Deck 5

Question 1

What are some quantitative standards that should be considered when evaluating the materiality of an uncorrected misstatement?

Answer 1

• The cost of the correction
• The significance of the misstatement relative to the needs of users
• The effects of misclassifications, for example, between operating and nonoperating

*Note - anything about numbers is quantitative considerations

Question 2

Which statement extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments would cause the auditor to request clarification?

• We believe that the action can be settled for less than the damages claimed
• We believe that the company will be able to defend this action successfully

Answer 2

We believe that the action can be settled for less than the damages claimed

This statement seems to give some indication that the lawyer believes that there is at least some likelihood that there may be a known or estimable amount and that the case may actually result in a liability.

Question 3

The purpose of applying analytical procedures in the overall review stage of an audit includes what types of items?

Answer 3

• Evaluating the overall financial statement presentation
• Evaluating the going concern assessment
• Assessing conclusions reached

*The review stage is not used to enhance the understanding of the client’s business, that is done at planning

Question 4

For a performance audit in accordance with GAGAS, if certain pertinent information is excluded from the audit report due to confidential or sensitive nature of the information, then the auditor should do what?

Answer 4

The auditor should disclose in the report that certain information has been omitted and the reasons that make the omission necessary.

Question 5

An internal auditor’s work most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about what?

• Existence of contingencies
• Valuation of intangible assets
• Existence of fixed asset additions
• Valuation of related party transactions

Answer 5

This question is essentially asking what area of work would reduce the auditor’s amount of work because the internal auditor can perform those procedures. The answer is the Existence of fixed asset additions.

The other 3 options involve more subjectivity and so should not be performed by the internal auditor

Question 6

Which best describes the auditor’s responsibility for other information that is outside the basic FSs, but is included in documents containing audited FSs?

1. Read the other information and consider whether it is materially consistent with the audited FSs
2. Apply certain limited procedures to the required supplementary information and add an other-matter paragraph to the FS audit report

Answer 6

The auditor should read the other information and consider whether it is materially consistent with the audited financial statements.

This question is asking about Other Information. If it was asking about required supplementary information that is outside the basic financial statements, the auditor should apply certain limited procedures to the required supplementary information and add an other-matter paragraph to the financial statement audit report.

Question 7

What type of analysis is often used to examine relationships between balance sheet accounts? (Analytical Procedures)

Answer 7

Ratio Analysis

Question 8

What should a practitioner include in an agreed upon procedures report?

Answer 8

A practitioner should include all findings from the application of the agreed-upon procedures in an agreed-upon procedures report.

Note: An agreed-upon procedures report provides no assurance

Question 9

What is an example of a characteristic that would most likely heighten an auditor’s concern about the risk of material misstatements arising from fraudulent financial reporting?

Answer 9

The entity’s industry is experiencing declining customer demand

Question 10

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of several leases that should be capitalized, but are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should do what?

Answer 10

Disclose the departure from GAAP in a separate paragraph of the accountant’s report

Question 11

In planning an audit, the auditor’s knowledge about the design of relevant internal control activities should be used to do what:

• Identify the types of potential misstatements that could occur
• Document the assessed level of control risk

Answer 11

Identify the types of potential misstatements that could occur

Question 12

Things to keep in mind while doing SIMS on exam:

Answer 12

• Pay attention to JE accounts, may be 2 that look applicable (i.e. sales and service revenue)
• Make sure JE accounts are going the right direction (DB AR, CR Sales)
• Think about what other accounts can give information (sale of equipment - see a gain on sale in IS)
• Consigned inventory is included in inventory at YE UNLESS it was already sold by the consignee
• PPE is a non-current account, NOT current
• Pay attention to if things are for the whole year or parts of the year (i.e. repayment of loan of X amount quarterly - multiply that by 4 to get the full year)

Question 13

During the compilation of FSs an accountant becomes aware that management not stated land and equity in accordance with GAAP and if it had been stated using GAAP the amounts would different by a material amount. The accountant decides to modify the standard compilation report because management will not revise the FSs. How would he revise them?

Answer 13

He would add a separate paragraph to the accountant’s report that discloses the departure from GAAP and its effects on the FSs.

If management doesnt revise FSs in a situation like this the accountant can withdraw from the engagement or modify the compilation report. If modification to the report is sufficient to disclose the departure from GAAP, the accountant should add a separate paragraph to the accountant’s report that discloses the departure from GAAP and its effects on the financial statements.

Question 14

What are some characteristics that would have an impact in determining the scope of an existing client audit?

What wouldn’t have an impact on the scope?

Answer 14

Impact:

• Current regulatory and statutory reporting requirements
• The effect of IT on the audit
• The auditor’s knowledge gained from prior experience with the client

No Impact:
-Preliminary evaluations of materiality and audit risk

The auditor’s preliminary evaluations of materiality and audit risk will impact the focus of the audit, rather than the scope.

Question 15

An examination report on the entity’s schedule of investment returns presentation, in accordance with specific criteria, provides what type of assurance?

Answer 15

Positive Assurance

Examination engagements provide a positive assurance in the form of an opinion.

Question 16

Experience on an audit committee or disclosure committee of a board of directors would not enable one to acquire the attributes of a financial expert. Such experience must be acquired through involvement as a principal financial officer, principal accounting officer, controller, public accountant, auditor, or one who actively supervises or assess the performance of one of these financial jobs. Serving on at least one other issuer’s audit committee or disclosure committee is not required.

Answer 16

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Question 17

A report on internal control over compliance will include what assertion?

Answer 17

A disclaimer of opinion on internal control over compliance

The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.