basic 1-50 Flashcards
1
Q
in the U.S. Who issue auditing standards to private companies
A
AICPA’s Audit Standards board
2
Q
in the the U.S. who issues auditing standard to audit public companies
A
Public company accounting oversight board(PCAOB)
3
Q
Aduit the goverment in the U.S. who issues the audit standards
A
U.S. Government Accountability Office (GAO)
4
Q
What is meant by generally accepted audit standards (GAAS) under the clarified auditing standards?
A
The statements of auditing standards issued by the AICPA auditing standards board.
5
Q
identify the four primary theme associated with the AICPA seven principles for audit standards setting.
A
1 purpose / premise2. Responsibilities3. Performance4. Reporting
6
Q
Identify the topics associated with each of the AICPA’ seven principles for audit standard setting.
A
- purpose 2. premise3. responsibilities4. reasonable assurance5. performance requirements to achieve reasonable assurance6. inherent limitations7. reporting
7
Q
Identify the topics associated with the three general standards formerly known as generally accepted auditing standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
A
- Train 2. Independence3. Due professional care
8
Q
Identify the topics associated with the four reporting standards for generally accepted auditing standards for generally accepted auditing standards (GAAS) which are still applicable to the PCAOB auditing standards.
A
- GAAP2. Consitency3. Disclosure4. Opinion
9
Q
List the six elements of quality control system.
A
- leadership responsibilities for quality within the firm 2. Relevant ethical requirements 3.Acceptance and continuance of client relationships4. human resources5. engagement performance6 Monitoring
10
Q
What are some considerations that must be given by the auditor during the planning phase of the audit?
A
- Determine whether to accept or continue the audit engagement;2. Assess the risk of material misstatement;3 Evaluate requirements for staffing and supervision 4. Prepare the required written audit program (also called the “audit plan”).
11
Q
What matter should be covered in the (successor) auditors inquiry of the predecessor auditor?
A
- Facts related to managements integrity2 significant accounting or auditing disagreements3. Any communications with the audit committee about fraud, illegal acts, and significant deficiencies in internal controls maters4. predecessor’s understanding of the reasons for client change in auditors.
12
Q
What matter are typically addressed in an engagement letter?
A
- the objective and scope of the audit2. the auditors responsibilities 3. Managements responsibilities4. statement about inherent limitations of an audit5. A statement identifying the applicable financial reporting framework6. Reference to expected content of any reports to be issued 7 other matters, as warranted
13
Q
What is the auditors basic audit planning responsibility?
A
The auditor should plan the audit ( and design the required written audit program or plan) to be responsive to the auditors assessment of the risk of material misstatement.
14
Q
what is the difference between an overall audit strategy and an audit plan?
A
An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing and extent of audit procedures to be performed.
15
Q
The clarified auditing standards introduced the term, “performance materiality.” What does that term mean?
A
Th amounts set by the auditors at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatement exceeds materiality for the financial statements as a whole.
16
Q
What is the audit risk model that is applicable to classes of trasactions or to account balances?
A
Audit risk = inherent risk * control risk * detection risk
17
Q
Define “audit risk”
A
The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement.
18
Q
Define “ Inherent risk”
A
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures
19
Q
Define “Control risk”
A
The probability that a material misstatement that occurred in the first place, would not be detected by applicable internal controls.
20
Q
Define “ detection risk.”
A
The probability that a material misstatement, that was not prevented or detected by internal controls, was not detected by the auditors substantive and audit procedures.
21
Q
Define “risk of material misstatement.”
A
The risk that the financial statement contain one or more material misstatement prior to the audit.
22
Q
Define “analytical procedures.”
A
evaluations of financial information through analysis of plausible relationships among both financial and non financial data.
23
Q
what three purposes might analytical procedure serve?
A
- required during planning 2. may be used as substantive evidence 3. required during final review
24
Q
What matters must be documented in connection with analytical procedures?
A
- The auditors exception and the factors considered in developing it;2. The results of the comparison of the recorded amounts (or ratios) with the exceptions and 3. Any additional auditing procedures performed to investigate significant differences identified by that comparison
25
What are the three categories of fraud-related risk factors that should be considered by the auditor?
1. Incentives/ pressures (the motivation for committing fraud)2. Opportunities (the ability to commit fraud)3. Attitudes/ rationalizations ( justification or excuse for committing fraud).
26
List the two types of financial-statement-related frauds?
1. Fraudulent financial reporting (sometimes called cooking the books)2. Misappropriation of assets (covering up theft by false journal entries).
27
When might an auditor have a duty to inform other outside of the audited entity of fraud -related matters?
1. In response to a valid subpoena2. To comply with applicable legal and regulatory requirements3. To respond appropriately to successor auditor's inquiries when the former client has given permission to predecessor4. To report fraud to the applicable funding agency under the requirements of government auditing standards.
28
what are the auditors responsibilities to communicate fraud identified by the auditor?
1. If the fraud is not material, the auditor should inform the appropriate level of management2. If the fraud is material (or if senior management is involved, even if not material,) the auditor should inform those charged with governance.
29
What is meant by the term " legal and regulatory framework"?
Those laws and regulations to which an entity is subject; noncompliance may result in fines, litigation, or other consequences that may have a material effect on the financial statements.
30
What is the auditor's responsibility to detect illegal acts?
The auditor should design the audit to provide reasonable assurance of detecting illegal acts having a direct and material effect on the financial statements.
31
What are the two ways the external auditor might use the work of an internal audit function?
1. to obtain audit evidence 2. To provide direct assistance.
32
When using the work of the internal audit function to obtain audit evidence, what three matters should the external auditor evaluate?
1. Objectivity- the internal audit function's organizational status and the objectivity of the internal auditors;2. Competence of the internal auditors;3. Whether the internal audit function applies a "systematic and disciplined approach, including quality control"
33
When using the internal audit function to provide direct assistance, what two matters should the external auditor evaluate?
1. Objectivity- the internal audit function's organizational status and the objectivity of the internal auditors; and 2. Competence of the internal auditors.
34
Define what is meant by the term " those charged with governance."
The person or organization with responsibility for overseeing the strategic direction of the entity and the obligations related to accountability of the entity
35
Define what is meant by the term "management."
The persons with executive responsibility for the conduct of the entity's operations.
36
What matters are the auditor required to communicate to those charged with governance?
~ the auditors responsibilities under GAAS; ~ The planned scope and timing of the audit;~ Significant finding from the audit.
37
What are the three objectives of internal control as identified in the definition of internal control?
1. Reliability of financial reporting:2. Effectiveness and efficiency of operations3. Compliance with applicable laws and regulations.
38
Identify three procedures and auditor might perform to obtain an understanding of internal controls?
1. Inquiry of appropriate personnel;2. observation of clients activities;3. Review entity's documentation of internal controls.
39
Identify three ways auditors might document their understanding of internal controls?
1. flowchart of transaction cycles;2. Internal control questionnaires;3. Narrative write-ups (memos).
40
Identify two reasons for assessing control risk at the maximum level.
1. The auditor believes that the design of internal control is ineffective2. the auditor believes that reliance on internal control (and performing applicable test of control) is not an efficient audit strategy compared to a wholly substantive audit approach.
41
Identify the five interrelated components of internal controls.
1. Control environment 2. Risk assessment3. control activities4. Information and communication systems5. Monitoring.
42
What is meant by the term "control environment"?
The policies and procedures that determine the overall control consciousness of the entity, sometimes called "the tone at the top."
43
What is meant by the term " risk assessment"?
The policies and procedures involving the identification prioritization, and analysis of relevant risk as a basis for managing those risks.
44
What is meant by the term "information and communication systems"?
The policies and procedures related to the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities.
45
What is meant by the term "control activities"?
The policies and procedures that help ensure that management directives are carried out especially those related to (1) segregation of duties, (2) physical controls,(3) authorization of transactions, (4) performance review, and (5) information processing.
46
List the three categories of incompatible functions associated with segregation of duties.
1. Authorization of transactions (execution function);2. Accounting (record keeping function);3. Access to assets (custody function).
47
What is the auditor's responsibility for assessing risk of material misstatement?
The auditor should identify and assess the risks of material misstatement (1) at the financial statement level and (2) at the relevant assertion level related to classes of transactions, account balances, and disclosures.
48
Define the term "significant risk."
Risks that the auditor believes require special audit consideration.
49
Define "material weakness."
A deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis.
50
Define " significant deficiency".
A deficiency (or combination of deficiencies) in internal control that is less severe that a materiel weakness, yet important enough to merit attention by those charged with governance.
51
What is meant by the term "deficiency in design"
When a control necessary to meet the control objective is missing, or when the control objective is not always met, even if the control operates as designed
52
What is meant by the term " deficiency in operation"?
When a properly designed control does not operate as designed, or when the person performing the control does not have the authority or competence to effectively person the control.
53
describe the auditor requirement for communicating deficiencies in an entity's internal controls
1. The auditor must communicate in writing the significant deficiencies ( including material weakness) identified in the audit2. the auditor may choose to communicate lesser matters too.
54
Describe the timing of the required communication of significant deficiencies in internal control.
Under AICPA professional standards, written communication is required no later than 60 days after the audit report release date (including matters communicated orally during the audit.)
55
What is meant by the term "transaction cycle"?
A group of essential homogeneous transactions; that is transaction of the same type.
56
Why do auditor emphasize transaction cycles?
Control risk is generally constant with in a particular category of transactions as all transaction are processed the same way. So the transaction cycle is the highest level of aggregation for which control risk may be viewed as a constant.
57
What is the difference between an accounts payable system and a vouchers payable system?
An account payable system aggregates payable to identify the total owed to any individual vendor. A voucher payable system keeps track of individual transactions for which payment is owed without summarizing the totals by vendor.
58
List the two broad categories of substantive procedures.
1. test of details2. Substantive analytical procedures
59
Identify the two categories of substantive test of details
1. test of ending balances2. test of transactions.
60
Identify the four considerations that determine the effectiveness and efficiency of analytically procedures used for substantive purposes.
1. Nature of the assertion;2. Plausibility and predictability of the relationship;3. Availability and reliability of data; and 4. Precision of the exception.
61
What is meant by "sufficient" and "appropriate" when " sufficient appropriate audit evidence " is mentioned?
~ "sufficient" refers to the quantity of evidence that is required; and ~ "Appropriate" refers to the quality of the evidence involved, in terms of "relevance" and "reliability".
62
Define "Assertion."
Impact or explicit statements of fact by management that are associated with the entity's financial statements.
63
List the three broad categories of assertions under AICPA professional standards.
1. Account balances at the end of the period (there are four assertions related to the balance sheet);2. Classes of transactions and events during the period (there are five assertions related to the income statement);3. Presentation and disclosure (There are four assertions related to the footnotes applicable to any of the financial statements).
64
List the four assertions about presentation and disclosure ( footnotes).
~ Occurence and rights and obligations; ~ completeness;~ Classification and understandably and accuracy and valuation. ~ Accuracy and valuation.
65
List the five assertions about classes of transaction and events during the period (income statement).
1. Accuracy2. Occurrence 3. completeness4. Cutoff5. Classification
66
List the four assertions about account balances at the end of the period (balance sheet).
1. Existance;2. Completeness3. Rights and obligations4. Valuation and allocation
67
What are the AICPA guideline to rank reliability of audit evidence?
1. Direct personal knowledge by the auditor is the most reliable audit evidence.2. Evidence obtained from an independent outside source is the next most reliable.3. Evidence obtained from the entity under effective internal control is next.4. Documentary evidence is more reliable than verbal responses to inquires (and original documents are more reliable that faxes and photocopies).
68
List the three categories of audit procedures.
1. Risk assessment procedures2. test of controls3. substantive procedures.
69
What are substantive procedures?
Procedure performed to detect material misstatements at the relevant assertion level; these consist of tests of details and substantive analytical procedures
70
Define "report release date"
The date the auditor grants the entity permission to use the auditor report (that date must be documented)
71
What is meant by the term "documentation copletion date" under the AICPA and PCAOB standards, respectively?
Under AICPA standards ( applicable to audits of "non issuers") The auditor should complete the assembly of the final audit file no later that 60 days after the "report release date."Under PCAOB standards ( applicable to audits of "issuers") - the auditor should complete the assembly of the final audit file no later that 45 days after the "report release date."
72
What is meant by the term "projected misstatements"?
The auditors best estimate of misstatements in populations suggested by audit sampling. ( The AICPA formerly used the term "likely error" for this concept)
73
What matters must be documented by the auditor in connection with the evaluation of misstatements?
1. The threshold for determining what is viewed as clearly trivial.2. All misstatements accumulated during the audit (and whether they have been corrected).3. The auditors conclusion as to whether any uncorrected misstatements are material ( individually or in the aggregate), and the basis for that conclusion.
74
What changes can the auditor make to the audit documentation after the documentation completion date?
~ the auditor must not delete audit documentation before the end of the retention period;~ The auditor may add to the documentation but must document any material added by whom when the reasons for the change and effect on the auditors conclusions.
75
What are the audit documentation retention requirements under AICPA and PCAOB standards, respectively.
Under AICPA standard ( applicable to audits of "nonissuers" )___ The audit documentation should be retained for at least five years from the report release date.Under PCAOB Standards (applicable to audits or issuers")__ the audit documentation should be retained for at least seven years from the report release date.
76
List two alternative procedures for a non-response to a positive confirmation ( usually performed after a second request was sent, but no response was received).
First verify subsequent cash receipts; or second examine underlying documents for apparent validity.
77
When might negative confirmations be justified?
1. The financial statement item involves a large number of small (immaterial) accounts;2. Control risk is low ( that is, internal control is viewed as effective);3. Recipients are expected to pay attention to the request.
78
What is meant by the term "negative confirmation" ?
A response is only requested in the event the confirming party disagrees with the identified balance. A non-response is view as indicating that party agreement.
79
What is meant by the term " positive confirmation"?
A response is requested whether or not the confirming party agree with the entity's recorded amount. A non-response indicates a "loose end" that must be resolved.
80
What is the auditors basic responsibility when auditing accounting estimates?
evaluate the reasonableness (and the adequacy of related disclosures) of any significant accounting estimates relative to GAAP or other applicable financial reporting framework.
81
What is meant by the term "estimation uncertainty"
The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. (The risks of material misstatement increase when there is high estimation uncertainty.)
82
What is the best evidence of fair value?
published price quotations in an active market
83
define fair value
The amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
84
What is meant by the term "observable inputs"?
Assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity.
85
What is meant by the term (unobservable inputs)
An entity's own judgement about what assumptions market participants would use. (estimation uncertainty increases when the fair value estimates are based on unobservable inputs instead of observable inputs)
86
List the two types of letter involved in the communication with the entity's lawyers.
~letter of inquiry- management's letter to the entity's lawyers ( as requested by the auditor) asking the lawyer to provide litigation-related information directly to the auditor~ lawyer's letter--- the lawyer's response directly to the auditor.
87
What is meant by the term "assert claim"?
Also referred to as "pending or threatened litigation" a claim that has already been filed (pending) or when the other part has announced an intention to sue (threatened).
88
What is meant by the term "unasserted claims"?
Audited entity has exposure to litigation but no one has yet filed a law suit or announced an intention to sue
89
List the four matters the lawyer's letter should address regarding "asserted" claims.
1. The nature of the litigation 2. the progress of the case to date 3. how management is responding or intends to respond to the litigation 4.An evalutation of the likelihood of an unfavorable outcome and estimate if one can be made, of the amount or range of potential loss
90
List the three matter the lawyers letter should address regarding "unasserted" claims.
1. The nature of the litigation 2. How management intends to respond if the claim is asserted and3. An evaluation of the likelihood of an unfavorable outcome and estimate, if one can be made, of the amount or range of potential loss.
91
What is the effect of a limitation in the lawyers response to the letter of inquiry on the audit report?
This would be considered a scope limitation sufficient to prevent an unqualified opinion and likely resulting in a disclaimer of opinion.
92
Under what circumstance might an auditor NOT be required to obtain a letter from the entity's legal counsel?
If the entity had no litigation, claims or assessments having financial reporting relevance and accordingly, did not engage legal counsel. ( in such a case, the management representations letter would include a statement to effect.)
93
What are the two basic categories of issues usually addressed by the management representation letter under the AICPA clarified auditing standards?
1. financial statements2. Information provided.
94
What is the purpose of obtaining the required management representation letter?
to document in writing the essence of managements verbal response to the auditors important verbal inquiries
95
List the members of the management who are responsible for signing the management representations letter.
The chief executive officer and chief financial officer
96
What is meant by the term "related party"
One party that controls or can significantly influence the management or operating policies of another party.
97
Identify three responsibilities of the auditor when related-party transactions have been identified.
1. obtain an understanding of the business purpose of the related-party transactin2. Determine if the related-party transaction was authorized by board of directors 3. Evaluate the adequacy of the disclosures of the related party transactions
98
What is meant by the term subsequent events
Events or transactions that occur after the balance sheet date up to the date of the auditor's report which have a material effect on the financial statements and, therefore, require either financial statement adjustment or disclosure.
99
What period of time defines a subsequent event?
The period after the balance sheet date up to the date of the auditors report.
100
When would a subsequent event require adjustment of the financial statements?
When material events or circumstances clarify (that is provide better information about) circumstances already in effect as of the balance sheet date
101
When would a subsquent event require disclosure in ( but not adjustment of) the financial statements?
When material events or circumstances arise after the balance sheet date.
102
What should the auditors do when subsequently discovered facts become known to the auditor ( either before or after the report release date)?
Discuss the matter with management (and possibly those charge with governance) and determine whether the financial statement require revision. If so, inquire how management will deal with the matter.
103
What procedures should the predecessor auditor perform when reissuing an audit report?
1. read the subsequent financial statements and compare to those previously audited2. Make inquiries of management and obtain written representations from management about issues affecting the previous representation obtained from management3, Obtain a representation letter from the successor audit about known relevant matters
104
What is meant by the term "dual dating the auditor's report"?
The auditor uses one date for the overall audit report, but specifies a later date to address a particular subsequent event, and does not imply responsibility for other matters beyond the basic date of the report.
105
When the auditor has substantial doubt about and entity's ability to continue as a going concern, what further evidence-gather responsibilities does the auditor have?
~ Inquire about managements strategy to overcome the entity's financial difficulties and ~ evaluate the feasibility of the key elements of management's plan with emphasis on "mitigating factors"
106
What is meant by the term "mitigating factors" when the auditor is evaluating an enity's going concern issues?
Those aspect of management's strategy that might be expected to improve the entity's cash flows (that is, generate cash inflows or reduce cash outflows).
107
Describe the auditors reporting responsibilities when the auditor
Consider the adequacy of disclosure about these issues relative to GAAP or other applicable financial reporting framework (is there a misstatement?) and If the financial statements (including disclosure) are consistent with the requirement of the applicable framework, the auditor should add an emphasis-of-matter paragraph after the unmodified opinion.
108
What meant by the term "reasonable period of time" when the auditor is assessing an entity's going concern issues?
A period of time not to exceed one year beyond the date of the financial statements being audited
109
What is the purpose of a bank confirmatin?
1. verifies the existance and ownership of bank accounts2. It also provides evidence about the completeness and terms of note payable with bank.
110
What is meant by the term "cutoff bank statement"?
Short period bank statement obtained directly from the bank (normally for a 10-day period ) useful in verifying the deposits in transit and providing some ( usually partial) evidence about outstanding checks on a bank reconciliation.
111
What is the schedule of inter bank transfer used for?
It is used to verify that transfer between the entity's bank accounts are recorded properly ( and to detect kiting, which overstates the cash balance)
112
what is meant by the term "kiting"
An overstatement of the true cash balance at year-end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between the entity's cash accounts.
113
Describe how the auditor performs the "cutoff test" for sales.
Examine the last few transactions before year-end and the first few after year-end. Agree the entries on the sales journal to the shipping documents (existence)l and agree the shipping documents to the sales journal (completeness),
114
What is meant by the "Lapping" related to accounts receivable?
An attempt to cover up a theft of receipts, where a clerk might apply a different customer account (whose payment was stolen) to conceal the theft.
115
What is meant by the term "derivative" ?
A derivative is a financial instrument or other contract whose value is derived (hence, the name derivative) from its relationship to something else known as the underlying. The underlying can be another financial instrument, a physical commodity, currency, etc.
116
What is meant by the term "hedge"?
A hedge is a defensive strategy designed to protect against the risk of adverse price or adverse price or interest rate movements to achieve a state of balance.
117
What is usually considered to be the best evidence of fair value for a financial instrument that is measured at fair value?
Quoted market prices obtained from financial publications, national exchanges, or NASDAQ.
118
Describe the basic steps that comprise the auditor's search for unrecorded liabilities.
1. Review cash disbursements after year-end and examine underlying documents to identify liabilities of the period under audit.2. examine unpaid invoices (and receiving documents at the time of the test.3. Inquire of management as to the completeness of liabilities (document that in the management representations letter).
119
When is the detailed testing of payroll ( or other expense accounts) typically performed?
Usually performed only when the auditor's analytical procedures suggest that there is a risk of material misstatement relating to payroll (or other expense accounts)
120
Define sampling risk
The risk that the sample may not be truly representative of the population.
121
Define "type I error"
The risk of under-reliance on controls ( that is, the risk of assessing control risk too high); or incorrect rejection of fairness of an account balance. (The AICPA considers this an error related to efficiency.)
122
Define "type II error"
The risk of over reliance on controls (that is, the risk of assessing control risk too low); or incorrect acceptance of the fairness of an account balance. ( the AICPA considers this an error related to effectiveness.)
123
Define "nonsampling risk"
Any mistake by the auditor other than sampling risk that is not a direct consequence of using a sampling approach.
124
List the two general approaches to audit sampling
1. Statistical 2. Nonstatistcal
125
Define "random sampling"
Sampling methodology where each item in the population has the same probability of being selected.
126
List the three factors, as indicated by AICPA table, that determine sample size for an attributes sampling application
1. Expected error rate (related to the variation in population)2. Tolerable error rate (related to precision)3. Risk of over-reliance ( type II error rate.)
127
What is the formula to obtain the sample size for probability- proportionate-to-size (PPS) sampling
n = reliability factor (from PPS tables ) X book value / tolerable error
128
List the various types of classical variable sampling techniques
1. difference estimation2. Ratio estimation3 mean-per unit estimation
129
what is the purpose of stratification?
to reduce the overall variability within a population
130
What is relevant "sampling unit" in PPS sampling ?
An individual dollar associated with the financial statement element involved.
131
What is the primary advantage of PPS sampling?
Efficiency-- If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than other sampling methods.
132
what is the primary disadvantage of PPS sampling?
PPS sampling does not work very well in dealing with understatements or zero (unrecorded) balances.
133
Define "general Controls"
Controls that have pervasive effects on all the specific computer processing applications
134
List the five categories of general controls
1. Organization and operation2. systems development and documentation 3. hardware and system software 4. Access5. Data procedures
135
Define "application controls"
Information processing controls that apply to the processing of specific computer applications (controls around input processing and output)
136
What two topics of responsibility are addressed in the "Managements responsibility" section of the auditor's report?
1. Management's responsibility for the fair presentation of the financial statements2. Managements responsibility for the design implementation and maintenance of internal control related to financial reporting
137
if the prior periods financial statements have been audited by a predecessor auditor whose report is not issued, the auditor should add an other other matter paragraph. what specific matter should that other matter paragraph address?
1. that the prior period financial statements were audited by predecessor auditor2. the type opinion expressed ( and the reason for any modification)3. the nature of any emphasis-of matter or other matter paragraph and 4. the date of the predecessor's report
138
If the auditors report includes a section after the opinion paragraph labeled "report on other legal and regulatory requirements," how should the introductory paragraph be labeled?
"report on financial statements" - ordinarily, the introductory paragraph does not have a label, but in this case, it would.
139
Identify the three requirements that determine whether a reference to component auditors is permitted
1. the component's financial statements must use the same framework as group 2. the component audiot has complied with GAAS (or PCAOB standards, as applicable). 3. the component auditor has issued an audit report on the component's financial statements (and that report is not restricted as to use).
140
What is meant by the term "component auditor"
An auditor who performs work on financial information of component that will be used as audited evidence for the group audit. A component auditor may be (1) part of the group engagement partner's firm (2) a network-affiliated firm, or (3) another unrelated firm.
141
When the group engagement partner decides to reference the component auditor work, what is the effect on the auditor's report?
Introductory paragraph management responsibility section-- no effectAuditor's responsibility section-- first sentence modified to identify the component audited by other auditors and the magnitude of financial statement involved.Opinion paragraph-- Modified to say "In our opinion, based on our audit and report of the other auditors..."
142
What is meant by the term "significant component"?
A component identified by the group engagement team that (1) is of individual financial significance to the group; or (2) due to its specific nature, is likely to include significant risks of material misstatement of the group financial statements.
143
What is meant by the term "emphasis-of-matter paragraph" in an auditor's report?
A paragraph that refers to a matter appropriately presented or disclosed in the financial statements that it is fundamental to users understanding of the financial statements.
144
What is meant by the term "other matter paragraph" in an auditors report?
A paragraph that refers to a matter other that those presented or disclosed on the financial statements that, in the auditor judgment, is relevant to users understanding of the audit, the auditor's responsibilities, pr the auditor's report.
145
Identify the three issues for which an emphasis -of - matter paragraph is required.
1. When there is substantial doubt about the entity's ability to continue as a going concern.2. when there is an inconsistency in accounting principles used. 3. When the financial statements re prepared in accordance with special purpose frameworks (such as cash basis, tax basis, regulatory basis, or contractual basis).
146
List the item comprising (that is, the structure) of an unmodified audit report under the AICPA's clarified audit standards.
1. Title2. Addressee 3. Introductory paragraph 4. Management responsibility section5. auditor responsibility section6 opinion paragraph 7. Signature ( with the city and state of the office responsible for the engagement)8. Date.
147
What type of report should the auditor express when a misstatement is viewed as material, but not pervasive?
Qualified opinion.
148
What is the auditor's responsibility with respect to consistency on audited financial statements presented on a comparative basis?
The auditor should evaluate the consistency between all such period presented, as well as the consistency of the earliest period cover by the auditor opinion with the previous period.
149
When a material change in accounting principle has been properly accounted for by the entity's financial statements (with adequate disclosure and justification that the adopted principle is preferable), what is the effect on the auditor's report?
The auditor should include an emphasis of matter paragraph to describe the change and references the footnote that discusses the change. the auditor should also state that the auditor's opinion is not modified with respect to the matter.
150
Where should an emphasis- of-matter or other-matter paragraph be presented in the auditor's report?
1. The emphasis- of matter paragraph should be presented after the opinion paragraph.2. the other-matter paragraph should be presented after the opinion paragraph (and after any emphasis-of-matter paragraphs).
151
What is meant by the term "initial audit engagement"?
An engagement in which (1) the financial statements for the prior period were not audited; or (2) the financial statements for the prior period were audited by a predecessor auditor.
152
What is meant by the term "other information" ?
Information other than the financial statements and the auditor report that is included in a document containing audited financial statements and the auditors report (can be financial and non financial information, but excludes "required supplementary information").
153
What does the term "readily available" mean?
It means that no further action by the entity is required being available through the entity website would be considered readily available, but being upon request would not be considered readily available.
154
What is meant by the term "required supplementary information"
Information that a designated accounting standard setter requires to accompany an entity's basic financial statements (although the information is not part of the basic financial statements, authoritative guidelines for measurements and presentation have been established.)
155
How does required supplementary information affect the auditor's report on entity's financial statements?
The auditor should include other-matter paragrah in the audit report to comment on required supplementray information (whether or not it is presented at all and whether or not it is presented in accordance with the prescribed guidelines)
156
Identify two general circumstances that would require an alert to restrict the use of the auditor's report.
1. when the subject matter is based on criteria that are only suitable for ( or available to) a limited number of users or 2. the matters are presented in a by product report that is not the primary objective of the engagement.
157
What is the auditor's responsibility to enforce the distribution of the auditors written communication having an alert to restrict the use of it?
The auditor is not responsible for enforcing such distribution. the purpose of the alert is to appropriately communicate the restricted distributions.
158
What is meant by the term "summary financial statements"?
Historical financial information that is derived from financial statements but that contains less detail that the financial statements, while still providing a structured representation consistent with the provided by the financial statements.
159
To what extent must the auditor comply with GAAS when auditing financial statements intended for use solely outside of the U.S.A.?
The auditor should comply with GAAS, Except for requirements related to the form and content of the auditor's report. (in this case, the auditor may report either using a U.S. form of report or using the report form and content associated with the other country.)
160
Identify the procedures an auditor should perform when engaged to report on the application of accounting principles to specific transaction.
1. Obtain an understanding of the form and substance of the transaction involved; 2. Consult with the "continuing accountant"(which requires the client's permission); and 3. Review applicable accounting requirements and consult with other, as necessary.
161
When is the AICPA pronouncement, "reports on application of requirements of applicable financial Reporting framework" applicable?
When providing a written report or verbal advice on; 1. The application of accounting principle to specific transactions2. the type of opinion that might be issued on specific financial statements.
162
What is meant by the term "special purpose framework"?
A financial reporting framework other than GAAP that is one of the following bases of accounting;1. cash basis 2. tax basis 3 . Regulatory basis4. contractual basis5. other basis that uses "definite set of logical, reasonable criteria"
163
When deciding whether to accept an engagement to report on financial statements prepared in accordance with special purpose framework, what three matters should the auditor consider?
1. the purpose for which the financial statemnt are prepared 2. the intended users of financial statements and 3. the steps taken by management to determine that the framework is acceptable in circumstances
164
Which special purpose frameworks require a paragraph in the auditor's report to restrict the distribution of the report to specified users?
The contractual basis and regulatory basis (not intended for general distribution) require such a restriction. the cash basis, tax basis, and regulatory basis intended for general use do not require such restricted distribution.
165
What is meant by the term "service organization"?
An organization or segment of an organization that provides service to user entities that are relevant to those user entities internal control over financial reporting.
166
What two type of reports of internal controls at the service organization may the service auditor be engaged to issue?
1. report on management's description of a service organization system and the suitability of design of controls (type 1 report)2. Report on management's description of service organization suystem and the suitability of design and operating effectiveness of controls (type 2 report)
167
When might the user auditor's report appropriately refer to the service auditor report?
The user auditor may refer to the service auditor in the user auditor's report containing a modified opinion, if that reference would be helpful to understanding the user auditors modification. ( There should be no reference to the service auditor in the user auditor's report containing an unmodified opinion.)
168
The auditor expresses positive assurance (an opinion) on what specific matters in a "letter for underwriters and certain other requesting parties"?
An opinion is only expressed on whether the audited financial statements and schedules, included in registration statement, comply as to form with SEC requirements.
169
What are the objective of the "compliance audit" ?
~ To express an opinion on whether the entity complied with applicable compliance requirements , at the level specified in the governmental audit requirements in the governmental audit requirement that are supplementary to GAAS and GAGAS and to evaluate those requirements.
170
List the three main differences in government audit standards relative to AICPA's Statements on auditing Standards.
~ Government auditing standards require a written report on internal control; ~~ government auditing standards require a written report in compliance with applicable laws and regulations and ~~ government auditing standards require the auditor to report any known instance of illegal acts that could result in criminal prosecution.
171
When must a state or local governmental enity be audited according to the single audit act of 1984, as amended?
When a state or local governmental eniity spends federal assisstance aggregating at least 750,00 in fiscal year.
172
What AICPA standards are applicable to reviews and complication for nonissuers
Statements on standards for accounting and review services (SSARS) are issued by the AICPA's accounting and review services Committee (ARSC).
173
what is the purpose of a "review" as prescribed under in statements on standards for accounting and review services?
The purpose of a "review" is to obtain limited assurance, sometimes called negative assurance, that there are no material modifications that should be made to the financial statements
174
What is the accountants's responsibility to establish an understanding for an engagement to compile a non-issuer's financial statements?
The accountant should establish an understanding about the engagements objective, management's responsibilities,the accountant's responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.
175
What is the effect on a compilation report if the accountant is not independent ?
A compilation does not require independence, since no assurance is provided--- but the compilation report must point out that fact when idependence is lacking. The auditor may choose to add a single sentence to the end of the compilation report without any further explanation as to the reasons for the impairment of indpendence; or may instead choose to disclose the reason for the impairment of independence
176
What is the accountant's responsibility to establish an understanding for an engagement to review a non-issuer's financial statements?
The account should establish an understanding about the engagement's objective, management's responsibilities, the accountant's responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.
177
What is the effect on succerssor accountants compilation or review report when the predecessor accountant's compilation or review report is not presented on the prior year's financial statements?
The successor accountant's report should include an explanatory paragraph that identifies the nature and date of the predecessor's report and states that the current accountant takes no responsibility for the prior year's financial statements.
178
What is the accountant's responsibility to establish an understanding for an engagement to compile specified elements of an entity's financial statements?
The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties' respective responsibilities , and the nature of the report to be issued. it is preferable, but not technically required, to get that understanding in writing.
179
What is the accountant's responsibility to establish an understanding for an engagement to compile an entity's pro forma financial information?
The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties'respective responsibilities , and the nature of the report to be issued. It is preferable, but not technically required, to get that understanding in writing
180
What are the accountants performance requirements regarding an engagement to compile proforma financial information?
The accountant should read the compiled pro forma financial information, including the summary of significant assumptions, and consider whether that information appears to be free of obvious material errors. Note: to compile the pro forma financial information, the accountant must have compiled, reviewed, or audited the historical financial statements on which the pro forma information is based.
181
list three usual type of attestation engagements. (This "menu" may change depending upon the specific subject matter involved.)
1. Examinations2. Reviews3. Agreed-upon procedures.
182
Describe an "agreed-upon procedures attestation engagement."
An engagement whereby the practitioner and the "specified parties" agree upon the specific procedures to be performed and the specified parties take responsibility for the sufficiency of the procedures for their purposes.
183
Define attest engagement
An engagement where a CPA practitioner is engaged to issue (or does issue) an examination, a review, or an agreed upon procedures report on subject matter that is the responsibility of another party.
184
List the two categories of requirements applicable to attestation engagements.
1. unconditional requirements-- indicated by "must" or "is required" and 2. Preemptively mandatory requirements-- indicated by "should", which permits rare departures.
185
List the three types of engagement that are permitted by AICPA attestation standards related to "prospective" financial information.
1. Examination- postive assurance is expressed2. Agreed- upon procedures-- assurance is provided as "procedures, findings" 3. compilation- no assurance is expressed (note that a "review" is not permitted!!!)
186
What is meant by the term "forecast"?
A forecast represents the predicted financial statement outcome -- the "best guess."
187
What is meant by the term "projection"?
A projection represents the financial statement outcome based on certain specified hypothetical assumptions, which may or may not be likely to occur.
188
What is the only type prospective financial statement for which an examination report can have general unrestricted distribution?
A forecast can have unrestricted distribution (but any report on a projection must have restricted distribution).
189
What conditions are required to be present for practitioner to issue an examination or review report on proforma financial information?
1. The document containing the proforma information includes or references the complete historical financial statements and 2. the accountant has audited or reviewed the related historical financial statements.
190
An examination report on pro forma financial information involves expressing an opinion on three matters. List the three matters.
1 Whether management's assumptions provide a reasonable basis for presenting the significant effects attributable to the transaction / events;2. whether the adjustments appropriately reflect those assumptions3. Whether the pro forma column reflects the proper adjustments of the historical financial statements.
191
List the three specific elements required by securities and Exchange Commission (SEC) in the Management discussion and Analysis (MD&A) presentation.
1. discussion of financial condition-- regarding liquidity and capital resources;2. Discussion of changes in financial condition and3. Discussion of results of operations
192
What precondition must exist for an auditor to accept an engagement to report on an entity's Management Discussion and Analysis (MD&A) presentation?
~~ practitioner must have audited the annual financial statements for the latest period covered by the MD&A presentation and~~ Any other financial statements involved must have been audited or at least review if they are interim
193
List the four assertions that are implicitly embodied in the Management Discussion and Analysis (MD&A) presentation
1 occurrence 2. consistency with the financial statement's 3. completeness of the explanation 4. presentation and disclosure
194
Define "assurance services."
Independent professional services that improve the quality or context of information for decision makers.
195
What is Systrust?
The AICPA's assurance service regarding systems reliability.
196
that is PrimePlus (formerly called ElderCare)?
The AICP's assurance service directed at the needs of aging persons.
197
What is Webtrust?
The AICPA's assurance intended to facilitate e-commerce activities.
198
List the five "principles" and categories of criteria associated with Trust Servies consisting of Systrust and WebTrust
1. Security2. Availability3. Processing Integrity4. Confidentiality5. Privacy.
199
Differentiate between the AICPA and PCAOB requirements regarding "retention" of audit documentation
~~ AICPA require retention of audit documentation for five years for audits of "nonissuers"~~ PCAOB requires retention of audit documentation for seven years for audits of "issuers."
200
Differentiate between the AICPA and PCAOB requirements regarding the documentation completion date.
~~ AICPA; A complete and final set of audit documentation should be assembled no later that 60 days after the report release date for audits of "non issuers"~~ PCAOB: A complete and final set of audit documentation should be assembled no later that 45 days after report release date for audits of "issuers"
201
Define "entity-level controls."
Controls related to the control environment; controls over management override; the company's risk assessment process; controls to monitor results of operation or other controls; controls over the period-end finacial reporting process; and policies that address significant business control
202
List the diffrences in the AICPA statement on quaility control statards (SQCS) relative to PCAOB audit standard N0. 7.
SQCS do not ~~ require and "engagment quality review " for any type of engagement;~~ impose a "cooling off" restriction or requirement that the reviewer must be an "associated person" of a registered public accounting firm~~ Require a "concurring approval of issuance" before issuing a report~~ Specifically require that engagement quality review documentation must be retained with other documentation
203
List the five financial statement assertions outlined in the PCAOB auditing standard No. 15.
1. existence 2. Completeness3. Rights and obligation 4. Valuation or allocation5. presentation and disclosure
204
What is the auditor's basic objective when reporting on supplemental information under PCAOB auditing standards No. 17?
To obtain sufficient appropriate audit evidence to express an opinion on whether the supplemental information is fairly stated, in all material respects, in relation to the financial statement as a whole.
205
What is the role of international federation of accountant's (IFAC) international Auditing and assurance standards Board (IAASB)?
~~ in general to be the global standard-setting body related to auditing, review, other assurance services, and quality control, and to facilitate convergence of national and international standards~~ With respect to auditing specifically, to issue International standards on auditing (ISAs) applicable to the audit of historical financial information.
206
Give two examples of "other members"
1. An unemployed member2. A Retired member
207
What is the main thing that "öther members" are expected to do?
Not commit discreditable acts.
208
Name three immediate family members
1. Spouses2. Spousal equivalents3. Dependents
209
Name three close relatives.
Parents, siblings and non dependent children
210
Immediate family members cumulatively may not own more that what percentage of an attest client?
5%
211
What is a member in business?
A member in business is an accountant who works for a company or government agency (such as an internal auditor) who is not working as a member in public practice
212
Which area of professional responsibility worries members in public practice but not members in business?
independence
213
Gifts or entertainment to members in business would create threats to integrity and objectivity if they either:
1. Violate the law or the policicies of their firm or other firms or2. are not reasonable in circumstances
214
Who in an attest firm may not hold prohibited employment positions with an attest client
partners or professional employees
215
Name three prohibited positions that partners or professional employee may not hold with an attest client.
Any of these: director, officer, employee, promoter, underwriter, voting trustee, trustee for any pension or profit-sharing trust of the clients, or any equivalent positions
216
If an officer of an attest client leaves the client and joins the firm, which position might the person occupy that would inevitably impair independence?
Team member or someone in a position to influence,
217
Give a an example of a common interest realty association.
Any of: condominium, cooperative, homeowners association, planned unit development, timeshare development.
218
What is the test to determine whether gifts impair independence?
Clearly insignificant (to the recipient).
219
What is the test to determine whether entertainment impairs independence?
Reasonable in circumstances
220
Which types of covered members are limited in their ability to consider going to work for an attest client?
Team members and those in positions to influence.
221
What two things should a person in a position to influence do after receiving an offer of employment from an attest client?
1. Promptly report to his or her firm2. Leave the engagement until a decision is made.
222
What type of job with an attest client create an independence problem for a firm when taken by one of its partners or professional employees?
A "key position"
223
When should a firm not have a depository account at an attest client bank?
When the chance the bank will experience financial difficulties is not remote.
224
Which three conditions make it okay for an individual covered member to have an account at an attest client bank?
Any one of these conditions 1. the balance is fully insured2. Any uninsured amounts are immaterial 3. Any material amounts are reduced within 30 days
225
From which entities should a covered member generally not borrow?
An attest client, its officers and directors, or any 10% shareholder.
226
Name two types of loans a covered member may have without impairing independence.
Any two of these:1. Auto loans collateralized by the vehicle 2. Loans fully collateralized by the cash surrender value of insurance policy3. Passbook or similar collateralized loans 4. Credit card or overdraft amounts up to $10,000
227
List the "covered members" Outlined in the principles of the code of professional conduct
~~ team members~~ those in a position to influence (PTI) team members~~ Other partners in the office (OPIO's)~~ ten-hour people ~~ the firm ~~ Any entity controlled by the above
228
During which two time periods must a firm be independent of an attest client?
1. The period covered by the financial statement2. The period of the professional engagement.
229
A covered member who owns share in mutual fund has what kind of interest in the fund's underlying securities?
Indirect
230
What happens if an attest team receives significant help from employees of another, nonindependent firm?
independence is impaired
231
What types of financial interest impair independence?
1. Direct and material2. direct and immaterial 3. indirect and material
232
If a covered member learns that she has inherited the securities of an attest client, what should she do?
Sell the securities as soon as practicable but definitely within 30 days.
233
A general partner's interest in the investments of the general partnership is what?
direct
234
A member may not sign a current-year audit report if the client has not paid fee due for how long ?
one year
235
Auditors may not hold a client harmless for what?
liability arising from fraud by the client's management.
236
What are three key terms in the conceptual framework?
Threats, safeguards, and acceptable level.
237
What are the three steps to applying the conceptual framework?
Identify threats, evaluate the significance of the threats, and identify and apply safeguards.
238
List some examples of false, misleading, or deceptive acts.
~~ creating false or unjustified expectation of favorable results;~~ implying the ability to influence a court or agency ~~ Estimating a fee knowing that the amount charged will likely be much higher
239
List at least two exceptions to the general rule that members may not disclose client confidences without specific contest of the client.
Any of: 1 to comply with valid summons or subpoena 2 as part of AICPA or state review of a member's practice 3. to initiate or respond to a complaint from AICPA or state board; 4 necessary to initiate, pursue or defend a lawsuit
240
Members who may advocate for their clients may not do which three things?
1. Stretch the bounds of performance standards2. Go beyond sound and reasonable professional practice3. compromise credibility
241
If a client objects to outsourcing, what should a member do?
either not outsourcing, or reject the engagement altogether .
242
What three things should a member describe when departing from generally accepted accounting principes?
1. the departure2. its approximate effects3. The reasons why normal compliance would mislead
243
What are two steps that will eliminate most conflicts of interest problems ?
1 full disclosure to the client 2 client consent
244
A violation of the rules is presumed if a member receives gifts or entertainment from a client if which two factors apply?
1. they violate policies of the member or the client or applicable laws and regulation and 2 the member knows of the violation or is reckless in not knowing
245
Name a discreditable act that can happen after your're fired
Removing client file or proprietary information
246
Which type of record necessarily belongs to the member and almost always need not be produced upon request?
working papers
247
Name the code's exceptions to what would normally be treated as a contingent fee.
A fee fixed by courts or other public authorities. Or, in tax matters, if determined by the result of judicial proceeding or agency findings.
248
A firm may not designate itself as "members of the AICPA" unless what condition applies?
All its CPA owners are members of the AICPA
249
IF after discussing a disagreement with superiors, a member believes the matter is serious and is not going to be resolved as it should, what should she do?
1. determine whether the organization's internal policies have any additional requirements for reporting differences of opinion2. determine whether she is responsible for reporting to third parties 3. consult legal counsel4. document the facts, principles, and conversations
250
Briefly summarize the general requirements that must always be met before members may perform non-audit services for attest clients.
The client must agree to assume all management and evaluative responsibilities. the member must not do so. the member and client must establish these agreements in writing.
251
CDOG
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