CPA Audit Section Flashcards
Risk of Material Misstatement
At both the financial statement level and the assertion level
The Permanent File
Or continuing file - includes copies of important items for the next year’s audits.
Allowance for Sampling Risk
Is the difference between the precision limit and the sample deviation rate (sample deviation rate = errors/sample size)
Attestation Engagements
Express a conclusion about an assertion
Completeness Assertion
Involves determining whether all transactions that should be recorded, are actually recorded.
Variables Sampling
Or quantitative sampling - is used for substantive testing. Confirming a monetary balance. Testing book value. Questions how much?
Attribute Sampling
Relates to how much of an item. It relates to whether the attribute is present, i.e. was the approval given.
Accounts Receivable Turnover
Net credit sales / Avg. accounts receivable (beg AR + end AR / 2)
Average Days to Collect
Days in year / Accounts receivable turnover
GAGAS
Generally Accepted Government Auditing Standards often called the “yellow book.”
Self-Interest Threat
The threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior.
Self-Review Threat
The threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.
Bias Threat
The threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.
Familiarity Threat
The threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective.
Undue Influence Threat
The threat that external influences or pressures will impact an auditor’s ability to make independent and objective judgments.
Management Participation Threat
The threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.
Structural Threat
The threat that an audit organization’s placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization’s ability to perform work and report results objectively.
Subsequent Event
A subsequent event is an event occurring after the balance sheet date but prior to the issuance of the auditor’s report, which has a material effect on the financial statements and therefore requires adjustment or disclosure in the statements. (AU-C 560). Two kinds - events that did exist at the balance sheet date and event that did not exist at the balance sheet date.
Auditor’s Engagement Letter Includes
- The basis of the auditor’s fee,
- The objective of the engagement and additional work to be performed such as management advisory services, and
- The fact that management is responsible for the entity’s financial statements.
Attest Engagement
To attest is to bear witness or to lend credibility. An attest engagement is to issue a written communication expressing a conclusion (opinion) on subject matter, or an assertion about the subject matter that is the responsibility of another party (AT 101.01)
GAAS
generally accepted auditing standards
SSAEs
Statements on Standards for Attestation Engagements
SASs
Statements on Auditing Standards (SASs) are pronouncements of the Auditing Standards Board (ASB) and are authoritative interpretations of the 10 generally accepted auditing standards, and departures therefrom must be justified (ET 202.01).
SSARSs
Statements on Standards for Accounting and Review Services - provide standards with respect to compilations and reviews of financial statements. SSARS do not apply to the processing financial data for clients of other CPA firms or to consulting on accounting matters since neither of these would be considered a compilation or a review.
SOX Section 404
Sarbanes-Oxley Act of 2002 - requires management to make an assessment of the effectiveness of internal controls over financial reporting.
Review Engagement
A review is an engagement undertaken to achieve, through the performance of inquiry and analytical procedures, limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP or, if applicable, with a comprehensive basis of accounting other than generally accepted accounting principles.
Written representations are required from management for all financial statements and periods covered by the accountant’s review report. Written representations are not required for a compilation engagement.
Comparative Financial Statements
Are financial statements presented together for one or more prior periods as well as the current period. Notes, explanations, and auditor qualifications should be retained to the extent that they continue to be of significance. Any change which affects comparability should be disclosed.
Statements for a series of periods are far more significant than those for a single period. They enhance the usefulness of financial reports and show more clearly the nature and trends of current changes affecting the enterprise.
Related Parties (Financial Statements)
The FASB ASC Glossary defines related parties as, among others, management, owners, family members of owners or management, affiliates, or any party which “can significantly influence the management or operating policies” such that the entity might be “prevented from fully pursuing its separate interests.”
Related party transactions must be fully disclosed in the notes to the financial statements, including the nature of the relationship involved, a description of the transaction, the dollar amounts of the transaction, and amounts due to and from related parties.
Unmodified Opinion
An unmodified opinion states that the financial statements are presented fairly in accordance with accounting principles generally accepted in the United States of America or an applicable financial reporting framework—the basic premise being that the auditor has tested the financials and they give an accurate representation of the company’s condition.
Analytical Procedures
Analytical procedures are a set of audit procedures that examine the relationships between financial and nonfinancial data. Analytical procedures encompass such investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
These procedures are used in the planning stage, as a substantive test about particular assertions, and as an overall review of the financial information in the final review stage of the audit.
Analytical procedures include ratio analyses (comparison of ratios to prior years and to industry averages) and reasonableness tests (e.g., comparison of aggregate salaries paid with the number of employees).
A Compilation
A compilation differs significantly from a review or an audit of financial statements. A compilation does not contemplate performing inquiry, analytical procedures, or other procedures performed in a review. Additionally, a compilation does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of source documents; or other procedures ordinarily performed in an audit. Therefore, a compilation does not provide a basis for obtaining or providing any assurance regarding the financial statements.
A Review
A review is an engagement undertaken to achieve, through the performance of inquiry and analytical procedures, limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP or, if applicable, with a comprehensive basis of accounting other than generally accepted accounting principles.
The accountant on a review engagement must show due professional care and is required to be independent.
Reviews are subject to the AICPA Statements on Standards for Accounting and Review Services (AR 60–600) and Interpretations.
Reasonableness Test
A reasonableness test compares a known, recorded amount (number of overtime hours in a week) with an estimated, or expected, amount (the average of weekly overtime during a similar period in a prior year). The auditor looks to see if the actual number is reasonable based on prior historical data. This test is a type of analytical procedure.
Tolerable Misstatement
Tolerable misstatement is the maximum monetary misstatement that may exist in an account balance or class of transactions, when combined with misstatements in other accounts, without causing the financial statements to be misstated. It is the threshold of materiality and is based on professional judgment. Tolerable misstatement applies to substantive testing and is an element of total audit risk. It must be considered in both statistical and nonstatistical sampling.
Tolerable misstatement varies inversely with sample size.
Compare to Tolerable Rate.
Materiality
Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report. Consequently, the FASB cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.
Independence
To be independent is to be free from conflicts of interest and bias, self-governing, impartial, not subject to control by others, not requiring or relying on something else, not contingent, and acting with integrity and objectivity (i.e., with judgment that is unimpaired and without bias or prejudice).
The CPA must be independent not only in fact but also in appearance. This means both that a true conflict must not exist (the fact of independence) and that the appearance, or impression, of conflict must not exist (the appearance of independence).
A registered public accounting firm and its associated persons must be independent of the firm’s audit client throughout the audit and professional engagement period.
Acceptance of Client
CPA firms should establish policies and procedures for determining the acceptance of a client to minimize the risk of being associated with a client whose management lacks integrity.
Control Activities
Control activities are the policies and procedures that help ensure that management directives are carried out and necessary actions are taken to address risks that threaten the achievement of the entity’s objectives. Examples of specific control activities include the following:
a. Authorization
b. Segregation of duties
c. Safeguarding
d. Asset accountability
e. Performance reviews
PCAOB
The Public Company Accounting Oversight Board (PCAOB) was established by Congress to oversee public company audits. Congress formed the group to protect the interests of investors and further the public interest in the preparation of audit reports. The PCAOB also oversees the audits of broker-dealers.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act, was enacted to develop new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
Scope Limitation
Scope limitation is a restriction on an audit that is caused by the client, issues beyond the control of the client, or other events that do not allow the auditor to complete all aspects of his or her audit procedures.
Statistical Sampling
Statistical sampling is a sampling plan in which the laws of probability are used for selecting and evaluating a sample from a population for the purpose of reaching a conclusion about the population. It allows the auditor to design an efficient sample, to measure the sufficiency of the audit evidence obtained, and to evaluate the sample results. It enables the auditor to quantify sampling risk (AU-C Glossary).
Requirements for a sampling plan to be statistical include the following:
Sample must be statistically selected (e.g., using random selection)
Sample results must be mathematically evaluated
Risk of Incorrect Acceptance
The risk of incorrect acceptance is an aspect of sampling risk when performing substantive tests of details. It is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when, in fact, it is materially misstated. It relates to the effectiveness of the audit and is more serious than the risk of incorrect rejection. It exists in both statistical and nonstatistical sampling and depends on professional judgment.
Professional Judgment
Professional judgment is “the application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.”
Professional Skepticism
Professional skepticism is the attitude an auditor must have when evaluating the reasonableness of management’s accounting estimates, assuming that the estimation process involves an inherent potential for bias due to the presence of subjective as well as objective factors.
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence (AU-C 200.17 and .A22–.A26). It is important when evaluating the risk of material misstatement due to fraud.
Flowchart
A flowchart is a graphic depiction, using uniform symbols to show the control flow, primary actions, and interrelationships of a task or a set of tasks. A flowchart can be created by a computer program, a computer system, the systems staff, or accountants and auditors.
Audit Procedure
An audit procedure is a series of specific and specialized steps or actions auditors take to meet audit objectives. Audit procedures may vary for different audit engagements, depending on the complexity of the activity under review, the type of company, and other factors unique to the engagement. Audit procedures are to be tailored to the engagement as compared to audit standards, which do not change. Audit procedures are used for tests of controls and substantive testing.
The seven basic audit procedures are (1) inspection, (2) observation, (3) inquiry, (4) confirmation, (5) recalculation, (6) reperformance, and (7) analytical procedures.
Fraud
Fraud is the intentional misrepresentation or failure to disclose a material fact or facts that results in injury or loss to someone relying on it.
Elements to Prove Fraud
- A material (significant) misrepresentation or omission of fact
- Knowledge of the falsity (scienter)
- Intent that the misrepresentation be relied on
- Actual reliance by another party
- Resultant damage suffered as a result of reliance
IESBA
The International Ethics Standards Board for Accountants is an independent standard-setting organization that serves the public by creating ethical standards for professional accountants. The IESBA also facilitates the convergence of international and national ethical standards through the development of an internationally appropriate code of ethics.
Non-Issuer
Nonissuers are all entities except for those defined as issuers.
The term “nonissuer” replaces the term “nonpublic entity.”
Internal Control
Internal control is a process, effected by an entity’s board of directors, management and other personnel, which is designed to provide reasonable assurance regarding the achievement of objectives in one or more categories:
Effectiveness and efficiency of operations
Reliability of financial information
Compliance with applicable laws and regulation
Internal control consists of five interrelated components. These are derived from the way management runs a business, and are integrated into the management process. The components are:
1 Control Environment 2 Risk Assessment 3 Control Activities 4 Information and Communication 5 Monitoring Activities
Audit Committee
An audit committee is a body formed by a company’s board of directors to oversee audit operations and circumstances. It selects and appraises the performance of the auditing firm. In accordance with SEC regulation, the audit committee must be composed of outside directors. The committee may also evaluate internal audit reports.