auditor’s responsibility; opinion
A report on compliance in connection with audited financial statements provides only ________ assurance on compliance
negative
When reporting on a single financial statement, an auditor is NOT required to determine the materiality of ____________
the complete set of financial statements; ONLY determine the materiality of the single financial statement being reported on
Modifications are made to the standard review report only when there is a ____________
departure from GAAP
A ________ _______ must accompanied by compiled financial statements, as required by SSARS
compilation report
_____ analysis is used for balance sheet accounts
Ratio
TF: The entity’s ability to continue as a going concern is a factor when performing a review
FALSE
TF: SSARS and PCAOB standards apply when performing a review of interim information
FALSE; ONLY PCAOB
A review of interim information of an issuer is to provide an accountant with a basis for reporting whether:
material modifications should be made to conform with GAAP
_____ assurance is provided in comfort letters
Negative
______ assurance is allowed when reporting on the results of performing a review of management’s assertion
Negative
A management representation letter is not required for a ______ engagement
compilation
For agreed upon procedures, who is responsible for the sufficiency of the procedures?
Management and the audit committee
TF: An auditor issues an opinion on agreed upon procedures
False
TF: Limited assurance is provided for agreed upon procedures
False; only for review
Audit risk is:
the risk that the auditor may unknowingly fail to appropriately modify his/her opinion on materially misstated financial statements
Detection risk is:
the risk that an auditor will NOT detect a material misstatement that exists in an assertion
What risks exist independently of the financial statement audit?
Control and inherent risk
A lack of independent checks is a fraud risk factor that provides ____________ for misappropriation of assets
OPPORTUNITY
_____ assurance is provided for indirect effects on the financial statements
NO
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports:
the planned level of assurance at the relevant assertion level
____ and inquiry may be used to evaluate the design of controls
Observation
Control risk is assessed to determine the risk that:
material misstatements exist in the financial statements
When obtaining an understanding of an entity’s internal controls, an auditor is/is not required to obtain knowledge about the operating effectiveness of controls
IS NOT
The five components of internal controls are:
risk assessment, control environment, information and communication systems, monitoring and existing control activities
When there are strong internal controls and the risk level is low, substantive procedures is:
minimal; however, do NOT eliminate for material balances, transaction classes or disclosures
TF: When there are none or weak internal controls, it is required to perform controls tests
False; perform maximum substantive procedures
TF: Both the auditor and management are responsible for complying with relevant laws and regulations
FALSE; management is responsible
Who is responsible for coordinating client assistance?
Both management and the auditor
The hiring of new personnel deals with _________, a component of internal control
risk assessment
Segregation of duties deals with _______, a component of internal control
existing control activities
Operating performance reviews deals with _______, a component of internal control
existing control activities
Involves the comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor is the definition of:
analytical procedures
Unrealized gains on AFS securities should properly be recorded in:
other comprehensive income
______ accounts tend to be more predictable
Income statement
TF: The auditor’s risk assessment affects the relevance of audit evidence
FALSE; it affects the nature, extent and timing of audit procedures
_______ provides evidence that a sale occurred
Shipping documents
TF: Related party transactions are considered to be arms-length transactions
FALSE; NOT arms length
Total debt/total assets indicates the portion of assets _______________, which is a meaningful ratio to calculate during the final audit review
financed by creditors
Inventory turnover:
COGS/Average Inventory
Return on assets
Net Income/Average Inventory
A lower risk of incorrect acceptance results in:
a larger sample size
Variables sampling is used to test:
whether an account balance is reasonable
PPS sampling is used to:
estimate overstatement errors
Statistical methods help plan the:
sample size
_______________ is the auditor’s best estimate of the deviation rate in the population before the sampling plan is executed
expected deviation rate
TF: Nonsampling risk can be measured in quantitative terms
False
In an audit of an issuer, the auditor is required to provide an opinion on:
F/S and the effectiveness of internal control
______ but not _______ results in an adverse opinion of the effectiveness of internal control
material weaknesses; significant deficiencies
A material weakness exists when there is a ______ possibility of material misstatement
reasonable
An entity level controls exists ______ of the audit
independently
When does the evaluation of the operating effectiveness of internal controls occur?
AFTER the planning stage
TF: The auditor cannot discuss the planned scope and timing of the audit with those charged with governance
FALSE; CAN discuss
TF: Management representation letters may not contain a statement regarding subsequent events
FALSE; may contain
TF: Representations about a client consulting with other auditors is required in a mgmt. rep letter
FALSE; NOT required
TF: Independence is impaired when an auditor serves as an investment advisor to the employee benefit plan
True
TF: Independence is required for preparation of a tax return
FALSE; NOT required
TF: Under IFAC Code of Ethics (nonissuers), partner rotation is not required
TRUE
A mutual fund constitutes a(n) _____ interest
indirect
TF: Providing extensive advisory services to a client will impair an auditor’s independence
FALSE; will NOT
Contingent fees are allowed when:
they involve a legal proceeding or ruling
Section 404 of the SOX Act of 2002 requires:
each annual report of an issuer to include management’s assessment of the effectiveness of internal control over financial reporting
If material instances of noncompliance are identified, the auditor should express:
either a qualified or adverse opinion on compliance
Government Auditing Standards require that the auditor issue a written report on:
internal control in ALL audits
Under the _______ Act, materiality is determined separately for each major federal financial assistance program
Single Audit
Government Audit Standards define 3 types of engagements:
financial audits, attest engagements, and performance audits
The _____ threat is the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior
self interest
________ 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
Management participation
The __________ is the financial reporting framework that is acceptable in view of the nature of the entity and the objective of the financial statements or that is required by law or regulation
applicable financial reporting framework
The preparation and fair presentation of the financial statements requires identification of the applicable financial reporting framework, preparation and fair presentation of the financial statements in accordance with the framework AND:
inclusion of an adequate description of the framework in the financial statements
The terms “may”, “might”, and “could” indicate ______ material
explanatory
The terms “must” and “is required” indicate a(n) ______ requirement
unconditional
The term “should” indicates a ______requirement
presumptively mandatory
When reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report is insufficient in the circumstances, GAAS requires that the auditor ___________ or ________ from the engagement
disclaim an opinion;withdraw
An auditor must be independent of an entity when performing an engagement in accordance with GAAS unless GAAS provides otherwise or _____________
the auditor is required by law or regulation to accept the engagement and report on the financial statements
GAAS is in the _____ paragraph
Auditor’s Responsibility
GAAP is in the _____paragraph
Management’s Responsibility AND Opinion Paragraph
TF: International Standards on Auditing permit the auditor’s report on group financial statements to make reference to a component auditor even if it is not required by law or regulation
FALSE; does NOT permit
TF: The auditor is NOT required to inquire of management regarding conditions or events beyond the period of assessment that may cast significant doubt about the entity’s ability to continue phue as a going concern
FALSE; IS required
The phrase “reasonable assurance about whether the financial statements are free of material misstatement is NOT required for ________ engagements
review
The objective of tests of details used as tests of controls is to evaluate whether:
an internal control operated effectively
TF: An integrated audit is required for an issuer
TRUE
TF: An integrated audit is required for a noninssuer
FALSE; it may be performed but it is not required
Only a _______ change would lead to an unmodified opinion with an _______ paragraph
justified; emphasis of matter
_______ information is outside the basic financial statements
Supplementary
If there is a problem with supplementary information, a(n) _________ paragraph is required
other matter
TF: A report issued on significant deficiencies requires a statement of compliance with laws and regulations
FALSE
______ is responsible for both the financial statements and for the selection and application of accounting principles
Management
The International Code of Ethics includes the following fundamental principles:
confidentiality, objectivity, professional behavior, professional competence and due care, integrity, and objectivity
TF: Failure to make minutes of B.O.D meetings available is a scope limitation that will prevent an unmodified opinion
TRUE
The risk of incorrect rejection and assessing control risk too high affects the _______ of the audit
EFFICIENCY
TF: Population variability has an inverse effect on sample size
FALSE; DIRECT
If an auditor is unable to perform the necessary procedures for a review, the review is considered _______
incomplete; no review report should be issued
TF: No assurance/opinion is provided for agreed upon procedures
TRUE
The sufficiency of the agreed upon procedures is the responsibility of __________
the client
TF: SSARS does not include the preparation of F/S in conjunction with litigation services that involved regulatory proceedings
TRUE
_______ risk is the risk that the auditor will NOT detect a material misstatement that exists in a F/S assertion
Detection
Deviation rates are used in tests of _____, NOT tests of ______
controls; balances
When an entity has a going concern, a(n) ________ paragraph is used to emphasize the matter
emphasis of matter
TF: A change in accounting principle does not result in an emphasis of matter paragraph appended to an otherwise unmodified opinion
FALSE; DOES result
______ assurance may be expressed when an accountant is requested to report on the results of performing a review of management’s assertion
Negative
For a review engagement, statements presented on OCBOA will require the auditor to:
modify the review report to reflect the fact that the F/S are presented on OCBOA; management NOT required to justify use of OCBOA
TF: Analytical procedures performed during planning often use data aggregated at a low level
FALSE; high level
A report on significant deficiencies in I/C should or should not be restricted
SHOULD
TF: A financial expert is required to have significant audit experience as a CPA
FALSE
International Standards on Auditing’s period of going concern is:
at least but NOT limited to twelve months from the balance sheet date
International Standards on Auditing require the auditor to consider the going concern when?
Throughout the engagement (when planning and performing audit procedures and in evaluating the results of audit personnel)
ADMITS: the procedures used to see if a company has a going concern
Analytical procedures, Debt compliance, Minutes (B.O.D.), inquiry, third parties, subsequent events review
FINE: conditions that indicate substantial doubt about going concern
Financial difficulties, internal matters (substantial dependence on a particular project), negative trends, and external matters
Mitigating factors for an entity’s ability to continue as a going concern:
plans to borrow money or restructure debt, plans to sell assets, plans to delay or reduce expenditures, plans to increase ownership equity
International Standards on Auditing state that management has a responsibility to assess the entity’s ability to continue as a going concern and requires:
the auditor to evaluate management’s assessment; NOT required for US auditing standards
TF: A disclaimer of opinion of appropriate for going concern uncertainty
TRUE (based on the auditor’s judgment); usually an emphasis of matter paragraph is used, however
TF: US auditing standards require the auditor to obtain written representations from management regarding its plans for future action
FALSE; International Standards on Auditing
Inadequate disclosure of a going concern results in a _________ or _______ opinion
qualified; adverse
A significant going concern uncertainty may be result in a :
disclaimer of opinion
_______ means that the information is reasonably obtainable from management’s accounts and records and that providing the information in the auditor’s report does NOT require the auditor to assume the position of a preparer of financial information
Practicable
When there is an adverse opinion, the ______ paragraph refers to a note where the matter is described
basis for an adverse opinion
Under US GAAS, a __________ opinion is only appropriate when the auditor is NOT able to gather sufficient, appropriate audit evidence
disclaimer
If alternative procedures cannot be performed in order to obtain sufficient appropriate audit evidence, the auditor should express a ________ or _________ opinion
qualified; disclaimer
International Standards on Auditing require the auditor to withdraw from the audit when the auditor is:
unable to obtain sufficient appropriate audit evidence due to a management imposed scope limitation
When the auditor expresses a qualified opinion due to a scope limitation, the opinion paragraph states that the qualification relates to the possible effect of the matter on the F/S and NOT:
the scope limitation itself
When the auditor is NOT independent but is REQUIRED by law or regulation to report on the F/S, the auditor should:
disclaim an opinion and should specifically state that the auditor is NOT independent; if reasons are disclosed, ALL reasons should be included
When the prior year’s F/S were NOT audited and the current year’s F/S are being audited, the auditor is facing a ___________. The beginning balances may not be ascertainable and therefore a ________ opinion on the statements of income, retained earnings, and cash flows may be required
scope limitation; disclaimer
Updating/changing prior opinions results in DORCS in an emphasis or other matter paragraph. DORCS is:
date of the auditor’s previous report, opinion type previously issued, reason for the prior opinion, changes that have occurred and statement that the “opinion….is different”
Recognized Type 1 Events:
Conditions that exist on or before the B/S date; a F/S adjustment is required
Recognized Type 2 Events:
Conditions that exist AFTER B/S date; footnote disclosure may be required
If the auditor believes that the F/S need to be revised to reflect a substantive event and management does NOT make the revision, the auditor should express a ______ or _______ opinion
qualified; adverse
The auditor should use the same materiality considerations as those used in planning and performing the audit of the F/S except:
if specified otherwise by an applicable regulatory requirement
The auditor should evaluate whether uncorrected misstatements related to the supplemental information are material either:
individually or in combination with other misstatements
For issuers and nonissuers, a(n) ________ paragraph or a _____ is used when reporting on supplementary information
other matter; separate report
What organization establishes GAAP?
International Accounting Standards Board (IASB); the rules established by them are NOT applicable to F/S prepared in accordance with IFRS
If F/S are prepared using a framework generally accepted in another country and the report is used in the US, a(n) ________ paragraph is included in the report
emphasis of matter
Regulatory bases of accounting are:
Frameworks that are based on US GAAP but do NOT comply with all of the requirements of GAAP
TF: Under US auditing standards, the following are the only special purpose frameworks: cash, tax, and regulatory
FALSE; contractual bases is included as well
International Standards on Auditing define a special purpose framework as a financial reporting framework designed to meet the financial information needs of:
specific users
A(n) ______ paragraph that RESTRICTS THE USE of the auditor’s report should also be used when special purpose financial statements are prepared in accordance with an other basis of accounting
other matter
TF: An other matter paragraph is required when F/S are prepared in accordance with a regulatory basis AND are intended for general use
FALSE
TF: A dual opinion on special purpose framework and GAAP is needed for F/S prepared on a regulatory basis for general use
TRUE
TF: When auditing both a single financial statement or a specific element and an entity’s complete set of F/S, the auditor can use audit evidence obtained during the audit of complete set of F/S in the audit of single F/S or specific element
TRUE
When the auditor’s report on compliance is included in the auditor’s report on the F/S, the restriction on the use of the report applies to the entire auditor’s report. If a separate report is issued, the only the ________ needs to be restricted as to its use
report on compliance
Who is responsible for the preparation of the summary F/S?
Management
STAFF: Understanding a client’s business for a compilation engagement
Staff qualifications, transaction types and frequency, accounting basis used to prepare the F/S, form of the accounting records and F/S form and content
Compiled F/S that omit GAAP disclosures are acceptable if the F/S are otherwise in conformity with GAAP, the reason for omission was NOT to deceive the user, and:
compilation report warns the user of missing disclosures
TF: Communication with the predecessor accountant is NOT required in a review engagement
TRUE
A review engagement expresses _______ assurance
LIMITED
TF: An example of a limited assurance phrase is: “we are not aware of any material modifications…”
TRUE
When an accountant on a compilation or review engagement becomes aware of a GAAP departure, the report would be modified or the accountant would ______
withdraw; NO opinion is expressed
Whenever predecessors accountants reissue their prior report, they should read the new F/S and:
obtain a representation letter from the NEW accountant
For a review of an issuer’s interim financial information, the review report should include a statement that the review was conducted in accordance with the:
standards of the PCAOB
TF: A representation letter is required for a compilation engagement
FALSE; NOT required
TF: An understanding of internal control is required for issuers and nonissuers review engagements on interim F/S
TRUE
TF: Communication with the predecessor accountant is required for a review engagement with or without interim FS
FALSE; only required for issuers with interim FS
Statements on Standards (SAS) is applicable to:
nonissuers with interim F/S
What two standards apply to audit engagements?
SAS (Statements on Standards) and PCAOB (for ISSUERS)
What standards apply to compilation and review engagements?
SSARS (Statements on Standards for Accounting and Review Services)
What standards apply to attest engagements?
SSAE (Statements on Standards for Attestation Engagements)
The five general standards for attestation engagements are: Training and proficiency, Independence, Performance/due professional care in planning and performance, Professional and 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
What are the two fieldwork standards for attestation engagements?
planning and supervision and appropriate, sufficient evidence to provide a reasonable basis for the conclusion
What are the four reporting standards for attestation engagements?
identify Subject matter or the assertion being reported on, disclose Significant reservations about the engagement, Express conclusions about the subject matter or the assertion, Restrict use of the report to specified parties (needed for AGREED UPON procedures)
Reviews provide ______ assurance
negative
TF: No assurance is provided for agreed upon procedures
FALSE; procedures and findings are listed
TF: Engagements to perform agreed upon procedures on prospective financial statements must include a summary of significant assumptions
TRUE
TF: Financial forecasts are for general use ONLY
FALSE; general AND limited use
Financial projections are for ______ ONLY
limited use
TF: In a typical comfort letter, the accountants express an opinion concerning the F/S compliance with the pertinent accounting requirements of the SEC
TRUE
An accountant’s report on the unaudited financial statements of a nonissuer should:
state that the accountant does NOT express an opinion on the F/S
After obtaining an understanding of the entity and its environment, includings its internal control, an auditor decided to perform tests of controls because:
the auditor’s risk assessment is based on the effective operation of controls
Before applying substantive tests to the details of accounts at an interim date prior to the B/S date, an auditor should:
consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable
Testing an entity’s controls of credit approval is in support of management’s financial statement assertion of:
valuation and allocation
TF: A report on significant deficiencies for a F/S audit of a nonissuer must be restricted
TRUE
TF: Auditing standards for federal financial financial assistance require extra fieldwork and reporting standards
TRUE
TF: Attestation engagements performed in conformity with Government Auditing Standards includes expanded requirements
TRUE
An audit organization performing engagements in accordance with GAGAS must have a peer review every ____ years
3
TF: When reporting on I/C under GAGAS, you must report all fraud and illegal acts
TRUE
Under GAGAS, a written report on I/C includes the assertion that evaluating compliance with laws, rules, and regulations with a direct and material effect on the F/S is part of developing a(n) _________ on F/S
opinion
TF: Under GAGAS, a written report on I/C includes the assertion that specific controls relating to the financial reporting are NOT included
FALSE; ARE included
Under GAGAS, a written report on I/C includes an indication either no weaknesses were found or that __________ (reportable conditions) were found, and an indication whether those deficiencies were material
significant deficiencies
__________ threat cannot be prevented by safeguards
Management participation
The audit threshold for federal audit requirements is expenditure of ________ of federal financial assistance
$750K
TF: Single audits are generally required unless the restrictive requirements of a program-specific audit are met
TRUE
Program specific audits are used when the expenditures are made under only one program and the terms of the award do not require a ____________
F/S audit
TF: A single audit includes a separate evaluation of materiality for each major program selected
TRUE
For low risk auditees, the auditor must test ____ percent of the total federal awards expended
20
For high risk auditees, the auditor must test ____ percent of the total federal awards expended
40
TF:A schedule of findings and questions costs is required by Government Auditing Standards
FALSE; Single Audit Act
Under GAGAS, if material instances of noncompliance are identified, the auditor should express a _____ or ______ opinion
qualified; adverse
TF: Per Government Auditing Standards, audit documentation should contain sufficient information so that supplementary oral explanations are NOT required
TRUE
GAGAS prescribes additional standards on the direct reporting of illegal acts AND:
reporting on I/C
A single audit represents a combined audit of both the entity’s F/S and _____________________
federal financial assistance programs
A report on internal control over compliance will provide a(n) _________ opinion
DISCLAIMER OF
TF: Tests of operating effectiveness of controls may be required if the risk assessment includes an explanation of the operating effectiveness of controls over compliance
TRUE
Under GAGAS, independence in mind and appearance is under the __________ ethics principle
objectivity
TF: An engagement to examine an entity’s internal control over financial reporting is an attest engagement
TRUE
A review of a nonpublic company’s pro forma F/S should be in accordance with ______
SSARS
Examinations of prospective F/S include _____ assurance regarding whether the statements are presented in conformity with AICPA guidelines and whether the underlying assumptions provide a reasonable basis for the F/S
POSITIVE
Reports on prospective financial statements are covered under ______
SSAE
Compilation of financial statements for a nonpublic entity is covered under ______
SSARS
There is a requirement that documentation related to each material account balance or transaction class be included on a separate page
FALSE
Examining paid vendor invoices provides evidence about ______ and ______
rights and obligations; valuation and allocation
_______ assurance is provided on compliance with contractual or regulatory requirements related to audited F/S
Negative
_____ assurance is provided in a report on other comprehensive basis of accounting F/S
Positive
_____ assurance is provided in a report on a specified account in a F/S
Positive
______ assurance is provided in a report on a financial presentation to comply with contractual agreements or regulatory requirements
Positive
A special report on F/S prepared on the cash basis of accounting should include an emphasis of matter paragraphs that refers to the _____ that explains cash basis of accounting
NOTE
TF: Registered firms must provide to the audit committee a schedule of unadjusted differences
TRUE
When a single item is changed in the F/S _____ the original date of the auditor’s report, the auditor would likely return to examine this one event and would then dual date his/her report
AFTER
A material change in accounting principle would result in the addition of a(n) ________________ paragraph to the unmodified opinion
emphasis of matter
TF: A justified departure from GAAP does NOT result in an emphasis of matter paragraph
FALSE; DOES
A(n) _____ opinion does NOT result in the modification of the introductory paragraph
ADVERSE
TF: If I/C was evaluated as part of an audit, the auditor must restrict the use of the report on I/C
TRUE
TF: An error in a balance does NOT mean that controls are not working
TRUE
TF: Confirmations provide evidence for valuation and allocation
FALSE; not the best/accurate valuations
Limited (or negative) assurance is provided in a _____ engagement
REVIEW
A report on I/C during a(n) ______ would include a restricted use paragraph
audit
Who is a comfort letter addressed to?
The underwriter
TF: A representation letter is NOT required for a compilation
TRUE
Inquiries for a review engagement are for ______ personnel
INTERNAL
Financial statements prepared on the cash basis of accounting provides _______ assurance
Positive
_____ assurance is provided for agreed upon procedures
NO
The AICPA code of professional conduct applies to:
compilations and reviews of the F/S of NONISSUERS
