AUD

Question 1

What does TID stand for in the GAAS general standards?

Answer 1

Training, Independence, and Due professional care

Question 2

What does PIE stand for in the standards of field work?

Answer 2

Planning and supervision, Internal Control, and Evidence

Question 3

What does GCDO stand for in the standards of reporting?

Answer 3

GAAP, Consistency, Disclosure, and Opinion

Question 4

When is an adverse opinion rendered?

Answer 4

When a severe GAAP departure is present in the financial statements.

Question 5

What are the two main differences between the standards of attestation and the auditing standards?

Answer 5

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.

Question 6

Formula for days sales in acc receivable?

Answer 6

Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.

Question 7

Adj entry for wages at end of year that weren’t recorded:

Answer 7

DR: Operating expensesCR: Accrued wages payable(accrued liab)

Question 8

Why would an auditor modify the auditor’s report based on the work of a specialist?

Answer 8

If there is a difference between the specialist’s valuation of an asset and the client’s.

Question 9

who should make up the audit committee?

Answer 9

members of the board or directors who are not officers or employees

Question 10

what are the 3 general standards?

Answer 10

adequete training, independence of mental attitude, and due professional care

Question 11

3 fieldwork standards?

Answer 11

adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence

Question 12

the auditors judgment of the overall fairness of the financial statements is applied within the framework of?

Answer 12

generally accepted audit principles

Question 13

what does the auditor primarily use to come up with materiality?

Answer 13

the prior year financial statements

Question 14

basics of independence concerning a close relative?

Answer 14

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

Question 15

when planning a new audit, why would the auditor consider the methods used to process accounting information?

Answer 15

Because the methods influence the design of internal control

Question 16

who appoints the PCAOB?

Answer 16

SOX created the PCAOB and it is overseen by the SEC

Question 17

under securities act of 1934 what organizations are required to submit audited financial statements?

Answer 17

every company traded on national and over the counter exchanges

Question 18

primary purpose of establishing quality control procedures for deciding whether to accept a new client?

Answer 18

minimize likelihood of association with clients whose management lack integrity

Question 19

to succeed in legal action against the auditor, the client must be able to show that?

Answer 19

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

Question 20

detection risk?

Answer 20

risk that auditor concludes no material misstatement exists when there actually is one

Question 21

3 components of audit risk?

Answer 21

inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk

Question 22

if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?

Answer 22

increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk

Question 23

why are inherent risk and control risk different than detection risk?

Answer 23

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

Question 24

the risk of material misstatement refers to:

Answer 24

the combination of inherent & control risk. Multiplying IR by CR results in the ‘risk of material misstatement’

Question 25

the level of detection risk is inversely related to:

Answer 25

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

Question 26

the audit program should be designed so that sufficient evidence is gathered to:

Answer 26

support the auditor’s conclusions

Question 27

Do most illegal acts affect the fin statements directly or indirectly?

Answer 27

indirectly.

Question 28

if you uncover an illegal act at a public company, the auditor is required to notify:

Answer 28

the SEC

Question 29

when auditor has reason to believe an illegal act has ocurred, he should do what?

Answer 29

consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client’s legal counsel

Question 30

what is lapping fraud?

Answer 30

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

Question 31

what is kiting?

Answer 31

money is moved from one account to the other but in different time periods to inflate the amount being reported

Question 32

does the PCAOB make auditing standards that must be followed by all CPAs?

Answer 32

it only makes auditing standards for public companies

Question 33

is the PCAOB a gov agency?

Answer 33

no

Question 34

what is an S-1 form?

Answer 34

a form that must be filed with the SEC whenever a company plans to issue new securities to the public

Question 35

what is auditors responsibility for supplementary information such as segment info?

Answer 35

auditor should apply limited procedures to the required info and report deficiencies in or omission of such info

Question 36

who creates auditing standards for private companies?

Answer 36

the AICPA

Question 37

what is form 8-K?

Answer 37

the form filed with SEC to report a significant event

Question 38

how long do you have to dispose of stock in a client if you inherited some unsolicited?

Answer 38

30 days

Question 39

do operating leases and claims against clients for immaterial amounts impair indedpence?

Answer 39

no

Question 40

are statements in the standards that include the word “should” mandatory?

Answer 40

they are considered presumptively mandatory- the auditor can depart from them if justification is documented

Question 41

what is the completeness assertion concerned with?

Answer 41

determining that all transactions are recorded

Question 42

in testing the existence assertion for an asset, the auditor normally works from the ______ to the _______

Answer 42

accounting records to the supporting evidence

Question 43

according to SOX how long does a firm keep audit documentation?

Answer 43

have to keep it 7 years

Question 44

what is the best place to put in writing the understanding between client and firm about what will take place during the audit?

Answer 44

the engagement letter

Question 45

to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:

Answer 45

canceled checks

Question 46

what does tracing shipping docs to sales invoices accomplish?

Answer 46

that all items shipments have been invoiced

Question 47

most effective control over recorded purchases?

Answer 47

supporting forms such as purchases orders and receiving reports are independently compared for agreement

Question 48

if trying to detect overstatement of sales, you start with the:

Answer 48

accounting records and trace to the source documents

Question 49

what is pervasiveness?

Answer 49

the extent to which an exception affects different parts of the financial statements

Question 50

difference between adverse opinion and disclaimer of opinion?

Answer 50

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

Question 51

what paragraph explicitly states the auditors responsibility to express an opinion?

Answer 51

the opening paragraph of the standard audit report

Question 52

when would a lack of independence cause a disclaimer of opinion?

Answer 52

in all cases

Question 53

if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?

Answer 53

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”

Question 54

on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?

Answer 54

it can be either

Question 55

what are the 2 situations which result in a qualified opinion?

Answer 55

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

Question 56

how many paragraphs does a standard unqualified report have and what are they?

Answer 56

3. 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

Question 57

when is an adverse opinion issued and how does the report change?

Answer 57

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.

Question 58

What situations would result in a disclaimer of opinion?

Answer 58

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.

Question 59

when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?

Answer 59

a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction

Question 60

which section of SOX requires mgmt to issue an internal control report?

Answer 60

Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting

Question 61

what is the definition of incompatible functions?

Answer 61

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

Question 62

what is the primary purpose of the auditors consideration of internal controls?

Answer 62

to determine the nature, extent, and timing of audit tests to be applied

Question 63

if the auditor finds a reportable condition in internal controls, who should they tell first?

Answer 63

the audit commitee

Question 64

if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:

Answer 64

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests

Question 65

what is the concept of reasonable assurance?

Answer 65

recognizes that the cost of internal controls should not exceed the benefits derived

Question 66

7 factors of the control environment: (I see ham bone)

Answer 66

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

Question 67

even the best designed IC can fail due to:

Answer 67

human error, faulty judgement, collusion, management override

Question 68

what are the five components of internal control? (clowns run cartels in mexico)

Answer 68

1) control environment2) risk assessment3) control activities4) information and communication5) monitoring

Question 69

***What is the process of assessing risk in general?

Answer 69

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.

Question 70

what is the audit risk formula?

Answer 70

inherent risk X control risk X detection risk = overall audit risk

Question 71

the auditor uses the assessed level of control risk to determine the acceptable level of

Answer 71

detection risk for financial statement assertions

Question 72

if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the

Answer 72

extent of tests of details

Question 73

what do assertions about existence or occurrence deal with?

Answer 73

whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period

Question 74

when an auditor assesses control risk as low, he must:

Answer 74

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

Question 75

what does ‘information and communication’ refer to as far as internal control within an organization?

Answer 75

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

Question 76

What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners

Answer 76

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

Question 77

4 assertions about account balances at end of period?Even Cain Realizes Value

Answer 77

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

Question 78

4 assertions about presentation and disclosure:Overeem Can’t Complain Anymore

Answer 78

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

Question 79

why is it best to have “blind” invoices received by the receiving department?

Answer 79

to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received

Question 80

what is the purpose of purchase cutoff testing?

Answer 80

to determine that items actually received in inventory have been included in the proper period

Question 81

what is an integrated test facility?

Answer 81

it puts fake transactions in with real transactions which are processed together without client employees knowing it

Question 82

a person who mails signed checks can also:

Answer 82

cancel the supporting documents

Question 83

an effective control over purchases would be to have the purchasing department authorized to:

Answer 83

purchase, but not initiate purchases

Question 84

an increased extent of tests of controls is most likely to occur when:

Answer 84

controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.

Question 85

are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?

Answer 85

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

Question 86

when should control deficiencies be reported?

Answer 86

either during the audit or after the audit’s completion, within 60 days of the report release date

Question 87

management must disclose material weaknesses in internal control if the weakness exists:

Answer 87

at the end of the year

Question 88

what are the 2 types of control deficiency?

Answer 88

design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently

Question 89

what is ratio estimation used for?

Answer 89

to measure the total estimated error amount within a population

Question 90

there is an inverse relationship between sample size and:

Answer 90

tolerable error. as the tolerable error decreases the sample size would increase

Question 91

what is sampling risk?

Answer 91

the risk that the sample chosen doesn’t accurately represent the population

Question 92

How is the allowance for sampling risk calculated?

Answer 92

It’s the difference between the upper limit and the deviation rate of the sample.

Question 93

what are embedded audit modules?

Answer 93

coded into the clients system to collect data for the auditor

Question 94

purpose of test data approach?

Answer 94

test data is entered with a known outcome into client’s system to see if it produces same result

Question 95

under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:

Answer 95

a disclaimer of opinion.

Question 96

if a control deficiency is discovered, what is the next step?

Answer 96

determine if it is a material weakness by gathering additional evidence

Question 97

what opinion is rendered if there is one or more material weakness in internal control over fin reporting?

Answer 97

an adverse opinion

Question 98

“if this statement is not correct… give details of difference directly to our auditors

Answer 98

acc rec confirmation

Question 99

“in our opinion, these statements audited by us comply in all material respects”

Answer 99

comfort letter to underwriters

Question 100

“no claims that OUR lawyer…”

Answer 100

management rep letter

Question 101

“which raises substantial doubt about its ability to continue as a going concrern”

Answer 101

auditors report

Question 102

CPA is associated with the financial statements, but is NOT independent

Answer 102

Compilation report

Question 103

providing NEGATIVE assurance on a company’s financials

Answer 103

review report

Question 104

material departure from GAAP but NOT materially misstated

Answer 104

qualified report for GAAP departure