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Audit > Audit > Flashcards

Audit Flashcards

1
Q

What is Management Responsible for in regards to the Financial Statements?

A

Preparation and Fair Presentation of Financial Statements in accordance with the Applicable Financial Reporting Framework

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2
Q

What is Management Responsible for in regards to Internal Control?

A

Internal Control Design, Implementation, Maintenance

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3
Q

What are the headings in the Audit Report for an Unmodified Opinion?

A

(TIM-AA) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion

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4
Q

What are the headings in the Audit Report for an Modified Opinion?

A

(TIMA-BA) Title; Introduction; Management Responsibility; Auditor Responsibility; Basis for (Modified) Opinion; Audit Opinion

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5
Q

In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the headings?

A

(TIM-AA EMO) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion; Emphasis-of-Matter; Other-Matter

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6
Q

What are the requirements for referencing a Component Auditor in the Audit Report?

A

Component Financial Statements must be prepared using same Financial Reporting Framework as the Group Financial Statements; Component Auditor must have performed audit in accordance with GAAS or PCAOB Standards.

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7
Q

What type of engagements follow SSARS (Statements on Standards for Accounting and Review Services)?

A

Compilations and reviews (of non-issuers) are governed by SSARS

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8
Q

What must the Group Engagement Partner do if they assume responsibility for the Component Auditor’s work?

A

Perform additional audit procedures; Be involved in Component Auditors work; Perform Risk Assessment procedures; Assess Risk of Material Misstatement

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9
Q

Which clients can have compilation engagements?

A

Non-SEC (non-public) registrants only.

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10
Q

What is a Compilation?

A

Accountant puts together financial statements with information PROVIDED BY MANAGEMENT. No opinion is expressed and no assurances are given. Independence is not required.

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11
Q

What disclosures are required for Compilation engagements?

A

Disclosures not necessary must state that they are not included

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12
Q

What type of assurance is given in a Review engagement?

A

Reviews give limited assurance.

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13
Q

What procedures are required for Review engagements?

A

Analytical procedures are required for reviews. Compare results to documented predictions.

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14
Q

What is a Review engagement?

A

Financial statements are presented with no opinion expressed- and limited assurances are given. Independence is required for a review engagement.

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15
Q

What is a Forecast?

A

A prospective financial statement that uses normal circumstances. General and limited use allowed.

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16
Q

What is a Projection?

A

A prospective financial statement using hypothetical situations. Only limited use by the client is allowed.

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17
Q

What are the requirements for Agreed Upon Procedures?

A

Independence is required; Only limited use by the client is allowed.

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18
Q

What disclosures are required for remote likelihood of losses?

A

No disclosure required.

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19
Q

What disclosure is required for a probable loss contingency?

A

Accrue if estimable. Emphasis-of-Matter paragraph if not estimable.

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20
Q

What disclosure is made if a loss contingency is reasonably possible?

A

Auditor assesses need for Emphasis-of-Matter paragraph based on loss likelihood.

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21
Q

How does a very material GAAP issue affect the Audit Report?

A

Adverse Opinion is issued. Emphasis-of-Matter paragraph is added after Opinion paragraph.

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22
Q

How is a gain contingency reported?

A

Gain contingencies are not reported.

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23
Q

How does an immaterial GAAP issue affect the audit opinion?

A

It doesn’t. Opinion is Unmodified.

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24
Q

How do GAS standards compare to GAAS?

A

GAS is more strict than GAAS.

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25
Q

What is required under the Single Audit Act?

A

An audit performed under governmental auditing standards (GAS).
Required for entities receiving federal assistance >/= $500k
A report on internal control over compliance is required (disclaims opinion)

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26
Q

What is Statistical Sampling?

A

Auditors use mathematical formulae (not judgment) to quantify risk, determine sample size, and evaluate sample results

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27
Q

What is Non-Statistical Sampling?

A

Auditors use judgment to estimate risk, determine sample size, and evaluate sample results

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28
Q

What are Substantive Procedures?

A

Tests of details and analytical review procedures to substantiate account balances

(Ex: Variables & PPS sampling)

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29
Q

What is Sampling Risk?

A

Risk that your sample isn’t representative of population

Can happen even if audit is done properly

Conclusion may have been different had entire population been tested

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30
Q

What is the risk of Incorrect Acceptance?

A

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated

Hurts audit effectiveness

Wrong conclusion reached

Efficient but not effective

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31
Q

What type of sampling are Control Tests?

A

Attribute Sampling

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32
Q

What is Non-Sampling Risk?

A

Risk of human (auditor) missing an error

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33
Q

What is Attribute Sampling?

A

Statistical sampling method used to estimate the rate of occurrence of a specific characteristic or attribute in a population

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34
Q

What is Variables Sampling?

A

Testing for a dollar amount

Value in sample gives information about value in entire population.

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35
Q

What is the risk of Incorrect Rejection?

A

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated

Hurts audit efficiency

Wrong recommendations given

Effective- but not efficient

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36
Q

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

A

Sampling unit is an individual dollar amount. Once a dollar is selected the entire account containing that dollar is audited

Does NOT use Standard Deviation

Larger or more valuable items get picked more often as part of the sample

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37
Q

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

A

PPS:
Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design

Classic Variables Sampling:
Easy to expand sample size- Selecting zero and negative balances easy

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38
Q

What is Allowance for Sampling Risk?

A

The amount that you add to the Sampling Error Rate to get some cushion for your sample. (gets you to the Upper Deviation rate)

As high as you think the population error rate could go based on experience.

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39
Q

What is Systematic Sampling?

A

Every Nth item of a population is selected

Population needs to be randomly ordered

Primary advantage is that population doesn’t require pre-numbering

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40
Q

What is Sequential Sampling?

A

Also called Stop or Go sampling

Allows auditor to stop an audit test if results have become clear

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41
Q

What functions are used in conjunction with Classic Variable Sampling?

A

Mean Per Unit = Sample Average x Number in Population

Stratification - Decreases effect of variance in population and reduces sample size

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42
Q

What is Projected Misstatement?

A

Misstatement found in sample - have to project it to remainder of population

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43
Q

What factors affect sample size?

A

Tolerable rate for error - Inverse relationship with sample size

Risk of assessing Control Risk too low - Inverse relationship with sample size

Expected population error rate - Direct relationship with sample size

Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.

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44
Q

After a Sampling Plan is developed- what are the steps in sampling?

A

Perform the Sampling Plan

Evaluate Results

Document Results

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45
Q

What is Discovery Sampling?

A

Audit is testing an area that is so crucial that zero population errors can be tolerated

Any phony employees on payroll?

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46
Q

What is the primary duty of an auditor?

A

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

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47
Q

What is the auditor’s responsibility for detecting theft or fraud?

A

Auditors are not responsible for detecting theft or fraud.

Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.

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48
Q

How is Audit Risk calculated?

A

Inherent Risk x Control Risk x Detection Risk

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49
Q

Describe Control Risk

A

Risk that material misstatement will not be detected by the entity’s internal control

Exists independently of the audit

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50
Q

Describe Inherent Risk.

A

The susceptibility of an assertion to material misstatement (human error)

Exists independently of the audit

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51
Q

Describe Detection Risk.

A

Risk that the auditor will not detect a material misstatement

Auditor CAN control

Do testing at year-end
Increase substantive testing
Run more effective tests

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52
Q

When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?

A

The earlier the auditor is hired- the better for audit planning and efficiency.

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53
Q

When can audit procedures be performed at interim dates?

A

If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates.

The auditor then reviews changes in the balances at year-end.

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54
Q

What is the auditor’s responsibility with respect to fraud and illegal acts?

A

Assess the RISK that such things will lead to material misstatements

Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements

Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee)

Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)

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55
Q

What are the three factors that affect/influence fraud?

A

Rationalization
Incentive
Opportunity

(RIO)

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56
Q

When can an auditor accept an engagement offered after the year is already closed?

A

The auditor can take the engagement if they are able to overcome the limitations of the engagement.

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57
Q

How can analytical procedures be performed in audit planning?

A

The auditor can compare actual versus forecasted numbers.

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58
Q

What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?

A

If issues relating to predecessor auditor’s work on previous Financial Statements come up during the current audit- Auditor must have client’s permission to discuss the issue.

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59
Q

What questions must an auditor ask with respect to procedures carried out by assistants?

A

Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?

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60
Q

Describe the key components of maintaining auditor independence.

A

Auditor must be independent in fact and appearance

Honesty

No direct financial interest

No indirect material financial interest

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61
Q

Describe Due Professional Care

A

Technical abilities mirror those held by peers in the profession
Follow GAAS Standards
Obtain a Reasonable Level of Assurance
Maintain Reasonable Level of Skepticism
Supervise Audit Staff
Review judgment at every level

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62
Q

What should an auditor do prior to accepting an audit engagement?

A

Review the previous financial statements

Speak to third parties

Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

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63
Q

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE (limited) assurance.

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64
Q

What questions should be asked by an auditor prior to taking an engagement?

A

Note: must have permission of client to contact predecessor auditor (no permission = no engagement)

Why the Auditor Change?
Any Serious Discussions with Audit Committee?
How is Management Integrity? Disagreements?
How was Internal Control?
Understand Industry or Be Willing to Learn
Consider Scope Limitation - Limited evidence available = no engagement

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65
Q

What should be included in an audit engagement agreement?

A

Note: must be written

Objectives of Engagement
Limitations of Engagement
Responsibilities of Management - Provide written assertions
Responsibilities of Auditor - Limited error/fraud responsibility
Expectations of Access to Records
Financial Statements (and Disclosures) are Management’s Responsibility
Compliance with Laws
Internal Control

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66
Q

What is management’s responsibility with respect to the financial statements?

A

Management is responsible for financial statements and adequacy of disclosures.

Presentation & Disclosure
Existence (Tests Overstatements)
Rights & Obligations
Completeness (Tests Understatements)
Valuation & Allocation

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67
Q

What is the purpose of the Audit Committee?

A

Responsible for Hiring Auditor

Oversees Internal Control

Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan

Acts as Liaison Between Auditor and the Board

Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

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68
Q

What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?

A

Less Acceptable DR = Run More Substantive Tests

More Acceptable DR = Run Less Substantive Tests

More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR)

Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)

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69
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

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70
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

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71
Q

What red flags may indicate higher risk in an audit?

A

Management compensation tied to stock
Aggressive financial forecasting
Former auditor disagreed with Management
Records not available for audit

Current audit procedures may need to be reconsidered if red flags exist.

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72
Q

What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?

A

Strives to make audit engagement procedures less patterned and predictable

Re-evaluates management’s application of accounting procedures

Finds and assigns audit personnel with relevant skills in this area

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73
Q

What was the effect of the SOX Act of 2002?

A

Created PCAOB

Designates Officer responsibility for internal control

Must disclose significant internal control weaknesses to auditor and audit committee

Must disclose any level of fraud discovered by employees with internal control responsibilities

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74
Q

What is the Hierarchy of Authoritative Literature?

A
  1. Statements on Auditing Standards (SAS)
  2. Auditing Interpretations- AICPA Guides & SOPs
  3. Industry Articles (no authority)
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75
Q

What quality control activities are undertaken by CPA firms with audit practices?

A

Firm Leadership exhibits quality and leads by example and sets the tone for the organization

Firm should Monitor and document that its policies and procedures are being followed

Firm should have Relevant Ethical Requirements

Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality

Firm should have competent and ethical personnel

Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

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76
Q

What is the independence requirement for Compilations?

A

Independence NOT required for Compilations

No Internal Control work allowed

No assurance given

77
Q

What is the independence requirement for a Review?

A

Reviews require independence.

No Internal Control work allowed
Performs analytical procedures
No material indirect financial interest allowed
No immaterial direct financial interest allowed

78
Q

For compilations and reviews- what knowledge must a service provider have?

A

Must have an understanding of the client industry.

79
Q

What are attestation services?

A

CPA issues an examination, a review (of an issuer), or an agreed upon procedures report on subject matter or an assertion

NOT considered a Consulting engagement

Independence Required

80
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

81
Q

Describe the limitations on Prospective Financial Statements?

A

Report is restricted to specified users.

Agreed-upon procedures are implemented.

82
Q

What is the role of the Group Engagement Team?

A

Develop Audit Strategy; Communicate with Component Auditors; Perform work on the Consolidation Process; Evaluate Audit Conclusions; Understand work of Component Auditors;

83
Q

Who is on the Group Engagement Team?

A

Firm Partners; Group Engagement Partner; Audit Staff

84
Q

Who establishes the Materiality threshold for the Component Auditor?

A

The Group Engagement Team; The Materiality threshold must be lower than the Group Materiality threshold

85
Q

What is the Group Engagement Partner responsible for?

A

Group Audit Engagement Direction - Supervision - Performance and the Audit Report

86
Q

What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Financial Materiality?

A

Audit the Financial Information

87
Q

What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Risk of Material Misstatement?

A

Perform Audit Procedures

88
Q

What should the Group Engagement Team do if a Component Auditor audits a Non-Significant Component?

A

Analytical Procedures performed at Group Level

89
Q

Why does an Auditor do if they suspect legal proceedings could contribute to a Material Misstagement?

A

Contact Client external counsel through a Letter of Inquiry

90
Q

How does a high level of acceptable Detection Risk affect an audit?

A

Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong.

91
Q

What should occur when a low level of Detection Risk is acceptable?

A

More Evidence collected

92
Q

What are the primary risks in an audit for a typical for-profit company?

A

Assets & Revenues overstated
Expenses & Liabilities understated

Exception - if the CPA Exam states that it is a tax-driven company flip them around

93
Q

Of what does audit Evidence consist?

A

Evidence consists of client accounting data and supporting documentation from client or from third parties.

94
Q

How does the quality of audit evidence vary depending on who has provided it?

A

Best evidence: Observation of activity by auditor.

2nd Best: Originates from External Parties and is sent directly to auditor (or items are generated by third party and provided to auditor by the client such as a bank statement)

Weakest: Oral evidence from management.

95
Q

What is the primary constraint on audit evidence?

A

Cost vs. Benefit is a primary constraint.

96
Q

What characteristics should audit evidence have?

A

Sufficient (quantity)

Appropriate: Relevant & Reliable (Quality)

97
Q

How is a Statement of Cash Flows audited?

A

Foot all balances - Check the Math

Trace Cash Flow items to other Financial Statements

Check classifications - Operating Activities Investing Activities Financing Activities

98
Q

What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?

A

Client should issue a disclosure to financial statement users and/or revise the financial statement.

99
Q

What should an auditor do if they discover they have forgotten to perform a substantive procedure?

A

Auditor should determine if other substantive procedures performed served as a substitute.

100
Q

When are Analytical Procedures required?

A

REQUIRED When planning the audit (preliminary)

REQUIRED When reviewing the audit (final)

Analytical procedures may be also performed optionally along with the substantive testing.

Use of Analytical Procedures in the audit must be documented.

101
Q

What are the substantive tests that are most often performed?

A 
Trace (or Vouch)
Reconcile
Analytical Procedures
Confirmations
Examine evidence that supports management assertions.

(T.R.A.C.E.)

102
Q

What type of procedure is a Budget vs. Actual comparison?

A

Analytical Procedures.

103
Q

How are Management Estimates audited?

A

Gain an understanding of management’s rationale and methods for developing estimates before you can judge reasonableness.

Auditor should formulate their own opinion on what a good estimate should be and compare it.

Determine if subsequent events affect the estimate.

104
Q

What is the Permanent File?

A

Information used for this audit and future audits and prior audits which is updated as needed.

105
Q

How long must audit workpapers be maintained?

A

Must be kept for 5 years after the audit release date or according to regulations whichever is longer (for non-issuers)

Must be kept for 7 years under PCAOB Audit

PCAOB audits also require an Engagement Completion Document

106
Q

What is the primary requirement for audit workpapers besides being written?

A

Any experienced auditor should be able to look at your work and understand what you did.

107
Q

How do Analytical Procedures assist the auditor?

A

Helps the Auditor:

Determine if Management Assertions are reasonable

Develop audit plan

Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

108
Q

How should documents removed from workpapers be treated?

A

After the audit report is released the firm has 60 days to subtract from the file.

You can still add to the file if you document it but you cannot delete any information after 60 days.

Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.

109
Q

What is the focus of Analytical Procedures?

A

Analytical Procedure focus is on dollar amounts (not internal controls)

Analyzes Financial Data: Do Financial Statements Make Sense?

Comparison of data between years

110
Q

How is the Current Ratio calculated?

A

Current Ratio = Current Assets / Current Liabilities

111
Q

How is the Quick Ratio calculated?

A

Quick Ratio = Liquid Assets / Current Liabilities

Liquid assets are cash, marketable securities, and A/R

112
Q

How is the Asset Turnover calculated?

A

Asset Turnover = Net Sales / Average Assets

113
Q

How is the Inventory Turnover calculated?

A

Inventory Turnover = COGS / Average Inventory

114
Q

What is the Test Data Method?

A

Auditor uses the client’s application program to process, off-line, a set of test data for which the proper results are already known

115
Q

How can Embedded Audit Modules in software be utilized in an audit?

A

Collects transaction data for the auditor

Enable continuous monitoring in an audit environment that is changing

116
Q

How is Parallel Simulation utilized during an audit?

A

Auditor reprocesses some or all of the client’s live data (using the auditor’s own software) and then compares the results with the client’s files

117
Q

How is Gross Margin % calculated?

A

Gross Margin % = Gross Margin / Sales

118
Q

What is the relationship between Internal Control and Substantive Testing?

A

Inverse Relationship

Stronger Internal Controls - Less Testing Needed

Weaker Internal Controls - More Testing Needed

119
Q

What type of testing are ratios?

A

Ratios are Analytical Procedures

120
Q

What determines the acceptable level of Detection Risk?

A

Risk of material misstatement

121
Q

How do management assertions affect the audit?

A

Management assertions help the auditor to plan the audit and select substantive tests.

122
Q

What does Vouching test?

A

Tests Existence.

Starts with F/S (or J/E) and searches for a voucher or source document to support the entry.

123
Q

Whose property are audit documentation (audit workpapers)? In what form must they be?

A

Audit workpapers are the property of the auditor.

They can be paper or electronic.

They must include a WRITTEN audit program (either paper or electronic).

124
Q

What is the Current File?

A

Information pertaining to the current year’s audit.

125
Q

How should documents added to work papers be treated?

A

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

126
Q

When is an audit of IT NOT required?

A

Controls are redundant to another department

The system does not appear to be reliable and testing controls would not be an efficient use of time

Costs exceed benefit

127
Q

What is the role of a Database Administrator?

A

Maintains database

Restricts access

Responsible for IT internal control

128
Q

What is the role of a Systems Analyst?

A

Recommends changes or upgrades

Liaison between IT and users

129
Q

What is the role of the data Librarian?

A

Responsible for disc storage

Holds system documentation

130
Q

What is the benefit of Generalized Audit Software in an audit?

A

Uses computer speed to quickly sort data and files- which leads to a more efficient audit

Compatible with different client IT systems

Extracts evidence from client databases

Tests data without auditor needing to spend time learning the IT system in detail

Client-tailored or commercially produced

131
Q

What is required in an examination of Internal Control under Sarbanes-Oxley?

A

CEO/CFO must disclose Internal Control deficiencies

Management must provide assessment of Internal Control

Management must certify Financial Statements

132
Q

What are the 3 objectives of Internal Control?

A

Reliability of Financial Reporting

Operational Efficiency/Effectiveness

Compliance with Law and Regulations

133
Q

What does an auditor’s assessment of Detection Risk determine?

A

Detection Risk determines nature- timing- and extent of audit procedures.

134
Q

How must an auditor document understanding of Internal Control?

A

Through written documentation such as Internal Control memos- flowcharts- and questionnaires

135
Q

What is the purpose of testing Internal Controls?

A

Auditor needs reasonable assurance that controls are functioning as designed and effective

Internal Control Testing should be strong as (IRON) so that nothing gets past them

Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents

If results are as expected- substantive procedures do not need to be adjusted

136
Q

What does Tracing test?

A

Tests Completeness

Starts with source document and traces forward to the journal entry.

137
Q

What are the limitations on Control Activities?

A

Controls can’t stop collusion or bad judgment

Management can override controls

Cost vs. Benefit relationship of fixing Internal Control deficiencies

138
Q

What is required if a Material Weakness or Significant Deficiency is identified?

A

A written report to management is required.

Previous weaknesses reported that still exist should be reported again

Should be reported no later than 60 days after audit report release date

139
Q

What is a Significant Deficiency?

A

Less severe than a material weakness yet important enough to merit attention by those charged with governance. All material weaknesses are significant deficiencies

140
Q

What must an auditor ask if using the work of third parties?

A

Are they competent?

Are they objective?

141
Q

What is a Control Deficiency?

A

A control is not operating as intended.

142
Q

What are the characteristics of a Covered Member?

A

All partners in office connected with the attest engagement
Partners or managers who provide nonattest services to the attest client
All members of attest engagement team
Immediate family (Spouse, dependents, parents, siblings, & adult kids)

143
Q

What are the requirements for a Covered Member?

A

No direct financial interest (stock ownership, financial interest in a client or trust)

No Material indirect financial interest (shares in a mutual fund, material interest in a company that has a material interest in client)

144
Q

When is independence required?

A

Audits, Reviews, Attestation Engagements

145
Q

What is the rule concerning contingent fees for a covered member?

A

Not allowed

146
Q

When are contingent fees allowed?

A

When fixed by courts or in tax matters if they are based upon the results of the proceedings

For compilations of F/S to be used by third parties - must include a statement that member is not independent

147
Q

What is the effect of not returning all client-provided documents upon request?

A

This is a discreditable act

You MUST return all documents the client gives you even if they don’t pay their bill.

If you create a document- however- like a work paper- you are not required to give the client a copy of papers you created if they haven’t paid their bill. They are the firm’s work papers- but are still confidential!

148
Q

What are the rules with respect to CPA firm names?

A

CPA firm names must not be misleading.

If partner dies- remaining partner has two years to change name if partnership dissolved. If partner dies and more than one partner still remains (i.e. 1 dies and you still have 2 or more partners…you don’t need to change the name)

All Partners/Shareholders must be members of the AICPA in order to hold themselves out as members of the AICPA. Non-CPAs can be owners- but 2/3 of Ownership must be CPAs. Non-CPA owner must not be involved with the accounting- and is still bound by AICPA code of conduct- must maintain CPE requirements and have Bachelor’s degree.

149
Q

What are the functions of the PCAOB?

A

Monitors CPA Firms who audit SEC clients - All SEC Audit firms must register

Issues standards for firms to follow - usually stricter than AICPA standards

150
Q

Who created the International Auditing Standards?

A

The International Auditing and Assurance Standards Board (IAASB)

Member of the International Federation of Accountants (IFAC)

151
Q

What rules must auditors follow for governmental audits?

A

Auditors must follow both GAAS and GAS aka the Yellow Book materiality threshold is usually lower
More detail is required on working papers
More stringent CPE rules and requirements - 24 hours of continuing education must be related to governmental auditing every 2 years
Compliance with Regulations is a requirement of the Audit Report

152
Q

For whom were IAASB International Auditing Standards created?

A

IAASB standards are for countries that don’t have their own standards and help set the tone for the rest of the members who do have their own standards (AICPA)

IAASB doesn’t override member standards

153
Q

What financial approach is used under IAASB audit standards?

A

IAASB standards are based on a risk assessment approach

154
Q

How do IAASB audit standards compare to US audit standards?

A

IAASB - No Internal Control audits

IAASB - No Referencing another Audit Firm

IAASB - Less detailed documentation

IAASB - Required: obtain written fraud assessment

IAASB - Required: location of auditor’s home office

155
Q

What are International Ethical Standards?

A

Standards set by International Ethics Standards Board for Accountants (IESBA)

Code of Ethics for Professional Accountants - Similar to AICPA Code of Professional Conduct

156
Q

Which groups are covered under the three sections of the International Ethical Standards?

A

A) Covers all accountants

B) Covers Public accountants

C) Covers accountants in a business environment

157
Q

What are the requirements for all accountants under the International Ethical Standards?

A

Accountants should have Integrity
Accountants should be Objective
Accountants should have Competence
Accountants should exercise Due Care
Accountants should maintain Confidentiality
Accountants should act Professionally

158
Q

What questions should public accountants pose to themselves under the International Ethical Standards?

A

What are the threats/safeguards?
Does this new client threaten our ethics?
What are the conflicts of interest?
What are the threats/safeguards for offering a second opinion?
What are the threats/safeguards for receiving commissions or contingent fees?
Is our marketing truthful?
What are the threats/safeguards for receiving client gifts?
What are the threats/safeguards to objectivity?

159
Q

What engagements are covered by the AICPA Code of Professional Conduct?

A

Covers all professional engagements and is the minimum standard of conduct

Member should additionally follow specific standards for a specific engagement

160
Q

What must an accountant have under the AICPA Code of Professional Conduct?

A

Integrity
Objectivity
No Conflicts of Interest
No known misrepresentations of facts
No outsourcing of judgment

161
Q

What are the threats to independence?

A

Self-Review (Auditing own work)

Advocate of the Client

Adverse Interest (Lawsuit against Client)

Too familiar with Client - could impair the appearance of Independence to public

Undue influence on Client - On Board of Directors- exception being an Honorary board position

162
Q

What are the requirements for Non-attest engagements?

A

Agreement must be in writing.
Independence not required - Must state if you are not independent

Applicable engagements: Consulting- Compilation

163
Q

When is a GAAP departure appropriate?

A

Departure from GAAP is appropriate if GAAP would cause Financial Statements to be misleading- then it must be explained/disclosed.

164
Q

Who must approve non-audit work performed by a firm for a client?

A

Client Audit Committee must approve non-audit work performed by Firm

Firm must disclose any potential independence issues to Audit Committee

165
Q

Which organization is in charge of determining if federal funds are being misappropriated?

A

GAO - Government Accountability Office

166
Q

Return on Equity

A

(Net Income - Pref Div)/Avg Common Equity (Stockholder’s equity)

167
Q

A/R Turnover

A

Net Credit Sales / Avg A/R

168
Q

Operating Cycle

A

Days in A/R + Days in Inventory

169
Q

Working Capital

A

Current Assets - Current Liabilities

170
Q

Working Capital Turnover

A

Sales / Avg Working Capital

171
Q

A/P Turnover

A

COGS / Avg AP

172
Q

Return on Assets

A

Net Income / Avg total assets

173
Q

Debt to Equity

A

Total Liabilities / Common SE

174
Q

Calculate Upper Deviation Rate

A

Sample Deviation Rate + Allowance for Sampling Risk

175
Q

How to determine sampling interval

A

Tolerable Misstatement / Reliability Factor

176
Q

How to determine sample size

A

Total reported balance / Sampling Interval

177
Q

What are the 5 components of internal control (COSO Framework)?

A 
Control Environment
Risk assessment
Information and Communication systems
Monitoring
Existing Control Activities
178
Q

What is the Audit Risk Model?

A

Audit Risk = (Inherent Risk x Control Risk) x Detection Risk

179
Q

What is the Risk of Material Misstatement (RMM)?

A

RMM = Inherent Risk x Control Risk

180
Q

Sample size has a direct relationship with which items?

A

Expected Misstatement
Standard Deviation
Assessed Level of Risk

181
Q

Sample size has an indirect relationship with which items?

A

Tolerable Misstatement

Acceptable Level of Risk

182
Q

What are the Quality Control elements?

A 
Human Resources
Engagement/Client acceptance & continuance
Leadership responsibilities
Performance of the engagement
Monitoring
Ethical requirements
183
Q

What kinds of issues can cause a Qualified or Adverse opinion?

A 
Accounting Policy
Presentation
Disclosures
Estimates
(must be very material or pervasive GAAP problem to issue Adverse)
184
Q

What can cause a Qualified (but GAAS-related) opinion?

A

Insufficient evidence

185
Q

What can cause a Disclaimer if opinion?

A

Insufficient evidence
Significant Going Concern Uncertainty
Lack of independence
(GAAS problem)

186
Q

What is an Emphasis-of-matter paragraph?

A

Used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users’ understanding of the F/S. (Ex: going concern, change in acctg principle, etc)

187
Q

What is an Other-Matter paragraph?

A

Refers to matters other than those presented or disclosed in the F/S that are relevant to the user’s understanding of the audit (Ex: restricted use, PY audited by predecessor, etc.)

188
Q

What types of engagements are defined by GAS?

A

Financial audits, attest engagements, & performance audits

Audit (4 decks)

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