Engagements Part 1

Question 1

what is professional skepticism?

Answer 1

a continuous attitude in which an auditor critically assesses audit evidence with a questioning mind

Question 2

when is professional skepticism applied?

Answer 2

when an auditor assesses audit evidence

Question 3

a CPA can accept an engagement where a client requests they render an opinion on the application of accounting principles done by another auditor BUT…

Answer 3

they should consult with the continuing CPA to ascertain all the available facts relative to forming a professional judgment

Question 4

What are the 3 potential auditor biases under the AICPA?

Answer 4

C.A.O
1. confirmation bias
2. automation bias
3. overconfidence bias

Question 5

What are the 4 attributes of audit evidence to management bias that affect its reliability?

Answer 5

C.A.A.S
1. accuracy
2. completeness
3. authenticity
4. susceptibility

Question 6

if risk of material misstatement (RMM) is high, what 5 actions must auditors take in order to reduce detection risk?

Answer 6

1. emphasize professional skepticism
2. assign more experienced staff or specialists
3. provide more supervision
4. reduce predictability of procedures
5. change the nature, timing and extent of procedures
   (ie testing at year end instead of an interim date)

Question 7

What are issuers?

Answer 7

entities w/publicly traded securities who report to the SEC

Question 8

What are the requirements of BOTH integrated (issuer) audits AND non-issuer integrated audits?

Answer 8

opinion on financial statements: YES
opinion on internal controls: YES
level of control testing: Extensive
test current period controls: YES
rely on prior control testing: Reference only

Question 9

What are the requirements of non-issuer financial audits?

Answer 9

opinion on financial statements: YES
opinion on internal controls: NO
level of control testing: Only financial controls
test current period controls: YES
rely on prior control testing: Reference only
Issue an unmodified opinion

Question 10

what are the 3 internal control deficiencies?

Answer 10

1. control deficiency
2. significant deficiency
3. material weakness

Question 11

What is the likelihood, magnitude and opinion issued for the internal control deficiency known as the control deficiency?

Answer 11

Remote (unlikely);

Inconsequential;

Unmodified

Question 12

What is the likelihood, magnitude and opinion issued for the internal control deficiency known as the significant deficiency?

Answer 12

Reasonable possibility;

Not material, but more than inconsequential;

Unmodified

Question 13

What is the likelihood, magnitude and opinion issued for the internal control deficiency known as the material weakness?

Answer 13

Reasonable possibility;

Material;

Adverse

Question 14

What is an Integrated Audit?

Answer 14

auditor expresses opinion on: fair presentation of financial statements AND the effectiveness of internal controls;
requires and understanding of an entity’s I/C structure;
difference in overall purpose

Question 15

What is a Financial Statement Audit?

Answer 15

auditor expresses opinion on the fair presentation of finanical statements; requires an understanding of an entity’s
I/C structure;
difference in overall purpose

Question 16

What are the 3 components of the internal control top down approach during an integrated audit?

Answer 16

During the planning phase:

1. looking at I/C at the F/S level (macro level) to understand the overall RMM
2. looking at significant classes (micro level) of transactions (inventory), accounts and disclosures to develop a plan for tests of controls (TOC)

After TOC is planned:
3. performing TOCs and evaluating results

Question 17

What are the 4 types of audits?

Answer 17

F.P.O.C.
Compliance
Operational
Financial
Performance

Question 18

What is the focus of a compilation audit, who is it performed by, and what are 2 examples?

Answer 18

applicable laws and regulations;

regulatory body;

IRS audit or OSHA audit

Question 19

What is the focus of an operational audit, who is it performed by, and what are 2 examples?

Answer 19

management policies and operations;

internal auditors;

Processes audits or I/C audits

Question 20

What is the focus of an financial audit, who is it performed by, and what are 2 examples?

Answer 20

fairness of financial statements;

exclusively performed by CPAs;

F/S audits OR interim reviews

Question 21

What is the focus of a performance audit, who is it performed by, and what are 2 examples?

Answer 21

efficiency and effectiveness;

the government accountability office (GAO);

Governmental project audits OR nonprofit process audit

Question 22

What is the formula for audit risk?

Answer 22

audit risk = RRM x Detection risk

Question 23

What is the primary objective of an independent auditor?

Answer 23

To form an opinion about the fair presentation of an entity’s F/S, expressed in a clearly written report

Question 24

Statements on Standards for Accounting and Review Services (SSARS) applies to what 3 types of attest services?

Answer 24

1. Review Engagement
2. Compilation Engagement
3. Preparation Engagement

Question 25

What is the review engagement and its standing on assurance, independence and report issuance?

Answer 25

when the CPA performs inquiries and analytical procedures;

1. provide limited assurance
2. independence is required
3. report is issued

Question 26

What is the compilation engagement and its standing on assurance, independence and report issuance?

Answer 26

when the CPA (assisting nonpublic entities and/or individuals) assembles and reads a full set of F/S used primarily by outside parties

1. provide no assurance
2. independence is not required, but must be disclosed
3. report is issued

Question 27

What is the preparation engagement and its standing on assurance, independence and report issuance?

Answer 27

when the CPA prepares F/S or specialized F/S elements, accounts or items of F/S used for internal purposes or by outside parties

1. provide no assurance
2. independence is not required
3. report is NOT issued

Question 28

what are some examples of non-attest services?

Answer 28

bookkeeping (making JE), reproducing client-prepared finanical statements, consulting or tax services

Question 29

who governs consulting services?

Answer 29

Statements on Standards for Consulting Services (SSCS)

Question 30

what does attest standards provide issuance of a report about?

Answer 30

a firm’s compliance with laws and regulations