Auditing Flashcards
No audit work=
Disclaimer of Opinion
Obtaining written management representations regarding the required supplementary information is what?
Limited procedure on required supplementary information
Comparative financial statements use what date?
Report date for the most recent audit
Materially Misstated=
GAAP
Inability to Obtain Sufficient Appropriate Audit Evidence=
GAAS
What paragraph is used when their is a going concern, justified change in accounting principle or change in audit opinion?
Emphasis of Matter
Paragraph that refers to matters other than those presented or disclosed in the financial statements?
Other-Matter Paragraph
What paragraph refers to required supplementary information?
Other-Matter Paragraph
Significant going concern uncertainty can also be what opinion?
Disclaimer
What does ISA require the auditor to obtain regarding plans for future action of going concern?
written representations from management
What opinion is use when there is an inadequate disclosure of going concern?
Qualified or Adverse
Corrections of an error in accounting principle affect what?
Consistency and require an emphasis of matter paragraph
Auditors Responsibility paragraph is modified when?
When the auditor expresses a qualified or adverse opinion due to material misstatement of the financial statements (GAAP) or disclaimer
Basis for Modification paragraph is placed before what paragraph?
Opinion paragraph
Lack of Independence leads to what opinion?
Disclaimer (GAAS)
material and pervasive management imposed scope limitation=
disclaimer or withdraw
In a comparative form the auditor should include the date of the prior period report, the service performed in prior period, description of material modifications, statement that service was less in scope than an audit, in what paragraph?
Other-matter
What should the auditor do if the prior period statements are not audited, reviewed or compiled?
Include in other-matter paragraph that the auditor assumes no responsibility for prior period FS
Recognized (Type 1) Event=
Financial Statement Adjustment
Nonrecognized (Type 2) Event=
Footnote disclosure
Period between the date of the FS and the date of the auditor’s report
Subsequent period (auditor has active responsibility)
What opinion should the auditor express if the auditor believes that the financial statements need to be revised to reflect a subsequent event and management does not make the revision?
Qualified or adverse opinion (GAAP issue)
Extend responsibility only for the particular subsequent event=
Dual Dating
If other information requires revision for a material inconsistency and management refuses to make the revision the auditor should:
notify those charged with governance and include material inconsistency in other-matter paragraph, withhold use of report, withdraw from engagement
Auditor’s report on the supplementary information for nonissuers may either be presented as an _ or _
Other-Matter Paragraph or Separate Report
Auditor’s report on the supplementary information for issuers may either be presented as an _ or _
auditor’s report on the financial statements or issue a separate report
Date of the auditor’s report on the supplemental information should not be earlier than
date of the auditor’s report and date on which the auditor obtained sufficient audit evidence
Auditor is prohibited from expressing an adverse or disclaimer of opinion on the supplementary information for who?
Nonissuers
What paragraph should report deficiencies/omissions and opinion about the supplementary information?
Other-Matter Paragraph
Who is not required to be independent of the entity
Reporting accountant
What paragraph states the special purpose framework is a basis of accounting other than GAAP?
Emphasis-of-Matter
What paragraph restricts the use of the auditor’s report? (Also used for special purpose FS)
Other-Matter
What should the auditor’s report include if the auditor reports on an incomplete presentation that is otherwise in accordance with GAAP?
Emphasis-Of-Matter Paragraph
What paragraph is the report on compliance that is included in the auditor’s report in?
Other-Matter
Nothing came to our attention=
negative assurance
Must have done what to accept an engagement?
Audited the FS
What two opinions may the auditor issue on the summary of financial statements?
Unmodified or Adverse
When should the auditor withdraw from the engagement to report on the summary financial statements?
When the auditor’s report on the FS contains an adverse or disclaimer of opinion
What do all SSARs engagements require?
Engagement Letter
Report on a review engagement should include:
Statement that a review is less in scope than an audit
Where should the accountant indicate the degree of responsibility of supplementary information?
Other-matter paragraph or separate report
Should a change in engagement (that is justified) report refer to the original engagement, any procedures performed, or any scope limitation?
NO
Audit may be changed due to what?
Change in client requirements or misunderstanding as to the nature of the service to be rendered
When accountants have reviewed prior year but compiled current year, what can they do?
Issue a compilation report and add a paragraph to the report on the current year or reissue the prior year
The predecessor accountant should read the new FS and obtain a rep letter from the new accountant when?
When they are asked to reissue their prior report
For a review of interim financial information the auditor should:
Obtain an understanding of internal control
Is inquiry of the entity’s lawyer regarding litigation, claims and assessments required?
NO..but use judgment
Comfort letter=
negative assurance on unaudited interim FS, required to perform a review
What statement must a comfort letter include?
Restricted Use
When there are material misstatements or deviations from the criteria, what should happen?
Report should be modified or withdraw
Scope Restrictions: Examination=
Positive assurance (qualified or disclaimer of opinion)
Scope Restrictions: Review=
Negative assurance (“nothing came to our attention”, withdraw)
Engagement in which the practitioner is engaged by a client to issue a report of findings based on specific agreed-upon procedures (mutual fund performance)
Agreed-Upon Procedure Engagement
Should the practitioner be independent in an agreed-upon engagement?
YES
Is use of the report restricted in an agreed-upon procedure engagement?
YES
Financial forecast=
general & limited use
financial projection=
limited use only
Is a review of prospective financial statements allowed?
NO
A practitioner may not issue a compilation report if the entity fails to _____________ that are used in the prospective financial statements
disclose a summary of the significant assumptions
Examination of Prospective FS=
Express an opinion
In an agreed-upon procedure, the prospective FS must include what?
Summary of significant assumptions
Pro forma financial statements may be?
Examined or Reviewed
If the auditor reissues the audit report at the client’s request and does not restate FS or revise the wording, the auditor should do what?
use the original report date on the reissued report
Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require what?
Qualified opinion with a basis for modification paragraph?
An accountant’s standard report on a compilation of a projection should not include a statement that?
The hypothetical assumptions used in the projection are reasonable in the circumstances
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that?
States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles
When financial statements include supplementary information which is outside the basic financial statements, but required by GAAP, the auditor may choose to do what?
Express negative assurance on the information, if review procedures have been appropriately performed
If the client is an issuer, what must the auditor perform?
Integrated audit of the client’s FS and IC
In an initial audit, is it mandatory to make inquires of the predecessor auditor?
YES (client permission needed)
Do you need to review the predecessor auditor’s engagement letter?
NO
Who is responsible for planning the audit, supervising the work of engagement team members and compliance with relevant auditing standards?
Engagement Partner
Touring client facilities, reviewing the financial history of the client, obtaining an understanding of client accounting, and inquiring of client personnel allows the auditor to what?
Obtain knowledge of the client’s business
Factors that determine the focus of the audit (nature) include:
Preliminary evaluations of materiality, audit risk, and internal control
Tests of controls are used to evaluate the operating effectiveness of internal controls in _____ or ______ material misstatements
preventing or detecting
Tests of details and analytical procedures are what?
Substantive Procedures-Used to detect MM
Is a written audit plan required for every audit?
YES
The internal audit function is considered to be part of what?
Monitoring component of internal control
The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated (essentially issue wrong opinion)
Audit risk
The susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
Inherent Risk (assessed by auditor)
Risk that a material misstatement that could occur in a relevant assertion will not be prevented and detected on a timely basis by the entity’s internal control
Control Risk (assessed by auditor)
Risk the auditor will not detect a material misstatement that exists in a relevant assertion?
Detection Risk (controlled by auditor)
When auditor determines the risk of material misstatement is high, detection risk should be set at what level?
LOW
The auditor can change the level of detection risk by doing what?
Varying the nature, extent and timing of audit procedures
What is always necessary for all relevant assertions when the assessed risk of material misstatement is low?
Substantive procedures
Greater risk requires what?
More persuasive evidence, larger sample size, shift from interim to year-end testing
It is the auditor’s responsibility to ______ the audit to obtain_______ about whether the FS are free of MM
plan and perform, reasonable assurance
Analytical Procedures are required during what?
Planning and Final Review Stage
Any indication of fraud should be discussed with an appropriate level of management, at least ___ level above those involved
one
Complete documentation of the auditor’s risk assessment and response is ____
required
Is the auditor responsible for preventing noncompliance and are they expected to detect noncompliance with all laws and regulations?
NO
Acceptable level of _____ risk is used to determine the nature, extent and timing of further audit procedures
detection
Objective of analytical procedures used during planning is:
Enhance auditor’s understanding and identify unusual transactions and events
Is the test of operating effectiveness of controls required?
NO
Significant risk exists when inherent risk is:
Exceptionally high
Risk assessment should be done by whom?
Management
Process that assesses the quality of internal control performance over time
Monitoring
Assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of related assets
Segregation of Duties
The auditor must document the understanding of the _____ and _____ of the entity’s internal controls
design, implementation
Documentation may include an item the auditor can FIND:
Flowchart, Internal Control Questionnaire, Narrative, Documentation from Client
Service Auditor Design of Controls (Type 1) Report
Does not provide the user CPA with a basis for reducing the assessment of control risk
Service Auditor Design and Operating Effectiveness of Controls (Type 2) Report
May provide evidence that would allow a reduction in the assessed level of control risk
Auditor may test risk at interim date if the controls are
strong
Auditor may test risk at period end (test whole year) if the controls are
weak
Use only substantive procedures when:
control risk is assessed at maximum (weak controls)
Tests of controls may be required when:
business uses IT or audit evidence is obtained in electronic form, controls are operating effectively, less risk of MM
Use both substantive procedures and (more) test of controls when:
controls are operating effectively (strong controls), less risk
Controls that are tested only during an interim period should be supplemented by additional evidence for the ____
remaining period
Testing dollar balances, analytical procedures and ratios are what?
substantive procedures
Use substantive interim testing only if ____ is low
Risk of material misstatement
Collusion, human error, and management override are examples of what?
Inherent limitations of internal controls
The audit plan usually cannot be finalized until the:
Consideration of the entity’s internal control has been completed
As part of understanding internal control, an auditor is not required to:
Obtain knowledge about the operating effectiveness of internal control
An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the:
Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset
Hierarchy of Audit Evidence:
AEIO
Audit evidence must persuade the auditor that the ending balances in the FS are what?
Fairly Presented
Analytical procedures should be based on what kind of relationships?
Predictable
Directional Testing, External Confirmation, Standard Auditing Procedures, Review of Relevant Assertions, Selecting Items for Testing to Obtain Audit Evidence and Matching Auditing Procedures to Specific Assertions are all what?
Tests of Details
Is an oral response an external confirmation?
NO-not direct written response
What assertion does examination/inspection support?
Existence
What duties should be segregated in the revenue cycle?
Credit approval, shipment, and billing/accounting
Incoming mail must be opened by a person who does not have access to what?
Accounts receivable ledger
Positive confirmations are best when?
Large $ amounts, expect errors/disputes, weak internal control
Negative confirmations (not as good as positive) are best when?
Low risk, small balances, expect customer attention
Two exceptions to confirmations are what?
Timing Differences, Misstatements (Must investigate both)
The bill is paid by whom to establish good segregation of duties? (Also prepares, signs and mails checks)
Treasurer
Who records the payable, approves the invoice for payment and records the payment after it’s paid?
Accounting Department
What is the auditor doing when they select cash disbursements made subsequent to year-end and examining the supporting documentation?
Searching for Unrecorded Liabilities
Today’s cash receipts cover yesterday’s theft=
Lapping
Cash is recorded two places at once=
Kiting
The auditor inspects date checks are deposited vs. when the receivable was credited to detect what?
Lapping
What is one of the best methods to guard against lapping?
Lock box system
What is useful for detecting kiting?
Bank Transfer Schedule
Is the observation of the beginning and ending physical inventory count required by GAAP?
YES
The client ____ the inventory and the auditor ____ the inventory
counts, observes
Auditor should ascertain that consigned inventory on hand is excluded from the physical inventory count tests what assertion?
Rights and Obligations
Auditor should search for unrecorded purchases of securities by examining transactions for a few days after year-end tests what assertion?
Completeness in the Investment Cycle
Confirmations should be requested from the custodian for securities that are in the possession of third parties tests what assertion?
Existence
Performing analytical procedures to test the reasonableness of dividend and interest income to determine all investment income has been recorded tests what assertion?
Completeness
Auditor reviews the repair and maintenance account to locate items that should have been capitalized and to test for what?
Completeness of Asset Additions
Auditor should inquire of management and review loan agreements and minutes to determine whether fixed assets have been pledged as collateral to test what assertion?
Rights and Obligations and Occurrence (Disclosures)
Payroll department should NOT have the authority to do what?
Initiate changes in hours or rates, sign checks
All stock issuances, dividend declarations, and treasury stock purchases must be authorized by who?
Board of Directors
Auditor should review board minutes for evidence of new debt tests what assertion?
Completeness (Balances)
The auditor should confirm notes or bonds directly with creditors tests what assertion?
Existence (Balances)
Reviewing interest expense for payments to debt holders not included in the debt listing and examining lease agreements for proper classification as operating or capital tests what assertion?
Completeness (Transactions)
What is the primary source of evidence is the client does NOT use a stock transfer agent?
Stock Certificate Book (Completeness)
Vouching transactions recorded during the current period to board minutes tests what assertion?
Existence and Occurrence
When the auditor identifies related party transactions that management didn’t identify or disclose, the auditor should?
Perform appropriate substantive procedures
FMV, Impairment, and Revenue Recognition are all examples of what?
Accounting estimates
The susceptibility of an accounting estimate to an inherent, lack of precision in its measurement is what?
Estimation uncertainty
To evaluate the reasonableness of an estimate, the auditor must first do what?
Obtain an understanding of how management developed its estimate
Where market prices are not available, appropriate ______ should be used to estimate fair value
Valuation Methods
Management should identify and support any _____ used
Significant assumptions
Determine whether management’s significant assumptions provide a ______ for fair value measurements
reasonable basis
Litigation, claims and assessments are all examples of what?
Contingencies
Who is the primary source of information regarding contingencies and who is responsible to identify and account for contingent liabilities?
Management
If the lawyer refuses to respond to the letter of inquiry, what opinion should be issued?
Qualified or Disclaimer
If the client refuses to permit inquiry of the attorney, what opinion should be issued?
Disclaimer or Withdraw
What do PCAOB standards require for all audits of issuers and for each engagement to review the interim financial statements?
Engagement Quality Review and Concurring Approval of Audit Report Issuance
What procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Performing cutoff procedures for shipping and receiving
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the
Shipping document file
An accountant who is conducting a review of the unaudited financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services would be required to
Obtain a management representation letter
When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant’s report and issue a (an:
Adverse
An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to:
Seek information about contingent liabilities and security agreements
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:
Sales billed to customers were actually shipped.
What is the only area where the CPA does not use judgement?
Deciding which items will be selected
What sampling is primarily used for testing internal controls?
Attribute sampling (Deals with Yes/No ?s)
What sampling is primarily used in substantive testing (Dollar values) of account balances?
Variables sampling
Using inappropriate audit evidence and improperly evaluating the results are examples of what?
Nonsampling Risk
If the auditor wants less risk, the sample size should be:
Larger
If the auditor can accept more risk, the sample size should be:
Smaller
If the auditor wants less deviation (tolerable deviation rate) the sample size should be:
Larger
If the auditor can accept more deviation (tolerable deviation rate) the sample size should be:
Smaller
If the auditor expects less deviation, the sample size should be:
Smaller
If the auditor expects more deviation, the sample size should be:
Larger
Sample Deviation Rate + Allowance for Sampling Risk =
Upper Deviation Rate
If Upper Deviation Rate
Rely on the control
If Upper Deviation Rate > Tolerable Deviation Rate, the auditor may:
NOT rely on the control
Variable sampling=
Misstatements
Attribute sampling=
Deviations/errors
The chance of an item being selected is proportionate to its dollar amount and if no errors are expected, it requires a smaller sample than other methods is an advantage of what?
PPS Sampling
Tolerable misstatement/Reliability factor=
Sampling Interval
Recorded amount of the population/sampling interval=
Sample size
When are dual-purpose samples used?
When the auditor believes there is an acceptably low risk that the deviation rate in the population exceeds the tolerable rate
Does the absence of monetary misstatements imply that controls are operating effectively?
NO
Is an integrated audit of internal control required for public companies?
Yes-by SOX
A missing control or when an existing control doesn’t achieve the desired objective is what?
Deficiency in Design (Key word: Inadequate)
When a control doesn’t operate as designed, or is performed by an inappropriate person is what?
Deficiency in Operation
Ineffective oversight by those charged with governance is an example of what?
Material Weakness
Whose responsibility is it to evaluate and address control deficiencies for a nonissuer?
Management
What must be included in the auditor’s written communication of internal control to management?
Restricted Use Wording
Management must provide a written assertion about the effectiveness of the entity’s internal control in a report that accompanies the auditor’s report for whom?
Issuers and Nonissuers
When is benchmarking of automated controls okay?
Low risk situations and if automated controls have not changed from one year to the next
What should the auditor do if management’s report is incomplete or improperly presented?
Modify their report to discuss the situation
Reporting on internal control for nonissuers must follow what?
SSAEs (Attestation Engagement)
If separate reports are issued what should each report contain?
Explanatory paragraph making reference to the other report
Presence of a material weakness in internal control results in what kind of opinion?
Adverse
Is the use of another auditor okay in private or public companies?
Private
Examination of effectiveness of internal control=
Express an Opinion
Consideration of internal control in an audit of financial statements (GAAS)=
Enable the auditor to plan the audit to determine NET
Who selects and appoints the independent auditor and sets the audit fee?
Audit committee
Auditors of issuers report to and are overseen by who?
Audit committee
The client representation letter should be dated the same date as what?
Auditor’s report
If the auditor concludes that written representations are not reliable the auditor should:
consider the possible effect on the audit opinion
The variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement all affect:
Sample size in a variables sampling application
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.
What applies to all services rendered?
Objectivity
What applies to attestation services (audits, special reports, and reviews)?
Independence
When can the member disclose confidential information without the consent of the client?
Subpoena or summons, quality (peer) review, inquiry made by AICPA or disciplinary board, legal defense team
Adverse interest threat=
Objectivity
Advocacy Threat=
Compromised
Familiarity Threat=
Sympathetic
Management Participation Threat=
Acting as Management
Self-Interest Threat=
Benefit
Self-Review Threat=
Evaluate your own work
Undue Influence Threat (Pressure)=
Subordinate Judgment
How long does the PCAOB require audit documentation to be kept?
Seven Years
Is the auditor’s independence impaired when the audit committee fails to administer the engagement?
YES
Who is the only society that can suspend or revoke a CPA’s license?
State Boards of Accountancy
Audit documentation should:
Show the accounting records reconcile with the financial statements
SAS rules require that audit documentation be retained for how long from the report release date?
Five Years
PCAOB rules require that audit documentation be retained for how long from the report release date?
Seven Years
SAS rules require the final audit documentation file to be assembled within how many days following the report release date?
60 days
PCAOB rules require the final audit documentation file to be assembled within how many days following the report release date?
45 days
Significant audit findings may result in what?
Modification of the auditor’s opinion or the inclusion of an emphasis-of-matter paragraph
If a client processes its data without any paper documentation, audit tests should be performed on a what basis?
Continuous
When is auditing around the computer (manual audit procedure) appropriate?
Simple batch systems
Emphasis on Input and Processing Stages (Auditing through the computer)=
CAAT
Client personnel are not informed when what test is being run?
Integrated Test Facility
Client’s system used to process the auditor’s data, off-line, while still under the auditor’s control is what?
Test Data
Advantage of using GASPs is what?
Test high percentage of transactions, require little technical knowledge and reduce audit time
To obtain sufficient evidence to form an opinion on whether the entity complied with compliance requirements is an objective of what?
Compliance Audits (Required by GAAS)
Auditor can change detection risk of noncompliance by varying what?
Nature, extent and timing of audit procedures
The audit organization performing audits in accordance with GAGAS is required to have a peer review at least once ever _____ years
3
A report on internal control for GAGAS includes what?
Descriptions of the scope of the auditor’s testing of internal control
For reporting on internal control under GAGAS, must an auditor communicate ALL significant deficiencies noted during the audit?
YES
A written report on the auditor’s understanding of internal control and the assessment of control in all risk audits is required by whom?
GAGAS
Independence Standards for GAGAS require the auditor to document what?
Threats to independence, safeguards, consideration, auditor’s understanding
What are the two main objectives of a single audit?
Audit of the entity’s FS and Compliance Audit
Entities that expend equal to or in excess of $750,000 in a fiscal year must have an audit performed in accordance with what act?
Single Audit Act-requires separate evaluation of materiality for each major program
Program specific audits do not include reports on the ______ ______ of the organization taken as a whole
financial statements
Both the auditor and the auditee must retain audit documentation for ___ years after issuance and receipt of single audits
3
For low-risk auditees, auditor must test ____ percent of federal awards expended
20
For other auditees, auditor must test ____ percent of federal awards expended
40
Six elements of quality control=
Human Resources, Engagement, Leadership responsibilities, Performance of the engagement, Monitoring, Ethical requirements
SOX requiring a second partner “preissuance” review of the audit documentation falls under what quality control element?
Monitoring
Does failed quality control mean failed GAAS?
NO
____ relates to the conduct of each individual audit engagement
GAAS
____ _____ standards relate to the conduct of all professional activities
Quality Control
The engagement quality control review should be completed ____ the engagement partner releases the audit report
Before
