CPA AUDIT REVIEW #1 Flashcards
Performance of a consulting service typically involves such activities as
(1) Determining client objectives
(2) Fact finding
(3) Definition of problems (opportunities)
(4) Evaluation of alternatives
(5) Proposals for action
(6) Communication of results
(7) Implementations
(8) Follow-up.
What’s the difference between consulting and assurance services?
When providing consulting services, the practitioner should inform the client of conflicts of interest that may occur, significant reservations about the scope or benefits of the engagement, and significant engagement findings or events.
When providing advisory services, the practitioner develops findings, conclusions, and recommendations for client consideration and decision making.
Assurance services focus on improving information rather than providing advice.
Which Authoritative body is responsible for issuing pronouncements in connection with unaudited financial statements or unaudited financial information of a non-issuer.
The Accounting and Review Services Committee.
What are some consulting services
Analysis of an accounting system, reviewing business plans, preparing information to obtain financing, implementation services, staff and other support services and product services
What is the objective of assurance services?
To provide information to assist in better decision making. Enhance decision making. Usually a case where one party monitors another and focuses on improving information.
What is the objective of consulting services?
Provide information resulting in better outcomes. To provide advice. Two party arrangement. In a consulting engagement, the CPA recommends actions to management based on their objectives in order to achieve better outcomes.
“Presumptively Mandatory” uses which word?
Should.
The Auditor must comply with a presumptively mandatory requirement.
“Unconditional Requirement” uses which word?
Must.
Quality control pertains to what?
The review of audit work. Quality control should provide reasonable assurance of compliance with professional standards, laws, and regulations. It also provides assurance that reports are appropriate.
Who can a CPA perform Actuarial services?
CPAs can only perform actuarial services for a non-issuer and cannot perform those services for issuers. If performed for a non-issuer it must be determined and approved by the Client first. Otherwise the CPA will impair his or her independence.
According to the Profession’s ethical standards which events justify a departure from an accounting principles?
New legislation and the evolution of a new form of business transaction are events that may justify departure from an established accounting principle. But determination of what constitutes unusual circumstances is normally a matter of professional judgment.
Which of the below is an indirect financial interest?
Ownership of fund shares or an Investment held through regulated mutual fund?
An investment held through a regulated mutual fund.
Does a covered member impair independence if it owns equity, bonds or has an investment in a client even if it isn’t material to the member?
YES - Independence is impaired if a covered member has a direct financial interest in a client, e.g., ownership of equity, debt securities (such as bonds issued by an attest client), or other investments in a client. A direct financial interest impairs independence even if it is not material to the member’s wealth.
What are the (3) conditions for use of the “de minimis exception” to the pre-approval requirement for nonaudit services?
- The issuer did not realize the services were nonaudit services at the time of the engagement.
2.Nonaudit services total less than 5% of the total revenues paid to the auditor by the issuer.
3.Nonaudit services brought to the attention of and approved by the audit committee prior to the audit being completed.
What are (3) judgements with an overall effect concerning fraud risk?
- Increase supervision
2.Consider whether or not the selection and application of accounting principles indicate bias.
3.Make audit procedures predictable.
What are (3) responses to specifically identified of fraud risk?
(1.) those having an overall effect on the audit
(2) those involving changes in the nature, timing, and extent of audit procedures
performed
(3).those that further address management override (performing a review of retrospective accounting estimates.)
What causes a decrease in the gross profit to sales ratio?
Unrecorded sales.
Note: Fictitious sales would increase the ratio because sales increased without no associated costs.
If accounts receivable turned over 7.1 times in Year 1 as compared with only 5.6 times in Year 2, it is possible that there were
Fictitious sales in year 2
The accounts receivable turnover is the ratio of sales to average receivables. Fictitious sales would increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0. For example, adding 1 to both parts of the fraction 3/2 decreases it to 4/3. The turnover ratio would decrease still more in the next period because the fictitious items would continue to increase receivables (which are cumulative) but not sales (which are closed periodically).
When an auditor obtains an understanding of the entity and its environment, including its internal control what is the order of events?
- Preparation of a flowchart documenting the understanding of the client’s internal control.
- Test of controls
- Substantive Procedures.
What is inherent risk?
Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of internal control.
If the auditor’s assessment of risk of the financial statement is judgmental and not sufficient what else can the auditor do?
The auditor can perform substantive procedures for all levels of assertions for each class of transactions. Substantive procedures were designed to detect material misstatements at the assertion level. Financial statements are based on assertions provided by management.
What does the audit plan address?
It is based on the audit strategy. It addresses the reporting objectives, the timing of the audit, areas of high risk, industry specific issues, and the audit resources required.
What are thee (3) conditions that do not violate the “contingency fee arrangement?’
(1.) The fee is based on a specific percentage of the portfolio.
(2.)The dollar amount of the portfolio is determined at the beginning of each quarter. Adjusted only for additions and withdrawals.
(3). Isn’t renewed more often than quarterly.
(3).
Which covered members must be independent of responsible parties?
- Anyone on the engagement team
- Supervisors or Managers of the engagement partner.
3.Anyone who consulted with the engagement team about technical matters specific to the engagement
What should a Auditor do as it relates to a broker’s quotation to support a fair value estimate?
The auditor should evaluate the broker’s objectivity which is the source of the fair value estimate to ensure s(he) has sufficient appropriate audit evidence.
With regards to related parties transactions provide an example of a situation occurring in the normal course of business.
Selling real estate at a price that differs significantly from its carrying amount.
What’s they key to using or identifying the work of a specialist?
They must be in a field other accounting or auditing.
The act of tracing serial numbers or items to the ledger or accounting records refers to which assertion test?
Completeness. This is testing to see if the accounting records is complete and provides reasonable assurance.
When does the auditor report fraud to an outside party?
When a subpoena has been issued.
● When an SEC client is changing auditors.
● As required by government auditing standards.
● When an auditor has been authorized to communicate with the preceding
auditor.
List risk assessment procedures used to assess the risk of material misstatements?
- Inquiries of management
- Observation and inspection of documents
3.Analytical Planning Procedures
4.The review of information from prior periods
5.The Audit team discussing how identified risks affect the audit.
What are the (5) sources of information used to apply analytical Procedures to develop expectations?
- Financial information from comparable prior period(s)
2.Anticipated results
3.Relationships among elements of financial info.
- Comparable info from client’s industry
- Relationships between financial and relevant nonfinancial info.
Accounts Receivables Turnover ratio
Net Sales / Avg Accounts Receivables
A higher accounts receivables ratio is better because it means customers are paying on time and their is a better cash flow.
Liberalization of credit policy means you will grant credit to those customers who can’t pay.
What causes the Accounts Receivable ratio to increase or decrease?
Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increase. Liberalization of credit policy will increase receivables.
If Net credit sales increases what happen to the accounts receivables ratio?
The accounts receivables ratio will increase.
Where should unrealized gains from available-for-sale securities be recorded?
In other comprehensive income.
Where should unrealized gains from trading securities be recorded?
In income.
In a financial statement audit of a non-issuer, an auditor would consider a judgmental misstatement to be a misstatement that
Involves a measurement error.
What are judgemental misstatements?
Judgmental misstatements are differences arising from the judgments of management about recognition, measurement, presentation, and disclosure.
What are the control activities?
- Performance Reviews
- Information processing
- Physical Controls
4.Authorization
- Segregation of duties
If the Auditor decides to rely on the operating effectiveness of controls in a computerized environment which controls are tested first?
General controls are tested before application controls because they have a pervasive effect.
General controls relate to all computer activities. Application controls relate to specific tasks. For e.g. Output controls and programmed controls.
What are the components of the control environment?
Champion!
- Commitment to competence
- Human Resources policies and practices
- Assignment of authority and responsibility
- Management’s philosophy and operating style
- Participation of those charged with governance.
- Integrity and ethical values
- Organizational structure
What are manual controls suited for?
Large, unusual or nonrecurring transactions.
The normal sequence of documents and operations on a well-prepared systems flowchart is
Top to bottom and left to right.
The normal sequence of documents and operations on a well-prepared systems flowchart is
Top to bottom and left to right.
What type of procedure are reconciliations and confirmations?
Substantive procedures.
What factors would ordinarily influence the decision if a separate engagement letter is needed when a auditor is the auditor for a parent and component?
(1) who engages the component auditor.
(2) whether a separate auditor’s report is to be issued on the component.
(3) legal requirements regarding the appointment of the auditor.
(4) degree of ownership by the parent.
(5) degree of independence of the component’s management from the parent entity.
When is the auditor most likely to rely on the work of an internal auditor?
When little or no judgement is required to evaluate audit evidence.
What are tests of control concerned with?
Operating effectiveness
- the manner in which controls were applied
(2) the consistency of application
(3) by whom or by what means they were applied
(4) whether the controls depend on other controls (indirect controls)
(5) The time or period for which the auditor intends to rely on the controls (AU-C 330).
An auditor’s evaluation of uncorrected misstatements for an audit of an issuer should include evaluation of the effects of uncorrected misstatements detected in
Prior years and misstatements detected in the current year that relate to prior years.
Which of the following “types of control” best describes procedures to ensure appropriate systems software acquisition?
General Controls.
General controls are policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems.
General controls commonly include controls over:
- Data center and network operations;
- Systems software acquisition and maintenance
- Access security; and application system acquisition, development, and maintenance.
