CPAExcl 1-Fin Stmt Audits

Question 1

Who is primarily responsible for the fairness of an entity’s financial statements?

Answer 1

Management. The financial statements are the representation of management.

Question 2

What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards?

Answer 2

The Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board.

Question 3

List some benefits of an audit to a private company (also known as a nonissuer).

Answer 3

1. More favorable cost of capital;
2. Insights into adequacy of internal controls;
3. Benchmark an entity’s performance with other similar entities.

Question 4

Define “Generally Accepted Accounting Principles (GAAP).”

Answer 4

The standards by which the quality of the financial statements is judged.

Question 5

In the U.S.A, who issues auditing standards applicable to audits of public companies (also known as issuers)?

Answer 5

Public Company Accounting Oversight Board (PCAOB).

Question 6

In the U.S.A, who issues auditing standards applicable to audits of governmental entities?

Answer 6

U.S. Government Accountability Office (GAO).

Question 7

In the U.S.A, who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?

Answer 7

AICPA’s Auditing Standards Board.

Question 8

What is the auditor’s primary role?

Answer 8

To provide an impartial (independent) assessment of the reliability of management’s financial statements.

Question 9

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.

Answer 9

1) Training
2) Independence
3) Due professional care.

Question 10

Identify the topics associated with the four reporting standards for Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 10

1) GAAP
2) Consistency
3) Disclosure
4) Opinion.

Question 11

Identify the topics associated with the three field work standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 11

Planning and supervision
Internal control
Evidence.

Question 12

Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.

Answer 12

Purpose/premise
Responsibilities
Performance
Reporting

Question 13

Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.

Answer 13

1. Purpose
2. Premise
3. Responsibilities
4. Reasonable assurance
5. Performance requirements to achieve reasonable assurance
6. Inherent limitations
7. Reporting

Question 14

What is meant by the term interpretive publications?

Answer 14

These consist of the appendices to the SASs, auditing interpretations of the SASs, the AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.

Question 15

What type of professional requirement is indicated by the word must in AICPA professional standards?

Answer 15

Unconditional requirement.

Question 16

What type of professional requirement is indicated by the word should in AICPA professional standards?

Answer 16

Presumptively mandatory requirement.

Question 17

Services for which a CPA firm is required to have a system of quality control.

Answer 17

Audits, attestation, compilation and review services. (Not applicable to tax or consulting services.)

Question 18

What is meant by the term engagement quality control review?

Answer 18

A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)

Question 19

Who is responsible for the administration of a quality control system?

Answer 19

May be vested in one person but everyone shares responsibility.

Question 20

List the six elements of a quality control system.

Answer 20

1. Leadership responsibilities for quality within the firm
2. Relevant ethical requirements (especially independence)
3. Acceptance and continuance of client relationships
4. Human resources
5. Engagement performance
6. Monitoring.

Question 21

What are some considerations that must be given by the auditor during the planning phase of the audit?

Answer 21

1. 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”).

Question 22

List the four basic steps in the audit process.

Answer 22

1. Planning
2. Internal Control Consideration
3. Substantive Audit Procedures
4. Reporting.

Question 23

List the two types of test of details.

Answer 23

1. Tests of ending balances

2. Tests of transactions.

Question 24

List the two types of substantive audit procedures.

Answer 24

1. Analytical Procedures

2. Tests of details

Question 25

What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?

Answer 25

1. Obtain the required understanding of the design of internal control for planning purposes.
2. Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls

Question 26

List the reason(s) for which an entity may receive a disclaimer of opinion.

Answer 26

Scope limitation (material and pervasive effect).

Question 27

List the four types of opinions that an auditor may give on financial statements.

Answer 27

Unmodified
Qualified
Adverse
Disclaimer.

Question 28

Prior to the clarified auditing standards, how was an Unqualified Audit Report structured?

Answer 28

An unqualified audit report was presented in three paragraphs:

1. Introduction (three sentences),
2. Scope (five sentences), and
3. Opinion (one sentence).

Question 29

How is an auditor’s unmodified audit report structured under the clarified auditing standards?

Answer 29

An unmodified auditor’s report is presented in 4 sections:

1. An introduction (1 sentence).
2. Management’s responsibility section (1 sentence).
3. Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
4. Opinion (1 sentence).

Question 30

List the reason(s) for which an entity may receive an adverse opinion.

Answer 30

Misstatement, such as a GAAP departure (material and pervasive effect).

Question 31

List the reason(s) for which an entity may receive a qualified opinion.

Answer 31

1. Misstatement, such as a GAAP departure (material, not pervasive effect)
2. Scope limitation (material, not pervasive effect).

Question 32

To what services are Statements on Standards for Accounting and Review Services (SSARs) applicable?

Answer 32

Statements on Standards for Accounting and Review Services are applicable to reviews and compilations of the financial statements of private companies, that is, non-issuers.

Question 33

What type of assurance is associated with an “audit” of an entity’s financial statements?

Answer 33

Positive assurance. Positive assurance is considered a high level of assurance.

Question 34

What type of assurance is associated with a “review” of an entity’s financial statements?

Answer 34

Negative assurance, which is considered a moderate level of assurance.

Question 35

What is a Compilation?

Answer 35

A compilation is an assembly of the financial records of a private company into a financial statement format without expressing any degree of assurance on the reliability of those financial statements.