Audit Ninja and Becker Cards Flashcards
OMB Circular A-133 says what?
That during government audits of internal controls auditors are specifically required to communicate weaknesses material to federal programs
Which set of standards does not allow reference to another audit firm in a report?
ISAs
Does an accountant need to come to a written understanding in an engagement letter for a review?
They need to come to an understanding but does not need to written into the engagement letter for a review
“The accountant should communicate to the entity’s senior management illegal employee acts discovered by the accountant that are clearly inconsequential,”
Should for Review
or
Compilation
Neither require it.
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include
Disclaimer of Opinion
Should an auditor divide responsibility with a specialist in an unmodified opinion?
No should only divide with other auditor in unmodified opinion
A public accounting firm must make representations regarding its independence to the audit committee when?
Prior to accepting the initial engagement and annually thereafter.
When does materiality not matter during an audit?
When fraud is detected.
Makes you question everything management does.
Non-sampling risk is…
all the aspects of audit risk that are not due to sampling.
Examples of nonsampling risk include failure to properly define the audit population,
failure to define clearly the nature of an audit exception,
failure to recognize an error when one exists in the sample,
failure to evaluate sample findings properly.
What to reference for an agreed upon procedure engagement?
Statements on Standards for Attestation Engagements
After determining that a related party transaction has, in fact, occurred, an auditor should
obtain an understanding of the business purpose of the transaction
What is an auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?
Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
incorporating additional elements of unpredictability in the selection of further audit procedures to be performed
Does what?
Is an overall response to address the assessed risk of material misstatement at the financial statement level
What sort of interests impair a CPA during an engagement?
Direct and material indirect interests impair a CPA
Changes to current ratio when paying off AP with Cash is affected how?
If ratio is above 1 a payoff increases ratio
If below 1 then a payoff decreases the ratio
Tests of details is what sort of procedure?
When is it not used?
It is an audit procedure
Not used during a review procedure
The statements “substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole” and “I am (we are) not aware of any material modifications that should be made to the financial statements” are both found where?
In a Review Report
A Check Digit is what?
it is a computed numeric value from an identification code to detected mis-keyed information
Online inquiry is…
an interactive procedure that allows a user to view individual records or transactions.
Used to confirm if errors have been corrected
Lead schedules are…
Working papers of auditor that group clients smaller accounts that will be combined into one financial stmt account
Example cash and cash equivalents that show up as one line item on balance sheet
During what time period must an auditor be independent?
During the engagement period
Not period under audit
The Single Audit Acts requires selection and test of programs that account for what percentage of spending by the entity?
40%
Hash Totals are…
Input controls, usually nonsense
Example the sum of invoice numbers
Nonsampling risks examples…
Use of wrong audit procedures
misinterpretation of audit evidence
failure to recognize a misstatement or deviation
Piecemeal opinion is..
having two or more different opinions on same report about different financial statements
When major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualification pertains to??
The possible effects on the financial statements.
Not on the client-imposed scope limitation
Is an inquiry into outside legal services usually performed by auditor during a review?
No
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from what accounts are most predictable?
AP
AR
Payroll
Advertising
Payroll is the most predictable
An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. What should the auditor do?
Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.
Misstatements of cash occur when?
When
Receipt date per Books occurs in period before the
Disbursement date per books
Is the accountant required to identify material misstatements in a compilation?
No
An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management’s assertions about:
Understandability and classification
To see if it is current or non-current
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about:
Valuation and allocation
if the inventory is becoming older, an obsolescence reserve might be required
The allowable risk of assessing control risk too low is what???
Represents the risk that an audit sample supports the conclusion that Internal Control is effective when it is not
If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue??
Unmodified opinion with an other-matter paragraph
How many days does the documentation completion date need to be after the report release date?
What is the significance of the documentation completion date?
needs to be done 60 days after report release date
the documentation completion date is date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
How should accountant respond on a report on the application of accounting principles to a specific transaction?
That the proper accounting treatment is the client’s responsibility
An auditor may decide to increase the risk of incorrect rejection when??
the cost and effort of selecting additional sample items is low
When is a compilation report not required?
What needs to happen?
When for management use only
Need to have Restriction on each page
Presumptively mandatory requirement is ??
Magic word?
Requirement that needs to be done except in rare case you come up with really good reason
Magic word is “should”
An integrated test facility is…
a set of transactions belonging to a dummy entity. These transactions have a predetermined result against which the computer processing will be compared. These transactions are run during the regular processing of data and often without the computer operator’s knowledge.
What should a written communication regarding significant deficiencies and material weaknesses identified during the audit say along with that some were found?
Auditors was to express opinion on financial statements and not an opinion on internal control
When is discovery sampling used?
It is used when the population occurrence rate is near zero
Do you need to assess the risk of material misstatement in..
Audit?
Review?
Audit=Yes, it is an audit procedure
Review=No
Contingent fees for preparing an original tax return are permitted?
No
SQCSs are…
Statements of Quality Control Standards
Assessing the control risk at below the maximum level is doing what?
It is showing reliance on the controls
Can some management representations be in oral format?
Yes, certain ones need to be in written format
Debt Ratio is equation…
Total Liabilities
divided by total assets
Total Assets
What are the 2 types of service reports?
Type 1-a report on management’s description of a service organization’s system and the suitability of the design of controls
Type 2- a report on management’s description of a service organization’s system and the suitability of the design and operating effectiveness of controls
How long does SSARs say to keep engagement documentation other than audits?
Not specific, firms should develop own standards
What is first step in when dealing with a clients derivatives?
Examine the contracts for possible risk exposure and the need to recognize losses.
THEN get commodity specialist
Representation letters are required by what sort of engagements?
Audit and Reviews
Not Compilations
What should an auditor do when asked to not audit certain financial statements?
It requires a qualification of the opinion
Section 402 of SOX Title IV, “Enhanced Conflict of Interest Provisions,” says
It is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.
What is vertical analysis?
It is proportional analysis of line items from financial stmts
It is usually the analyzed item divided by sales
Section 10A(m) of the Securities Exchange Act of 1934 prohibits???
the receipt of “any” consulting, advisory, or compensatory fees from the registrant for services other than as a member of the board.
What individuals would the auditor direct fraud-related inquiries?
In-house people only
NOT external legal or banks
What is a professional engagement that a CPA may perform to provide assurance on a system’s reliability?
CPA SysTrust
When to send a letter of inquiry to lawyers under…
PCAOB?
ISAs?
PCAOB has presumptive requirement to send it (ALWAYS!!!)
ISAs- Only when auditor thinks there is chance of material misstatement
For a review
Does the accountant need be in physical receipt of the management representation letter as of the date of the accountant’s review report?
No
Only need to have it prior to the release of the report.
In order for a firm to designate itself as “Members of the AICPA” what must happen?
all CPA owners must be members of the AICPA
During a compilation if financial statements do not disclose the basis of accounting used what should the accountant do?
Disclose the basis of accounting in the accountant’s compilation report.
An auditor may report on condensed financial statements that are derived from complete financial statements if the:
auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived
When Control Risk is too low is that ineffective or inefficient?
Ineffective- when you say assess control risk too low you are letting mistakes get through and have an ineffective audit
The primary source of information to be disclosed regarding litigation, claims, and assessments is…
client’s management
What standards need to be referred to in an audit of issuers?
PCAOB and GAAP standards
If an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern and that the entity’s disclosures are adequate, then the audit report may be either do what 2 things?
Unmodified with emphasis-of-matter paragraph
or
Disclaim
Per Government Auditing Standards, audit documentation should contain sufficient information so that…
Supplementary oral explanations are not required.
When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion WHEN?
Each year that the financial statements initially reflecting the change are presented
When an auditor expresses an adverse opinion, the opinion paragraph should include
A direct reference to a separate paragraph disclosing the basis for the opinion
If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue….
Unmodified opinion with an other-matter paragraph
An unjustified accounting change would get what sort of opinion?
Qualified or Adverse
NOT Emphasis paragraph
Return on Equity Equation
Net Income - Preferred Dividends
divided by
Average common equity
When you see the word balance in substantive procedure question what is usually a good choice for an answer of what to perform?
Perform cut-off procedures
Should the statement
“The accountant is not aware of any material modifications that should be made to the financial statements to conform with GAAP.”
be in a compilation report?
No, because no such assurance in a compilation engagement
Do prospective financial statements in an agreed upon procedures agreement need a summary of significant assumptions?
Yes
Who sets the criteria for the agreed upon procedures?
The client (and then agrees with the auditor)
When would the use of the negative form of accounts receivable confirmation most likely be justified?
When a small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
Example Utility Customers
Would Audit documentation demonstrate compliance with quality control standards for a specific audit? Why or Why Not?
No
Quality control standards relate to the conduct of a firm’s audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement.
The purpose of an engagement letter is
To help avoid misunderstandings with respect to the engagement.
What standards provide a framework beyond historical financial statements?
Attestation Standards
Incremental audit risk is what…
the increase in risk when substantive test are performed at interim dates
The upper precision limit is…
the upper limit based on sampling in which misstatement is expected to be
if tolerable rate is lower it is not good because you could have exceeded it
What should accountant’s review report say about supplementary information?
that the information has been subjected to the same procedures
or
compiled from information represented by Mgmt
According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?
Any direct and MATERIAL indirect financial interests
What does
Obtaining confirmation from lenders about inventories pledged provide evidence for???
about understandibility and classification
What to watch out for on check adjustments simulations?
Materiality levels
What to remember about inventory adjustments?
They affect the cost of goods sold.
Uses COGS as balancing journal entry
What types of reports have the statement-
“not aware of material modifications that should be made to the financial statements for them to be in conformity with GAAP.”
A Review
and/or
Compilation
Just a Review.
What type of report on a service provider gives assurance on controls?
The one that includes the phrase
“test of operating effectiveness”
Sections of SOX 402 403 404 406
402-Cant issue credit to issuer
403-10% owners need to report to SEC
404-Must file internal control acknowledgement
406-Code of Ethics adopted
Parallel Simulation is…
A Computer-assisted auditing techniques that processes client input data on a controlled program under the auditor’s control to test controls in the computer system?
Edit Routines are…
Controls that show data has been editted
Should you Always, Never or Sometimes
Communicate previous ongoing significant deficiencies?
Include definition of material weakness?
Internal control matters reported is a restricted report?
Give significant deficiencies report to stockholder?
Always to first 3
Never to stockholders
How to determine sampling interval?
Equation
Tolerable Misstatement $ Amount
divided by
Reliability Factor
How to determine sampling size?
Total Reported Amount
divided by
Sampling Interval
Tainting % is what?
It is
(Recorded Amt-Audit Amount)
divided by
Recorded Amt
Mean-per-Unit Estimation Equation to get Point Estimate
(Audit Value of Sample
divided by
of Samples)
times
Population
A Point Estimate is..
a best guess (seriously!)
Ratio Estimation Equation to get a Point Estimate
(Audit value of Sample
divided by
Book Value of Samples)
times
Total Book Value of Samples
Difference Estimation Equation to get a Point Estimate
(Book Value-Audit Value)
divided by
of items audited
times
population of items
Equation for sample size without stratification
Population Total
divided by
Sampling Interval
Equation for Sample Size with Stratification
Take out large items
Remainder value of population
divided by
Sampling interval
An entity’s internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:?
Cancelled Checks,
Then would look into the supporting documentation for each one
A purely substantive audit is…
An audit with no tests of internal controls
Government Auditing Standards are issued by?
The Comptroller General of the United States
How long does a partner in charge have to sit in time out before they can go back to auditing that client?
Needs to be off for 5 years
Net operating profit percentage equation?
Operating Income
Divided by
Gross Sales
What should financials reviewed by CPA say on them?
See accountants review report
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should:
Not refer to the change in the auditor’s report.
For subsequent date in Audit that you decided NOT to dual date, what date should you use?
The date on which you get enough evidence,
NOT the date of the events
The quarterly data required by SEC Regulation S-K have been omitted. What stmt must be included in the auditor’s report?
“The company has not presented the selected quarterly financial data.”
GAGAS ethics principles include…
Serving Public interest
Integrity
Objectivity,
Proper use of Government Information
Resources and Positions
and
Professional Behavior
NOT Fraud Detection!!!
In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if the:
Auditor, as a result of the specialist’s findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.
NEVER DIVIDE RESPONSIBILITY with a specialist
Is the correction of an error an accounting principle change?
No it is not.
