Chapter 6

Question 1

What types of loans do not impair independence?

Answer 1

1. Automobile loans
2. Loans of the surrender value under terms of an insurance policy
3. Borrowings fully collateralized by cash deposits at the same financial institution
4. Credit Cards and cash advances on checking accounts with an aggregate unpaid balance of $10,000 or less

Question 2

What audit services do not need to be pre-approved by the audit committee of an issuer?

Answer 2

Non-audit services that do not exceed five percent of total revenues from an audit client do not require audit committee pre-approval as long as the services are brought to the audit committees attention and approved before the completion of the audit

Question 3

What tax services provided to an issuer are allowed?

Answer 3

Tax compliance, Tax planning, and tax advice

Question 4

What is one difference in independence under IFAC Code of Ethics and U.S. Ethical standards

Answer 4

IFAC Code of Ethics: an auditor may provide internal audit services if appropriate safeguards are put in place to limit or eliminate threats to independent
U.S. Ethical Standards: Internal audit outsourcing services may not be provided to audit clients

Question 5

What activity is required when exercising due care?

Answer 5

Consulting with experts. exercise of due care dictates consultation or referral when a professional engagement exceeds the CPA’s personal competence

Question 6

What financial interests in the client during the period of engagement impairs a CPA’s independence?

Answer 6

Direct and immaterial indirect financial interests

Question 7

Is an audit firm independent if the client has not paid their audit fees for over a year?

Answer 7

independence might be impaired if more than one years audit fees from a client remain unpaid. Such amounts take on some of the characteristics of a loan, and it may appear that the practitioner is providing capital for the client

Question 8

What are the rules behind disclosing a clients name?

Answer 8

It is permissible for a member to disclose the name of a client without the consent of the client unless the disclosure of the clients name results in the release of confidential information (bankruptcy or financial difficulty)

Question 9

What events may justify a departure from GAAP?

Answer 9

New legislation or an evolution of a new form of business transaction. The departure may be justified if the CPA can demonstrate that due to unusual circumstances, the financial statements would otherwise be misleading.

Question 10

What does section 4 of SOX require?

Answer 10

It requires that the company’s external auditors attest to, and report on, the internal control assessment made by management of the issuer

Question 11

Audit documentation serves mainly to provide:

Answer 11

1. The principle support for the auditors work
2. assistance in the planning, conduct, and supervision f the audit
3. Accountability
4. Useful information

Question 12

What is one column usually included in the working trial balance

Answer 12

The working trial balance usually contains a column for adjustments and reclassifications

Question 13

What is one type of documentation that is required for audit documentation?

Answer 13

An indication of audit documentation that the accounting records agree or reconcile with the financial statements?

Question 14

What is the documentation completion date?

Answer 14

The date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such (For PCAOB = 45 days after the report release date)

Question 15

What is the main reason that many auditors hesitate to use embedded audit modules?

Answer 15

Auditors are required to be involved in the system design of the application to be monitored

Question 16

In computer audit applications, efficient and effective system usage requires:

Answer 16

1. Identification of the appropriate audit tasks

2. Appropriate software to perform the selected audit tasks

Question 17

What is parallel simulation?

Answer 17

A technique in which the auditor processes the client’s data using the auditor’s own software. The auditor then compares his or her results to those obtained by the client

Question 18

What are the reporting responsibilities under GAGAS expanded to include?

Answer 18

1. Reports on compliance with laws, rules, and regulations violations of which may affect the financial statement amounts
2. Reports on internal control over financial reporting

Question 19

What is one key difference between reporting standards for financial audits under Government Auditing Standards (Yellow Book) Vs generally accepted auditing standards?

Answer 19

The report on the audit of financial statements under Government Auditing Standards (Yellow Book) should describe the scope of the auditor’s testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests

Question 20

When does an auditor express an opinion?

Answer 20

An auditor does not express an opinion on the effectiveness of internal control over compliance (they are supposed to form an opinion on whether the government complied with applicable compliance requirements in all material respects)

Question 21

What are the principles of ethics, as defined by GAGAS?

Answer 21

They address the topics of serving the public interest, integrity, objectivity, proper use of government information, resources and positions, and professional behavior

Question 22

What is the primary purpose of a second partner review?

Answer 22

To ensure that the financial statements are presented in conformity with GAAP

Question 23

What are two differences between IFAC and AICPA?

Answer 23

1. Under IFAC, an audit firm is permitted to act in an advocacy role, such as an arbitrator for the client, for a dispute as long as it’s not material to the financial statements and proper safeguards are applied. AICPA believes this impairs independence
2. Under IFAC, a firm is not allowed to provide bookkeeping services to the client. Under AICPA, as long as the audit firm applies “General Requirements for Non Attest Services” independence is not impaired if the client has provided and approved it