Deck 2

Question 1

Which of the following engagements require the practitioner to be independent in order to issue a report, even though the report contains no assurance?

Preparation
Compilation
Review
Agreed-upon procedures

Answer 1

Agreed-upon procedures

Agreed-upon procedure engagements require the practitioner to be independent in order to issue a report, even though the report contains no assurance.

Question 2

Can accountant-client privilege be waived?

Answer 2

Yes, it may be waived by the client.

Confidential client information generally cannot be disclosed without the client’s consent. However, it can be disclosed with the client’s consent. Thus, the privilege may be waived by the client.

Question 3

One of the four general standards that apply to all engagements is the requirement to exercise due professional care. To exercise due professional care a CPA must posses the same degree of skill commonly possessed by others in the field and must critically review the work done by others assisting in the engagement.

Answer 3

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Question 4

Which of the following examples is not an example of an inherent limitation of internal control?

• A fraud scheme whereby an employee orders personal goods and his supervisor, who is in on the scheme, signs the checks to pay for those goods.
• Management’s failure to enforce control policies surrounding access to inventory allows employees to steal assets.
• A programming error in the design of an automated control allows an employee to give himself an unauthorized pay increase.
• A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

Answer 4

A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

This implies that internal controls are inadequate. Inherent limitations do not relate to controls that are missing or nonexistent, but rather to reasons why internal controls cannot provide absolute assurance.

Question 5

For an entity that processes most of its financial data in electronic form without any paper documentation, what should the auditor do?

Answer 5

Perform audit tests on a continuous bases

This is required when financial data is processed electronically without provision of paper documentation, to ensure that controls are Operating Effectively throughout the period under audit.

Question 6

Curing planning, the auditor learns the company engages in multiple hedging activities. This knowledge may result in the auditor increasing the assessment of what?

Answer 6

Inherent Risk

An increase in inherent risk may result when the entity engages in transactions that are more likely to be recorded incorrectly. Hedging transactions often involve estimates and complex calculations and, therefore, are more likely to be recorded incorrectly than other simpler transactions.

Question 7

The required risk assessment discussion should include consideration of the risk of management override of controls and include all KEY members who participate on the audit team, including the engagement partner.

Answer 7

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Question 8

U.S. auditing standards require the auditor to perform analytical procedures related to what:

Interest Expense
Revenue
Internal Controls

Answer 8

Revenue

Question 9

In a situation where there are new auditors in the CY that want to present comparative FSs, what does the PY auditors need to do?

Answer 9

The PY auditors should perform limited procedures, such as reading the current statements, comparing the current and prior statements, and obtaining representation letters from the client’s management and from the CY auditors.

Question 10

If a CPA is unable to perform necessary procedures in a review of FSs of a nonissuer, what will be the effect on the CPAs review report?

Answer 10

CPA should not issue a review report because the review is incomplete.

Accountants must be able to perform whatever procedures they deem necessary, and if those procedures are not accomplished, the review is incomplete. A review that is incomplete will prevent the issuance of a review report.

Question 11

What is the relationship between the SEC and PCAOB?

Answer 11

The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers.

Question 12

Entities that expend more than $750,000 in federal financial assistance are required to receive an audit that complies with the provisions of the Single Audit Act.

Answer 12

Key word is EXPEND, the entity must spend more than $750k in federal financial assistance to need an audit.

Question 13

Which of the following standards should a CPA apply in a review of MD&A?

SSAE
Statements on Standards for Consulting Services
SSAR
Statements on Auditing Standards

Answer 13

SSAE

Question 14

What are some required components of the independent auditor’s report expressing an unmodified opinion?

Answer 14

• An Auditor’s responsibility paragraph including a reference to GAAS
• An opinion paragraph including a reference to GAAP

Question 15

In what situation would an unmodified opinion with an emphasis of matter paragraph result?

1. A justified change in accounting principle
2. An unjustified change in accounting principle
3. A justified change in accounting estimate

Answer 15

1. A justified change in accounting principle

2 would result in a qualified or adverse opinion
3 does not require an emphasis of matter paragraph

Question 16

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate what?

Answer 16

Authorization of transactions from the custody of related assets

The hiring function provides authorization for payment. Distributing payroll is a custodial function.

Question 17

Failure to make the minutes available is a scope limitation sufficient to preclude an unmodified opinion.

Answer 17

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Question 18

What is an example of a ratio used to evaluate an entity’s profitability?

Answer 18

Net Income/ Net Sales

which equals net profit margin, it indicates the percentage of every sales dollar that becomes profit

Question 19

The accountant must be independent to perform an agreed-upon procedures engagement, and should not provide an opinion or any other form of assurance on the sufficiency of the procedures applied. The specified party (often the client) is responsible for the sufficiency of the procedures.

Answer 19

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Question 20

An uncertainty may result in any opinion. From unmodified to adverse, to disclaimer, to unqualified, all of them.

Answer 20

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Question 21

What are some facts about comfort letters?

Answer 21

• A review interim financial information is required before a comfort letter may be issued
• Comfort letters provide negative assurance regarding unaudited FSs.
• Comfort letters are generally restricted as to use.
• A comfort letter is addressed to the named underwriter, not to management or the board of directors.

Question 22

What is an example of a service that requires the accountant to comply with SSARs?

Answer 22

Preparation of financial statements
Compilations
Reviews

Question 23

What are conflicts of interest related to a client employing auditors from the firm that audits the client?

Answer 23

The conflict of interest provisions of SOX Title II apply only to the issuer’s CEO, CFO, Controller, or Chief Accounting Officer (or to any person serving in an equivalent position) within 1 year preceding the audit.

(Internal audit doesnt count)

Question 24

should an audit of FSs prepared on the cash basis of accounting receive a qualified, adverse, or disclaimer of opinion due to the departure from GAAP?

Answer 24

NO and no additional paragraphs should be added either.

Question 25

What is a procedure most likely to be used to test completeness of fixed assets?

Answer 25

Review of items charges to repairs and maintenance

When the auditor reviews large items charged to repairs and maintenance, he/she is looking for items that may have been erroneously expensed instead of capitalized. The completeness assertion focuses on just that – items that should have been included in fixed assets but were not.

Question 26

Assertions involving complex calculations have relatively high inherent risk.

Answer 26

Example: Company recently invested, for the first time, in securities for which the accounting is highly complex.

Question 27

One way to think of Inherent Risk is: if there was no internal control at all over financial reporting, what is the risk of the transaction or transactions as they are described.

Answer 27

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Question 28

What is an example of documentation NOT required for an audit in accordance with GAAS?

Answer 28

The basis for the auditor’s decision to perform tests of controls.

The auditor is not required to evaluate OE as part of understanding internal control, and therefore, need not document the basis for the decision.

Question 29

When assessing control risk, an auditor is required to document what?

Answer 29

The auditor should always document his or her understanding of the entity and its environment, including the components of internal control. The auditor should also document his or her risk assessment and the basis for this assessment.

Question 30

What procedure would help an auditor use to identify an unusual year- end balance?

Answer 30

Scanning the TB may help the auditor identify unusual year-end balances.