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Audit - with back up > Audit 6 > Flashcards

Audit 6 Flashcards

1
Q

What does the AICPA Code of Professional Conduct govern?

A

ANY service that a member of the AICPA performs

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2
Q

A professional code of conduct is..

A

A distinguishing mark of a profession that accepts a high degree of responsibility toward the public

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3
Q

A member in public practice should be independent in…

A

FACT and APPEARANCE when providing auditing and other attestation services

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4
Q

Objectivity applies to..

A

ALL services rendered

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5
Q

Independence is not required for…

A

compilations and non-attestation services

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6
Q

Independence is impaired if a covered member…

A

has a direct financial interest (regardless of materiality) or a material indirect interest in an attestation client

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7
Q

Independence is not impaired in a financial institution client by…

A
  • Fully collateralized car loans - Cash advance or credit card balance not exceeding $10,000 - Bank account fully insured by the government - Pasbook loan
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8
Q

Independence is impaired if an individual…

A

who was formerly employed by the client participates on the engagement team or is in a position to influence the engagement when the engagement covers any period of his or her former employment with the client

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9
Q

Independence is impaired by an immediate family member or close relative’s..

A

employment with a client in a key position

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10
Q

Independence is impaired if a partner or professional employee…

A

leaves the firm and is employed by the client in a key position unless the individual is no longer in a position to influence or participate in the firms business decision and amounts due

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11
Q

Independence is impaired if an individual who is a member of the engagement team…

A

is seeking or discussing potential employment with the client

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12
Q

Independence is impaired if a member…

A

makes management decisions for an attest client

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13
Q

Independence is impaired with respect to a client…

A

who is more than one year overdue in the payment of professional fees

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14
Q

Integrity and objectivity rule applies to

A

CPA, CPA firm, Company employees

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15
Q

Professional competence includes

A
  • the technical qualifications of the CPA and of the CPAs staff - the ability to supervise and evaluate work - and the knowledge of technical subject matter OR the ability to obtain that knowledge by research or consultation
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16
Q

Due professional care requirements

A
  • member must possess same degree of skill commonly possessed by others in the field - member must act as a reasonably prudent accountant would - member must critically review work done by those assisting in the engagement at every level of supervision
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17
Q

Compliance with standards rule measures…

A

quality of performance

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18
Q

Accounting principles rule

A

general rule: GAAP should be followed except in unusual circumstances may justify a departure from GAAP

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19
Q

In what situations is a member in public practice required to disclose confidential client information?

A
  • to comply with a validly issued subpoena or summons - as part of a quality review (peer review) - in response to any inquiry either made by ethics division or the trial board of the AICPA or disciplinary body of a state CPA society - your legal defense team (when client is suing you)
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20
Q

Contingent fee is established for performing services when

A
  • no fee is charged unless a specific finding or result is obtained - the fee amount is dependent upon the finding or result obtained
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21
Q

Contingent fees are specifically prohibited for…

A

audits and reviews of F/S or examinations of prospective financial information

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22
Q

Contingent fees are permitted when..

A
  • when they are fixed by courts - for compilations of F/S expected to be used by third parties only if the member includes a statement that the member is not independent
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23
Q

Acts discreditable include

A
  • failure to return records to a client after demand made - failing to follow standards - negligence in F/S prep - solicitation or disclosure of CPA exam q/a - disclosure of confidential information obtained from a prospective client or non-client without consent
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24
Q

Member in public practice shall not advertise in a manner that is

A

false, misleading, or deceptive

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25
Q

Member in public practice shall not receive commission when member or firm also performs…

A

an audit or review for the client, compilation of F/S expected to be used by third parties, or an examination of prospective F/S

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26
Q

Threats to compliance with the fundamental principles

A
  • adverse interest threat - advocacy threat - familiarity threat - management participation threat - self-interest threat - self-review threat - undue influence threat
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27
Q

Adverse interest threat

A

Threat that a member will not act with objectivity because the member’s interests are opposed to the client’s interest (public practice)/employing organization (members in business)/atttest client (independence)

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28
Q

Advocacy threat

A

Threat that a member will promote a client’s/employing orgs/attest client’s interests or position to the point that his or her objectivity or independence/objectivity/independence is compromised

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29
Q

Familiarity threat

A

Threat that, due to a long or close relationship with a client/person or employing org/attest client, a member will become too sympathetic to their interests or too accepting of the work or product/service

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30
Q

Management participation threat

A

Threat that a member will take on the role of client/attest client management or otherwise assume management responsibilities. Not applicable to members in business

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31
Q

Self-interest threat

A

Threat that a member could benefit, financially or otherwise, from an interest in, or relationship with a client/employing org/attest client or persons associated with them

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32
Q

Self-review threat

A

Threat that a member will not appropriately evaluate the results of a previous judgment made or service performed or supervised by the member or an individual in the member’s firm/employing org and that member will rely on that service in forming a judgment as part of another service/attest engagement

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33
Q

Undue influence threat

A

Threat that a member will subordinate his or her judgment to an individual associated with a client/employing org/attest client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member

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34
Q

Acceptable level of threat occurs when

A

the threat does not compromise a member’s compliance with the rules

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35
Q

PCAOB

A

Public Company Accounting Oversight Board – 2 members MUST be CPAs and 3 members CANNOT be CPAs. Subject to oversight by the SEC

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36
Q

What is the PCAOB responsible for?

A
  • Registering public accounting firms that audit issuers - establishing rules relating to the prep of audits of issuers - conducting inspections, investigations, and disciplinary proceedings concerning registered public accounting firms
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37
Q

Each registered firm must

A
  • Maintain audit documentation for 7 years - provide a concurring or second partner review of each audit report - describe the scope of testing of the issuer’s I/C structure and procedures in audit reports
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38
Q

When auditing an issuer, the following other services are prohibited

A
  • bookkeeping - financial information systems design and control - appraisal/valuation - actuarial - mgt functions or human resources - internal audit outsourcing activities - services as a broker/dealer/investment advisor/investment banker - legal services - expert services unrelated to audit
39
Q

When auditing an issuer, what service is permissible?

A

Tax services, if preapproved by the audit committee

40
Q

The lead audit or coordinating partner and the reviewing partner must

A

rotate off the audit every five years

41
Q

Registered firms must report the following to the audit committee

A
  • critical accounting policies and practices to be used - alternative accounting treatments discussed with the corps mgt - material written communications between the audit firm and mgt
42
Q

“cool off” period

A

audit firm cannot have employed the issuer’s CEO/CFO/Controller/CAO for a one-year period preceding the audit

43
Q

SOX required enhanced financial reports

A
  • must reflect all material adjustments - must disclose all material off-balance sheet transactions - must disclose related parties - must include an internal control report stating mgts responsibility and an assessment of the effectiveness - must disclose whether code of ethics exists for senior financial officers - must disclose whether the audit committee has at least one member who is a financial expert
44
Q

“time out” period

A

lead and concurring partners are subject to a 5-year “time out” period before returning to an engagement

45
Q

Preapproval is not required for

A

Non-audit services that do not exceed 5% of total revenues from the audit client during the fiscal year provided, so long as non-audit services are promptly brought to the attention of the audit committee before completion

46
Q

PCAOB independence standards

A

-Responsibility to not knowingly or recklessly contribute to violations - Auditor Independence - Contingent fees - Tax transactions - Tax services for persons in financial reporting oversight roles - audit committee preapproval of certain tax services - audit committee preapproval of non-audit services related to I/C over financial reporting - communication with the audit committee concerning independence

47
Q

Employee benefit plan: impairment of independence

A
  • any direct financial interest or a material indirect financial interest in the plan or the plan sponsor - connection to the plan or the plan sponsor - records maintained by accountant or member of accounting firm
48
Q

State boards of accountancy: sole power to license

A

statutes in all 50 states grant to state boards of accountancy the sole power to license CPA

49
Q

Categories of misconduct

A
  • while performing accounting services - outside scope of accounting services - criminal conviction
50
Q

Audit documentation

A

“working papers” is the principal record of audit procedures performed, evidence obtained, and conclusions reached

51
Q

Audit documentation should

A
  • assist in planning/conducting/supervising audit - show that accounting records reconcile with the F/S - be prepared in enough detail so that an “experienced auditor” who has no previous connection with the audit can understand: NET, results, significant findings, conclusions reached
52
Q

Nonissuers must retain audit documentation for

A

5 years

53
Q

All documentation must be assembled within

A

60 days of the report release date (nonissuers) and 45 days of the report release date (issuers)

54
Q

Permanent file

A

includes documentation that has a continuing interest from year-to-year

55
Q

Current file

A

contains audit documentation applicable to the year under audit

56
Q

COPAL

A
  • Control Team - Operators - Programmer - Analyst - Librarian
57
Q

How does IT affect audit testing?

A

Audit tests should be performed on a continuous basis

58
Q

How may the auditor gather evidence in a heavy IT audit?

A
  • manual audit procedures (“auditing around the computer”) - computer-assisted audit techniques (CAAT “auditing through the computer”)
59
Q

What types of audit testing should be done in a highly computerized system?

A

Substantive testing AND tests of controls (to assess control risk)

60
Q

How does an auditor “audit around the computer”

A

Auditor tests the input data, processes the data independently, and then compares the results of both

61
Q

When are manual audit procedures appropriate?

A

For simple bath systems with a good audit trail

62
Q

What are the risks of auditing around the computer?

A

insufficient, paper-based evidence and insufficient audit procedures

63
Q

How does an auditor “audit through the computer”

A

-Transaction tagging -Embedded Audit Modules -Test Data -Integrated Test Facility -Parallel Simulation

64
Q

What are the sources of standards for governmental audits?

A

GAAS and GAGAS

65
Q

GAGAS contains standards for audits of…

A

-Gov’t orgs, programs, activities, and functions -Gov’t assistance received by contractors, NFP orgs, and other nongovernmental orgs

66
Q

What reasonable assurance does GAGAS include designing the audit to detect?

A

Material misstatement resulting from noncompliance

67
Q

Audits of recipients of federal financial assistance should be conducted in accordance with

A

GAAS and GAGAS

68
Q

Types of government audits

A
  • Financial Audits - Attestation Engagements - Performance Audits
69
Q

GAS basis F/S audits incorporate GAAS to determine

A

whether the F/S present fairly the financial position, results of operations, and if applicable, cash flows in accordance with GAAP

70
Q

Attestation engagements performed in conformity with GAS, incorporate AICPA standards for

A

examinations, reviews, and agreed-upon procedures by reference and include expanded requirements

71
Q

Performance audits under GAGAS have what three objectives?

A
  • Effectiveness, economy, and efficiency - Internal Control - Compliance
72
Q

Under GAGAS, mgt responsibility includes

A
  • Identification of applicable laws/regs with compliances requirements - Establishment of internal controls - Preparation of supplementary financial reports - Obtaining an audit that satisfies relevant legal/regulatory/or contractual requirements
73
Q

Under GAGAS, auditor responsibility includes

A
  • Obtaining reasonable assurance that the F/S are free of material misstatements resulting from violations of laws/regs that have a DIRECT and MATERIAL effect on the determination of F/S amounts - Assessing whether mgt has identified laws/regs that have a DIRECT and MATERIAL effect on the determination of amounts in the entity’s F/S - Obtaining understanding of possible effects of laws/regs on F/S identified by mgt and those identified by auditors
74
Q

GAGAS, objective of compliance audits

A

To obtain sufficient evidence to form an opinion on whether the entity complied, in all material respects, with the compliance requirements applicable to its programs

75
Q

GAAS assumes that mgt will re:compliance audits

A
  • Identify gov’t programs and understand/comply with requirements - Maintain effective controls - Conduct ongoing evaluation and monitor compliance requirements - Take appropriate corrective action on audit findings
76
Q

Overall standards for compliance audits

A
  1. Perform a risk assessment 2. Design responses to the risk assessment 3. Determine if supplementary audit requirements exist 4. Obtain written representations from mgt 5. Prepare reports 6. Prepare required documentation
77
Q

Audit risk of noncompliance model

A

audit risk of noncompliance = risk of material noncompliance * detection risk

78
Q

Inherent risk of noncompliance

A

Susceptibility of a compliance requirement to noncompliance that could be material, assuming that there are no related controls. Exists independent of the audit.

79
Q

Control risk of noncompliance

A

The risk that noncompliance with a compliance requirement that could be material will not be prevented or detected on a timely basis by an entity’s internal control. Exists independent of the audit.

80
Q

Detection risk of noncompliance

A

The risk that the auditor will not detect material noncompliance that exists. Detection risks relates to the auditor’s procedures.

81
Q

Tests of the operating effectiveness may be required if…

A
  • Risk assessment includes an expectation of the operating effectiveness of controls over compliance - Substantive procedures do not provide enough evidence to support a conclusion - Tests of controls are required by the applicable governmental audit requirements
82
Q

Auditor may prepare a report several different ways such as..

A
  • Opinion on compliance - Report on I/C over compliance - Combined report on compliance and I/C control over compliance
83
Q

Required documentation re:compliance audits

A
  • Assessed risk of material noncompliance (procedures performed/documentation of I/C) - Responses to the risk assessment (procedures to test compliance/results of procedures and test of controls) - Basis or rationale for materiality levels - Compliance with supplemental requirements
84
Q

Government auditing standards – ethical standards

A
  • Serving the public interest - Integrity - Objectivity - Proper use of gov’t info, resources, and positions - Professional behavior
85
Q

Government auditing standards – general standards

A
  • Independence of mind and appearance - Professional judgment - Competence - Quality control and assurance (peer review every 3 yrs)
86
Q

GAGAS requirements for reporting on financial audits

A
  • Auditor’s compliance with GAGAS - Report on I/C and compliance with laws/regs/contracts/grant agreements - Deficiencies in I/C fraud/noncompliance - Report views of responsible officials - Reporting confidential or sensitive information - Distribute reports - Additional GAGAS considerations for financial audits
87
Q

GAGAS reporting fraud and illegal acts

A

Similar to GAAS, required to report all illegal or possible illegal acts.

88
Q

GAGAS threats to independence

A
  • Self-interest - Self-review - Bias - Familiarity - Undue influence - Mgt participation - Structural
89
Q

Single Audits are required when

A

An entity that expends total federal assistance equal to or in excess of $750,000 in a fiscal year to have an audit performed in accordance with the single audit act

90
Q

Objectives of a single audit

A
  • Audit of the entity’s F/S and report on a separate schedule of expenditures of federal awards in relation to those F/S - Compliance audit of federal awards expended during the year as a basis for issuing additional reports on compliance related to major programs and on I/C over compliance
91
Q

Single audit – materiality

A

Considered separately in relation to each major program NOT in relation to F/S as a whole

92
Q

Elements of quality control

A
  • Human resources - Engagement/client acceptance and continuance - Leadership responsibilities - Performances of the engagement - Monitoring - Ethical requirements
93
Q

Objective of quality control standards for an engagement

A

To provide reasonable assurance that the audit complies with professional standards and applicable legal and regulatory requirements and that the auditor issues a report that is appropriate

Audit - with back up (3 decks)

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