Audit Flashcards

Question 1

Q

SECTION 1

Question 2

Q

Section 1.1: Overview of Auditing Engagements

What are the balance sheet assertions?

Answer

A

“CPR-ACE”
* Completeness
* Presentation
* Rights and Obligations
* Accuracy, Valuation and Allocation
* Classification
* Existence

Question 3

Q

Section 1.1: Overview of Auditing Engagements

What are the different types of terminology used by the auditor to articulate their understanding and responsibility within their respective standards?

Answer

A

Must: Unconditional. Absolutely required.
Should: Presumptively mandatory. The consideration is required, but carrying out the procedure is not required.
Could, Might, May: Does not enforce a professional requirement. The auditor has the responsibility to consider the matter.

Question 4

Q

Section 1.3: Overview of Attestation Engagements

What is the purpose of Statement on Standards of Attestation Engagement (SSAE)?

Answer

A

Attestation engagements are additional services that are the responsibility of another party, other than an audit, that a CPA performs
An attestation engagement reports on subject matter other than traditional financial statements
A party, who is not the practitioner, makes an assertion about whether the subject matter is measured or evaluated in accordance with suitable criteria

Question 5

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Section 1.4: Additional Professional Services

What are assurance and advisory services?

Answer

A

Assurance and advisory services focus on improving information for better decision making.
Involves monitoring one party by another party.
They improve the quality of information for its decision makers.
They often relate to audit, attestation or other non-standard services.

Question 6

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Section 1.4: Additional Professional Services

What are consulting services?

Answer

A

Think a retirement advisor. The Retirement Advisor consults you to purchase certain stock. This will result in more money being earned.

Consulting services strive to provide advice
They often involve two-party arrangements.
Consulting services are designed for the improvement of operations, resulting in better outcomes.

Question 7

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Section 1.5: Quality Control

What is included in the Acceptance component in regard to quality control?

Answer

A

Consideration of client’s integrity.
Competence, capabilities and resources of the firm’s personnel to perform the engagement.
The firm can comply with legal, regulatory and ethical requirements.

Question 8

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Section 1.5: Quality Control

What are the components of Engagement Performance in regard to quality control?

Answer

A

Engagements are preformed in accordance with professional standards and legal requirements.
The firm issues appropriate reports.
Consistency in the quality of engagement performance.
Supervision responsibility
Review responsibility

Question 9

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Section 1.5: Quality Control

What are the components of Relevant Ethical Requirements in regard to quality control?

Answer

A

“RIP-SOD”
* Responsibilities
* Integrity
* Public interest
* Scope and nature of services
* Objectivity and independence
* Due Care

Question 10

Q

Section 1.5: Quality Control

What are the components of Monitoring in regard to quality control?

Answer

A

The policies and prcedures are:
* Relevance
* Adequate
* Operating effectively
* Complied within practice
* Includes inspection and evaluation of prior engagements.

Question 11

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SECTION 2

Question 12

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Section 2.1: Code of Professional Conduct

What is included in the AICPA Code of Professional Conduct?

Answer

A

General ethical principles that are aspirational in character
Set of specific, mandatory rules describing minimum levels of conduct a member must maintain

Question 13

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Section 2.2: Independence

When is a CPA not independent?

Answer

A

Preparing an actuarial report using assumptions not approved by the client
The CPA owns investments that are material
An investment held through a regulated mutual fund
Determining which recommendations for improving internal control should be implemented for a non public attest client

Question 14

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Section 2.2: Independence

When is a CPA independent?

Answer

A

Providing extensive advisory services for a client
Advisor to a client’s board of trustees

Question 15

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Section 2.2: Independence

What would be considered an indirect financial intererst that may cause lack of independence?

Answer

A

An investment held through a regulated mutual fund

Question 16

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Section 2.3: Integrity and Objectivity

What is included when an CPA violates the material misrrepresentation rule?

Answer

A

Making materially false and misleading entries in financial statements or records
Failing to make corrections in materially false or misleading statements or records when the member has such authority
Signing a document with materially false and misleading information

Question 17

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Section 2.3: Integrity and Objectivity

What are the elements that underlies the development of an overall audit strategy?

Answer

A

Materiality and audit risk in determining the nature, timing, and extent of procedures to apply

Question 18

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Section 2.6: Other Responsibilities

What services cannot have contingent fee arrangements?

Answer

A

Audits or reviews of financial statements
An examination of prospective financial information
Certain tax services
Compilation that reasonably might be used by a third party that does not disclose lack of independence in the report

Question 19

Q

Section 2.6: Other Responsibilities

What are some characteristics of alternative practice structures (APS)?

Answer

A

Independence rules for an APS apply
CPAs who own the attest firm and remain financially responsible under state law for the firm’s attest work are deemed to be in compliance with the financial-interests requirement
CPAs may own the majority of financial interests in the attest firm, but substantially all revenues may be paid to another entity for services and the lease of employees and equipment
CPAs remain responsible, financially and otherwise, for the attest work performed to protect the public interest, not the interest of the CPA

Question 20

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Section 2.6: Other Responsibilities

What are some of the requirements for the Form of Organization and Name Rule?

Answer

A

All CPA owners must be members

Question 21

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Section 2.7: Other Pronouncements on Professional Responsibilities

What are the conditions when an auditor may provide an issuer client nonaudit services without impairing independence and without obtaining the preapproval of the audit committee?

Answer

A

Nonaudit services were promptly brought to the attention of, and approved by, the audit committee prior to the completion of the audit
The services were not recognized as nonaudit services by the issuer at the time of the engagement
The revenue limit

Question 22

Q

Section 2.7: Other Pronouncements on Professional Responsibilities

What are the responsibilities and activities of the PCAOB?

Answer

A

Registering public accounting firms
Overseeing the audit of public companies that are part of the SEC
Establishing or adopting standards on auditing, quality control, ethics and independence
Inspecting audit firms. 1 year for over 100 audits/year; 3 years for less than 100 audits/year
Conducting investigations and disciplinary proceeds that involve registered public accounting firms and those that are associated with the firms.

Question 23

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SECTION 3

Question 24

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Section 3.1: Pre-Engagement Acceptance Activities

What is usually communicated to management in an audit?

Answer

A

Arrangements that involve a predecessor auditor

Question 25

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Section 3.1: Pre-Engagement Acceptance Activities

Why is it important for an auditor to detect illegal acts?

Answer

A

Because the illegal acts may prevent the auditor from relying on the representation from management

Question 26

Q

Section 3.2: Planning and Audit

What should be included in an engagement letter?

Answer

A

Objective and scope
Responsibilites of auditor and management
Inherent limitations
Internal Control
Involvement of internal auditors
The financial reporting framework
The expected form and content of audit reports
Management will not intervene in the auditor’s work

Question 27

Q

Section 3.2: Planning an Audit

When does the auditor begin the financial statement audit plan?

Answer

A

After the overall audit strategy is developed by the auditor
After preliminary judgments about materality

Question 28

Q

Section 3.2: Planning an Audit

What should be included in the audit plan?

Answer

A

Nature, timing and extent of procedures
Extent of risk of material misstatement
Planned further audit procedures
Procedures that relate to the financial statement assertions
Other audit procedures required by GAAS and PCAOB

The auditor does not discuss the nature and timing of detailed procedures

Question 29

Q

Section 3.2: Planning an Audit

Why would the auditor need to review the prior-year financial statements when conducting an audit?

Answer

A

By reviewing the prior-year financial statements, the auditor is obtaining assurance that
* Opening balances do not contain misstatements that may have an affect on the current year’s financial statements
* Accounting policies that are reflected in the opening balances are consistently applied to the current period’s financial statements

Question 30

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Section 3.2: Planning an Audit

What should an auditor do if non-issuer management refuses to provide access to the documentation?

Answer

A

The auditor should review the risk assessment on the opening balances of the financial statements.

Question 31

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Section 3.2: Planning an Audit

What are the purposes for evaluating the risk and adequacy and effectiveness of controls?

Answer

A

Compliance with laws and regulations
Safeguarding of assets
Reliability and integrity of financial information

Question 32

Q

Section 3.3: Audit Risk and Materiality

What are the types of risk factors?

Answer

A

Audit Risk: The risk, which is assessed by the auditor, that the auditor will fail to modify an opinion on the financial statements when they are actually materially misstated.
Control Risk: Assumes the risk will not be prevented or detected on a timely basis by internal controls.
Inherent Risk: Assumes no internal controls exist. Also, complex calculations are more likely to be misstated than simple ones.
Detection Risk: Detection risk is the amount that the auditor is willing to accept.

Question 33

Q

Section 3.3: Audit Risk and Materiality

What is the definition of audit risk?

Answer

A

Audit risk is an aggregate of risk of material misstatements and detection risk

A material misstatement:
* May happen in the company’s accounting process
* Will not be detected or prevented by the company’s own internal control
* Will not be detected by the independent auditors, which will then be inadvertently reported in the audited financial statements.

Question 34

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Section 3.3: Audit Risk and Materiality

Why does an auditor evaluate inherent risk?

Answer

A

Inherent risk is the suspectability that there may be a material misstatement to a financial statement assertion before the auditor considers related controls

Question 35

Q

Section 3.3: Audit Risk and Materiality

What is the Audit Risk Model?

Answer

A

Audit risk is based on the risk of material misstatements and detection risk.

Audit Risk = Risk of Material Misstatement (RMM) x Detection Risk

Risk of Material Misstatement = Inherent Risk x Control Risk

Detection Risk = Auditor’s Risk

Question 36

Q

Section 3.3: Audit Risk and Materiality

How does a decrease in the amount of misstatements, or audit risk, impact the auditor’s plan?

Answer

A

The acceptable level of detection risk is inversely related to assessed risk of material misstatement

Greater assurance of substantive testing needs to be done:
* Planned audit procedures should be performed at year-end instead of interim
* Selecting a more effective audit procedure
* Increasing the extent of particular tests

Question 37

Q

Section 3.3: Audit Risk and Materiality

What would an auditor most likely review in a preliminary judgement about the materiality of financial statements as a whole for non-issuers?

Answer

A

Reported income categories
Total Equity
Net Asset Value

Question 38

Q

Section 3.3: Audit Risk and Materiality

What would an auditor most likely review in a preliminary judgement about the materiality of financial statements as a whole for issuers?

Answer

A

Pre-tax profit from continuing operations
Prior-period information
Period-to-date information
Budgets
Forecasts

Question 39

Q

Section 3.3: Audit Risk and Materiality

What is a judgmental misstatement?

Answer

A

Judgmental misstatements are differences arising from the judgments of management about recognition, measurement, presentation and disclosure that the auditor may consider unreasonable or inappropriate

Question 40

Q

Section 3.3: Audit Risk and Materiality

What are the different types of known misstatements?

Answer

A

Missapplication of accounting principles
Inaccuracy of processing data
Classification difference of a reported financial statement element to a classification according to GAAP

Question 41

Q

Section 3.3: Audit Risk and Materiality

What is a projected misstatement for a non-issuer?

Answer

A

A projected misstatement is the auditor’s best estimate based in populations from the audit sample

Question 42

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Section 3.3: Audit Risk and Materiality

What does the auditor include when evaluating for uncorrected misstatements of an issuer?

Answer

A

Prior years and misstatements detected in the current year that relate to prior years
Possible undetected misstatements
Accumulated uncorrected misstatements could exceed materiality

Question 43

Q

Section 3.4: Understanding the Entity and Its Environment

What risk assessment procedures would a continued auditor perform in planning an audit?

Answer

A

Internal audit reports
Interim statements
Quarterly reports
Minutes of board meetings

Question 44

Q

Section 3.4: Understanding the Entity and Its Environment

In a new audit engagement, what should an auditor do if they do not have expertise in the new client’s industry?

Answer

A

Inquiries of management and others in the new engagement
Analytical procedures
Observation and inspection

Question 45

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What is the objective of analytical procedures applied as risk assessment procedures?

Answer

A

Improve the auditor’s understanding of the client’s business
Improve the auditor’s understanding of significant events and transactions
Identify unusual transactions or events and amounts

Question 46

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

How does an auditor determine whether to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances?

Answer

A

The determination is whether the audit risk can be sufficiently reduced

Question 47

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What is the main reason to use analytical procedures in an audit?

Answer

A

Analytical procedures alone may be enough to provide a level of assurance for some assertions.
Relationships within the data is expected to exsist, even if there certain conditions not present.

Examples include:
* Unusual events or transactions
* Business or accounting changes
* Misstatements
* Fluctuations in the data

Question 48

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What type of accounts are used for analytical procedures?

Answer

A

Income statement accounts
Income statement accounts may be more predictable because they represent transactions over a period of time

Question 49

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What is the purpose of analytical procedures?

Answer

A

Analytical procedures focus on the relationships between financial and nonfinancial data at a high level using simple and complex models
The precision of the data is important to the auditor in determining on how to use analytical procedures as substantive procedures.
Study of how elements of the financial data is expected to conform to a pattern that is based on the entity’s experience
The auditor will determine the best analytical procedure to use for testing the nature of an assertion

Question 50

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What might be the outcome if analytical procedures are more precise?

Answer

A

Differences between the auditor’s expectation and management’s reported amount are more likely to be caused by material misstatements
The more detailed information, the more precise the expectation

Question 51

Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What analytical procedures are included when forming an overall conclusion of an audit?

Answer

A

Consider the adequacy of evidence gathered in response to unusual or unexpected balances identified
Unusual or unexpected balances or relationships not previously identified

Question 52

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What is the auditor’s responsibility regarding consideration of fraud in a financial statement audit?

Answer

A

Assess the risks of material misstatement due to fraud

Question 53

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What are examples of misstatements?

Answer

A

Inaccuracy of processing or obtainin financial data
Omission of an amount or disclosure
A disclosure is not presented
Incorrect accounting estimate is made by misstake
Unreasonable management judgments about accounting estimates
Inappropriate selection or application of accounting policies that the auditor considers inappropriate

Question 54

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What is a potential risk of material misstatement due to fraud?

Answer

A

Management overide of controls
The auditor’s procedures should address the risk of management override of controls apart from any possible existence of more identifiable risks

Question 55

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

How should an auditor identify and assess risks that may result in material misstatements due to fraud in a financial statement audit?

Answer

A

Evaluating whether the entity’s related controls have been suitably designed and implemented

Question 56

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What is the auditor’s responsibility to report fraud?

Answer

A

The auditor should obtain reasonable assurance about whether the financial statements are free from material misstatement

It is not the auditor’s responsibility to parties that are not members of governance or the audit committee that the auditor discovered fraud

Question 57

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What is the difference between incentive, rationalization and opportunity?

Answer

A

Incentives are reasons for management to feel motivated to commit fraud
Rationalization can relate to a person frequently justifying reasons for committing fraud
Opportunities occur when company management will have the opportunity to take advantage of ineffective internal control procedures or override those controls in order to take advantage for their own self-interest

Question 58

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

Why are new accounting requirements subject to being an incentive for fraudulent reporting?

Answer

A

Management may feel pressure to maintain financial stability while changing to the new accounting requirements

Question 59

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What are the three conditions of fraud?

Answer

A

Incentives or pressures from management
Opportunity to override controls
Ability to rationalize the fraudulent act

Question 60

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What are examples of intentional misstatements to deceive users?

Answer

A

Altering accounting records or documents
Misrepresenting or omitting significant information
Misapplying accounting principles

Question 61

Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What are examples of missappropriation of assets?

Answer

A

Theft of physical assets
Embezzelment
An action that causes a payment not to be received
Using entity assets for personal reasons

Question 62

Q

Section 3.7: Consideration of Laws and Regulations in an Audit

When would an auditor withdraw from an engagement if a client committed an illegal act?

Answer

A

The auditor should consider the implications in relation to other representaions of management
If the illegal act is questionable
Management cannot be trustedin the matter
Serious doubts arise about management’s representations

Question 63

Q

Section 3.7: Consideration of Laws and Regulations in an Audit

What is the main reason that an auditor cannot discover all noncompliance in an audit?

Answer

A

Noncompliance by the client often includes operating aspects, as well as accounting aspects
The auditor has the responsibility to detect noncompliance that has a direct effect on the financial statements
Since the client’s operating activities are not part of the audit, the auditor will not find the compliance

Question 64

Q

Section 3.7: Consideration of Laws and Regulations in an Audit

What should an auditor do if noncompliance is discovered?

Answer

A

The auditor should apply audit procedures specifically directed to determine if act of compliance has occurred

Answer 62

A

Obtaining and understanding of internal control
Performing tests of controls
Performing substantive testing
Perform tests of internal controls
Procedures performed in assessing risk of material misstatement

Answer 63

A

External quality reviews of the internal auditor’s activities
Discussions with management personnel
Previous experience with the internal auditor

Answer 64

A

A management’s specialist possess expertise in a field other than accounting or auditing.
The work in the management specialist’s field is used by the entity to assist in preparing the financial statements

Answer 65

A

Related party transactions are disclosed in the financial statement
Assessing the risk of material misstatement of related party transactions

Answer 66

A

Loans with no scheduled terms for payment
Borrowing or lending at either interest-free or low rate
Selling real estate below the appraised value

Answer 67

A

Focus on substantive testing of the transactions
* Analyze account records for transactions
* Evaluate the business purpose of the transaction
* Verify the terms and conditions of the transaction

Answer 68

A

The auditor considers that management bases its judgement on both subjective and objective factors.
Controls over estimates may be difficult to establish
There may be potential bias in the subjective factors
The auditor should maintain professional skepticism towards both subjective and objective factors

Answer 69

A

For financial statements, if the amount is not reasonable, then it should be treated as an identified misstatement.
For estimates, the amounts may be possibly bias and the auditor should reconsider the estimate as a whole

Answer 70

A

Economic conditions
Management’s selection of the assumptions of market participants
The result of modifications from management’s assumptions
The entity’s plans
Past experience
Prior-period assumptions

Answer 71

A

The auditor will test the data to arrive at the fair value of the interest rate swap contract
The auditor should test how management made an accounting estimate and the data on which it is based, including evaluation of the method of measurement and the assumptions used

Answer 72

A

The information used in monitoring may be correct, but the subject tested may be ineffective to control

Answer 73

A

Faulty human judgment
Simple errors or misstakes
Management override
Cost-benefit considerations
Losses
Lawsuits and other contingencies
Violations of laws and regulations
Warranties
Theft

Override by a low-level employee is not considered an inherent limitation

Answer 74

A

“CRIME”
Control Activities
Risk Assessment
Information Services
Monitoring
Environment of Control

Answer 75

A

Participation of those charged with governance (aka Tone at the Top)
Integrity and ethical values (including hiring personnel)
Organizational structure
Management’s philosophy and operating style
Assignment of authority and responsibility
Human Resources polices and practices
Committment to competence
Removing incentives that increase the probability of dishonest or unethical acts (i.e. bonuses for high rate of growth revenues)

Answer 76

A

Performance reviews
Information processing
Physical controls
Authorization
Segregation of Duties

Answer 77

A

Identify risks relevant to the preparation of the financial statements
Estimate their significance
Assess the probability
Decide about responses to them

Answer 78

A

Monitoring ongoing activities (i.e. supervision)
The actions of internal auditors
Consideration of communications from external parties (i.e. customer complaints)

Answer 79

A

Physical and hardware components
Software
People
Procedures
Data

Answer 80

A

The entity and its environment
Sources of information given about the understanding
Risk assessment procedures performed

Identifying specific controls relevant to management assertions is not part of the documentation

Answer 81

A

The auditor is required to have an understanding of each of the five components of internal control when evaluating the design of controls

Answer 82

A

Operating effectiveness evaluation
Test of controls are used primarily for an audit of an issuer

Answer 83

A

Substance rather than form because management may establish the internal control, but not enforce them.

Answer 84

A

Inquiries
Observations
Inspection of documents and reports
Tracing transactions

Answer 85

A

Determine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented
Assess the risks of material misstatement
Design further audit procedures
Evaluate the operating effectiveness of relevant controls.

Answer 86

A

Processes used to prepare significant accounting estimates
Classes of significant transactions
How the transactions are recorded
If the transactions are electonric or manual
How the transactions are captured
Controls over journal entries

Answer 87

A

A system flowchart shows the overall view of inputs, outputs and processes of a system
A program flowchart shows specific steps in regarding to a computer program

Answer 88

A

Controls over operations are effective and efficient
The procedures used to acquire, test, develop, etc.
Access of the equipment and data
Documenting and approving programs and changes to programs
Control over data center and network operations
Systems software acquisition and maintenance
Access security
Application system acquisition, development, and maintenance.

Answer 89

A

Understanding of internal control to evaluate the design of relevant controls and determine if they have been implemented.
Knowledge about the design and implementation of relevant internal controls should be used to identify types of misstatements that could occur
The auditor is interested in the design of the control and whether the control has been placed into operation at the entity

Answer 90

A

The auditor is not attempting to determine whether the control is effective
The auditor’s understanding is not established to design risk assessment procedures
Analtyical procedures are not used to demonstrate an auditor’s understanding of the client’s internal control
The auditor does not search for significant deficiencies

Answer 91

A

Flowcharts are useful for systems development
For understanding, evaluating and documenting an entity’s internal control

Answer 92

A

Customer: Places Order
Sales: Sends order for credit approval
Credit Department: Approves credit for order
Sales: Sends acknowledgement of approved order to customer
Inventory Warehouse: After receiving approved credit, sends goods to shipping.
Shipping: After receiving approved credit order, ships the product, with a BOL and packing slip to the customer.
Billing: After receiving the approved credit order, BOL and packing slip, creates an invoice.
Accounts Receivable: Records the invoice in the A/R file
General Ledger: The invoice is recorded in the Daily Invoice Summary and posts the General Ledger File
General Ledger is reconciled with the A/R file and inventory records.

Answer 93

A

Customer: Sends a check for payment with the remittance advice.
Mailroom: Creates a remittance listing
Cash Receipts: Receives the remittance listing and checks and prepares the deposit slips and deposits the checks at the bank.
Accounts Receivable: Receives the remittance listing and records in the A/R file.
Controller: Receives the remittance listing and updates the General Ledger File.
Bank: Deposits the checks and provides a validated deposit slip.
Controller: Compares the remittance listing with the validated deposit slip

Answer 94

A

Confirms valuation, accuracy and allocation
The credit approval provides proof that the account receivable is collectible.

Answer 95

A

Cash
Trade Receivables
Other Receivables
Allowance for Credit Losses
Sales
Sales Returns
Credit Loss Expense

Answer 96

A

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal
Compare shipments with the sales journal

Answer 97

A

Because the shipping file or shipping documentation would provide the best evidence of a sale or transaction occurring
All other areas (i.e. customer file, invoice) occur after a shipment was made

Answer 98

A

The open accounts receivable records are maintained in the customer’s account ledger
Reviewing the customer’s account ledger will provide evidence that uncollected items in the customer’s account are valid receivables

Answer 99

A

Whether all cash receipts are kept and recorded.

Answer 100

A

Bank lockbox system
Daily reconciliation of cash discounts and cash receipts
Surveillance system over the cashier

Answer 101

A

A field check tests the characters to verify that they are the correct type for that field
A validity check tests the relationships among other items and other parts of the system (i.e. Customer #1272 is included in the customer file)

Answer 102

A

Inventory Control: Authorizes a purchase requisition to the purchasing and accounts payable departments.
Purchasing: Creates a purchase order based on the requisition with the approved vendor.
Receiving: Receives a blind copy of the purchase Order
Vendor: Receives the purchase order
Vendor: Ships Goods
Receiving: Receives the goods and compares the information on the packing slip with the purchase order
Receiving: Creates a receiving report
inventory Control: Updates inventory records based on receiving report.
Accounts Payable (Vouchers Payable): Receives receiving report and enters information in the A/P file for payment.

Answer 103

A

The responsibilities of all parties involved
The messages that will be initiated
How the messages will be interpreted
Means of authenticating and verifying the completeness and accuracy of the messages
The effective date of the contract
The required level of security

Answer 104

A

The benefits of preventive controls outweigh the costs
The opportunity to apply detective controls is limited once a transaction has been processed
Preventitive controls prevent fraud or error

Answer 105

A

Time tickets should specifically identify labor hours as direct or indirect
Compare daily journal entries with the factor labor summary

Answer 106

A

Design is evaluated to determine whether a control can effectively prevent, or detect and correct, material misstatements
A deficiency occurs when an unapproved change to the data was made after the data was approved (i.e. changing time worked after timecards have been approved)

Answer 107

A

A data dictionary is a file which the records relate to specified data items.
It contains definitions of data records, files and the list of programs used to access and process the data.
Permission is required to retrieve data or modify data items

Answer 108

A

The payroll register file because it contains each payroll transaction for each employee.
An entry in the payroll register is reconciled to time cards to test if the recorded transaction actually occurred.

Answer 109

A

Written policies for capitalization and expenditure
Review of application and depreciation methods
Proper authority for acquisition and retirement of assets
Detailed property records
Physical controls over assets
Using budget to forecast
Control acquisitions and retirements

Answer 110

A

All purchases of factory equipment are required to be made through the purchasing department
It is not made through the department needing the equipment

Answer 111

A

An approved authorization determines that the materials are obsolete and unusable for normal purposes

Answer 112

A

Inquiries of personnel
Observations of activities and operations
Review entity’s documentation of controls, including policies and procedures

Answer 113

A

Prenumbered requisitions should be examined for proper authorizations, quantities, descriptions and dates
Reperformance of relevant activities and client controls
Examining material requisitions

Answer 114

A

Compares the securities in the safe-deposit box with the recorded investments

Answer 115

A

When the auditor has an expectation of the operating effectiveness of internal control; OR
Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.

Answer 116

A

The auditor believes that the controls are likely to be ineffective
Performing only substantive procedures would effectively reduce audit risk to an acceptably low level

Answer 117

A

Testing the operating effectiveness of the relevant control may not be efficient
Testing the control may be inefficient
Risk assessment procdures may not have identified effective controls regarding the assertion
Testing the operating effectiveness of control may be inefficient

Answer 118

A

From Least to Most:
* Inquiry (Combined with other audit procedures i.e. observation and inquiry, etc.)
* Observation
* Inspection of relevant documentation
* Reperformance of a control.

Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.

Answer 119

A

Dual-purpose testing involves performing:
* A test of details
* A test of controls on the same transaction. Tests of controls are used to determine whether controls are operating effectively.

Answer 120

A

Test of Controls: Testing that controls are operating effectively
Test of Details: Testing for specific management assertions

Answer 121

A

The auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels to design and perform further audit procedures
Tests of details are substantive procedures
They should be performed for all relevant assertions related to each material transaction class, balance, and disclosure
The auditor’s objective is to obtain sufficient appropriate evidence to form an opinion on whether statements are materially misstated

Answer 122

A

Assessment of RMM at the financial statement level
The auditor’s overall response

Answer 123

A

Test of details
Analytical procedures

Substantive procedures should be performed for significant transaction classes. Regardless of the assessed RMM.

Answer 124

A

Reperformance
Observation

Answer 125

A

Over a period of time (i.e. a year): The auditor may be able to rely on the control
At a point in time (i.e. interim): The auditor will need to include other tests

Answer 126

A

Because observation is only for a point in time – when the auditor is watching the process.

Answer 127

A

To restrict detection risk for significant transaction classes
The auditor should design and perform substantive procedures for all relevant assertions related to each material transaction class, account balance, and disclosure

Answer 128

A

Professional skepticism
Increased supervision
Assignment of staff with more experience and expertise
Greater unpredicability of audit procedure choices
Changing nature, timing and extent of audit procedures

Answer 129

A

Assigning more experienced personnel and individuals with special skills
Increasing supervision
Emphasizing professional skepticism
Modifying procedures to obtain more persuasive evidence.

Answer 130

A

Advantages
* The transactions from throughout the period may be processed and the results can be compared with the client’s results.
* Provides Assurance that edit checks have been applied during the period.

Disadvantages
* Cost of obtaining the program and the coordination effort required to obtain transactions to reprocess.

Answer 131

A

Advantages
* It tests the actual program in operation.

Disadvantages
* It requires considerable coordination.
* The dummy transactions must be purged prior to internal and external reporting.

Answer 132

A

Advantages
* This approach directly tests specific controls.

Disadvantages
* It Tests Processing at only one moment in time, but not the system used throughout the year.

Answer 133

A

Advantages
* It permits continuous monitoring of online, real-time systems.

Disadvantages
* Audit hooks must be programmed into the operating system and applications program.

Answer 134

A

ITF requires the auditor to create a dummy record within the client’s actual system
Test data approach has the auditor create a set of dummy transactions for testing

Answer 135

A

Board of Directors
Audit Committee

Answer 136

A

Purpose of the Audit was to report on the financial statements, not to provide assurance on internal control
Definition of Significant Deficiency
Definition of Material Weakness
Report of any significant deficiencies or material weaknesses
Restricted Report

Answer 137

A

A control deficiency may arise either in the design or operation of a control.
It is the lowest level of deficiency identified in the standards.

Answer 138

A

Operating effectiveness relates to how and by whom the control (manual or automated) was applied and the consistency of application.
A control that is not implemented, no matter how well designed, is ineffective absent the mitigating effect of compensating controls. Furthermore, the control risk is high for all other controls.
A properly designed control does not function as designed

Answer 139

A

The evaluation of design considers whether a control (alone or with others) can effectively prevent, or detect and correct, material misstatements.
An improper design may be a significant deficiency or material weakness in internal control that the auditor should communicate to management and those charged with governance.
The lack of a control that provides documentation for invoices is a failure of design, not an operating issue.

Answer 140

A

Disagreements with management that have been satisfactorily resolved
Initial selection of significant accounting policies in emerging areas that lack authoritative guidance

Answer 141

A

The auditor should refer any immaterial fraud to the appropriate level of management for their action

Answer 142

A

Walkthroughs are the most effective way of achieving the objective of tests of controls
The auditor follows a transaction from origination to being reported on the financial statements

Answer 143

A

Inquiry
Observation
Inspection of relevant documentation
Reperformance of Controls

Answer 144

A

When a material weakness is discovered
The auditor believes that the internal control is not effective

Answer 145

A

The auditor obtains an understanding of the overall risks at the financial statement level
The auditor then performs procedures on significant classes of transactions, account balances, disclosures, and their relevant assertions

Answer 146

A

Control environment
Controls over management override
Monitoring results of operations
Controls over period-end financial reporting process
Monitoring other controls
Risk assessment process

Answer 147

A

An auditor is not responsible for including a reference to the service provider’s report if the service auditor was not responsible for examining any portion of the user entity’s financial statements.
If the user auditor’s opinion is modified, the service auditor’s work may be referred to if it is relevant to understanding the modification

Answer 148

A

If the user auditor is unable to obtain a sufficient understanding of the controls of the user entity, the auditor may use either a SOC 1 Type 1 or SOC 1 Type 2 report.

Answer 149

A

A service auditor’s report should be helpful in providing a sufficient understanding to plan the audit of the user organization.
The service auditor’s report may express an opinion on the fairness of the description of the controls implemented at the service organization and whether they were suitably designed.
If the service auditor also has tested controls, the report may express an opinion on the operating effectiveness of the controls.

Answer 150

A

SOC Type 1
* Includes a disclaimer of opinion related to the operating effectiveness of internal controls
* Reports at a specific point in time
* Further audit testing is required by the user auditor

SOC Type 2
* Reports on the design and operating effectiveness of internal control
* Report is based over a period of time
* The user auditor can reduce its overall control risk assessment

Answer 151

A

The user auditor should not refer to the service auditor if the user auditor issued an unmodified report
The user auditor may refer to the service auditor if the user auditor modifies the opinion because of a modified opinion by the service auditor

Answer 152

A

Competence of the engagement team and external specialists
Ability to perform the engagement in accordance with the relevant standards and legal and regulatory requirements.
Ability to issue an appropriate practitioner’s report.

Answer 153

A

The auditor should determine whether management has adequately described complementary user controls

Answer 154

A

Reperformance is the independent execution of procedures or controls
An example of reperformance is developing an aging schedule

Answer 155

A

Observation
Inspection
Visits to premises and facilities

Answer 156

A

The evidence must be sufficient and appropriate
Appropriate evidence is relevant and reliable in supporting the conclusions to base the opinion

Answer 157

A

Direct observation is the most reliable
Inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control

Answer 158

A

Income statement audit deals with the verification of transactions
Balance sheet audit deals with verification of account balances

Answer 159

A

Obtained from independent sources
Generated internally under effective internal control
Is obtained directly by the auditor
Is in documentary form, whether paper, electronic, or other medium
Consists of original documents

Answer 160

A

Unreturned negative confirmation requests rarely provide significant evidence about assertions other than certain aspects of existence.
Unreturned negative confirmations do not provide explicit evidence that the intended parties received the requests and verified the information provided.

Answer 161

A

If there are no replies to negative confirmations, then it is assumed that the customer agrees with the balance.
However, this may not be the case the majority of the time because no auditor follow-up occurs.
Unreturned negative confirmation requests rarely provide significant explicit evidence.

Answer 162

A

When the acceptable audit risk is high
The assessed risk of material misstatement is low
A small number of accounts may be in dispute
When many small balances are involved
A very low exception rate is expected
The auditor has no reason to believe that the recipients of the requests are unlikely to consider them
The auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls

Answer 163

A

To reduce the risk that recipients will respond without verifying the information
It may be ineffective because of the lower response rate due to additional information needs to be completed by the recipient

Answer 164

A

The assessed RMM is high
The auditor should consider confirming the terms of the transaction with the third parties in addition to examining documents

Answer 165

A

Rights and Obligations
Existence

Answer 166

A

Because customers may not report underestimated amounts

Answer 167

A

The appropriate audit tasks for personal computer applications
The appropriate software to perform the selected tasks

Answer 168

A

Information stored on computer files can be accessed by an auditor who does not have a lot of understanding about the client’s hardware or software.

Answer 169

A

The auditor should determine the effects on the allowance for doubtful accounts
Expand tests of collectibility
The verification of the allowance for doubtful accounts ensures that receivables are fairly presented at their net realizable value in the balance sheet and that credit loss expense is fairly stated in the income statement.

Answer 170

A

External confirmation of accounts receivable by sending requests to customers tests for existence.
They must be confirmed unless:
1. They are immaterial
2. Confirmation would be ineffective
3. The assessed risk of material misstatement is low and other procedures address the risk.

Answer 171

A

The auditor should review supporting documents for new large balances occurring after the interim date

Answer 172

A

Completeness: Trace items on the daily remittance list to the last validated deposit ticket for the period
Existence: Counting Cash
Cutoff: Inspecting and tracing items on daily remittance lists for several days before and after period end
Occurrence: Vouching cash receipts to accounts receivable and customer orders

Answer 173

A

Kiting is the recording of a deposit from an interbank transfer in the current period while failing to record the related disbursement until the next period.
This fraud exploits the lag (float period) between the deposit of a check in one account and the time it clears the bank on which it is drawn.

Answer 174

A

To determine if cash balances were overstated because of kiting.

Answer 175

A

Preliminary judgments about materiality levels
The smaller the levels of materiality, the larger the sample size

Answer 176

A

Cash in bank
Collateral for loans

Answer 177

A

Vouching accounts payable to supporting documentation

Answer 178

A

Inspection of receiving and issuing procedures in order to disclose for unrecorded liabilities
Shipping orders and receiving reports that are not reflected in the records suggest that transactions are not being properly recorded.

Answer 179

A

Examining cash disbursements made after the balance sheet date and comparing them with the accounts payable trial balance
Sending confirmations to vendors with small and zero balances
Reconciling payable balances with vendors’ documentation
Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices
Trace subsequent payments to recorded payables is a primary procedure to match payments (checks issued) after year end with the related payables

Answer 180

A

Reading of the minutes
Analysis and recomputation of interest expense
Mailing of bank confirmation forms

Answer 181

A

Review the vendor invoices to trace them to the receiving report

Answer 182

A

Tracing from the schedule to the inventory tags and ultimately to the auditor’s count sheet.
Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets.

Answer 183

A

Reconciliation of detailed inventory records with the inventory count taken.

Answer 184

A

Vendor invoices because the information includes:
* Items purchased
* Amount due
* Payment terms

Answer 185

A

If there are large debits to accounts receivables and small periodic credits.

Answer 186

A

The auditor vouches the quantities recorded in the work-in-process by examining the documents for material requisitions.

Answer 187

A

Vertical Analysis
Non-financial information (i.e. volume of goods)
The inventory turnover ratio

Answer 188

A

The auditor should become satisfied by performing alternative audit procedures.
Attending a year-end inventory count is obviously impractical when the entity measures its inventory using statistical methods.
The auditor is required to attend and observe at least some counts and should evaluate whether the methods applied and results are appropriate.

Answer 189

A

Tracing a sample of tags to the physical inventory listing to ensure that the tagged items are included in the listing
Tracing the details of test counts to the final inventory schedule

Answer 190

A

Perform extensive tests of current year property and equipment transactions
The auditor also may not rely on controls after obtaining an understanding of internal control

Answer 191

A

To obtain evidence that expenditures for property and equipment that should be capitalized are not charged to expense.

Answer 192

A

Select equipment recorded in the accounting records and locate them on the floor.

Answer 193

A

Equipment that was sold or disposed of
The life of an asset has been lengthened

Answer 194

A

The auditor will evaluate the propriety of the interest rate used in discounting the future lease payments.

Answer 195

A

The auditor should vouch items from the accounting record and locate the physical assets

Answer 196

A

Test for completeness assertion:
1. Inspect the property
2. Inspect insurance and tax records
3. Tour client facilities
Select items from accounting records and locate them during the plant tour

Answer 197

A

The auditor should examine the collateral estimate its fair value
The auditor may refer to publish data to obtain current market quotes

Answer 198

A

Analytical procedures
Applying an expected rate of return to the net investment amount

Answer 199

A

Inspect documents
Physically examine assets
Inspection of deeds, lease agreements, insurance policies, invoices, canceled checks, and tax notices

Answer 200

A

An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount.
The transaction to record the amortization is a recurring entry that, if miscalculated, could result in a lower return than expected

Answer 201

A

Using analytical procedures to estimate the total investment income.

Answer 202

A

The auditor should examine the collateral and estimate its fair value to determine the reasonableness of the arrangement.
The auditor may refer to published data such as current market quotations to determine the value of securities.

Answer 203

A

Recomputing the interest earned on the basis of face amount, interest rate, and period held
The auditor may use information from bond certificates (interest rates, payment dates, issue date, and face amount) to recalculate bond interest earned
The amount includes uncollected accruals

Answer 204

A

Multiply the average outstanding loan balance by the interest rate and Compare the result to the interest expense recorded
The debt-to-equity ratio, which equals total liabilities divided by total equity, also can be calculated and compared with previous periods

Answer 205

A

The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue, which includes:
* Determine that all noncurrent debt has been recorded and constitutes bona fide liabilities
* Verify that federal and state laws relevant to financial reporting have been complied with
* Determine that premium, discount, interest payable, and interest expense are accurately recorded
* Monitor compliance with debt contracts
* Review proper presentation and disclosure in the financial statements.

Answer 206

A

Confirmation with the bond trustee
The auditor should verify bond-sinking fund transactions with the trustee

Answer 207

A

The recorded interest expense should reconcile with the oustanding bonds payable
If the interest expense is overstated, then an unrecorded noncurrent liability may exist

Answer 208

A

The auditor should test closing entries to determine whether net income has been closed to retained earnings
This assures that net income was properly closed to retained earnings will help an auditor determine whether retained earnings is valued correctly

Answer 209

A

That all capital stock transactions are properly authorized
All entries in the capital stock account should be traced to the minutes of the board of directors’ meetings
The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed

Answer 210

A

Apply analytical procedures
Recalculate payroll accruals
Compare payroll costs with entity standards or budgets

Answer 211

A

Compare clock cards with shop job time tickets
The job tickets, which contain the total hours worked on each job, should not vary significantly from the employee time cards used to compute payroll

Answer 212

A

Recalculating benefits for selected participants based on the plan provisions using relevant service and salary history to support the recorded benefits paid to the participants
Inquiries of management about pension benefit agreements
Comparison of general ledger and financial statement balances
Recalculation of pension costs

Answer 213

A

Verify that employees work the hours for which they are paid
Vouch a sample of employees in the payroll register to approved clock data

Answer 214

A

Without Merit = No additional clarification necessary
Action will not result = No additional clarification necessary
Nominal in amount = No additional clarification necessary

Problems establishing liability = Clarification needed
Settled for less than damages claimed = Clarification needed
Meritorious defenses to this action = Clarification needed

Answer 215

A

To corraborate the information furnished by management about litigation, claims and assessments

Answer 216

A

External counsel refuses to respond to the letter of inquiry
Management refuses permission for the auditor to contact legal counsel
The legal counsel response specifically excludes information on a pending legal matter because of publicity concerns

Answer 217

A

The response may be limited to matters to which the legal counsel has given substantive attention in the form of legal consultation or representation.
The response may be limited to matters that the entity and the auditor have agreed on materiality limits, and management has stated the limits in the letter of inquiry

Answer 218

A

Reading the latest subsequent interim statements, if any
Inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters
Reading the minutes of meetings of owners, management, and those charged with governance
Obtaining a letter of representations from management
Inquiring of legal counsel
Obtaining an understanding of management’s procedures for identifying subsequent events.

Answer 219

A

If the account was current in the reporting year, then the bankruptcy would be disclosed and no adjustment needed.
If the account was reported as aged, or already impaired, then the financial statements are adjusted and a disclosure is made

Answer 220

A

The auditor should notify management and those charged with governance that the auditor will seek to prevent future reliance on the auditor’s report.
If, despite such notice, management or those charged with governance do not take the necessary steps, the auditor should take appropriate action to prevent reliance on the auditor’s report

Answer 221

A

A disclosure is made in the pro-forma financial statement presentation in the balance sheet footnotes

Answer 222

A

Convertible bonds do affect interpretation of the financial statements
The do not require and adjustment to the financial statements, but they do require a disclosure in the notes

Answer 223

A

Obtain certain written representations from management
These written representations confirm certain matters or to support other audit evidence
They do not include financial statements, the assertions in them, or supporting books and records
They complement other audit procedures but do not provide sufficient appropriate evidence or affect the other procedures (i.e. subsequent events)

Answer 224

A

Acknowledgment of its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud
Knowledge of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others if the fraud could materially affect the financial statements
Knowledge of allegations of fraud or suspected fraud affecting the entity obtained in communications from employees or others
Aspects of contracts that may affect the statements, including noncompliance (i.e. contractual agreements)
All transactions have been recorded in the accounting records
Discontinuing a line of business

Answer 225

A

Materiality limits are usually set by the auditor in order to efficiently perform the audit
Materiality limits would ordinarily apply to related party transactions

Answer 226

A

Analytical procedures
Review of subsequent events
Review of compliance with debt and loan agreements
Reading minutes of meetings
Inquiry of legal counsel
Confirmation with related and third parties of arrangements for financial support.

Answer 227

A

Plans to dispose of assets
Borrow money or restructure debt
Reduce or delay expenditures
Increase equity
Negotiate reductions in required dividends being paid on preferred stock
An uninsured or underinsured catastrophe
Internal work stoppages
Litigation, legislation, or similar matters jeopardizing operating ability
Loss of a key franchise, license, or patent
Loss of a principal customer or supplier

Answer 228

A

Using assets as collateral is very common in everyday business (i.e. a building is used as collateral for the mortgage)

Answer 229

A

Sampling for Attributes
* Used for testing of controls
* Actual deviation rate > Tolerable deviation rate = Increased Risk
* Overreliance/Underreliance
* Effectiveness of Controls
* Assessing control risk to low

Sampling for Variables
* Used for testing of details
* Actual Misstatements > Tolerable Misstatements = Increased Risk
* Incorrect Acceptance/Incorrect Rejection
* Efficiency of Controls
* Assessing control risk too high

Answer 230

A

That the auditor’s conclusion based on the sample may be different in the population.
This would cause an erroneous conclusion

Answer 231

A

Produces an estimate having a desired level of precision with a smaller sample size

Answer 232

A

Does the conclusion only effect the sample? = Sample Risk
Does the conclusion effect past the sample? = Non-Sampling Risk

Answer 233

A

The deviation rate in the auditor’s sample is greater than the tolerable popular deviation rate
The deviation rate in the population is less than the tolerable population deviation rate

Answer 234

A

The population variability of difference or ratios are less than the populations of carrying amounts or audited values.

Answer 235

A

Every time in the population has equal, or known, and non-zero probability of being chosen.

Answer 236

A

Auditor’s sample deviation rate > the tolerable misstatement
True deviation rate < the tolerable misstatement

Answer 237

A

It is not determined mathematically
The auditor’s judgment is used to determine sample size and results (i.e. auditor selected inappropriate audit procedures)

Answer 238

A

When the calculated audit amounts are approximately proportional the the client’s carrying amounts

Answer 239

A

Auditor’s sample deviation rate < the tolerable misstatement

True deviation rate > the tolerable misstatement.

Answer 240

A

Population size
Overreliance Risk
Expected deviation rate
Tolerable deviation of the population rate

Answer 241

A

The number of times a certain characteristic occurs within the population

Answer 242

A

Achieved upper deviation limit
(Sample deviation rate)

Answer 243

A

Variables sampling is used to estimate quantities or dollars in substantive testing
An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling
For example, an estimate whether the dollar amount in inventory is reasonable

Answer 244

A

In monetary-unit sampling, the auditor can measure can control risks associated with observing less than 100% of the population.
The auditor can then measure the risk of accepting the recorded amount as fair, even though it may be materially misstated.

Answer 245

A

Because each invoice has a probability proportional to its monetary value of being selected

Answer 246

A

The auditor may refer to these notes either in the Emphasis of Matter or Other Matter sections of the Auditor’s Report

Answer 247

A

The first paragraph identifies the titles of the financial statements.
Identifies the applicable financial reporting framework and its origin (i.e. GAAP, OCBOA).

Answer 248

A

A critical audit matter (CAM) is any matter resulting from the audit of the financial statements that:
* Is either communicated, or must be communicated to the audit committee.
* Relates to material accounts and disclosures (i.e. possible material loss).
* Involves challenging, subject or complex auditor judgement.
* A possible material loss due to an uncollectible receivable

Answer 249

A

When the event occurs after the date of the auditor’s original report.

Answer 250

A

Those charged with governance (i.e. Board of Directors, Audit Committee)
Audited entity

Answer 251

A

The event occurs after the date of the auditor’s original report
The auditor does not need to do any additional procedures on the note
The event is included in a separate note and is labeled unaudited

Answer 252

A

A subsequent event was discovered after the audit report was released
The auditor is only responsible for the subsequent event that was discovered

Answer 253

A

There is substantial doubt about the going concern of an entity, and the concern is not disclosed in the financial statement.

Answer 254

A

A qualified opinion is issued when:

There is a material misstatement related to specific amounts in the financial statement that is not pervasive.
Circumstances not controlled by the entity
Circumstances related to the nature or timing of work due to the late engagement.
Limitations imposed by management.
Unjustifed change in accounting principle
Scope limitation
Omitting a financial statement from the audit (i.e. Statement of Cash Flow).

Answer 255

A

The auditor is unable to obtain sufficient appropriate evidence that would confirm that the financial statements, as a whole, are free from material misstatement.
A refusal from the client’s attorney to provide a letter of inquiry would cause a qualified or disclaimer to be issued.

Answer 256

A

The auditor complies with all regulations of the audit
The audit is feasible
The auditor can perform procedures on unrelated items

Answer 257

A

Qualified or disclaimer, depending on pervasiveness
Auditor is unable to obtain sufficient audit evidence

Answer 258

A

The basis of opinion changes to “Basis for Adverse Opinion”
The section will include a statement that “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion.”

Answer 259

A

The auditor should disclose the departure in the disclaimer, including its effects if they have been determined by management or by the accountant’s procedures.

Answer 260

A

The auditor cannot obtain sufficient appropriate evidence, which results in the financial statements being materially misstated and pervasive.
A scope limitation that results from circumstances not controlled by the entity.
A scope limitation because of circumstances related to the nature of timing of the work (i.e. unable to confirm beginning inventory).
A scope limitation due to limits imposed by management
The auditor is unable to determine information due to an employee fraud scheme

Answer 261

A

An unreasonable justification for a change in accountin principle
Related party transactions are not disclosed in the financial statements
Financial statements contain a material misstatement

Answer 262

A

The group engagement team should have an understanding of the component auditor’s professional competance and compliance with ethical requirements.
Confirm that the component auditor meets the same ethical requirements as the group engagement team.

Answer 263

A

The group auditor should obtain the component auditor’s audited financial statements.
The group auditor should make inquiries regarding the component auditor’s professional reputation and independence.

Answer 264

A

If the auditor concurs with the change, a separate paragraph is required
If the effect of the change is not material to the financial statements, then the change is not referred to in the auditor’s report

Answer 265

A

The change is reported prospectively as a change in principle.
The change is recognized in the auditor’s report as to consistency.
If the change results prior period adjustments that will cause material misstatement in prior financial statements, then the opinion will be either qualified or adverse.

Answer 266

A

The new principal and the method of accounting are in accordance with the reported framework.
Appropriate disclosures are made
The entity has justified that the change is preferable.

Answer 267

A

Either an adverse or qualified opinion

Answer 268

A

A change in specific subsidiaries
Correction of a mistake in the application of accounting principle
Change from an accounting principle from non-GAAP to GAAP

Answer 269

A

If a change in principle is not material to the financial statements, then the auditor does not refer to the change in the current-year report.

Answer 270

A

Disclosed in the notes to the financial statements

Answer 271

A

The auditor’s report should include an emphasis-of-matter paragraph that describes the change.

Answer 272

A

Management is responsible for estimating what future effects will have with regard to the financial statements.

Answer 273

A

If the auditor agrees that there is a remote likelihood of a material loss that was from an uncertainty

Answer 274

A

A scope limitation involving a recorded uncertainty

Answer 275

A

The prior year’s financial statement were auditor by another auditor (do not provide the auditor’s name).
The date of the report
The type of opinion expressed
The reason for any modifications
The nature of any emphasis-of-matter or other-matter paragraph

Answer 276

A

The auditor updates the report on the previous financial statements, regardless of the opinion previoulsly expressed.

Answer 277

A

The date of the report is based on the most recent audit.
The auditor dates the report no earlier than the date the auditor obtained sufficient appropriate evidence for the opinion of the most recent audit.

Answer 278

A

An event that has, or will have, a significant effect on the entity’s financial position (i.e. a departure from GAAP to prevent missleading reports).
A material change in an accounting principle occurs
An uncertainty related to a future outcome (i.e. litigation)
Significant transactions with related parties
Unusually important subsequent events
A major catastrophe that has a significant impact on the financial position

Answer 279

A

An Other-Matter paragraph is used for unaudited prior-period statement.

Answer 280

A

Under PCAOB, an emphasis paragraph is
* Never required
* Not a substitute for Critical Audit Matters (CAM)
* Not referred to in the opinion section

Answer 281

A

To determine if there are any material misstatements that should be made to the financial statements.
It provides the auditor with a basis for reporting whether material modifications should be made in order to conform
The review provides negative assurance
Independence in required

Answer 282

A

A modification of a review of interim financial information would be made if there is a departure due to inadequate disclosure, and the auditor believes that if it’s feasible, it should be included in the report.

Answer 283

A

Reading documentation of the prior audit and prior reviews
Reading recent annual information and prior interim financial reviews
Consider current audit results
Ask management about any changes in business or internal control.
If it’s an initial review, make inquiries of the predecessor auditor and review their documentation.
If it’s an initial review, obtain knowledge of the relevant information.

Answer 284

A

The auditor should request management to revise the letter of transmittal.

If management refuses to revise the other information
* Communicate the matter to those charged with governance
* Include in the description of Other Information section of the auditor’s report
* Withhold the auditor’s report
* Withdraw from the engagement

Answer 285

A

Read the other information and determine of there are any material inconsistencies with the audited statements.
Determine that the other information is separate from the required supplementary information (RSI)
To respond if there are statements that would undermine the credibility of the auditor’s report

Answer 286

A

Other information contains financial and nonfinancial information that are not reported on the audited financial statements.

Examples include
* Annual Report to Owners
* Management Report on Operations
* Selected Quarterly Data
* Financial Summaries

Answer 287

A

The auditor should read the Other Information section to consider if there are:

Any material inconsistencies between the Other Information section and the financial statements
A material misstatement of fact exists
The information is misleading

Answer 288

A

The RSI is reported in a separate paragraph after the opinion section, and should be added if
* The RSI is not omitted
* Presecribed guidelines are followed
* Required audit procedures are completed
* Limited procedures are performed to report any omissions or deficiencies.

Answer 289

A

A section after the opinion paragraph is added for the RSI
* RSI reference and the applicable reporting framework.
* Statement that the RSI is the responsibility of Management
* Statement that the auditor has applied procedures in accordance with GAAS
* Statement that the auditor does not express an opinion or provide any assurance on the RSI

Answer 290

A

Inquire if RSI within the prescribed guidelines
Whether methods of measurement or presentation have changed and the reason for the change
Any significant assumptions or intepretations
Compare the RSI for consistency with the basic statements
Obtain management’s written representation to its responsibilities to the RSI and compliance with guidelines

Answer 291

A

The materiality level used for the audit of the financial statements

Answer 292

A

Auditor must determine that the supplementary information is based on the underlying records that are used to prepare all of the financial statements
Information relates to the same period as the financial statements.
Financial statements were audited
Auditor’s report did not express an adverse or disclaimer of opinion
Supplementary information will be presented with the audited statements or be made readily available without any additional changes made by management.
An auditor is not required to perform subsequent event procedures on Supplementary Information.

Answer 293

A

Understand the methods of preparation
Inquiring about the purpose and criteria for the supplemental information
Inquiring about significant assumptions

Answer 294

A

Preparing SI in accordance with applicable criteria
Providing written representations
Including the auditor’s report on the SI with the SI and the audited statements

Answer 295

A

Determine whether the summary statements agree with the related information in the audited statements.
Determine that information in the summary statements can be recalculated based on the related information in the audited statements
Comparing the summary statements with the related information in the audited statements
Evaluate whether the summary statements are prepared in accordance with the applied criteria applied by management
Obtain a representation letter from management

Answer 296

A

The auditor audited the statements from which they are derived.
The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria.

Answer 297

A

An emphasis-of-matter paragraph identifying the reporting framework used in the preparation of the financial statements
An emphasis-of-matter paragraph indicating that the framework differs from accounting principles generally accepted in the U.S.
The auditor should report using the U.S. form of report

Answer 298

A

Use other professional experts, if required
Obtain an understanding of the conditions that are needed to issue the report
Review the relevant requirements of the framework

Answer 299

A

By an accountant in public practice
Applies to an actual transaction given specific facts and circumstances of a specific entity.
Addresses whether a reporting framework applies to a proposed transaction involving facts or circumstances of a specific entity.
Addresses how a completed transaction of a specific entity may be accounted for under the existing reporting framework.
Does not apply to a current, or continuing, auditor
Independence is not required, but must disclose the lack of independence

Answer 300

A

If the auditor believes that the statements are not suitably titled.

The auditor should disclose any reservations in a basis for qualified opinion section.
The auditor will qualify the opinion.

Answer 301

A

Preparation is a service to prepare financial statements without attaching a report or determining whether the accountant is independent.
A preparation of financial statements include preparation of Personal Financial Statements for presentation with a financial plan. (i.e. completing a personal financial statement to obtain a mortgage).

Answer 302

A

The other historical or prospective financial information is adapted as necessary in the circumstances
Prospective financial statements may be prepared and compiled, but not reviewed

Answer 303

A

A disclosure would be placed on the face of the financial statements.

Answer 304

A

A preparation service allows the accountant to generate financial statements and release them to the client or third parties without a report.
Each page should stated that the prepare provides no assurance.
Independence is not required, and does not need to be reported to management

Answer 305

A

Management’s agreement about certain matters
It acknowledges and understands its responsibilities
Accuracy and completeness of records
Significant judgments it provides for the preparation of the financial statements

Answer 306

A

A statement on each page that no assurance is provided
The agreed-upon terms of the engagement should include identification of the applicable financial framework to be used
The engagement documentation should include the engagement letter and a copy of the prepared financial statements

Answer 307

A

When an accountant in public practice is engaged to prepare financial statements
The determination of whether the accountant has been engaged to prepare financial statements depends on the services requested
Assisting the the preparation is not applicable

Answer 308

A

Prospective financial information
Proforma financial information
Other historical financial information

Answer 309

A

A compiliation report with special wording that notes the accountant’s lack of independence

Answer 310

A

To apply accounting and financial reporting expertise to assist management in the presentation of financial statements
No assurance is provided

Answer 311

A

For a review, an accountant expresses a conclusion, not an opinion. An opinion is issued for audits.
The accountant expresses limited assurance on the financial statements
A review is substantially less in scope than an audit
“…not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.”

Answer 312

A

If the prior-period report is not reissued, a separate paragraph is added to the review report indicating:
* The prior-period statements were audited
* The date of the previous report
* The opinion expressed
* The substantive reasons if the opinion was not unmodified
* No audit procedures were performed after the date of the previous report

Answer 313

A

The accountant would express a modified conclusion.
On the review report, the accountant would create a heading titled “Qualified Conclusion or Adverse Conclusion”
The accountant would describe the matter causing the conclusion under the paragraph, before the conclusion paragraph, titled “Basis for Qualified Conclusion” or “Basis for Adverse Conclusion”

Answer 314

A

Read the financial statements to confirm that they conform with GAAP
Reconcile the financial statements with the accounting records
Obtain written representation from management
Comparison of current and prior year account balances
Compare current year budget to forecast
Industry benchmarks

Answer 315

A

Business combination
Change in capitalization
Disposition of a signficant portion of a business
Change the form of a business
Proposed sale of securities and the application of the proceeds

Answer 316

A

The accountant’s objective is to assist management to present the pro forma financial information and to report it in writing withouth provide any assurances.
The PFFI may be compiled only if it is contained in a document that includes the financial statements on which they are based.
The statements must have been reviewed, compiled or audited in order to be included in the document.
No type of assurance is provided

Answer 317

A

The accountant must include a summary any significant assumptions with the PFFI, in addition to the complete financial statements that were used to compile the PFFI and the accountant’s report.

Answer 318

A

Complete financial statements
Report on the statements
Summary of Significant Assumptions with PFFI (If applicable)

Answer 319

A

A description of the nature, timing and extent of the procedures performed.
Specific items or matters tested are identified
Who performed the work
The date the work was completed
Who reviewed the work
The date and extent of the review

Answer 320

A

Independence is required for all attestation engagements
Have unresticted access to information that the practitioner considers necessary
Determine that the subject matter is appropriate
Expect to prepare a written report

Answer 321

A

Obtain reasonable assurance about whether the subject matter, as measured or evaluated by certain criteria, is free from material misstatement.
Expresses an opinion about whether the subject matter is accordance with certain criteria, or the responsible party’s assertion is fairly stated.
Communication is further required.

Answer 322

A

For an assertion-based examination, the subject matter is based on responsible party’s assertion.
For a direct examination, the practitioner’s conclusion will evaluate directly, using suitable criteria, the subject matter for which the accountable party is responsible.

Answer 323

A

The responsible party is responsible for the written letter of representations.
If the engaging party is not the responsible party, then the practitioner should obtain written representations from both parties.

Answer 324

A

The auditor is independent
A statement referring to the standards established by the AICPA
All findings based on specific procedures performed on subject matter.
The procedures performed were agreed to by the engaging party
A statement that the report may be not suitable for othe purposes
The subject matter is the responsibility of the responsible party.
Any exceptions identified based on the procedures performed.

Answer 325

A

The engagement party agrees that the procedures performed.
The engagement party acknowledges that the procedures performed are appropriate before a report is issued.
The subject matter is reasonably consistent
Evidence is expected to exist in order to provide a reasonable basis for the findings.
Other conditions are met

Answer 326

A

Several significant assumptions do not provide a reasonable basis for the forecast.
Significant assumptions, including the summary of assumptions, are not disclosed in the presentation.
A practitioner should not examine a presentation that omits all disclosures

Answer 327

A

Projection
* The practitioner may perform an examination.
* The examination is for limited use by the enity and the party that is negotiating directly with the entity.

Financial Forecast
* General Use

Answer 328

A

A financial projection is based on estimates of conditions that are be based on one or more hypothetical assumptions.
A financial forecast is based on assumptions based on conditions that are expected to exist and courses of action expected to be taken.

Answer 329

A

Financial forecasts or projections.
Summaries of significant assumptions
Summaries of accounting policies

Answer 330

A

A presentation omits:
* Sales or gross revenues
* Gross profit or cost of sales
* Unusual or infrequently occurring items
* Provision for income taxes
* Discontinued Operations
* Income from continuing operations
* Net income
* Basis or diluted EPS
* Significant changes in financial position

Answer 331

A

Identification of pro forma information
Reference to the financial statements that were used
If the financial statements were audited or reviewed
That the review was made in accordance with AICPA standards
A review is substantially less in scope than an audit
No opinion is expressed
The objective of PFFI and its limitations
The practitioner’s conclusion providing limited assurance

Answer 332

A

Pro Forma financial information uses historical financial information to show what might have been reported if the transaction or event occurred at an earlier date.

Answer 333

A

Compliance with specified requirements (i.e. laws, regulations, rules, contracts, grants, etc.)
In an compliance engagement for agreed-upon procedure, effective of internal control over compliance with specified requirements.
Performance of procedures to provide reasonable assurance of detecting material noncompliance.

Answer 334

A

Occurrence
Consistency
Completeness
Presentation and Disclosure

Answer 335

A

Reported transactions, events and explanations consistent with the financial statements
Historical financial amounts are accurately derived from the statements and related records
Nonfinancial data have been accurately derived from related records.

Answer 336

A

The MD&A is a written assertion that may be examined or reviewed by the practitioner.
Whether the historical financial statement amounts are accurately derived from statements and related records.
Reported transactions, events and explanations are consistent with the statements.
Nonfinancial data have been accurately derived from related records.

Answer 337

A

In relation to MD&A, control risk is the risk that material misstatements may occur because the entity’s internal control did not detected the MD&A misstatement in a timely manner.

Answer 338

A

Financial statement audit
Written report on internal control over financial reporting

The report on internal control provides does not provide an opinion

Answer 339

A

Performance audits include economy and efficiency audits.

Groups included in performance audits consist of:
* Government entities, programs, activities and functions
* Government assistance administered by contractors, not-for-profit entities and other nongovernmental activities.

Answer 340

A

Program effectiveness and results
Economy and efficiency
Internal control
Compliance with legal requirements
Providing prospective analysis, guidance and summary information.

Answer 341

A

A description of the scope of the auditor’s testing of compliance with laws and regulations.
A description of significant deficiencies and material weaknesses in internal control

The report on internal control provides does not provide an opinion

Answer 342

A

Significant deficiencies and material weakness in internal control
Instances of fraud and noncompliance with provisions of laws and regulations that have a material effect on the audit, as well as cause attention to those charged with governance.
Noncompliance with provisions of contracts and grant agreements that has a material effect on the audit.
Abuse that has a material effect on the audit.

Answer 343

A

The supervisory review of the evidence that supports the findings, conclusions and recommendations.
Departures due to law
Departures due to regulations
Any scope limitations
Restrictions on access to records
Views of responsible officials if their report discloses fraud
Any other issues

Answer 344

A

Operate the audited entity’s information technology system
Perform internal audit services
Prepare accounting records

Answer 345

A

The falsification is communicated by the auditor to the auditee and the auditee fails to make a required report of the matter

Answer 346

A

Reporting on the reliability of performance measures
Internal control over financial reporting
Compliance with requirements of specified laws, regulations, policies, contracts, or grants
MD&A

Answer 347

A

If the entity still does not report the noncompliance to the outside entity

Answer 348

A

Identify the entity’s government programs and understanding and complying with the compliance requirements.
Designing, implementing and maintaining effective controls over compliance
Evaluating and monitoring compliance
Taking necessary corrective action to ensure compliance
Consider whether management has identified the applicable compliance requirements

Answer 349

A

It occurs when a reasonable possibility that material noncompliance with a compliance requirement will not be prevented, or detected and corrected, on a timely basis

Answer 350

A

The auditor’s risk assessment includes an expectation of the operating effectiveness of controls related to the applicable compliance requirement (ACR)
Substantive procedures alone do not provide sufficience audit evidence.
Tests of controls are required by the governmental audit requirements (GAR)

Answer 351

A

The emphasis of the audit is on major programs related to federal awards administered by nonfederal entities that expends $750,000 or more in federal awards in one fiscal year.
Audit is in accordance with GAO and OMB Requirements.
The auditor determines on whether a deficiency in internal control is a signficiant deficiency or a material weakness in relation to the type of compliance.
The auditor should identify all significant deficiences and material weaknesses.

Answer 352

A

Activities allowed or unallowed
Allowable costs/cost principles
Cash management
Eligibility
Matching, level of effort, and earmarking
Reporting

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