CPA Audit Section Cont.

Question 1

Integrated Audit

Answer 1

An integrated audit is an audit of internal control over financial reporting being integrated with the audit of financial statements.

In an integrated audit of internal control over financial reporting and the financial statements, the auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously:

1) to obtain sufficient evidence to support the auditor’s opinion on internal control over financial reporting as of year-end, and
2) to obtain sufficient evidence to support the auditor’s control risk assessments for purposes of the audit of financial statements.

Question 2

Audit Plan

Answer 2

The audit plan should include a description of:

a. the nature, extent, and timing of planned risk assessment procedures sufficient to assess the risks of material misstatement.
b. the nature, extent, and timing of planned further audit procedures at the relevant assertion level for each material class of transactions, account balance, and disclosure.
c. other audit procedures to be carried out for the engagement in order to comply with GAAS.

Question 3

Blank Confirmation

Answer 3

A blank confirmation is a form of confirmation that asks the recipient to fill in the balance or furnish other information.

Blank confirmations also provide a greater degree of assurance, but there is a higher probability that the confirmation will not be returned because of the additional effort required on the part of the participant.

Question 4

Positive Confirmations

Answer 4

A “positive” confirmation is one in which the debtor is requested to respond whether or not he is in agreement with the information given (AU-C Glossary). The “positive” form is used when individual account balances are relatively large or when there is reason to believe that there may be a substantial number of accounts in dispute or containing inaccuracies or fraud.

Question 5

Interim Substantive Procedures

Answer 5

When substantive procedures are performed at an interim date, the auditor should perform further substantive procedures or substantive procedures combined with tests of controls to cover the remaining period that provide a reasonable basis for extending the audit conclusions from the interim date to the period end.

Question 6

Objectivity

Answer 6

In the context of external auditing, objectivity is remaining impartial in judgments in order to get more quality information. To be objective is to be intellectually honest and free of conflicts of interest. Objectivity is the ability to maintain an impartial attitude in both fact and appearance based on one’s actions and relationships.

The quality of objectivity is required of all CPAs, not just those in public practice. It is a state of mind that is essential to the maintenance of the public’s trust.

Question 7

Competence

Answer 7

Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member’s professional life. It is a member’s individual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member’s services meets the high level of professionalism required by these Principles.

Question 8

Internal Auditor

Answer 8

An internal auditor is an employee of a business entity who audits the work performed by accountants and others within the enterprise. Although internal auditors are employees of the enterprise they audit, they must be independent with respect to the employees whose work they audit.

In addition to auditing the financial reports generated by the accounting system, the internal auditors review the operational policies of the enterprise and make recommendations for improving efficiency and effectiveness.

Findings of the internal auditor are reported to top management or to a special audit committee of the entity’s board of directors.

Question 9

Assessing an Internal Audit Work Includes

Answer 9

a. the objectivity of the internal audit function;
b. the internal auditors’ technical competence;
c. that the internal auditors’ work is carried out with due professional care;
d. that the communications between the internal and external auditors are effective;
e. the internal auditors’ knowledge of prior-year audits;
f. how the internal auditors allocate their audit resources; and
g. the scope of internal audit activities.

Question 10

Internal Control Questionnaire

Answer 10

An internal control questionnaire (ICQ) is a series of questions about specific internal controls. The questions are generally designed to be answered “yes,” “no,” and “not applicable.” The answers to the questions are obtained by inquiry (asking questions of employees), observations by the auditor, or tests of records and transactions by the auditor.

Question 11

SSAE 1

Answer 11

Clearly explains that an attestation engagement is an engagement in which a practitioner issues “a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.”

Question 12

Attestation Standards

Answer 12

Attestation standards are a set of standards that provides guidance and a broad framework for a variety of attest services performed by a certified public accountant. There are an increasing number and variety of services demanded of a certified public accountant (CPA) in today’s environment. Some of these services require an attestation by the CPA.

Attestation standards, then, are a set of guidelines titled general standards, standards of fieldwork, and standards of reporting that apply to the type of engagement specified above.q

Question 13

Agreed-upon Procedures Engagement

Answer 13

An agreed-upon procedures engagement is one in which a practitioner is engaged to issue a report of findings based on specific procedures performed on subject matter. The client engages the practitioner to assist specified parties in evaluating subject matter or an assertion as a result of a need or needs of the specified parties.

Question 14

IFAC

Answer 14

The International Federation of Accountants (IFAC) is an assembly representing more than two million accountants. IFAC serves as the accounting profession’s global professional organization.

Question 15

Inherent Risk

Answer 15

Inherent risk is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Inherent risk exists as an inseparable part of certain assertions and/or account balances or classes (e.g., cash, complex calculations, and accounts dependent on accounting estimates).

Inherent risk may also arise from external factors (e.g., technological obsolescence) or internal factors (e.g., lack of sufficient working capital).

Question 16

Inventory

Answer 16

The aggregate of items of tangible personal property owned by the business (to which the firm has legal title) intended either for internal consumption in the production of goods for sale or for sale is considered inventory. The balance of costs applicable to goods on hand, including raw materials (for use in the production process), intermediate products and parts still in the production process (work-in-process), and finished goods is also considered inventory.

Question 17

Compensating Balance

Answer 17

A compensating balance is a cash balance left on account with the bank in exchange for a loan. It is usually a specified percentage of the amount of the loan, and is often required as collateral or to secure a more desirable stated interest rate. The actual effect is to decrease the actual balance borrowed and to increase the effective interest rate (the cost to the borrower). The compensating balance must be disclosed.

Question 18

Communication With Predecessor Auditor

Answer 18

The communication with the predecessor auditor may be either written or oral. Matters subject to the auditor’s inquiry of the predecessor auditor may include the following:

• Information that might bear on the integrity of management
• Disagreements with management about accounting policies, auditing procedures, or other similarly significant matters
• Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity
• Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control
• The predecessor auditor’s understanding about the reasons for the change of auditors

Question 19

Auditor with Final Responsibility

Answer 19

The primary supervisory responsibility of the auditor with final responsibility is to explain to the staff assistants how the results of various auditing procedures performed by the assistants should be evaluated. This is most in keeping with directing the efforts of the assistants regarding their responsibilities and the objectives of the audit procedures.

Question 20

Ratio Estimation

Answer 20

Ratio estimation is similar to difference estimation except that the auditor determines the ratio of misstatements in the audited values to recorded values and estimates the audited balance by multiplying the recorded balance by the computed ratio.

Question 21

Risk

Answer 21

Risk is exposure to uncertainty that is a function of volatility and impact, particularly as it relates to the impact on cash flow or earnings.

Risk is the possibility of an event occurring that will have an impact on the achievement of objectives. Risks can be internal (poor performance, bad management, fraud, etc.) or external (competition, changes in laws and regulations, changes in technology, weather, etc.). Risk is often measured in terms of likelihood and impact.

Question 22

Inquiry

Answer 22

An inquiry is the seeking of appropriate information from knowledgeable persons inside (both management and staff) or outside the entity (e.g., bankers, attorneys, vendors, customers, predecessor auditor) with the approval of management. Inquiries are generally achieved by asking questions and receiving responses. Inquiries of management are used extensively in investigating unusual fluctuations or items, fraud, errors, and contingent liabilities. The confirmation process is an inquiry that obtains a written response from independent parties to corroborate information contained in the accounting records.

Inquiry and confirmation are two of the seven basic methods of obtaining audit evidence.

Question 23

Defalcation

Answer 23

Defalcation is a form of accounting fraud, a misappropriation of assets, a mishandling of funds, or embezzlement.

Question 24

An Assessment

Answer 24

• The amount of taxes levied by a taxing authority, such as county property taxes
• The amount of dues or fees charged stockholders, members of organizations, and others to raise additional funds or cover losses
• The value placed on property that will be used to determine the amount of tax to levy, such as the value given a car used to determine the personal property taxes that are due

Assessment is also the process of determining the amount of a tax levy or the amount of dues or fees to charge.

Question 25

A Claim

Answer 25

A claim is the right to receive payment or to sue; it can be used in bankruptcy to identify and categorize creditors.

Question 26

Litigation

Answer 26

Litigation is a suit that is contested in court. It is a legal action.

Question 27

The Audit Risk Should be Lowered

Answer 27

The auditor should perform the audit to reduce audit risk to a low level that is, in the auditor’s judgment, appropriate for expressing an opinion on the financial statements. The auditor does this by determining overall responses and designing the nature, timing, and extent of further audit procedures based on risk assessments made at the financial statement and relevant assertion level.

Question 28

Integrity

Answer 28

Integrity is an unimpaired condition or firm adherence to a code of ethics or moral values.

Integrity is an essential component of independence but is also a quality which all CPAs, even those who are not independent, must possess.

Integrity is a fundamental element of character that is measured in terms of what is right and just, requiring adherence to both the form and the spirit of technical and ethical standards, tolerating no deceit or subordination of principle. Yet it is intimately tied to the principles of independence and objectivity and of due care.

Question 29

Reliance on the work of an Internal Auditor

Answer 29

The internal auditors’ work may affect the nature, timing, and extent of the audit, including:

• Procedures the auditor performs when obtaining an understanding of the entity’s internal control structure,
• Procedures the auditor performs when assessing risk, and
• Substantive procedures the auditor performs.

Question 30

Auditing LCA’s

Answer 30

The auditor should design and perform audit procedures to identify litigation, claims, and assessments involving the entity that may give rise to a risk of material misstatement, including:

a. Inquiring of management and, when applicable, others within the entity, including in-house legal counsel;
b. Obtaining from management a description and evaluation of litigation, claims, and assessments that existed at the date of the financial statements being reported on and during the period from the date of the financial statements to the date the information is furnished, including an identification of those matters referred to legal counsel;
c. Reviewing minutes of meetings of those charged with governance; documents obtained from management concerning litigation, claims, and assessments; and correspondence between the entity and its external legal counsel; and
d. Reviewing legal expense accounts and invoices from external legal counsel.

Question 31

The Successor may do the Following

Answer 31

a. Make specific inquiries of the predecessor as to matters that affect the conduct of the audit.
b. Review the predecessor’s workpapers, including documentation of planning, internal control, audit results, and other matters of continuing accounting and auditing significance, such as the working paper analysis of balance sheet accounts, and those relating to contingencies.

Question 32

Referencing an Accounting Principle Change

Answer 32

The auditor’s standard report does not include an expression of an opinion related to the consistent application of accounting principles if (a) no change in accounting principles has occurred or (b) there has been a change in accounting principles or the method of their application, but the effect of the change is not material.