AUD Deck 2 Flashcards
The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in
civil proceedings.
An auditor who wishes to capture an entity’s data as transactions are processed and continuously test the entity’s computerized information system most likely would use which of the following techniques?
Embedded audit module
Misstatements may result from fraud or error, such as
1) an inaccuracy in gathering or processing data from which the financial statements are prepared,
2) an omission of an amount or disclosure,
3) a financial statement disclosure that is not presented in accordance with the applicable financial reporting framework,
3) an incorrect accounting estimate arising from overlooking or clear misinterpretation of facts
4) judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.
When an auditor is asked to report on the fair presentation of financial statements prepared in conformity with a regulatory basis of accounting, he or she is required
to issue a standard report modified for the departures from GAAP. An additional paragraph is added to this report which expresses the auditor’s opinion on whether the financial statements are presented in conformity with the prescribed basis of accounting.
Programmed controls are controls built into programs to prevent unauthorized manipulation of data. Since programmers write the programs (and, consequently, the built-in controls), a programmer could modify a program to bypass programmed controls and manipulate data.
The best way to prevent this is not to allow programmers to have access to programs during actual processing. This is accomplished by segregation of duties within EDP for computer programming and computer operations.
Strong internal controls lower the risk of material misstatement. In the payroll department, the auditor would be looking for controls such as
a payroll imprest system (the accounting department wires funds to the bank account, the amount of which is based on totals from the payroll department summary),
separation of duties for payroll preparation (payroll process is supervised by the treasurer or the CFO signs the checks that the payroll department has prepared),
separation of duties for distribution of checks, and
special control procedures for unclaimed checks.
If the payroll clerk distributes signed payroll checks that the payroll clerk has prepared, there is no separation of duties. This procedure allows an opportunity for the clerk to prepare a check for someone who is not an employee or to keep an extra check for himself. Returning the undistributed checks to the payroll department also provides an opportunity for misappropriation of those payroll checks. Undistributed checks should be held and investigated by someone outside the payroll department
Examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement
Intercompany transactions & large revenue transactions at period-end
Management’s letter of representation would ordinarily include references to the following:
Management’s responsibilities, as set out in the terms of the audit engagement for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework
Management’s acknowledgment of their responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error
Acknowledgment of their responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud
Significant assumptions used in making accounting estimates, including those measured at fair value, are reasonable.
Related party relationships and transactions have been appropriately accounted for and disclosed.
All events subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.
The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter.
The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with the applicable financial reporting framework.
Management provided the auditor with:
access to all information, of which they are aware, that is relevant to the preparation and fair presentation of the financial statements such as records, documentation and other matters;
additional information requested for the purpose of the audit; and
unrestricted access to persons within the entity the auditor determined it necessary to obtain audit evidence.
All transactions have been recorded in the accounting records and are reflected in the financial statements.
Disclosure of the results of management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud
Management has no knowledge of any (or disclosed to the auditor all information that they are aware of regarding) fraud or suspected fraud that affects the entity and involves:
management,
employees who have significant roles in internal control, or
others when the fraud could have a material effect on the financial statements.
Management’s acknowledgement of (or no knowledge of any; or disclosure to the auditor of all information that they are aware of regarding) allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others
Management’s disclosure of all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements
Disclosure of (have disclosed to the auditor all known actual or possible; or are not aware of any pending or threatened) litigation, claims, and assessments whose effects should be considered when preparing the financial statements (and management has not consulted legal counsel concerning litigation, claims, or assessments)
Management’s acknowledgment of disclosing the identity of the entity’s related parties and all the related party relationships and transactions of which they are aware
Which of the following statements is correct regarding the liability of a CPA for services performed?
A CPA’s work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.
A CPA is required to exercise due care when preparing tax returns or other accounting work. The CPA is held only to the standards of reasonable care and competence and does not have the duty to be infallible.
An auditor should perform the following procedures in relation to contingencies:
Read available interim information Inquire of management Read available minutes Inquire of legal counsel Obtain a letter of representation
The introductory paragraph in the auditor’s report should
identify the entity whose financial statements have been audited,
state that the financial statements have been audited,
identify the title of each statement that the financial statements comprise, and
specify the date or period covered by each financial statement that the financial statements comprise.
Section 408 of SOX Title IV, “Enhanced Review of Periodic Disclosures by Issuers,” dictates that:
the SEC will review disclosures made by issuers.
Special attention will be paid to the disclosures of issuers:
who have issued material restatements of financial statements,
who experienced significant volatility in their stock price,
have the largest market capitalization,
are emerging companies with disparities in price to earnings ratios, and
with operations that significantly affect any material sector of the economy.
As the acceptable level of detection risk increases, an auditor may change the:
This means the auditor is placing more reliance on the entity’s internal control and, thus, requires less assurance from substantive testing. This allows the nature, timing, and extent of substantive tests to be modified and, in this case, lessened. As a result, timing of substantive tests could be shifted from year-end to an interim date
Based on Rule 505 of the AICPA’s Code of Professional Conduct, a firm may only designate itself as “Members of the AICPA” when
all CPA owners are members
Accounts Receivable Assertions
AU-C 315.A114 states that (1) assertions about existence deal with whether assets (receivables are assets) exist at a particular date and that (2) assertions about rights and obligations deal with whether assets are the rights of the entity at a particular date. Confirmation of receivables verifies both the existence of the receivable and the rights of the entity to be paid the amount owed by the debtor.
Confirmations do not provide primary evidence of completeness (whether all assets are included) or valuation (whether the accounts will actually be paid).
Analytical procedures are performed both at the beginning and at the review stages of an audit. At the review stage, the objective is to assess the conclusions reached about the overall financial statement presentation. If unexpected relationships still exist at this point after a significant amount of evidence has been gathered
then more testing is necessary.
Piecemeal opinion:
It is not appropriate to provide an opinion that current assets are fairly stated and disclaim an opinion on the financial statements taken as a whole due to a scope limitation because it may tend to overshadow the auditor’s disclaimer of opinion. This practice is referred to as making a “piecemeal opinion” and is prohibited per AU-C 705.15. An auditor may express an opinion on only one basic financial statement, such as the balance sheet.
Uncertainty about going concern or Inconsistency
If adequately disclosed in the financial statements, an uncertainty about an entity’s ability to continue as a going concern or other accounting matters (other than those involving a change in accounting principles) may be, at the accountant’s discretion, emphasized in the accountant’s report (but will not require a modification to the standard compilation or review report).
Reports in compliance with the “Yellow Book” need to contain the scope of the auditor’s testing but do not need to include immaterial misstatements
Scope of auditor’s testing not include immaterial misstatements
An auditor is required to have the competence, skills, technical knowledge, and experience to perform an audit professionally and in accordance with:
An auditor is required to perform an audit professionally and in accordance with all standards. The auditor must understand all standards in order to perform an audit in the first place.
Under the Private Securities Litigation Reform Act of 1995,
deliver a report concerning the noncompliance under applicable law or regulations to the SEC within one business day.
The requirement to disclose noncompliance under applicable law or regulations to parties other than the client’s senior management and those charged with governance is not ordinarily a part of the auditor’s responsibility. Such disclosure would be precluded by the auditor’s ethical or legal obligation of confidentiality, unless the matter affects his or her opinion on the financial statements. However, auditors may be required, under certain circumstances, to make a report to the SEC relating to noncompliance with laws and regulations that has a material effect on the financial statements. Such disclosure may be necessary if the auditor withdraws from the engagement because the board of directors has not taken appropriate remedial action. This is considered a reportable disagreement for purposes of Form 8-K.
