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Audit > Audit > Flashcards

Audit Flashcards

1
Q

Does weak internal controls constitute an adverse opinion?

A

No

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2
Q

Can the financial statements not be prepared according to GAAP and still have an unmodified/unqualified opinion?

A

Yes - Departure from GAAP is permissible if financial statements would be otherwise misleading

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3
Q

What is the order of the Audit Report for an Unmodified Opinion?

A

Title
Addressee (As required by circumstances of the engagement NOT MANAGEMENT)
Management’s Responsibility Section
Auditor’s Responsibility Section
Auditor’s Opinion
Other Reporting Responsibilities
Signature of Auditor
Auditor’s address
Date of the Auditor’s Report

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4
Q

What is the order of the Audit Report for an Unqualified Opinion?

A

Title
Addressee (shareholders NOT MANAGEMENT)
Opinion Section (1st Section)
Basis for Opinion Section (RAPMEE RAPMEE)
Critical Audit Matters
Signature, Tenure, Location
Report Date

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5
Q

When is the earliest date for an auditor’s report?

A

The date the auditor has obtained sufficient appropriate audit evidence to support the opinion.

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6
Q

What amount of time is there to assemble the audit report after completion of audit?

A

45 (issuers) or 60 (non issuers) days following the report release date

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7
Q

Where is the Critical Audit Matters section in the audit report?

A

Immediately follows the Basis for Opinion Section

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8
Q

Words used in Modified Opinion Report

A

Except for

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9
Q

Where should the auditor disclose the reasons for expressing an adverse opinion

A

Before the opinion paragraph

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10
Q

What type of opinion should be used for nonissue when auditor is not independent?

A

Disclaimer of Opinion

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11
Q

Where should a significant change in accounting principle be is the auditor’s report?

A

Emphasis of matter paragraph following the opinion paragraph

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12
Q

Where should auditor report substantial doubt about the entity’s ability to continue as a going concern?

A

Emphasis of matter paragraph

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13
Q

If management has a footnote in the financial statements regarding a pending lawsuit that has not been accrued because loss is not estimable, what type of report should be given?

A

Unmodified without an emphasis of matter paragraph

Management has put it in the footnotes, so no further emphasis is required.

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14
Q

In the audit of a nonissue, what is an auditor’s responsibility for supplementary information, such as the disclosure of pension information, which is outside the basic financial statements but required by the GASB?

A

The auditor should apply certain limited procedures to the supplementary information and add an other-matter paragraph to the auditor’s report.

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15
Q

“US generally accepted principles” is an accounting term that . . .

A

Encompasses the conventions, rules, and procedures necessary to define US accepted accounting practice at a particular time.

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16
Q

What are Generally Accepted Auditing Standards (GAAS)

A

Measures of the quality of the auditor’s performance, and guide the auditor in the performance of a properly planned and executed audit.

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17
Q

Where should an auditor of a nonissue disclose the substantive reasons for expressing an adverse opinion in a basis for modification paragraph?

A

Preceding the opinion paragraph

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18
Q

Auditor may express opinion on account’s receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole if . . .

A

Report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

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19
Q

What is auditors responsibility when client’s financial statements include supplementary financial information required by FASB?

A

The auditor should perform limited procedures.

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20
Q

Definition of preclude

A

Prevent from happening; make impossible

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21
Q

If auditor withdraws from further association with client after issuing an audit report, what is her responsibility if she discovers facts that could have caused her to revise the report.

A

The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.

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22
Q

Definition of purport

A

Appear or claim to be or do something, especially falsely; profess

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23
Q

What are the six interrelated elements of quality control?

A

HELP ME
Human Resources
Engagement/client acceptance and continuance
Leadership responsibilities
Performance of the engagement
Monitoring
Ethical requirements

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24
Q

What factors should be considered when determining personnel requirements?

A

Engagement size and complexity
Personnel availability
Special expertise required
Timing of the work to be performed
Continuity and periodic rotation of personnel
Opportunities for on-the-job training

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25
Q

What are management’s responsibilities?

A

Financial statements
Internal controls

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26
Q

What is the primary objective of an auditor when considering the acceptance an initial audit engagement of a nonissuer?

A

Establish whether the preconditions for an audit are present.

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27
Q

What must an auditor consider if the client requests that the engagement be changed from an audit to a compilation?

A

Effort needed to complete the audit
Cost of completing the audit
Reasons for the client’s request

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28
Q

What is the engagement partner responsible for?

A

Planning the audit
Supervising the work of engagement team members
Compliance with relevant auditing standards

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29
Q

What are the six main financial statement assertions?

A

COVER U

Completeness
CutOff
Valuation, Allocation, and Accuracy
Existence and Occurrence
Rights and Obligations
Understandability and Classification

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30
Q

What should an auditor consider when developing an overall audit strategy?

A

Preliminary evaluations of materiality, audit risk, and internal control

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31
Q

What does independent auditor look at to determine competence of internal auditors?

A

Education, professional certification, experience, performance evaluations, the audit plan, audit procedures, and the quality of audit documentation.

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32
Q

Can internal auditors be used to assist with testing internal controls?

A

Yes, but their involvement should be limited.

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33
Q

What are the objectives of analytical procedures during the planning stage?

A
  • Enhance the auditor’s understanding of the entity and of transactions and events that have occurred since the last audit date.
  • Identify unusual transactions and events, and amounts, ratios, or trends that might be significant to the financial statements and may represent specific risks relevant to the audit.
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34
Q

What are five components of internal control?

A

CRIME
Control Environment
Risk Assessment
Information and Communication Systems
Monitoring
Existing Control Activities

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35
Q

What are inherent limitations in internal control?

A

Inherent limitations in internal control recognize that human judgement in decision making can be faulty and that breakdowns in internal control can occur because of human error. These limitations prevent auditors from providing absolute insurance about an internal control system.
- Deliberate circumvention of controls by collusion of two or more people
- Management override
- Human error

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36
Q

What are some “Control Environment” factors?

A

Tone at the top
Management’s philosophy and operating style
Entity’s organizational structure
Participation of those charged with governance
Methods of assigning authority and responsibility
Human resource policies and practices

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37
Q

What is an auditor’s primary consideration regarding an entity’s internal control?

A

Whether the controls affect the financial statement assertions (to evaluate the risk that a material misstatement may exist in the financial statements).

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38
Q

What are walk-through procedures usually performed in an issuer’s integrated audit?

A

Inquiry
Observation
Inspection of relevant documentation
Reperformance of controls

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39
Q

Which of the computer-assisted techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?

A

Integrated test facility

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40
Q

Which computer assisted duding technique processes client input data on a controlled program under the auditor’s control to test controls in the computer system?

A

Parallel simulation

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41
Q

If updating a prior year report that originally was issued with an adverse opinion due to lack of adequate disclosure because management has changed the disclosures to be accurate, what should the updated auditor’s report include?

A

Express an unmodified opinion with an emphasis-of-matter paragraph (following the opinion paragraph) added to the report.

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42
Q

What is a predecessor auditor’s responsibility if a former client requests a predecessor auditor to reissue the prior year’s audit report in connection with the issuance of comparative financial statements by the client?

A

Read the current report, compare it to the previous report, and obtain a letter of representation for the successor auditor.

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43
Q

What opinion should be declared if auditor is not able to observe physical inventories?

A

Disclaimer of opinion

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44
Q

What are financial statement assertions?

A

Valuation, allocation, and accuracy
Completeness
Understandability and classification

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45
Q

What are General controls?

A

General controls are policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system. General controls include procedures to ensure appropriate systems software acquisition.

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46
Q

What are the walkthrough procedures usually performed in an issuer’s integrated audit?

A

Inquiry
Observation
Inspection of relevant documentation
Reperformance of controls

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47
Q

What is the primary reason many auditors hesitate to use embedded audit modules?

A

Auditors are required to be involved in the system design of the application to be monitored.

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48
Q

If a nonissuer requests that the audit engagement be changed to a review engagement, how, if at all, should the accountant’s review report be modified if the auditor agrees with the change?

A

The accountant should issue the review report without mentioning the change in engagement.

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49
Q

What is a Critical Audit Matter?

A

A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.

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50
Q

When are analytical procedures required to be performed?

A

Planning stage AND
Final review stage

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51
Q

What are characteristics of professional skepticism?

A

A questioning mind and a critical assessment of audit evidence.

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52
Q

What is the definition of fraud?

A

An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

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53
Q

What are the three fraud risk factors?

A

Incentives/pressures
Opportunity
Rationalization/attitude

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54
Q

What is Audit Risk?

A

Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.

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55
Q

What is inherent risk?

A

Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming that there are no related controls.

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56
Q

What factors that require assertions have a high inherent risk?

A

High volume transactions
Complex calculations
Amounts derived from estimates
Cash

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57
Q

What is Control Risk?

A

Control risk 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.

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58
Q

What are factors that cause an auditor to assess control risk as high?

A
  • There are no effective controls relative to the specific assertion
  • The implemented controls are not operating effectively
  • It would not be efficient to test the operating effectiveness of controls
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59
Q

What is Detection Risk?

A

Detection risk is the risk that the auditor will not detect a material misstatement that exists in a relevant assertion.

Detection risk is a function of the effectiveness of audit procedures and of the manner in which they are applied.

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60
Q

What is the audit risk formula?

A

Risk of Material Misstatement x Detection Risk

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61
Q

What is the Risk of Material Misstatement Formula?

A

Inherent Risk x Control Risk

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62
Q

What is a factual misstatement?

A

A factual misstatement is a misstatement about which there is no doubt.

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63
Q

What are some procedures to test design effectiveness?

A

Procedures to test design effectiveness include a mix of inquiry, observation, and inspection.
Walkthroughs that include these procedures are sufficient to test design effectiveness.

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64
Q

What are some procedures to test operating effectiveness?

A

Procedures the auditor performs to test operating effectiveness include a mix of inquiry of appropriate personnel, observation of the company’s operations, inspection of relevant documentation, and reperformance of the control.

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65
Q

What are assertion level risks?

A

Assertion level risks are risks that relate to specific transactions, account balances, or disclosures at the relevant assertion level.

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66
Q

What is a dual purpose test?

A

A dual purpose test is a test of controls that is performed concurrently with a test of details on the same transaction.

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67
Q

What is the primary purpose of reviewing conflict-of-interest statements signed by members of management?

A

To identify transactions with related parties

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68
Q

What is the objective of substantive testing?

A

To detect material misstatement in financial statements.

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69
Q

What is the hierarchy of audit evidence?

A

AEIOU
Auditor’s direct personal knowledge and observation
External evidence
Internal evidence
Oral evidence
U know this!

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70
Q

What ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor’s conclusions?

A

Professional judgement

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71
Q

When is a disclaimer of opinion issued?

A

A disclaimer of opinion is issued when there is a significant scope limitation, when the auditor is not independent, or when the financial statements are not audited.

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72
Q

What are an entity’s objectives?

A

Financial reporting
Operations
Compliance

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73
Q

How long are registered public accounting firms required to prepare and maintain audit work papers and other information related to any audit?

A

7 years

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74
Q

What do analytical procedures consist of?

A

Analytical procedures consist of evaluations of financial information made by a study of meaningful relationships among both financial and nonfinancial data and generally involve comparisons of recorded amounts, which often help highlight unusual fluctuation.

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75
Q

Are income statement or balance sheet accounts more predictable?

A

Income statement accounts tend to be more predictable than balance sheet accounts because they represent transactions over a period of time rather than at one point in time. Also, relationships involving transactions subject to management discretion (travel and entertainment) are less predictable.

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76
Q

What is the primary objective of analytical procedures used in the final review state of an audit?

A

The purpose of applying analytical procedures during the overall review stage of an audit is to evaluate the overall financial statement presentation, to assess the conclusions reached, and to assist in forming an opinion on whether the financial statements as a whole are free of material misstatement. Also used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit.

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77
Q

What are liquidity ratios?

A

Liquidity ratios are measures of a firm’s short-term ability to pay maturing obligations.
Current ratio
Quick ratio

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78
Q

What are Activity Ratios?

A

Activity ratios are measures of how effectively an enterprise is suing its assets.
Accounts receivable turnover
Days sales in accounts receivable
Inventory turnover
Days in inventory
Accounts payable turnover
Days of payables outstanding
Cash conversion cycle
Asset turnover

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79
Q

What are profitability ratios?

A

Profitability ratios measure the financial performance of an enterprise for a given time period.
Profit margin
Return on assets
Return on sales
Return on equity
Gross (profit) margin
Operating cash flow ratio

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80
Q

What are investor ratios?

A

Investor ratios are measures that are of interest to investors.
Basic earnings per share
Price earnings ratio
Dividend payout

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81
Q

What are Long-Term Debt Paying Ability Ratios (Coverage Ratios)?

A

Coverage ratios are a measure of security for long-term creditors/investors.
Debt to equity
Total debt ratio
Equity multiplier
Times interest earned

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82
Q

Calculate Current Ratio

A

Current assets divided by current liabilities

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83
Q

Calculate Quick Ratio

A

Cash and cash equivalents + short-term marketable securities divided by Current liabilities

Excludes inventory

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84
Q

Calculate Accounts Receivable Turnover

A

Sales (net) divided by Average accounts receivable (net)

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85
Q

Calculate Days Sales in Accounts Receivable

A

Ending accounts receivable (net) divided by Sales (net)/365

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86
Q

Calculate Inventory Turnover

A

Cost of goods sold divided by average inventory

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87
Q

Calculate Days in Inventory

A

Ending Inventory divided by Cost of goods sold/365

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88
Q

Calculate Accounts Payable Turnover

A

Cost of goods sold divided by Average accounts payable

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89
Q

Calculate Days of Payables Outstanding

A

Ending accounts payable divided by Cost of goods sold/365

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90
Q

Calculate Cash Conversion Cycle

A

Days sales in accounts receivable + Days in inventory - Days of payables outstanding

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91
Q

Calculate Asset Turnover

A

Sales (net) divided by Average total assets

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92
Q

Calculate Profit Margin

A

Net Income divided by Sales (net)

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93
Q

Calculate Return on Assets

A

Net Income divided by Average total assets

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94
Q

Calculate Return on Sales

A

Income before interest income, interest expense, and taxes divided by Sales (net)

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95
Q

Calculate Return on Equity

A

Net income divided by Average total equity

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96
Q

Calculate Gross (profit) margin

A

Sales (net) - Cost of goods sold divided by Sales (net)

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97
Q

Calculate Operating Cash Flow Ratio

A

Cash flow from operations divided by Ending current liabilities

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98
Q

Calculate Basic Earnings per Share

A

Income available to common shareholders divided by Weighted average common shares outstanding

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99
Q

Calculate Price Earnings Ratio

A

Price per share divided by Basic earnings per share

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100
Q

Calculate Dividend Payout

A

Cash dividends divided by net income

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101
Q

Calculate Debt to Equity

A

Total liabilities divided by Total assets

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102
Q

Calculate Total Debt Ratio

A

Total liabilities divided by Total assets

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103
Q

Calculate Equity Multiplier

A

Total assets divided by Total equity

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104
Q

Calculate Times Interest Earned

A

Income before interest expense and taxes divided by Interest expense

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105
Q

What is attribute sampling?

A

Testing for specific characteristics (seeking errors) internal control

Primarily used for testing internal controls.

Example: Inspecting employee time cards for proper approval by supervisors.

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106
Q

What is statistical sampling?

A

In statistical sampling, auditors specify the sampling risk they are willing to accept and then calculate the sample size that provides that degree of reliability. Results are evaluated quantitatively.

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107
Q

What is nonstatistical sampling?

A

In non statistical sampling, the sample size is not determined mathematically. Auditors use their judgement in determining sample size, and sample results are evaluated using auditor judgement.

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108
Q

Who is responsible for mailing checks?

A

The last person to sign the check

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109
Q

What is Kiting?

A

Kiting is a scheme whereby a check drawn on one bank is deposited in another bank, but the disbursement is not recorded on a timely basis, resulting in an overstatement of cash.

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110
Q

What is Lapping?

A

Lapping is a scheme where a current receipt of cash (or a check) is stolen. To prevent detection, a subsequent receipt is applied to the previously unrecorded customer account.

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111
Q

Where is the primary evidence regarding year-end cash balances in the financial statements documented?

A

Bank reconciliations is where primary evidence regarding year-end cash balances in the financial statements is documented because they reconcile the balance per the bank to that per the financial statements.

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112
Q

What information is an auditor looking for when sending out bank confirmations to all banks with which the client has done business throughout the year?

A

Deposit account balances
Contingent liabilities
Security agreements

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113
Q

What is the primary purpose of sending standard confirmation requests to financial institutions?

A

To corroborate information regarding deposit and loan balances.

114
Q

What is a bank lockbox system?

A

This is when customer remittances are mailed directly to the bank. The bank deposits them and sends company a list of remittances received.

115
Q

How does an auditor test the segregation of duties related to inventory?

A

Personal inquiry and observation

116
Q

To satisfy the valuation assertion when auditing an investment accounted for by the EQUITY method, what would an auditor most likely do?

A

Examine the audited financial statements of the investee company, including performing recalculations of prorate share of income/loss.

117
Q

How should an auditor verify the valuation of marketable securities at the balance sheet date?

A

Compare the prices of the securities to published closing prices at the balance sheet date.

118
Q

What is the primary responsibility of a bank acting as registrar of capital stock?

A

To verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

119
Q

What would an auditor most likely do when performing a search for unrecorded retirements of fixed assets?

A

Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.

In a search for unrecorded disposals, the auditor would vouch a sample of assets on the property ledger to those on hand in the client’s facility.

120
Q

What would an auditor most likely do when testing for unrecorded retirements of equipment?

A

Select items of equipment from the accounting records and then locate them during the plant tour.

Tracing (old) equipment recorded in the books to the actual equipment during a plant tour is a control which tests for unrecorded retirements.

121
Q

What should an auditor do if the nonissue client refuses to give permission to the auditor to communicate with their external legal counsel?

A

If a nonissue refuses to give permission to the auditor to communicate with its external legal counsel, the auditor should issue a disclaimer of opinion, which is a modified opinion. Alternatively, the auditor may decide to withdrawal from the audit.

122
Q

What happens if a lawyer refuses to furnish information requested in an inquiry letter?

A

A lawyer’s refusal to furnish the information requested in an inquiry letter would be a limitation on the scope of the audit sufficient to prevent an unmodified opinion.

123
Q

What is the primary reason an auditor requests letters of inquiry be sent to a client’s attorneys?

A

A letter of audit inquiry to the client’s lawyer is the auditor’s primary means of obtaining corroboration of the information furnished by management concerning litigation, claims, and assessments.

124
Q

Should an auditor’s report on significant deficiencies be made available to stockholders?

A

No
Auditor’s report on significant deficiencies in internal control is a restricted use report, intended solely for the information and use of management, those charged with governance, and others within the organization.

125
Q

What level of assurance is provided with an agreed upon procedures engagement?

A

Agreed upon procedure engagements provide no assurance.

126
Q

What is the main thing to do when engaged to examine pro forma adjustments?

A

Check the math

127
Q

An accountant’s compilation report on a financial forecast should always include what statement?

A

The there will usually be differences between forecasted and actual results.

128
Q

What does SOC stand for?

A

System and Organization Controls

129
Q

What level of assurance can an auditor issue in a compliance report?

A

Negative Assurance Only

130
Q

What will be stated to indicate “Negative Assurance”

A

Negative assurance is indicated by stating that nothing came to the auditor’s attention that caused the auditor to believe that the entity failed to comply with the specified aspects of the contractual agreement.

131
Q

When can Negative Assurance be given?

A

Negative assurance can be given when:
1. There are no identified instances of non compliance
2. Auditor has expressed an unmodified opinion or qualified opinion on the financial statements
AND
3. Applicable covenants or regulatory requirements have been subjected to audit procedures as part of the financial statement audit.

132
Q

What are conditions of a Compliance Report in connection with audited financial statements?

A

The auditor must have audited the client’s financial statements and may only issue negative assurance on compliance.

133
Q

Should a written report on internal control be prepared in a government audit?

A

Yes
In a financial statement audit, GAGAS require a report on internal controls over financial reporting, not a report of internal controls over compliance.

134
Q

What is the content of the report on internal control of a government audit?

A

1, Assertion that evaluating compliance with laws, rules, and regulations with a direct and material effect on the financial statements is part of developing an opinion on financial statements.
2. Assertion that specific controls relating to financial reporting are considered.
3. Indication that either no weaknesses were found or that significant deficiencies (reportable conditions) were found, and an indication whether those deficiencies were material.

135
Q

Does GAGAS require that the auditor express an opinion on internal controls?

A

No
Only require a report on internal control and compliance that describes the scope of the auditor’s testing and any findings - no opinion.

136
Q

Who do Government Auditing Standards published by the Government Accountability Office apply to?

A

Government Auditing Standards primarily apply to audits of federal financial assistance and government organizations.

137
Q

What are the three types of engagements defined by the Government Audit Standards?

A

1, Financial Audits
2. Attest Engagements
3. Performance Audits

138
Q

Who is subject to the Single Audit Act?

A

Entities that expend total federal assistance equal to or in excess of $750,000 in a fiscal year.

139
Q

What are the two main objectives of a single audit?

A
  1. Audit of the entity’s financial statements AND reporting on a separate schedule of expenditures of federal awards in relation to the financial statements.
  2. Compliance audit of federal awards expended during the year as a basis for issuing additional reports on compliance related to major programs and on internal control over compliance.
140
Q

What is the difference in materiality determinations when a single audit is required?

A

Materiality must be determined for each major program separately - not on the financial statements as a whole.

141
Q

What are five reports issued under single audits?

A
  1. Financial Statement Report (GAAS)
  2. SEFA Report (in relation to)
  3. GAGAS (Yellow Book) Report
  4. Single Audit Report
  5. Schedule of Findings and Questioned Costs
142
Q

How long must records be kept from a single audit?

A

Both the auditor and audit must retain audit documentation for THREE YEARS after issuance and receipt.

143
Q

What does SSARS stand for?

A

Statements on Standards for Accounting and Review Services (SSARS)

144
Q

When does SSARS not apply?

A
  1. When accountant prepares personal financial statements for inclusion in written personal financial plans
  2. Solely for submission to taxing authorities
  3. In conduction with litigation services that involve pending or potential legal or regulatory proceedings
  4. In conjunction with business valuation services
145
Q

What is the title on a compilation report?

A

There is no title on a compilation report.

146
Q

Is it required that an accountant manually sign a compilation report?

A

A signature is required, but it does not have to be manual.

147
Q

What information should be included in an additional paragraph if comparative financial statements are being presented in current year review and prior year was audited?

A
  1. That prior period statements were audited
  2. Date of the previous report
  3. Opinions expressed and if other than unmodified, the reasons for the modification, and
  4. Than no auditing procedures have been performed since the previous report date.
148
Q

What authority is used when doing an interim (quarterly) review of private/nonpublic company that has been audited?

A

SAS (Statements on Auditing Standards) not SSARS because the company has already been audited.

149
Q

What are conditions for auditor to conduct a review of the interim (Quarterly) financial statements of a nonpublic company?

A
  1. Latest financial statements were audited
  2. Auditor has been engaged to audit the next financial statements or audited the entity’s latest annual financial statements
  3. Same financial reporting framework is used
    4.Interim financial information is condensed, conforms with an appropriate reporting framework, includes explanatory note, and it accompanies the latest audited financial statements (or those statements are made readily available.
150
Q

SOAP

A

Summary of Adjustments Past

151
Q

If an issuer adequately discloses going concern, is the auditor required to include an explanatory paragraph?

A

No report modification if disclosed - permitted but not required

152
Q

What is the objective of a review of interim financial statements?

A

The objective of a review of interim financial statements is to provide the accountant, through inquiries and analytical procedures, with a basis for reporting whether material modifications should be made to such information to conform with generally accepted accounting principles.

153
Q

Under what circumstances may a CPA charge fees that are contingent upon finding a specific result?

A

If fixed by the courts, other public authorities, or in tax matters if based on the results of judicial proceedings.

Fees are not regarded as being contingent when they are fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies. Further, contingent fees are permitted for compilations only if the member includes a statement that the member is not independent.

154
Q

What are the ethical principles that guide the work of auditors in the conduct of audits under government auditing standards?

A
  1. Serving the public interest
  2. Integrity
  3. Objectivity
  4. Proper use of governmental information
  5. resources and positions
  6. Professional behavior

FRAUD DETECTION is NOT an ethics principle

155
Q

What are the seven threats to independence under GAGAS?

A
  1. Self-Interest Threat
  2. Self-Review Threat
  3. Bias Threat
  4. Familiarity Threat
  5. Undue Influence Threat
  6. Management Participation Threat
  7. Structural Threat
156
Q

What is Self-Interest Threat?

A

Self-interest threat is the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior.

157
Q

Safeguards to threats to independence identified by GAGAS are generally not effective to mitigate what type of threat?

A

If an auditor were to assume management responsibilities for an audited entity, the management participation threat created would be so significant that no safeguards could recuse the threat to an acceptable level.

158
Q

Does a CPA need to be independent in order to prepare financial statements?

A

CPA is not required to make a determination of whether the CPA is independent of the client for a preparation engagement because it is a non attest service.

159
Q

What standards are applicable for a compilation of a nonissue?

A

Statements on Standards for Accounting and Review Services (SSARS) are applicable for a compilation of a nonissuer.

160
Q

How long is audit documentation required to be kept?

A

Audit documentation is required to be kept for 7 years for public company audits or 5 years for other audits.

161
Q

When does audit documentation have to be assembled?

A

Audit documentation is required to be assembled within 45 days for public company audits or 60 days for other audits following the report release date.

162
Q

When does the auditor obtain a written representation letter from the client’s management?

A

Representation letters are obtained at the end of the audit. The representation letter should not be dated earlier than the date of the auditor’s report.

163
Q

When auditing a nonissuer, what is an auditor’s responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements but required by GAAP?

A

The auditor should apply certain limited procedures to the supplementary information.

164
Q

In an audit of an issuer’s financial statements, the auditor determined that there was substantial doubt about the issuer’s ability to continue as a going concern for a reasonable period of time. If there were no other significant audit findings, which of the following indicates the proper form of the audit report that should be issued?
a. An adverse opinion with an other-matter paragraph
b. A disclaimer of opinion
c. An unqualified opinion with an explanatory paragraph.
d. A qualified opinion with an emphasis-of-matter paragraph.

A

c. An unqualified opinion with an explanatory paragraph.

For issuers, an explanatory paragraph is required to be included in the auditor’s report when there is substantial doubt about the entity’s ability to continue as a going concern. In the absence of no other significant audit findings or scope limitations, an unqualified opinion with an explanatory paragraph would be appropriate.

165
Q

Which of the following terms used in the “Statements of Auditing Standards” indicates a presumptively mandatory requirement?
a. Must
b. Should
c. Could
d. Consider

A

b. Should

The term “should” indicates a presumptively mandatory requirement, which must be followed in all cases in which the requirement is relevant, except in rare circumstances when departure from the requirement is permitted with appropriate justification or performance of sufficient alternative procedures with appropriate documentation.

166
Q

What type of limitation are mistakes resulting from human error?

A

Inherent limitation

167
Q

When is an adverse opinion rendered?

A

An adverse opinion is rendered when there is a departure from GAAP.

168
Q

What is the first thing an auditor should do if they become aware of an apparent material misstatement of fact in other information included in a document containing audited financial statements?

A

Discuss the matter with management is the first thing to do.

169
Q

What should be indicated when a predecessor auditor’s report is not presented?

A

That the statements were audited by a predecessor auditor. The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the successor.

The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reason for the modification.

The nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the predecessor auditor’s report.

The date of the predecessor auditor’s report.

170
Q

When should an auditor express an adverse opinion?

A

The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.

171
Q

What is the auditor’s responsibility for other information that is outside the basic financial statements, but is included in documents containing audited financial statements?

A

Read the other information and consider whether it is materially consistent with the audited financial statements.

172
Q

In an audit of a public company, what does the independent auditor generally report on?

A

Fair presentation of financial statements
and
Management’s assessment of internal control

173
Q

What does the auditor rely on when determining if a gift received from an audit client would impair auditor independence?

A

Auditor should rely on professional judgement when determining if a gift received from an audit client would impair auditor independence.
Auditor would use professional judgement to determine if the value of the gift would impair independence based on materiality.

174
Q

Does the auditor have to have knowledge of the client’s industry to accept an audit?

A

No - needs knowledge before starting the audit

175
Q

If a generally accepted auditing standard is considered “unconditional” what must an auditor do?

A

The auditor must comply with the standard in order for the auditor to complete an engagement in accordance with GAAS - no exceptions.

176
Q

Is being aware of evidence that contradicts other evidence an example of professional skepticism?

A

Yes - example an auditor who observes client inventory sees that the inventory exists but should still ask to see the invoices to make sure that the inventory belongs to the client. Should the invoice contain a name other than the client, this would be an example of evidence that contradicts other evidence, an indication of fraud.

177
Q

Does the auditor have to be independent to audit a non-issuer?

A

Yes

178
Q

Generally Accepted Auditing Standards for audits of non-issuers are issued by who?

A

The AICPA’s Auditing Standards Board (ASB) in the form of Statements on Auditing Standards

179
Q

What are some financial statement account balances that are based on estimates made by management?

A

Depreciation Expense
Pension Expense
Allowance for doubtful accounts

180
Q

What is the audit committee of a publicly traded company made up of?

A

Members of the board of directors who are not officers or employees. the audit committee should be composed of independent directors who are not officers or employees of the organization and do not have other relationships that impair independence.

181
Q

In an audit of a non-issuer, what is generally correct regarding US GAAS and US GAAP?

A

US GAAP is for the client to follow, the auditor follows US GAAS

182
Q

Is the PCAOB part of the government?

A

No it is not. It was created by congress when the Sarbanes Oxley Act and is funded by CPA firms and their publicly traded clients.

183
Q

What is the likelihood that material misstatements will not be prevented or detected on a timely basis during an audit?

A

There is a REMOTE likelihood that material misstatements will not be prevented or detected on a timely basis.

184
Q

Would management’s disregard of its responsibility to maintain an adequate internal control environment impact the decision to accept a new audit engagement?

A

Yes - an auditor does not want to knowingly associate with a client that lacks an adequate internal control environment.

185
Q

When is an adverse opinion rendered?

A

An adverse opinion is rendered when there is a departure from GAAP.

186
Q

What happens if an auditor is unable to obtain the audited financial statements of a significant subsidiary?

A

A scope limitation exists. If it is material and pervasive, the auditor would issue a disclaimer of opinion.

187
Q

What should the successor auditor indicate if the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented?

A

The successor auditor should indicate in an Other-Matter paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued by the predecessor auditor, and if the report was modified, the substantive reasons therefor and 4) the nature of any emphasis of matter or explanatory paragraph included in the previous report. The predecessor auditor can only be named if that auditor’s practice was acquired by or merged with that of the successor auditor.

188
Q

If a nonissuer changes from an accounting principle not in accordance with the applicable framework to an accounting principle in accordance with the applicable reporting framework, how should the auditor characterize this change?

A

As a correction of a misstatement.

189
Q

What is a procedure that an auditor would generally perform regarding subsequent events?

A

Compare the latest available interim financial statements with the statements being audited.

190
Q

What opinion is issued if an auditor lacks independence?

A

A disclaimer of opinion should be issued when an auditor lacks independence.

191
Q

What would an auditor do if financial information is presented in a printed form that prescribes the wording of the independent auditor’s report, but the form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor’s responsibility.

A

An auditor should not sign a preprinted report form that includes statements that are inconsistent with the auditor’s responsibility. Instead, the form should be revised or a separate, more accurate report should be attached.

192
Q

What opinion is issued if the Statement of Cash Flows is not included in the financial statements?

A

A qualified opinion is issued if the Statement of Cash flows is not included in the financial statements.

193
Q

When can a dual date be used?

A

Dual dating is used when there is a subsequent event occurring after the original date of the auditor’s report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financial statements - the date appropriate for the most recent audit is used in this case).

194
Q

What is the date that should be used when material subsequent events are found?

A

The date on which sufficient appropriate audit evidence (including procedures related to subsequent events) was obtained.

195
Q

What should an auditor do to obtain reasonable assurance?

A

Plant the work, properly supervise any assistants, apply appropriate materiality levels, identify and assess risks of material misstatement whether due to fraud or error, and obtain sufficient appropriate audit evidence.

196
Q

What type of opinion is issued if a client switches from LIFO to FIFO and there is no material effect on the financial statements in the current year, but there will be a material effect in future years?

A

Issue an unmodified opinion. (No emphasis of matter paragraph)
If a change in accounting principle does not have a material effect the financial statements in the current year but the change is expected to have a material effect in later years, the auditor is not required to recognize the change in the auditor’s report in the current year.

197
Q

What is included in the Opinion Section of the auditor’s report?

A

The auditor’s Opinion section indicates the nature of the engagement (i.e. audit), the financial statements covered in the (audit) engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement.

198
Q

If a client does not use GAAP because if GAAP is used the financial statements will be misleading, what type of opinion should be issued?

A

An unmodified opinion with an emphasis-of-matter paragraph.

199
Q

What is in the first section of the issuers audit report?

A

This is opinion section
We have audited the balance sheets of Company X as of December 31, 2022, and 2021 and the related statements of Income, Comprehensive income, stockholders’ equity, and cash flows for each of the years then ended and the related notes and schedules. (collectively referred to as the financial statements) In our opinion, the financial statements present fairly in all material respects the financial position of the company as of December 31, 2022, and 2021 and the results of its operations and its cash flows for the years then ended conformity with accounting principles generally accepted int he United States of America.

200
Q

What is in the second section of the issuers audit report?

A

Basis for opinion section.
FS responsibility of management
Our responsibility is to express an opinion on the company’s FS bas on our audits
We are a public accounting firm registered with the Public Company Accounting Oversight Board and are required to be independent with the US Federal securities Laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Also, paragraphs for 1) conducted audit in accordance with standards of PCAOB, plan and perform audit to obtain reasonable assurance whether FS are free of material misstatement due to error or fraud, 2) audits including performing procedures to assess the risks of material misstatement, 3) procedures included examining on a test basis evidence regarding the amounts and disclosures in the FS, and 4) also included evaluating accounting principles used and significant estimates made by management as well as overall presentation of FS

Last sentence is “We believe that our audit provides a reasonable basis for our opinion.”

201
Q

What is last sentence of the Basis of Opinion section of the audit report?

A

“We believe that our audit provides reasonable basis for our opinion.”

202
Q

What are the labels used for sections of an audit report for an issuer?

A

Opinion on the financial statements
Basis for opinion section
Critical Audit Matters

203
Q

What is at end of audit report for issuer?

A

Auditor’s signature - firm name, not engagement partner
Information regarding audit tenure “We have served as Company X’s auditor since 2011.”
City, and State or Country
Date of Audit Report

204
Q

What date is used on Audit Report?

A

The date the auditor gathered sufficient appropriate evidence
Same for issuer and non-issuer

205
Q

When is a Critical Audit Matters section included in the audit report?

A

A CAM is used when the opinion is Unqualified, Unmodified, Qualified, or Modified. Still used if Emphasis of Matter or other matter paragraph is used.

Not used when adverse or disclaimer of opinion because it would confuse reader.

Only used for issuers.

206
Q

Explicit vs Implicit

A

Explicit = Expressed
Implicit = Implied

207
Q

How is a qualified opinion expressed in the audit report?

A

Except for the effects the matter to which the qualification relates, the financial statements present fairly in all material respects, financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.

208
Q

How is an unqualified opinion expressed in the audit report?

A

In our opinion, the financial statements present fairly in all material respects the financial position of the company as of December 31, 2022, and 2021 and the results of its operations and its cash flows for the years then ended conformity with accounting principles generally accepted int he United States of America.

209
Q

When would an auditor express a qualified opinion?

A

A qualified opinion is expressed when:
1) Lack of sufficient appropriate evidence or restrictions on the scope that led the auditor to conclude that an unqualified opinion cannot be expressed but a disclaimer would be inappropriate.
2) Auditor believes that on the basis of the audit, the financial statements contain a departure from GAAP, the effect of which is material, and the auditor has concluded not to express an adverse opinion.

210
Q

What are common restrictions on scope of the audit that could lead to a qualified opinion?

A
  1. Observation of physical inventories
  2. Confirmation of accounts receivable by direct communication with debtors
  3. Accounting for long term investments when the auditor has not been able to obtain audited FS of an invested
211
Q

Where does the auditor disclose the reasons for a qualified opinion in the auditor’s report?

A

In the Opinion section immediately following the opinion paragraph.

“Except for” or “with the exception of” are only acceptable words to you. Not “subject to” or “with the foregoing explanation” or anything else are unacceptable.

212
Q

What phrase would be required as a modification in the Basis of Opinion Section of the issuer’s audit report if the opinion is Qualified due to a scope limitation instead of Unqualified?

A

“Except as discussed above,” we conducted our audits in accordance with PCAOB . . .

213
Q

What change is made to the Basis of Opinion Section of the issuer’s audit report if the opinion is due to a GAAP issue instead of Unqualified?

A

There is no change to the Basis of Opinion section if the opinion is qualified due to a GAAP issue.

214
Q

What wording is added to the opinion section of the issuer’s audit report if a qualified opinion is issued because of a GAAP issue?

A

In our opinion, except for the effects of (whatever the GAAP issue is), as discussed in the following paragraph, the financial statements present fairly, . . .

215
Q

What change(s) are made to the Basis for Opinion section when using a qualified opinion due to a GAAP issue?

A

No changes are made to the basis for opinion section when a qualified opinion is issued to to a GAAP issue.

216
Q

How many sections are in the audit report (excluding title and address) when an unqualified or qualified opinion is issued?

A

3
Opinion
Basis for Opinion
Critical Audit Matter

217
Q

How many sections are in the issuer’s audit report (excluding title and address) when an adverse or disclaimer of opinion is issued?

A

2
Opinion
Basis for Opinion

218
Q

What change is made to the first paragraph of the opinion section of an issuer’s audit report when an adverse opinion is issued?

A

“In our opinion, because of the effects of the matters discussed in the following paragraphs, the financial statements do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2019 and 2018, or the results of its operations or its cash flows for the years then ended.”

219
Q

What change(s) are made to the Basis of Opinion section of the issuer’s audit report if an adverse opinion is issued?

A

There are no changes - same as unqualified opinion.

220
Q

What change(s) are made to the opinion section of the auditor report for an issuer if issuing a disclaimer of opinion?

A

Title is changed to “Disclaimer of Opinion on the Financial Statements”
“We were engaged to audit” the accompanying balance sheets . . .”
“As described in the following paragraph, (state reason for disclaimer of opinion)”
“. . . we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements, and we do not express an opinion on these financial statements.”

221
Q

What change(s) are made to the basis for opinion section of the auditor report for an issuer if issuing a disclaimer of opinion?

A

Title is changed to “Basis for Disclaimer of Opinion”

Would still use “These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB”
The rest of the basis for opinion would be omitted.

222
Q

When is a disclaimer of opinion issued?

A

When auditor is not independent or there is a scope limitation that prevents the auditor from completing the audit.

223
Q

What is the first paragraph of the critical audit matters section of the audit report?

A

“The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.”

224
Q

What is a critical audit matter?

A

A critical audit matter is any matter that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgement.

225
Q

Under PCAOB for audit reports of issuers, what type of response is required by the audit committee regarding critical audit matters communicated to them by the independent auditor?

A

No response is required from the issuer’s audit committee regarding agreement or disagreement with critical audit matters.

226
Q

What is wording if no critical audit matters are found?

A

“Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.”

It is unlikely that no critical audit matters will be found.

227
Q

What should the auditor’s report for each current year critical audit matter contain?

A

Identify the critical audit matter
Description of the considerations that caused the auditor to identify the matter as a critical audit matter.
Description of how the critical audit matter was addressed it he audit
Reference to the related financial statement accounts and/or disclosures.

228
Q

What matters are required by PCAOB to be communicated to the audit committee (critical audit matters)?

A

Significant risks the auditor identified
Relevant matters regarding the entity’s accounting policies and estimates
Significant unusual transactions
Matters regarding the auditor’s evaluation of any related parties and transactions with those related parties.
Matters identified that are significant to the oversight of the financial reporting process.

229
Q

What is included in Form AP?

A

Name of CPA audit firm and city and state
Name of the issuer whose FS were audited
Date of the audit report and if the report is dual dated
End date of the most recent period’s FS identified in the audit report
Name of the engagement partner
Whether other accounting firms participated in the audit and information about those firms
Whether the firm divided responsibility
Signature of partner or authorized officer

230
Q

What other accounting firms are mentioned in Form AP?

A

The name, location and extent of participation of the other accounting firm whose participation in the audit accounts for 5% or more of the total audit hours.

The number and extent in total of all other accounting firms whose participation in the audit accounts for less than 5% of the total audit hours, not the names.

231
Q

Where is Form AP filed?

A

With the PCAOB

232
Q

Where is the Audit Report filed?

A

SEC

233
Q

When does Form AP have to be filed?

A

Must be reported within 35 days after the audit report is first filed with the SEC unless the audit report is included in a registration statement (then it would be 10 days).

234
Q

Do the client’s financial statements, accounting records and documentation the client keeps support the auditor’s opinion?

A

No - the accounting records support the financial statements, our audit evidence, our work papers support our opinion.

235
Q

What does the appropriateness of evidence depend on?

A

Appropriate audit evidence must be both reliable and relevant. The appropriateness of evidence depends on it being pertinent, objective, timely, and corroborated by other evidence.

236
Q

What is the order of most reliable to least reliable evidence?

A
  1. Auditor’s direct personal knowledge
  2. Evidence obtained from external sources
  3. Evidence obtained from the client - internal evidence in writing
  4. Oral evidence obtained from the client
237
Q

What is evidence that is considered auditor’s direct personal knowledge?

A

Knowledge that comes from observation, examination, inspection, or recalculation.

238
Q

When do you have to do analytical procedures?

A

Planning and final review stages can do during evidence gathering stage

239
Q

What are analytical procedures?

A

Number crunching
Ratio analysis, trend analysis, compare financial to nonfinancial information

240
Q

What provides the most authoritative guidance when auditing an issuer?

A

PCAOB - Public Company Accounting Oversight Board

241
Q

What provides the most authoritative guidance when auditing a nonissuer?

A

SAS - General guidance provided by a Statement on Auditing Standards

242
Q

What is meant by generally accepted auditing standards?

A

Generally accepted auditing standards (GAAS) are measures of the quality of the auditor’s performance, and guide the auditor in the performance of a properly planned and executed audit.

243
Q

In order to form an opinion on the financial statements, what should the auditor consider?

A

In order to form an opinion on the financial statements, the auditor should consider whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework.

244
Q

Which paragraph(s) of a nonissuer auditor’s report on financial statements under US auditing standards should refer to GAAP?

A

Opinion and Management’s Responsibility

245
Q

If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, what option would the auditor ordinarily express?

A

A qualified opinion

246
Q

What type of report should be issued when an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements?

A

A “Disclaimer of Opinion” must be issued when a CPA is associated with FS of a publicly held entity, but has not audited or reviewed such FS.

247
Q

Is it mandatory to perform audit tests on payables?

A

No

248
Q

What is an audit procedure that may identify related party transactions?

A

Reviewing confirmations of loans receivable and payable is useful for determining the existence of related party transactions because guarantees are commonly provided by or for related parties.

249
Q

What are Statements on Standards for Attestation Engagements (SSAE)?

A

Statements on Standards for Attestation Engagements apply to engagements in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, which is the responsibility of another party. An engagement to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria would fall within this scope.

250
Q

What is the risk of material misstatement?

A

Inherent risk + Control risk

251
Q

What does assessing risk based on the effective operation of controls involve?

A
  1. Identifying specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions and
    2 Performing tests of such controls to evaluate their effectiveness.
252
Q

Why should an auditor concentrate on the substance of the procedures rather than their form when obtaining an understanding of internal control?

A

Management may establish appropriate procedures but not enforce compliance with them.

The auditor should be more concerned with the effective functioning of controls than with their form.

253
Q

What are the requirements when an auditor is asked to issue a report on a client’s compliance with contractual agreements or regulatory requirements in connection with a financial statement audit.

A

The auditor must have audited the client’s financial statements and may only issue negative assurance on compliance.

254
Q

What are the ethical principles that guide the work of auditors in the conduct of audits under government auditing standards?

A
  1. Serving the public interest
  2. Integrity
  3. Objectivity
  4. Proper use of governmental information, resources, and positions
  5. Professional behavior
255
Q

What is a cognizant agency for the audit?

A

A cognizant agency for the audit is typically the federal awarding agency that provides the most amount of direct funding to a nonfederal entity.

256
Q

What should an accountant’s report state for compiled financial statements?

A

The accountant conducted the compilation in accordance with Statements on Standards for Accounting and Review Services. (SSARS)

257
Q

What type of opinion can an auditor report when the auditor is reporting on compliance with aspects of contractual agreement in connection with audited financial statements?

A

Negative assurance, NOT an opinion, may be rendered in an engagement which the auditor is reporting on compliance with aspects of contractual agreement in connection with audited financial statements

258
Q

What action should an auditor take in response to discovering a deviation from the prescribed control procedure?

A

Make inquiries to understand the potential consequence of the deviation.

259
Q

What should an auditor do if she finds several errors in the financial statements that the client prefers not to correct and those errors are not material?

A

Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

260
Q

What are the two types of service auditor reports?

A
  1. Type 1 report is a report on the design and implementation of the controls at a service organization
  2. Type 2 report is a report on the design, implementation, and operating effectiveness of controls at a service organization.
261
Q

What are the elements of a CPA firm’s quality control?

A

HELP ME
1. Human resources
2. Engagement/client acceptance and continuation
3. Leadership responsibilities
4. Performance of the engagement
5. Monitoring
6. Ethical requirements

262
Q

When auditing a nonissue, what should the auditor do if she identifies the same control deficiencies that were communicated during the prior year audit?

A

For nonissuers, if an auditor has communicated other deficiencies in a perior period and management has chosen not to correct the deficiencies for cost or other reasons, the auditor need not repeat the communication in the current period.

263
Q

Who does the PCAOB report to?

A

SEC

264
Q

What does an auditor generally report on in an audit for a public company?

A

If the client is an issuer, the auditor will perform an “integrated audit” of the client’s financial statements AND the auditor will attest to management’s assertion regarding internal controls over financial reporting. In an integrated audit, the auditor must report on both fair presentation of financial statement and internal controls over financial reporting.

265
Q

What are some account balances that are based on estimates made by management?

A

Allowance for doubtful accounts
Depreciation expense
Pension expense

266
Q

What do audit standards measure?

A

The quality of the auditor’s performance

267
Q

Who makes up the audit committee of a publicly traded company?

A

In a publicly traded company, the audit committee must be made up of members of the board of directs who are not officers or employees.

268
Q

What are examples of the auditor’s use of professional skepticism?

A
  1. Using third party confirmation to provide support for management’s representations
  2. Circumstances that suggest the need for audit procedures in addition to those required by GAAS (hiring a specialist)
269
Q

In an audit of a non-issuer, what is generally correct regarding US GAAS and US GAAP?

A

US GAAP is for the client to follow, the auditor follows US GAAS

In an audit, the CPA follows GAAS to provide an opinion as to whether the client followed GAAP

270
Q

What is Undue influence threat?

A

In an audit engagement, with regard to threats to independence, if the client threatens to terminate the covered member’s firm after disagreement over accounting principles, this is referred to as the Undue Influence threat.

271
Q

What are some things that should be documented in the engagement letter:

A
  1. The objective and scope of the audit
  2. The auditor’s responsibilities
  3. Management’s responsibilities
  4. A statement about the inherent limitations of the audit
  5. A statement identifying the applicable financial reporting framework
272
Q

Describe attestation standards and quality control standards

A

Attestation standards apply to individual attestation engagements while quality control standards apply to the firm’s attestation practice as a whole

273
Q

What are attestation standards?

A

SSAE - Statements on Standards for Attestation Engagements

274
Q

What is an attestation?

A

An attestation is an examination, review, or agreed upon procedures engagement related to subject matter or an assertion that is the responsibility of another party.

275
Q

What are some of an audit firm’s considerations when it comes to acceptance and continuance policies?

A
  1. Firm’s ability to meet reporting deadlines
  2. Firms’ ability to staff the engagement
  3. Independence
  4. Integrity of client management
276
Q

Preconditions of audit

A
  1. Is financial reporting framework the client is using acceptable.
  2. Agreement of management that it acknowledges and understands its responsibility

Can the client be successfully audit?

277
Q

Management responsibilities

A
  1. Preparation and fair presentation of the financial statements
  2. Design, implementation, and maintenance of internal control
    3.Provide auditor with:
    a. access to all information managements is aware that is relevant to the preparation and fair presentation of the financial statements
    b. additional information that the auditor may request
    c. unrestricted access to persons within the entity from whom the auditor determines it is necessary to obtain audit evidence
278
Q

Questions to ask predecessor auditor prior to accepting the engagements

A
  1. Management integrity
  2. Disagreements with predecessor auditor
  3. Reason for the change in auditors
  4. Any fraud, noncompliance with laws and regulations, or internal control matters and their communication to management, audit committee, and those charged with governance
  5. Fee payment problems
  6. Nature of any significant or unusual transactions including those with related parties.
279
Q

Questions to predecessor auditor during the audit

A
  1. Do opening balances contain misstatements that could materially affect the current period financial statements
  2. Have accounting policies reflected in the opening balances been consistently applied?
280
Q

Content and requirement of getting predecessor’s audit documents

A

Have to get permission from management to review these documents.

these documents would include:
1. Planning documentation
2. Risk assessment procedures
3. Audit results
4. Matters of continuing accounting and audit significance

281
Q

What is included in the engagement letter:

A
  1. Objective of the audit
  2. Management’s responsibilities
  3. Auditor’s responsibilities
  4. Limitations of the engagement
  5. Identification of the applicable financial reporting framework
  6. Reference to the expected form and content of any reports to be issued
282
Q

If the entity uses income tax basis, where does the auditor include the description of how that basis differs from GAAP?

A

Notes to the financial statements

Audit (1 decks)

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