Deck 1

Question 1

When would it be proper for an accounting firm to sign off on a current year audit report if their client is struggling?

Answer 1

A member in public practice may not sign a current year audit report if it has unpaid fees UNLESS the client files for bankruptcy

Question 2

How must a CPA justify a departure from GAAP?

Answer 2

1. Describe the departure
2. Describe the departures approximate effects
3. Demonstrate that following GAAP would mislead investors
4. Give reasons why compliance would be misleading.

Question 3

Two assertions for which confirmation of accounts receivable balances provides primary evidence are….?

Answer 3

1. Rights and obligations
2. Existence

Confirmation of AR provides primary evidence for rights and obligations and existence. I.e. Direct third party responses are proof that AR are valid and that the amounts are owed to the entity

Question 4

What would be discovered by an auditor’s review of a client’s sales cut off?

Answer 4

1. Unrecorded sales at year end

2. Subsequent-year sales that were improperly included in the current year

Question 5

What determines the effectiveness of detection risk?

Answer 5

1. Nature
2. Extent
3. Timing

Question 6

To satisfy the valuation assertion when auditing investments accounted for by the equity method, an auditor would most likely…

Answer 6

Examine the audited financial statements of the investee company

Question 7

Due professional care requires an auditor to…?

Answer 7

Critically review the work completed and the judgments made at every level of supervision

Question 8

An independent auditor must have…?

Answer 8

Competence and Capability:

1. Adequate technical training
2. Proficiency in auditing

Question 9

What are the two AICPA requirement categories?

Answer 9

1. Unconditional requirements

2. Presumptively Mandatory

Question 10

What language is used for:

1. Unconditional Requirements?
2. Presumptively Mandatory?

Answer 10

1. Unconditional Requirements:
   - “Must”
   - “Is Require”
2. Presumptively Mandatory:
   - “Should”
   - Document rare exceptions

Question 11

What is the primary purpose of establishing Quality Control policies and procedures for deciding to accept a new client?

Answer 11

To minimize the likelihood of association with clients whose management lacks integrity

Question 12

How are differences between engagement partners and the quality control reviewer resolved?

Answer 12

By following firm’s policies and procedures

Question 13

What is the rotation timing for engagement/review partners? (According to SOX 2002)

Answer 13

Five (5) years mandatory rotation

Question 14

What does the PCAOB identify as examples of “Significant Engagement Deficiencies?”

Answer 14

1. Engagement team failed to obtain sufficient appropriate evidence
2. Engagement team reached an inappropriate overall conclusion
3. Engagement report is not appropriate
4. Firm is not independent of client

Question 15

An Auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. What does this include?

Answer 15

1. Objective of audit
2. Description of an audit
3. Management Responsibilities
4. Management responsible to correct material misstatements and evaluate immaterial adjustments
5. Auditor’s responsibilities

Question 16

In planning a new engagement an auditor would consider…?

Answer 16

1. Nature of the engagement
2. Type of report to be issued
3. Nature of financial statements, schedules, and other information the auditor is reporting on
4. Nature/Condition of client’s records
5. The assessed level of control risk - including occurrence rate of attributes
6. Needs in particular circumstances for supervision/review of work

Question 17

What is a Type I Error?

What is a Type II Error?

Answer 17

Type I Error: False Rejection > Efficiency > Under-reliance on Internal Control > Incorrect rejection of $-Balance

Type II Error: False Acceptance > Effectiveness > Over-reliance on Internal Control > Incorrect acceptance of $-Balance

Question 18

List the factors that directly relate to sample size.

Answer 18

1. Expected Error Rate

2. Population size - not explicitly considered in attributes sampling

Question 19

List the factors that are inversely related to sample size.

Answer 19

1. Tolerable error rate
2. Risk of over-reliance; Type II Error
3. Risk of under-reliance

Question 20

What is the formula for the observed deviation rate for the sample?

Answer 20

Number of Errors in the Sample / Sample Size

Question 21

List the three factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application.

Answer 21

1. Expected error rate
2. Tolerable error rate
3. Risk of over-reliance

Question 22

When is attribute sampling used?

Answer 22

Attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence that is quantifiable.

Question 23

What three key factors must be considered when determining sample size?

Answer 23

1. Risk of Over-Reliance - AKA risk of assessing control risk too low
2. Expected deviation rate (related to variability)
3. Tolerable deviation rate (related to precision)

Question 24

Formula for determining sample size.

Answer 24

Sample size = Type II Error x Exp. Dev Rate x Tolerable Error Rate

Question 25

What are the relationships of the following to sample size?

1. Type II Over-Reliance
2. Expected Error Rate
3. Tolerable Error Rate
4. Type I Under-Reliance
5. Population Size

Answer 25

1. Inverse
2. Direct
3. Inverse
4. Inverse
5. Direct (Population size is not a consideration of sample size)

Question 26

What is the difference between variable sampling and attribute sampling?

Answer 26

Attribute Sampling = Tests of Control

Variable Sampling = Testing dollar amounts

Question 27

What is projected misstatement?

Answer 27

An auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

Question 28

How do you calculate the Probability-Proportional to Size (PPS) Sample Size?

Answer 28

(Reliability Factor x Book Value) / Tolerable Misstatement (Net of expected misstatement)

Question 29

How do you calculate the sampling interval for PPS?

Answer 29

Population Book Value/Sample Size

Question 30

What is the primary reason auditors hesitate to use embedded audit modules?

Answer 30

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