Audit Standards and Engagement Planning

Question 1

Compliance Audit

Answer 1

Compliance audits are ones that follow normal and regulations (complies with)
– IRS audits
– governmental units to determine compliance with laws and regulations (special-purpose framework)
– CPA to determine compliance with provisions of a board or note agreement.

Question 2

Operational Audit

Answer 2

Operational audits – effectiveness/efficiency/economy – done by internal auditors, government auditors, or CPAs
– audit any department or division of the Corporation to see if meeting organizational goals.
– Review by government auditors determined the effectiveness and benefit of special government funded programs. (SAA – single audit act)

Are they speaking to the organizational goal?
Are they doing the right thing, effectively, within the proper budget?

Question 3

Clarity Standard ASB (Auditing Standards Board)

format

Answer 3

Clarity Standard Format:(to make GAAS easier to understand) nonpublic
– Introduction (purpose and scope)
– Objective (what are we trying to achieve)
– Definition (terms that are specific to a standard)
– Requirements (must, required to, unconditional, or should, presumptively mandatory requirement)
– Application (guidance or other explanatory material)

Question 4

I-CORRIIA (mnemonic)

Answer 4

ICORRIIA (mnemonic)
I – Inquiry
C – Confirmation
O – Observation
R – Recalculation
R – Re-performance
I – Inspection (assets)
I – Inspection (documents)
A – Analytical procedures

Question 5

TIPPICANOE (mnemonic) – 10 GAAS

Answer 5

TIPPICANOE (mnemonic) 10 GAAS measures the quality of auditor’s performance:
General Standards (qualification and
quality)
T – Training and proficiency
I – Independence (no direct or indirect material, integrity, objectivity)
P – Due Professional Care (skill, due diligence, without negligence, critical review of work at every level)
Standards of Fieldwork (gathering of evidence)
P – Planning and Supervising
I – Internal Controls
C – Corroborative Audit Evidence
Reporting Standards (audit report)
A – Accounting principles in conformity with US GAAP (explicit)
N – No new accounting principles applied – consistency (implicit)
O – Omitted informative disclosures – none (implicit)
E – Expression of an opinion

Question 6

Steps in an Audit

Answer 6

Steps in an audit:

1. ) Prepare for the audit
2. ) Obtain understanding of client, its environment, including internal control
3. ) Assesses risks of material misstatement and determined nature, timing & extent of further procedures
4. ) Perform tests of control
5. ) Perform substantive procedures
6. ) Formulate an opinion
7. ) Issue audit report

Question 7

DISAPPROVE (mnemonic)

Answer 7

DISAPPROVE (mnemonic)
Reminds us that audit committees would disapprove an auditor who failed to inform them about matters.
D – Disagreements with management about accounting policies or audit procedures
I – Noncompliance with laws and regulations, including Illegal acts and significant error is discovered during the audit and fraud involving senior management
S – Significant accounting policies adopted or changed by management
A – Adjustments proposed by the auditor with a significant impact on the financial records (uncorrected misstatements)
P – Prior discussions with management before acceptance of the engagement
P – Problems arising during the audit in obtaining evidence and employee cooperation
R – Responsibilities of the auditor under GAAS to obtain reasonable assurance
O – Other Information regarding responsibilities
V – Views of other accountants who were contacted by management on significant matters
E – Estimates and accounting records and the process used to obtain the (fair value estimates)

Question 8

RID-C (mnemonic)

Answer 8

RID-C (mnemonic)
R – REASON for change - the successor needs to know why the predecessor understands that he or she is no longer continuing the audit of the client
I – INTEGRITY of management - the predecessor should inform the successor whether they believe management can be trusted
D – DISAGREEMENTSduring - if any conflicts arose during the application of accounting principles or the performance of the audit procedures during the time the predecessor was the auditor the predecessor should provide details for the successor to understand the nature of the disagreement and how they were resolved
C – COMMUNICATION with Management or those charged with Governance - such as the audit committee, regarding fraud and noncompliance with applicable laws and regulations, including illegal acts, and significant deficiencies and material weaknesses in internal control

Question 9

FACSIMILE (Engagement Letter)

Answer 9

FACSIMILE (engagement letter) - (mnemonic)
F – FEES
A – AUDITOR’S responsibility (GAAS)
C – CONFIRMATION of engagement
S – SCOPE and OBJECTIVE of the engagement (stmts auditing and obj is an opinion on F/S)
I – INTERNAL CONTROLS (communicate significant deficiencies and material witnesses in I/C)
M – MANAGEMENT’S RESPONSIBILITY (prep and presentation of F/S, Design, Implementation and Maintenance (DIM) of I/C and access to info)
I – IRREGULARITIES - Fraud
L – iLlegal act - Non-Compliance with applicable laws and regulations
E – ERRORS

Question 10

Presentation and Disclosure (RACU)

Management Assertions

Answer 10

Presentation and Disclosure	
R	RIGHTS and OBLIGATIONS and Occurrence
A	ACCURACY and VALUATION
C	COMPLETENESS
U	UNDERSTANDABILITY and Classification

Question 11

Account Balances At Year-End (RACE)

Management Assertions

Answer 11

R RIGHTS and OBLIGATIONS
A APPLICATION and VALUATION
C COMPLETENESS
E EXISTENCE

Question 12

Classes of transactions and events (CPA – CO)

Management Assertions

Answer 12

C COMPLETENESS
P PERIOD / CUTOFF
A ACCURACY

C CLASSIFICATION
O OCCURRENCE

Question 13

11 Management Assertions that are represented in the Financial Statements (COCA – CURVE)

Answer 13

C COMPLETENESS
O OCCURRENCE
C CUTOFF
A ACCURACY

C	CLASSIFICATION
U	UNDERSTANDABILITY
R	RIGHTS and OBLIGATIONS
V	VALUATION and ALLOCATION
E	EXISTENCE

Question 14

The Auditor must Maintain Independence for Attestation Engagements (CARES/ERAS)

Answer 14

The Auditor must maintain independence for attestation engagements (CARES/ERAS)
C COMPILATION (unless a lack of independence is indicated)
A AGREED-UPON PROCEDURES engagements and other engagements covered by the attestation standard
R REVIEW
E EXAMINATION (Audits)
S SPECIAL REPORTS

E EXAMINATION
R REVIEW
A AGREED-UPON PROCEDURES
S SPECIAL REPORTS

Question 15

Testing the Cycles for ARCC’s by doing RIIO

Answer 15

Testing the Cycles for ARCC's by doing RIIO	
R	RE-PERFORMANCE
I	INSPECTION - ASSET
I	INSPECTION  - DOCUMENT
O	OBSERVATION

Question 16

Understanding How Controls Work (UPDATED)

Answer 16

Understanding how controls work	
U	UNDERSTAND
P	POLICIES
D	DOCUMENT
A	ASSESS (are they working?)
T	TEST of controls
E	REASSESS (are they working correctly?)
D	DOCUMENT CONCLUSION

Question 17

Factors of Control Environment (CHOPPER)

Answer 17

Factors of Control Environment (CHOPPER)
C COMMITMENT to COMPETENCE
H HUMAN RESOURCES policies and procedures
O ORGANIZATIONAL STRUCTURE
P PARTICIPATION of those charged with Governance
P PHILOSOPHY of management and management’s OPERATING STYLE
E ETHICS VALUES AND INTEGRITY
R RESPONSIBILITY ASSIGNMENT

Question 18

Audit Procedures (I-CORRIIA) -Substantive Tests

Answer 18

Audit Procedures (I-CORRIIA) - Substantive Tests
I	INQUIRY 
C	CONFIRMATION
O	OBSERVATION
R	RECALCULATION
R	RE-PERFORMANCE
I	INSPECTION of tangible ASSETS
I	INSPECTION (examination) records and documents
A	ANALYTICAL PROCEDURES

Question 19

Standard for Audit Evidence (U-PERCV)

Answer 19

Standard for Audit Evidence (U-PERCV)
U UNDERSTANDABILITY and CLASSIFICATION (Trace purchases)
P PRESENTATION and DISCLOSURE (Read F/S)
E EXISTENCE and OCCURRENCE (Observe physical inventory)
R RIGHTS and OBLIGATIONS (examine vendor invoices)
C COMPLETENESS and CUTOFF ( perform cutoff tests receiving and shipping
V VALUATION or ALLOCATION (review supplier catalogs to estimate replacement costs of inventory on hand.

Question 20

6 Elements of to Quality Control (HEAL – ME)

Answer 20

6 Elements of to Quality Control (HEAL – ME)
H HUMAN RESOURCES (Personnel management) establish policies and procedures for effective hiring
E ETHICAL Requirements (Independence)
A ACCEPTANCE and continuance of client relationship and specific engagement
L LEADERSHIP responsibilities for quality with and the firm (“tone at the top”)

M MONITORING
E ENGAGEMENT Performance

Question 21

FIND (mnemonic)

Answer 21

F Flow Chart
I Inquiry - Questionnaire
N Narrative
D Documentation

Question 22

Internal control structure related to spending cycle (Questionnaire to document control activities) and I/C activities as well (PRAISE)

Answer 22

Internal control structure related to spending cycle (Questionnaire to document control activities) and I/C activities as well (PRAISE)
P PHYSICAL CONTROL (verify all goods receipt)
R RECORDING (verify receiving reports prepared for all goods received)
A AUTHORITY (select individual canceled checks and balanced them to be purchase orders, receiving reports, vendor invoices, and payment vouchers)
I INDEPENDENCE CHECKS
S SEGREGATION of DUTIES
E EVALUATE PERFORMANCE

Question 23

Independence required required for: CARES/ ARES

Answer 23

Attest Function = Must be Independent
Independence required required for:

* Audit - Yes	
* Review - Yes- Report	
	* Compiliation - No Indep.- Engag Ltr- Must be indicated if not-Report, 1 Para
	* Taxes - No
	* Consultation - No
	* F/S Preparation Engagement-No Indep. - Engag Ltr - No Report
	* Other non-atest services (Payroll)

Question 24

Nature Audit Procedures

Answer 24

Nature Audit Procedures – this includes its purpose (tested control vs. substantive procedures) and its type (I – CORRIIA), the nature of audit procedures is the most important consideration in responding to assessed risk. The higher the auditor’s risk assessment (RMM), the more Relevant and Reliable the audit evidence should be.

Question 25

Timing of Audit Tests

Answer 25

Timing of audit tests – is referred to WHEN the procedures are performed as well as the PERIOD or DATE for which the audit evidence is applicable. The HIGHER audit risks assessment the CLOSER to the period and substantive procedures should be performed.

Question 26

Extent of Audit Procedures

Answer 26

Extent of Audit Procedures – this refers to the QUANTITY of a specific audit procedure can be performed. The HIGHER the auditor’s risk assessment (RMM), the GREATER the extent of the audit procedures, which may mean MORE procedures or may mean LARGER SAMPLE SIZES to which procedures are applied.

Question 27

Flow of Management’s Assertions

Answer 27

Management Assertions (U – PERCV) – F/S—> Objectives (corroborate management’s assertions)—>Audit Procedures (ICORRIIA)

Question 28

Audit Procedures Should be Used by an Auditor for what Purpose(s)

Answer 28

Audit procedures should be used by an auditor to obtain understanding of the entity and its environment including its:

1) internal control (risk assessment procedures),
2) test the operations effectiveness of controls (test of controls) and
3) detect material misstatements (substantive procedures).

Question 29

Inspection (Examination) of

Records or Documents (e.g. invoice for an equipment transaction)

Answer 29

Inspection (Examination) of records or documents

1) Tracing – completeness – tracing from source document into books (completeness)
2) Vouching – books to source(existence/occurrence)

Question 30

5 Basic Type of Comparisons That May be Performed as Analytical Procedures (CRAFT)

Answer 30

5 basic types of comparisons that may be performed as analytical procedures (CRAFT)
C CLIENT vs INDUSTRY
R RELATED ACCOUNTS - certain account have expected relationships
A ACTUAL vs. BUDGET-actual activity should be plausible with budget
F FINANCIAL vs. NON-FINANCIAL- certain nonfinancial measures are associated with dollars of revenue or cost.
T THIS YEAR vs. PRIOR- income for current yr should be closely associated with prior yr.

Done during (phase):

1) planning (considered risk assessment is required),
2) substantive testing
3) overall review.(required)

Question 31

If an auditor discovers fraud that they consider immaterial, to whom should they report this?

Answer 31

There is no materiality threshold when awareness or suspicion of fraud. Fraud must be communicated by the auditor to management and/or those charged with governance. In any circumstance where fraud is either detected or suspected, the auditor is required to communicate it accordingly.It’s governance who will decide if the fraud should be disclosed to a regulator, such as the PCAOB. The auditor’s communication should be made to a LEVEL of management at least ONE ABOVE those involved.

Question 32

An auditor of a non-issuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it?

Answer 32

An item is material if it has the potential to influence the decisions of a financial statement user. When a misstatement that is quantitatively, not material, arises from a system with effective controls, or when it is the first time a misstatement has arisen from the system, it is not likely that the misstatement is representative of numerous misstatements and they would not be considered qualitatively material either.

Question 33

As part of the audit, the auditor will send a letter to the client’s, attorney. Which of the following statements is most likely to appear in the letter the client’s sends?

Answer 33

An auditor obtains a letter from a client’s attorney to learn if there are any pending legal matters that create contingent liabilities that are required to be accrued or disclosed in the financial statements. It will generally include a list of items provided by the client to the auditor with the request that the attorney provide information about them and any other possible matters that are not listed. An indication of a lack of awareness of items that should be considered in the preparation of the financial statements will be included in the attorney’s response, not the letter to the attorney.

Question 34

A non-issuer, has asked an auditor to compile its financial statements that omit substantially all disclosures required by GAAP. The auditor may comply with this request provided the omission is clearly indicated in the auditor’s report and the?

Answer 34

An accountant may compile financial statements that omit substantially all disclosures IF the omission is not for the purpose of misleading investors. The report is not RESTRICTED. Since disclosures are omitted, there would not be NOTES to financial statements to DESCRIBE the reasons for the omission. Omitted disclosures most likely would influence potential creditors’ conclusions, which is why the report indicates the lack of disclosure.

Question 35

Detection risk and the audit risk model:

Answer 35

Audit risk, the risk that the auditor will fail to issue an appropriate report when the financial statements are materially misstated, consists of the risk of material misstatement (RMM), which is the risk that the financial statements will be materially misstated, and detection risk (DR), which is the risk that the auditor will not detect the material misstatement. RMM consists of inherent risk (IR), which is the risk that an item will be materially misstated if there are no controls, and control risk (CR), which is the risk that the entity’s internal control will neither prevent the material misstatement nor detect and correct it on a timely basis. The formula for calculating AR is RMM x DR indicating that, as RMM decreases, DR may increase without affecting AR, which can be calculated as DR = AR/RMM.

Question 36

The evaluation of significant accounting estimates and determining materiality of misstatements?

Answer 36

The evaluation of significant ACCOUNTING ESTIMATES and DETERMINING MATERIALITY of misstatements are both processes requiring the auditor’s JUDGEMENT and NOT delegated anyone,

Question 37

An auditor determines that, due to accounting errors, both a company’s expenses and revenues are materially understated, each by approximately the same amount. What is the auditor’s most likely course of action in response to these findings?

Answer 37

In drawing conclusions as to whether or not financial statements are fairly presented, the auditor will consider KNOWN misstatements both individually and in the aggregate. The financial statements would be considered materially misstated if a user’s judgment would be affected, whether the misstatement affected a particular item or the entity’s financial position or results of operations as a whole. The auditor will PROPOSE ADJUSTMENTS to both revenues and expenses regardless of the fact that net income is not materially misstated. A material misstatement may result from error or fraud and the auditor would only report such a misstatement to the audit committee as a fraud scheme if there was reason to believe that it was a fraudulent misstatement.

Question 38

Describe an inherent risk in an audit:

Answer 38

Inherent risk is the risk that an item will be materially misstated if there are no internal controls in place. When items are relatively complex or require a high volume of transactions, there is a higher likelihood of error, as would be the case when the valuation of assets is dependent on estimates involving high levels of judgment. Risks can be mitigated by internal controls, but all represent risks of material misstatements if controls are not in place, making them all part of inherent risk.

Question 39

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a non-issuer (nonpublic entity)?

Answer 39

When performing a review, in addition to having or obtaining an understanding of the client and its business, the accountant is REQUIRED to make INQUIRES of management and perform ANALYTICAL procedures, which involve developing expectations based on relationships among financial statement elements that have predictable patterns and comparing actual results to expectations, which may also include those indicated in budgets and forecasts. The accountant is not required to obtain an understanding of internal control in a review engagement and, as a result, would not observe controls.

Question 40

Decreased audit risk - Increased Federal & State Funds?

Answer 40

Increased federal and state funding providing a profitable year would decrease audit risk and risk of material misstatement since management will have less of a need to overstate profits.

Question 41

Increased audit risk - Control of the board of directors by a majority stockholder who is the CEO

Answer 41

Increased audit risk - Control of the board of directors by a majority stockholder who is also the CEO (management is dominated by a single individual) gives one individual the opportunity to circumvent internal controls, increasing audit risk and the risk of material misstatement.

Question 42

Increased audit risk - Selling one-half of a controlling interest in another company

Answer 42

Increased audit risk - Selling one-half of a controlling interest in another company means that the equity method would be applied instead of the preparation of consolidated financial statements. This would increase audit risk due to the reduced ability to obtain information and also increase the risk of material misstatement.

Question 43

Decreased audit risk - The elimination of a loss contingency due to a lawsuit being dropped

Answer 43

Decreased audit risk - The elimination of a loss contingency due to a lawsuit being dropped eliminates the possibility of understating a potential liability reducing audit risk and the risk of material misstatement.

Question 44

Increased audit risk - Acquiring title to a contaminated site is an unusual transaction

Answer 44

Increased audit risk - Acquiring title to a contaminated site is an unusual transaction and creates a contingent liability, depending on the nature of the contamination. As a result, both audit risk and the risk of material misstatement are increased.

Question 45

Which of the following professional services would be considered an attestation engagement?

Answer 45

Attestation engagements include reporting on financial projections and forecasts. Advocating on behalf of a client about trust tax matters is a tax service, not an attestation service. Providing financial analysis, planning, and capital acquisition services; and advising management in selecting a computer system are non-attest services.

Question 46

An Attestation Engagement

Answer 46

An engagement to express an OPINION on a description of INTERNAL CONTROLS placed in operation as of a specific date. Attestation engagement will result in a REPORT. Such a report will express an opinion on management’s description of internal controls placed in operation and will disclaim an opinion as to their effectiveness, which could only be evaluated by performing procedures for the entire period for which the opinion is expected to cover. The report would not, identify controls relevant to specific assertions.

Question 47

How would an auditor of a non-issuer most appropriately respond to a heightened assessed risk of material misstatement?

Answer 47

An auditor will respond to an increased risk of material misstatement by MODIFYING the NATURE of substantive procedures, selecting those likely to be more effective; modifying the TIMING of substantive procedures by performing fewer at interim periods and more near the end of the period; and increasing the EXTENT of substantive testing by performing more procedures and selecting larger sample sizes. The auditor will also use more experienced staff or staff with specialized skills to perform procedures. Tests of controls are designed to determine if an auditor’s perception of the strength of internal control is valid so that it can be relied upon, potentially reducing the necessary substantive testing.

Question 48

An accountant can perform, with pre-approval of the audit committee of the board of directors, which of the following non-audit services during the audit of an issuer?

Answer 48

Under Sarbanes-Oxley, an auditor of an issuer will NOT be considered independent as a result of performing BOOKKEEPING services; management functions or human resources; or internal audit outsourcing services. The auditor may perform tax services as long as they are pre-approved by the client’s audit committee, having satisfied itself that the performance of the service will not impair the auditor’s independence.

Question 49

During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing?

Answer 49

An external auditor may use the services of an internal auditor to assist with TEST of CONTROLS or SUBSTANTIVE TEST provided that the external auditor believes that the internal auditor is COMPETENT and OBJECTIVE in performing such procedures.

Question 50

Which of the following is a special purpose framework?

Answer 50

General purpose frameworks are sets of standards designed to meet the needs of a wide range of users. They include GAAP, ISSUED by the FASB; International Financial Reporting Standards, ISSUED by the IASB; Statements of Federal Financial Accounting Standards, ISSUED by the FASAB; and Statements of Governmental Accounting Standards, ISSUED by the GASB. Frameworks such as the cash basis, tax basis, or a authorized state regulatory agency basis are considered SPECIAL PURPOSE frameworks.

Question 51

As the acceptable level of detection risk decreases, the assurance directly provided from?

Answer 51

The auditor performs substantive tests to address detection risk. When detection risk is HIGHER than ACCEPTABLE, it is DECREASED by INCREASING substantive TESTING. Substantive TESTING can be DECREASED when the risk of material misstatement is LOW and a HIGH LEVEL of detection risk is acceptable.

Question 52

If an auditor was examining a client’s Certificates of Deposit. What would auditor’s audit documentation likely include?

Answer 52

Certificates of Deposit, can be easily transferred from one party to another. There is the risk that the client representative may misappropriate them and say that they were not returned by the auditor. Acknowledging that they were returned significantly reduces the opportunity for the employee to commit fraud through misappropriation of assets. A physical count of certificates would be compared with purchases and sales records to obtain reasonable assurance that the inventory count is accurate.

Question 53

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

Answer 53

Developing expectations means ANTICIPATING what evidence will reveal before looking at the evidence. If, upon performing analytical procedures, the auditor BECOMES AWARE of an unusual relationship among various items on the financial statements, the auditor might anticipate the causes for the unusual relationship based on the auditor’s understanding of the entity and its environment. The auditor can then compare these expectations to the explanations given by the client. Analytical procedures involve COMPARING client data to auditor determined EXPECTED RESULTS, not expectations developed by the client.

Question 54

In which of the following circumstances would a covered member’s independence be impaired with respect to an “issuer” client under PCAOB auditing standards?

Answer 54

The auditor of an issuer may not have ANY DIRECT financial interest in an audit client, including an investment in the client’s bonds, regardless of whether or not it is material. Materiality is ONLY relevant if the financial interest is INDIRECT.

Question 55

The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to?

Answer 55

Quality control policies and procedures related to client acceptance and continuation are designed to minimize the likelihood that the firm will associate with a client with management that LACKS INTEGRITY. Quality control policies and procedures related to training and assigning personnel to engagements, address making certain that personnel are able to fulfill their responsibilities.

Question 56

To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would?

Answer 56

Audit risk (AR), which is the risk that the auditor will express a MORE FAVORABLE opinion than is appropriate under the circumstances, is a function of a combination of the risk of material misstatement (RMM) and detection risk (DR). The RMM consists of inherent risk (IR), which is the risk of a material misstatement when there are no controls in place designed to prevent or detect and correct it on a timely basis, and control risk (CR), which is the risk that controls will not prevent or detect and correct a material misstatement on a timely basis. In order to maintain AR at an acceptable level, as RMM INCREASES, which would occur when CR INCREASES, DR must DECREASE proportionately.

Question 57

The audit program usually cannot be finalized until The audit program usually cannot be finalized until the?

Answer 57

The audit program is a STEP-by-STEP LIST of audit procedures. The audit program describes the NATURE, TIMING and EXTENT of audit procedures. The auditor must gain an understanding of the entity’s internal controls to design appropriate tests to achieve audit objectives. The auditor’s UNDERSTANDING of internal control is ONE of the factors considered in determining the nature, timing, and extent of audit procedures, which will be specified in the audit programs.

Question 58

Regarding fraud risk factor(s) :

Answer 58

When transactions are complex, many individuals within the entity will not understand the intricacies and, as a result, it becomes easier to deceive others, creating an opportunity to commit fraud. When stock options are due to expire shortly after financial statements are issued, that creates an incentive to overstate results in order to increase the value of the options, but it does not provide an opportunity.

Question 59

Which of the following statements is correct concerning an auditor’s responsibility to report fraud?

Answer 59

The auditor is REQUIRED to report ALL knowledge or suspicion of fraud to the client’s SENIOR MANAGEMENT and its AUDIT COMMITTEE. If the fraud is committed by low-level employees and amounts are inconsequential, it is sufficient to report it to a level of management ABOVE the one the fraud occurred and would not require disclosure to senior management and the audit committee. It would generally not be appropriate for the auditor to disclose knowledge or suspicion of fraud to third parties including stockholders or the SEC.

Question 60

To compile financial statements of a non-issuer in accordance with Statements on Standards for Accounting and Review Services, an accountant should?

Answer 60

A COMPILATION consists of READING the financial statements with the goal of determining if they are FREE of OBVIOUS misstatements. In order to recognize an obvious misstatement, the accountant must have an UNDERSTANDING of the client, including the nature of its transactions. The accountant performing a compilation does NOT look for material misstatements in the financial statements but is alert to the possibility that they may exist. Inquiries of customers, vendors, and creditors, usually in the form of confirmations, are made in an audit not in a review or compilation.

Question 61

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to?

Answer 61

Quality control policies and procedures related to acceptance or continuation of a client relationship are primarily designed to PREVENT the firm from associating with a client whose MANAGEMENT LACKS INTEGRITY. An auditor, in complying with GAAS, may monitor risk factors concerning misstatements arising from the misappropriation of assets. Quality control standards require policies related to the assignment of personnel.

Question 62

To Report on agreed-upon procedures to financial data the auditor’s report on these agreed-upon procedures should contain a (an)?

Answer 62

An AGREED-UPON PROCEDURES engagement is an ATTEST ENGAGEMENT subject to the attestation standards. Since the REPORT is based on the conclusions of the procedures performed that were AGREED UPON between the auditor and the client, the auditor would want users to know what those procedures were as a basis for any ASSURANCE provided. The application of agree-upon procedures to royalties would not affect the auditor’s report on the financial statements. The auditor would NOT EXPRESS an opinion as to effectiveness. In an agreed-upon procedures engagement, the CPA and specified parties agree on the procedures to apply and the specified parties, NOT THE AUDITOR, take responsibility for their sufficiency.

Question 63

Operational audits vs. Compliance audits

Answer 63

Operational audits, often performed by INTERNAL AUDITORS and GOVERNMENTAL auditors, are designed to determine if an entity is operating as it is expected to, including the execution of duties in accordance with the entity’s internal control policies and procedures. Compliance audits are designed to determine if an entity is COMPLYING with LAWS and REGULATIONS, such as tax audits performed by the IRS.

Question 64

Accepting and engagement

Answer 64

Step one – whether or not the preconditions of an audit have been met
two key considerations in making this decision:
1 – acceptability of the financial reporting from being applied
2 – management’s agreement that it understands and accepts certain responsibilities

Question 65

To obtain reasonable assurance, the auditor?

Answer 65

To obtain reasonable assurance, the auditor:
1 – Plan the work
2 – Properly supervise his assistants
3 – Determine and apply appropriate materiality levels
4 – Identified and assesses risks of material misstatements
– may be due to error or fraud
– based on auditor’s understanding of entity and environment
5 – Obtain sufficient appropriate audit evidence

Question 66

Unconditional Requirement

Answer 66

An unconditional requirement must be complied with in order for the auditor to complete engagement in accordance with GAAS. an auditor is required to comply with unconditional requirements, which will always include word “MUST” or the phrase “IS REQUIRED TO”, in every circumstance which applies

Question 67

A Presumptively Mandatory Requirement

Answer 67

A Presumptively Mandatory Requirement is one that the auditor is also expected to comply with in every circumstance to which it applies. In rare circumstances the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective, but must document how an alternate procedure was sufficient to achieve the objective of the standard (must document explanation for not doing so) a presumptive the mandatory requirement will always include the word “SHOULD”.

Question 68

Assurance Services (including audit/review services)

Answer 68

Assurance Services IACPA Special Committee on Assurance Services (Elliott Committee).
“Independent professional services that improve the quality of information, or its context, for decision-makers”. An engagement in which an accountant issues a report designed to enhance the degree of confidence of third parties and management about the outcome of an evaluation or measurement of financial statements (subject matter) against an applied financial reporting framework (criteria).

Question 69

PCAOB Requirements communication with those in charge of governance.

Answer 69

The auditor should discuss with the audit committee any significant issues discussed with management in regard to appointment or retention of the auditor.
The auditor will also communicate the results of the audit.
– Significant accounting policies and practices
– Critical accounting policies and practices
– Critical accounting estimates
– Significant unusual transactions

Question 70

Other matters to be communicated to those in charge of governance:

Answer 70

Other matters to the community include:
– The auditor’s responsibility for other information and documents containing the audited F/S
– Difficult or contentious matters for which the auditor sought outside consultation
– Going concern issues
– Uncorrected and corrected mistakes
– Material written communications provided to management
– Modifications to the audit report
– Disagreements with management
– Difficulties in performing the audit

*Unlike the communication under GAAS, the auditor is required to submit the communication to governance prior to issuance of the auditor’s report

Question 71

Steps in planning an audit (Planning Procedures)

BRAINSTOPS

Answer 71

1) Basic discussions with the client
2) Review the audit documentation
3) Ask about recent developments
4) Interim financial statements
5) Non-Audit personnel
6) Staffing
7) Timing (various audit procedures)
8) Outside assistance (use of specialists)
9) Pronouncements(changes in accounting principles and audit standards)
10) Scheduling with client (coordinated activity)

Question 72

Misstatements

Answer 72

KNOWN misstatements are misstatements specifically identified during the audit.
LIKELY misstatements are misstatements that have NOT been specifically identified, but are considered likely to exist based on audit evidence obtained or due to a difference between management and auditor judgment. May be based on assumptions that KNOWN misstatements identified in a sample are proportionately present in the population.
*the auditor MUST communicate all known and likeliness statements (even immaterial), identified during the audit, other than does the auditor believes trivial to the appropriate level of management on a timely basis.

Question 73

Forms of Attestation Engagements

Answer 73

Forms of Attestation Engagements:

1) Examinations
2) Reviews,
3) Performance of agreed upon procedures
* Compilations are not considered accounting and not attestation services, resulting in a report that provides no explicit ASSURANCE: the information included in the financial statements and related disclosures.