Deck 4

Question 1

Which act of the AICPA Code of professional conduct does this item below violate:

A client continuously demands the engagement team member to return their documents. The engagement team member refuses to return the client records until the client pays their fees for the engagement.

Answer 1

Acts discreditable Rule

Even if the client is overdue on their payment to the CPA, the CPA must return the client documents.

Note: If a client requests member prepared records or member’s work products that are in the member’s custody that have not previously been provided to the client, the member may retain them until fees have been paid.

Question 2

Which act of the AICPA Code of professional conduct does this item below violate:

An accounting firm financial interests are owned by 2 CPAs and 3 non-CPA’s. The firm’s current and past engagements include reviews and audits of non-issuers.

Answer 2

Form of Organization and Name Rule

A firm that is in public practice, which is a firm that renders attest, tax, and management advisory services, must be owned by a majority of CPA’s.

Question 3

There are only 3 options for opinions on internal control:

Qualified
Adverse
Disclaimer

Answer 3

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Question 4

Where to find an opinion in authoritative literature on Internal Control: PCAOB Standards in Audit Procedures Section
AS 2201

Answer 4

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Question 5

If the objective of a test of details is to detect the overstatements of sales, the auditor should trace transactions from what to what?

Answer 5

Accounting records to the source documents

If the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.).

Question 6

In the audit of an issuer, who must assess and report on internal control:

Management OR the auditor?

Answer 6

Both, It is management’s responsibility to assess and report on internal control, but the auditor is also required to assess and report on internal control.

Question 7

What is a reason that does not justify the use of accounting estimates?

Answer 7

Data about future events cannot be accumulated in a cost-effective manner

Accounting estimates are not used to measure future events. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.)

Question 8

What is are entity level controls and an example of them?

Answer 8

Entity level controls are high-level controls that have a pervasive effect on the company’s internal control. ELC’s include controls related to the period end financial reporting process, such as management’s procedures used to initiate, authorize, and record JEs into the GL.

Question 9

What are pro forma FSs?

Answer 9

Pro forma FSs are financial statements that show the effect of hypothetical event on historical FSs if it had occurred during the period covered by the FSs.

Question 10

In a compilation of FSs where management wants to omit substantially all disclosures required by GAAP, the accountant may comply with this request if what?

Answer 10

The omission is clearly indicated in the compilation report
AND
To the accountant’s knowledge, the omission is not intended to mislead any person who might be expected to use the FSs.

Question 11

Is a review of the interim FS of a public company conducted under SSARS?

Answer 11

No, nonissuers review of interim FSs are conducted under SSARS. Issuers review of interim FSs are conducted under PCAOB.

A interim review of a issuer also provides negative assurance and may be performed in connection with the provision of a comfort letter. When a comfort letter is issued, the auditor is required to perform a review of interim financial information in accordance with auditing standards.

Question 12

If an accountant becomes aware of a material departure on the FS’s while performing a review, would they issue an adverse opinion?

Answer 12

No, no opinion is issued in a review engagement. However, the report should be modified to disclose the departure from GAAP.

Departures from GAAP should be disclosed in a separate paragraph of the accountant’s report. The paragraph should appear after the accountant’s conclusion paragraph under the heading “Known departures from accounting principles generally accepted in the USA.

Question 13

FSs of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review does what:

-Includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.
OR
-Provides only limited assurance that the FSs are fairly presented

Answer 13

Includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

The review report does not state that limited assurance is provided. The report simply states that the accountant is not aware of any material modifications that should be made to the FSs.

Question 14

The government accountability Office Yellow Book suggests that in addition to financial statements, such an audit may include what?

Answer 14

Program results, compliance with laws and regulations, and economy and efficiency

Question 15

Reporting standards associated with government audits include requirements in addition to those associated with GAAS.

What is something that is a requirement for a government audit that is not required for an audit performed under GAAS?

Answer 15

A written communication of the auditor’s work on internal control

Audits performed in accordance with government auditing standards require a written communication regarding the auditor’s work on internal control. GAAS only require written communication about internal control when SDs are noted.

Question 16

What should be reported related to compliance of the following report types are issued on a company’s FSs?

1. Unmodified or Qualified
2. Adverse or Disclaimer of Opinion

Answer 16

1. Unmodified or Qualified = Negative assurance
2. Adverse or Disclaimer of Opinion = Only issue a report on compliance when there are identified instances of non compliance

Question 17

A letter issued on SDs relating to an entity’s internal control observed during an audit of the FSs of a non issuer should include what?

Answer 17

A restriction on the use of the report

Any report issued on significant deficiencies noted during an audit should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control, (2) include the definition of significant deficiencies, and (3) include a restriction on the use of the report.

Question 18

What is something that would cause an auditor to suspect an employee payroll fraud scheme?

Answer 18

There are significant unexplained variances between standard and actual labor cost.

Question 19

When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative FSs, when should the auditor express a qualified opinion?

Answer 19

Each year that the FSs initially reflecting the change are presented

Question 20

Audit Evidence is obtained by the auditor when performing all of the following except:

Performing substantive Procedures
Reviewing the Previous Audit
Completing a Risk Assessment
Determining the Sample Size

Answer 20

Determining the Sample Size

Audit evidence is not gathered when the auditor is determining the sample size. After the sample size is selected, the auditor will gather audit evidence by performing substantive procedures, test of controls, and other audit procedures.

Question 21

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to what?

Answer 21

Records produced by investment services

Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services such as “Moody’s Dividend Record.” These books state the dividend that was declared and paid by the investee.

Question 22

Of the following, which is more reliable evidence in an audit:

• An executed loan agreement
• A fax of a signed client loan guarantee transaction

Answer 22

An executed loan agreement

The auditor is examining only documentary evidence during the audit. Because the executed loan agreement is original documentation, it is the most reliable.

A fax of a signed loan guarantee transaction is less reliable evidence than the original signed loan agreement.

Question 23

A written client rep letter most likely would be an auditor’s best source of corroborative information of a client’s plans to do what:

• Terminate an employee pension plan
• Discontinue a line of business
• Make a public offering of its common stock

Answer 23

Discontinue a line of business

A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management’s plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as “held for sale” would be reported separately in the income statement under “discontinued operations.”

Question 24

In a situation where a CPA purchases stock of a client corporation and places it in a trust as an educational fund for the CPA’s minor child. The trust is not material to the CPA, but is to the child. As this relates to independence of the CPA, is this a direct or indirect financial interest and is it materiality a factor?

Answer 24

Direct Financial Interest, Materiality is not a factor

Question 25

Proper authorization of write-offs of uncollectible accounts should be approved by what department?

Answer 25

Treasurer, NOT AR department

The treasurer does not perform duties that are incompatible with authorizing write-offs since he or she is usually not involved with sales transactions or recordkeeping.

Question 26

An auditor should consider both generally accepted auditing standards and government auditing standards when auditing the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the terms of the financial assistance. Government auditing standards include generally accepted auditing standards

Answer 26

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Question 27

Search “Compilation Illustrative Report” in authoritative literature

Answer 27

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Question 28

An accountant may issue a compilation report for a client’s financial statements that omit all required GAAP disclosures, provided the omission is not intended to mislead financial statement users AND the omission is clearly indicated in the accountant’s report.

Answer 28

Don’t forget it also is indicated in the accountant’s report

Question 29

Why does an auditor assess control risk?

Answer 29

Because it affects the level of detection risk that the auditor may accept.

The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions.

Question 30

What paragraphs change for an audit opinion of a nonissuer with the qualified opinion, adverse opinion, and disclaimer of opinion?

Answer 30

Qualified Opinion: auditor’s responsibility paragraph, Opinion (Except for) and basis for opinion paragraph.

Adverse opinion: same as qualified opinion except opinion paragraph says “Do not present fairly”

Disclaimer of opinion: same as qualified opinion except opinion paragraph says “Disclaimer” and Intro paragraph changes to “Engaged to audit”

This is different for an issuer