Exam 1

Question 1

What type of assurance does a review provide? Compilation?

Answer 1

Review = Limited Assurance
Compilation = No Assurance

Question 2

Who is allowed to see the auditor’s report for an agreed-upon procedure engagement?

Answer 2

Audit reports for agreed upon procedures engagements should to be ‘restricted’ to specific users.

Question 3

Bob is a CPA at Big4 LLP. Bob also owns a majority stake in a bakery shop. The bakery is also an audit client of Big4 LLP. Who needs to observe the AICPA Professional Code?

Answer 3

Bob
Bob’s Bakery
Big4 LLP

Question 4

Who is a covered member?

Answer 4

1. Person who can influence the attest engagement team
2. Person in a position to influence the attest engagement
3. Partner/Manager who provides 10 or more hours of non-attest services to the attest client
4. Partner in the office in which the lead attest engagement partner works
5. The firm and firm’s employee benefit plan
6. Any entity whose policies are controlled by any of the individuals noted above

Question 5

What type of audit evidence provides the highest level of assurance in an attest engagement?

Answer 5

Evidence obtained from independent sources

Question 6

When is an auditor of a government entity required to prepared a written report on internal control structure? (According to GAS)

Answer 6

According to GAS, in all audits regardless of circumstances

Question 7

In obtaining an understanding on entity’s internal control structure, an auditor is required to obtain knowledge about the _______?

Answer 7

design of relevant controls pertaining to each of the five internal control components and whether they have been placed in operation.

NOT REQUIRED to determine operating effectiveness of controls unless Control Risk is assessed below maximum.

Question 8

When is an emphasis of matter paragraph necessary?

Answer 8

When a matter is appropriately presented/disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.

Question 9

When is an other matter paragraph necessary?

Answer 9

A matter other than those presented/disclosed in the financial statements that, in the auditor’s judgment, is relevant to the users’ understanding of the audit, auditor’s responsibilities, or auditor’s report.

Question 10

Where is the emphasis matter paragraph located in the auditor’s report? And, where is the other matter paragraph located?

Answer 10

Emphasis-of-Matter is after the opinion paragraph.

Other Matter is after the opinion paragraph AND after the Emphasis of Matter paragraph.

OPINION
EOM
OM

Question 11

How would an entity’s noncompliance with requirements be reported by an auditor in accordance with Government Auditing Standards?

Answer 11

A Qualified or Adverse Opinion

Question 12

When should a CPA in public practice maintain objectivity and be free from conflict of interest?

Answer 12

When performing all professional services.

Question 13

When should a CPA in public practice be independent in fact and appearance?

Answer 13

When performing audit services and other attestation services.

Question 14

Does an auditor have to be independent to perform a compilation?

Answer 14

No. Auditor does not need to be independent to issue a compilation report.

Question 15

Can an auditor issue a review report if they’re not independent?

Answer 15

No. An auditor must be independent to issue a review report because a review report provides ‘negative assurance.’

Question 16

Which of the following scenarios would impair independence of an auditor?

(a) An automobiled loan from a client bank collateralized by the automobile
(b) A joint, closely held business investment with the client that is material to the auditor’s net worth

Answer 16

(a) Does not impair. So long as the loan is adequately collateralized by the car, there is no independence problem.
(b) Does impair. Closely held business with client? Big independence problem

Question 17

Can a covered member audit and belong to a…

(a) Social Club?
(b) Trade Association?
(c) Credit Union?

Answer 17

(a) Social Club - Only if membership is purely social
(b) Trade Association - No. A member cannot belong to a trade association that is an attest client.

(c) Credit Union:
- Independent if member is eligible to join because of his/her individual qualifications
- NOT Independent if member is only eligible because of provision of professional services

Question 18

Can a covered member audit and belong to a Common Interest Realty Association (CIRA)?

Answer 18

Yes, if the following safeguards are met:

(1) CIRA performs similar to local gov’t functions
(2) Covered Member’s annual assessment is not material to the CM or CIRA
(3) Liquidation of CIRA would not result in a distribution to the CM
(4) If CIRA becomes insolvent, CM’s assets are safe from creditors

Question 19

Who is a Member in Business?

Answer 19

Employed or engaged on a contractual or volunteer basis in a(n) executive, staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, NFP Sector, and regulatory or professional bodies.

Question 20

In order to use the negative form of accounts receivable confirmation, what conditions should be met?

Answer 20

1. The RMM (included assessed level of control risk) is low
2. A large number of small balances is involved
3. An expected very low exception rate
4. The auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration

Question 21

“I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.”

Answer 21

Compilation Report on Financial Statements

Question 22

“In our opinion, the schedule of profit participation referred to above presents fairly, in all material respects, Paul Newman’s participation in the profits of XYZ company for the year ended December 31, 20X1, in accordance with the provisions of the agreements referred to above.”

Answer 22

Reports on Audit of F/S Prepared in Accordance with Special Purpose Framework

Question 23

“In our opinion, management’s assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction.”

Answer 23

Examination Report on Pro Forma Financial Information

Question 24

Who is a close relative?

Answer 24

Parents, Siblings, and Non-dependent Children

Question 25

What is the difference between fraudulent financial reporting and misappropriation of assets?

Answer 25

Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users and improperly recording the revenue results in such misstatements.

Misappropriation of asset happens when people who are entrusted to manage the assets of an organisation steal from it or misuse the asset for personal use.

Question 26

What type of Segregation of Duties are non-compatible?

Answer 26

• Authorization of asset disbursement
• Recording of assets
• Custody of assets

Question 27

What is Lapping?

Answer 27

Lapping occurs when a remittance received from one customer is stolen and the shortage is hidden by crediting the first customer’s account with the cash received from a second customer. Lapping is best prevented by separating custody from recording. The person responsible for receiving cash should not also be responsible for posting the amounts to the accounts receivable subsidiary ledger.

Question 28

If an auditor uses an oral explanation from the client as sufficient support from audit procedures performed, how should the auditor document this?

Answer 28

TRICK QUESTION: Oral Explanations are never sufficient support/evidence

Question 29

When should the auditor refer to consistency in the auditor’s report?

Answer 29

When the auditor has obtained assurance as to the consistency of application of accounting principles between the current and preceding year, no mention of consistency is included in the audit report.

Question 30

Can a member have an account at a bank that is an audit client?

Answer 30

A member may maintain a depository account at a bank client so long as any uninsured amounts in the account are immaterial to the member.