Deck 2 Flashcards
What is considered in planning a sample for test of controls?
auditor should consider sampling risk. If the allowable risk assessing control is too low , audit will be ineffective (type 2- effectiveness)/ incorrect acceptance.
Preliminary judgement about materiality levels are considered when planning risk assessment procedures or substantive tests.
Nonissuer’s integrated audit includes separate report on ICFR
which includes that management is responsible for design, implementation and maintenance of effective ICFR.
The report can be for general use.
what is included in Key Audit Matters(KAM) section?
areas with high degree of professional judgement/estimates
Significant risk of material misstatement
significant event, transactions (merger).
what Benford’s law can be used for?
Can be used by auditor to identify fraud. For example, by examining the distribution of purchase order (PO) amounts, an auditor can determine whether the data complies with Benford’s Law. If the client’s internal controls dictate that purchases over $5,000 require higher authorization, the auditor might see a spike in PO amounts starting with four. This could indicate an employee creating fraudulent POs under the $5,000 threshold to avoid scrutiny.
SOC1 and SOC2 reports
soc1 - user’s financial reporting
Type 1 - design on controls relevant to financial reporting
Type 2 -Design and operating effectiveness of controls relevant to financial reporting
Soc3 - for general use
soc2- user’s operations
Type 1 - design of controls relevant to user’s operations
Type 2 - design and operating effectiveness of controls relevant to user’s operations.
While reporting KAM (nonissuers) if the auditor expresses a qualified opinion, how should it get reported?
Audit report should include key audit matter section referencing basis for opinion section rather than describing the issue causing modification.
(KAM should not be included for adverse and disclaimer of opinion unless required by law)
What would impair CPA’s independence-
CPA’s nondependent stepchild has a material indirect financial interest
Client exceeded 90 days limit for outstanding unpaid invoices due to the CPA?
A close relative - nondependent stepchild would impair independence if they have material indirect financial interest. They may have immaterial direct financial interest.
Independence is impaired if audit fees not paid within one year.
Which would impair CPA’s independence- CPA is a trustee but not beneficiary of a trust which holds 15% of client’s stock
CPA has a material investment in a diversified mutual fund which invests in client?
Mutual fund is indirect financial interest, because CPA cannot control the fund. Although interest in mutual fund is material, associated interest with client will be immaterial- do not impair independence.
Independence is impaired if trust/estate has direct or indirect material financial interest if - 1. CPA can make investment decisions for the trust
2.Trust holds more than 10% of the client
3.Holding in the client is more than 10% of trust’s holdings.
since the holding is more than 10% of the client- it’ll impair independence.
While creating audit plan, which procedures auditor to perform to detect material misstatements?
The auditor would use Substantive procedures (test of details and analytical procedures) to detect material misstatements.
What procedure auditor would perform regardless of assessed level of control risk?
Auditor would perform some level of substantive procedures to restrict detection risk for significant transaction classes. Substantive testing cannot entirely be eliminated even with lowest possible control risk.
What are the steps in auditor’s assessment of control risk (RMM)?
Obtain an understanding of control environment ,systems and internal control.
Perform tests of control.
Assess the impact of controls on the financial statement.
After CR and RMM are assessed, auditor will perform tests of details of transactions to detect material misstatement in the financial statements.
What is common between audit of entity’s financial statements and integrated audit of nonissuer?
Both must obtain an understanding of the design of entity’s internal control structure.
In Financial statement audit- auditor expresses opinion on fair presentation of financial statements.
Integrated audit - auditor expresses opinion on fair presentation of financial statements and effectiveness of internal controls.
How completeness of revenue cycle can be determined
Completeness of revenue cycle can be determined by looking at
All transactions/sales are recorded
Sales revenue is recognized (goods shipped to customers)
Sales invoices are prepared for shipping documents.
Which service may a CPA perform for a commission or contingent fee?
Representing a non attest client in an IRS examination.
A CPA cannot charge contingent fee for preparing amended tax return.
Relevant assertions and audit procedures-
Inventory balance was significantly over /Existence and Occurrence : Observation, Inspection and Examination , Vouching
Allowance for uncollectible accounts/valuation, allocation and accuracy : Review of subsequent events, independent recalculations, estimates
A/R accounts sold,not removed from books/Rights and Obligations : Inspections and examination, review of subsequent events
Increase in CR due to decrease in CL, CA remained unchanged/ Completeness (understated liabilities) : Tracing , review of subsequent events.
Search for unrecorded retirements of FA - inspect property ledger and then tour the client facility.
All stock issues included in B/S - confirm with third party confirmation
Equity in invested income is fairly stated - Obtain and Read financial statements and audit report of investee.
