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Audit > Final Audit Review > Flashcards

Final Audit Review Flashcards

1
Q

SECTION 1

A
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2
Q

Section 1.3: Overview of Attestation Engagements

What is the purpose of Statement on Standards of Attestation Engagement (SSAE)?

A
  • Attestation engagements are additional services that are the responsibility of another party, other than an audit, that a CPA performs
  • An attestation engagement reports on subject matter other than traditional financial statements
  • A party, who is not the practitioner, makes an assertion about whether the subject matter is measured or evaluated in accordance with suitable criteria
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3
Q

Section 1.4: Additional Professional Services

What services are included in personal financial planning services?

A
  • Assisting the client to act on personal financial planning decisions
  • Monitoring progress in achieving goals
  • Updating recommendations and revising planning decisions
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4
Q

Section 1.5: Quality Control

Why would an engagement partner schedule a pre-audit conference with the audit team?

A

To provide guidance to the staff regarding such technical issues as the expected use of client personnel and the expectations of the audit team

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5
Q

SECTION 2

A
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6
Q

Section 2.1: Code of Professional Conduct

What is included in the AICPA Code of Professional Conduct?

A
  • General ethical principles that are aspirational in character
  • Set of specific, mandatory rules describing minimum levels of conduct a member must maintain
  • All members should act in the best interest of the public
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7
Q

Section 2.1: Code of Professional Conduct

What are the threats in independence?

A
  • Adverse Interest Threat
  • Advocacy Threat
  • Familiarity Threat
  • Management Participation Threat
  • Self-Interest Threat
  • Self-Review Threat
  • Undue Influence Threat
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8
Q

Section 2.1: Code of Professional Conduct

What is adverse interest threat?

A

The client is working against the CPA

Examples
* Is the client, or a officer, director or shareholder of the client, suing the Auditor?
* A claim is filed against the firm to get back insurance payments made to the client
* A lawsuit filed against the client, its officers and directors, and the auditor firm

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9
Q

Section 2.1: Code of Professional Conduct

What is advocacy threat?

A

The auditor advocates for the client. The auditor is more interested in the client’s interest or position that would impair their independence

Examples
* Performing forensic accounting services to the client who is in litigation
* Acting as an investment adviser for an officer, director or 10% shareholder of the client
* Underwriting or promoting a client’s shares
* Act as a registered agent for the client
* Endorses a client’s service or products

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10
Q

Section 2.1: Code of Professional Conduct

What is familiarity threat?

A
  • The auditor has a long or close relationship with the client
  • The auditor becomes too sympathetic to the client’s interest or accepts the client’s work without performing due diligence

Example
* An auditor’s immediate family or close relative is employed by the client
* An auditor’s friend is employed by a client
* A former employee of the audit firm is employed by the client in a key position
* The auditor has a close relationship with the office, director or a 10% shareholder of the client

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11
Q

Section 2.1: Code of Professional Conduct

What is management participation threat?

A
  • The auditor will act on behalf of the client or assume client’s management responsibilities
  • The auditor cannot act as the CEO of the company
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12
Q

Section 2.1: Code of Professional Conduct

What is self-interest threat?

A

The auditor benefits with a client or persons associated with client (think Enron)

Examples
* The auditor has a financial interest in the client, and the audit will have an affect on the fair value of the company
* The auditor’s spouse enters into employment negotiations with the client
* The auditor’s firm has a contingent fee arrangement with the client
* The majority of the auditing firm’s revenue is based on the financial health of the client

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13
Q

Section 2.1: Code of Professional Conduct

What is self-review threat?

A
  • If the auditor performed the work, then there is no need to review it.
  • The auditor may rely on the service performed when forming a judgement as part of the audit

Example
* The auditor creates the financial statements and then audits them in the same period.
* The auditor does bookkeeping for the client
* A partner in the auditor’s firm is also associated with the client’s company as an employee, officer, director or contractor

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14
Q

Section 2.1: Code of Professional Conduct

What is undue influence threat?

A

The client threatens to fire the firm because of a disagreement over accounting principles

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15
Q

Section 2.2: Independence

When is a CPA not independent?

A
  • Preparing an actuarial report using assumptions not approved by the client
  • The CPA owns investments that are material
  • An investment held through a regulated mutual fund
  • Determining which recommendations for improving internal control should be implemented for a non public attest client
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16
Q

Section 2.2: Independence

What is an example of an indirect financial interest

A

An investment held through a regulated mutual fund

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17
Q

Section 2.3: Integrity and Objectivity

What are the elements that underlies the development of an overall audit strategy?

A

Materiality and audit risk in determining the nature, timing, and extent of procedures to apply

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18
Q

Section 2.6: Other Responsibilities

What are some of the requirements for the Form of Organization and Name Rule?

A
  • Any CPA owners that are included on the letterhead must be members
  • All CPA owners must be members
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19
Q

Section 2.7: Other Pronouncements on Professional Responsibilities

What is one of the SEC guidelines for independence?

A
  • Audit committees ordinarily must preapprove the services performed by accountants
  • Approval must be either explicit or in accordance with detailed policies and procedures
  • If approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed.
  • Preapproval of accountants’ services may be in accord with detailed policies and procedures rather than explicit
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20
Q

Section 2.7: Other Pronouncements on Professional Responsibilities

What does the PCAOB not have legal authority to do?

A

Prosecute violations by registered accounting firms

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21
Q

SECTION 3

A
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22
Q

Section 3.1: Pre-Engagement Acceptance Activities

What is usually communicated to management in an audit?

A

Arrangements that involve a predecessor auditor

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23
Q

Section 3.2: Planning an Audit

What is the purpose of performing risk assessment procedures?

A
  • To assess the risk of material misstatement of financial statements
  • Financial statement accounts that more than likely will have a misstatement
  • Conditions that require an extension of audit tests
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24
Q

Section 3.2: Planning an Audit

What should be included in the audit plan?

A
  • Nature, timing and extent of procedures
  • Extent of risk of material misstatement
  • Planned further audit procedures
  • Procedures that relate to the financial statement assertions
  • Other audit procedures required by GAAS and PCAOB

The auditor does not discuss the nature and timing of detailed procedures

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25
Q

Section 3.2: Planning an Audit

When is the audit plan developed?

A
  • After the auditor has an understanding of the existing internal control
  • After the auditor has established an overall audit strategy
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26
Q

Section 3.2: Planning an Audit

What details do management and the auditor usually agree upon when discussing the general audit strategy with the client’s management?

A
  • Objective and scope of the audit
  • Responsibilities of the auditor and management
  • Inherent limitations of the audit and internal control
  • Financial reporting framework
  • Expected form and content of audit reports
  • Schedules and analyses that the client’s staff should prepare
  • The extent of involvement of the client’s internal auditors
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27
Q

Section 3.2: Planning an Audit

What inquries should be made to the predecessor auditor, and when should they be made?

A

Before Accepting the Engagement
* Integrity of management
* Disagreements with management
* Communications about fraud and noncompliance
* Any significant deficiencies or material weaknesses
* What is the reason for the change in auditors

After accepting the engagement
* Matters that may raise concerns regarding the reporting consistency with prior and current years

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28
Q

Section 3.3: Audit Risk and Materiality

What are judgmental misstatements?

A
  • Judgmental misstatements occur when there are judgments of management about recognition, measurement, presentation, and disclosure.
  • They include the selection or application of accounting policies that the auditor considers unreasonable or otherwise inappropriate.
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29
Q

Section 3.3: Audit Risk and Materiality

What does the auditor include when evaluating for uncorrected misstatements of an issuer?

A
  • Prior years and misstatements detected in the current year that relate to prior years because the prior years affect the beginning balances of the current year’s financial statements
  • Possible undetected misstatements
  • Accumulated uncorrected misstatements are material
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30
Q

Section 3.3: Audit Risk and Materiality

What are extrapolations?

A

Extrapolations are projected identified misstatements in samples to the relevant population

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31
Q

Section 3.3: Audit Risk and Materiality

According to clarified standards, how is materiality referred to in the planning stages of an audit?

A
  • Materiality in the planning stages of an audit is referred to as performance materiality
  • The materiality is set by the auditor at less than the materiality for the financial statements as a whole
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32
Q

Section 3.3: Audit Risk and Materiality

What would an auditor tolerate when decreasing the amount of misstatements in a class of transactions?

A
  • When the amount of misstatements that an auditor will tolerate decreases, that means that the risk of material misstatement increases
  • Detection risk decreases
  • The auditor will perform planned auditing procedures closer to the balance sheet date
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33
Q

Section 3.5: Audit Data Analytics and Analytical Procedures

How are the ratios interpreted?

A

Return on Assets
* Net Income/Average Total Assets
* The higher the ROA number, the better

Asset Turnover
* Sales/Average Total Assets
* The higher the asset turnover, the better a company uses its assets to generate revenue

Inventory Turnover
* A higher ratio tends to point to strong sales and a lower one to weak sales

Accounts Receivable Turnover
* A higher turnover ratio means payments quickly converts its receivables into cash

Times Interest Earned
* A higher times interest earned ratio means that the company presents less of a risk to investors and creditors in terms of solvency.

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34
Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What is the purpose of analytical procedures?

A
  • Analytical procedures focus on the relationships between financial and nonfinancial data at a high level using simple and complex models
  • The precision of the data is important to the auditor in determining on how to use analytical procedures as substantive procedures.
  • Study of how elements of the financial data is expected to conform to a pattern that is based on the entity’s experience
  • The auditor will determine the best analytical procedure to use for testing the nature of an assertion
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35
Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What are considered analytical procedures?

A
  • Review the sales trend to develop the expected sales rate
  • Computing accounts receivable turnover
  • Estimating payroll expense
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36
Q

Section 3.5: Audit Data Analytics and Analytical Procedures

How does an auditor determine whether to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances?

A

The determination is whether the audit risk can be sufficiently reduced

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37
Q

Section 3.5: Audit Data Analytics and Analytical Procedures

What would cause an increase in the inventory turnover?

A
  • Inventory is being stolen
  • Constant sales and lower inventory also indicate higher turnover
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38
Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What are examples of misstatements?

A
  • Inaccuracy of processing or obtaining financial data
  • Omission of an amount or disclosure
  • A disclosure is not presented
  • Incorrect accounting estimate is made by misstake
  • Unreasonable management judgments about accounting estimates
  • Inappropriate selection or application of accounting policies that the auditor considers inappropriate
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39
Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What is the auditor’s responsibility regarding consideration of fraud in a financial statement audit?

A

Assess the risks of material misstatement due to fraud

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40
Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

What is the difference between incentive, rationalization and opportunity?

A
  • Incentives are reasons for management to feel motivated to commit fraud
  • Rationalization can relate to a person frequently justifying reasons for committing fraud
  • Opportunities occur when company management will have the opportunity to take advantage of ineffective internal control procedures or override those controls in order to take advantage for their own self-interest
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41
Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

Why are new accounting requirements subject to being an incentive for fraudulent reporting?

A

Management may feel pressure to maintain financial stability while changing to the new accounting requirements

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42
Q

Section 4

A
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43
Q

Section 4.1: Using the Work of Internal Auditors

What would an auditor consider when assessing the competence and objectivity of an entity’s internal auditor?

A
  • External quality reviews of the internal auditor’s activities
  • Discussions with management personnel
  • Previous experience with the internal auditor
  • Assessing the organizational status of the director of internal audit
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44
Q

Section 4.3: Related Parties

What documents should be reviewed in order to identify a related party transaction?

A
  • Minutes of board meetings and other committees
  • Filings with regulators
  • Conflict of interest statements
  • Transactions with major customers, lenders and borrowers
  • Accounting records for large or unusual transactions or balances
  • Invoices of law firms
  • Confirmations of compensating balance transactions
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45
Q

Section 4.3: Related Parties

What documents should be reviewed in order to determine a related party transaction?

A
  • Evaluting management’s procedures
  • Request from management the names of all the related parties
  • Review SEC filings
  • Names of all pension and other trusts
  • Review shareholder listings
  • Review prior year’s audit documentation
  • Inquire predecessor auditor
  • Review material investment transactions
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46
Q

Section 4.3: Related Parties

What documents should be examined in order to determine a related party transaction?

A
  • Obtain an understanding of the business purpose or transaction
  • Examine invoices, agreements, contracts and documents
  • Is the transaction approved by governance
  • Test for reasonableness
  • Audits of interentity balances
  • Inspect and confirm the transaferability and value of collateral
  • Discuss significant information with intermediaries, such as banks or attorneys
  • Confirm the transaction amount and terms, including guarantees and other significant data, with the other parties.
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47
Q

Section 4.4: Accounting Estimates and Fair Value

What are the auditor’s responsibilities for accounting estimates?

A
  • Maintain an attitude of professional skepticism
  • Review and evaluate the process used
  • Determine if bias exists
  • Communicate to those charged with governance about significant estimates
  • Determine that all needed estimates have been developed
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48
Q

Section 4.4: Accounting Estimates and Fair Value

What are management’s responsibilities for accounting estimates?

A
  • Take action on subjective as well as objective factors
  • Determine that all needed estimates have been developed
  • Maintain internal control over the process of development
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49
Q

Section 4.4: Accounting Estimates and Fair Value

What is most likely to be used in evaluating the reasonableness of an entity’s accounting estimates when an auditor considers whether assumptions are significant?

A

Deviations from past experiences

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50
Q

Section 5

A
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51
Q

Section 5.1: Introduction to Internal Control

What are the types of inherent limitations of internal control?

A
  • Faulty human judgment
  • Simple errors or misstakes
  • Management override
  • Cost-benefit considerations
  • Losses
  • Lawsuits and other contingencies
  • Violations of laws and regulations
  • Warranties
  • Theft

Override by a low-level employee is not considered an inherent limitation

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52
Q

Section 5.2: Internal Control Components

What are the components of a control environment?

A

“THE CROP”
* Those charged with governance (aka Tone at the Top)
* Human Resources polices and practices. Assignment of authority and responsibility
* Ethical and Integrity Values (including hiring personnel)
* Committment to competence
* Responsibility and Accountability. Removing incentives that increase the probability of dishonest or unethical acts (i.e. bonuses for high rate of growth revenues)
* Organizational structure
* Philosophy and operating style of Management

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53
Q

Section 5.2: Internal Control Components

What are the components of control activities?

A
  • Performance reviews
  • Information processing
  • Physical controls
  • Authorization
  • Segregation of Duties
  • Performance indicators
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54
Q

Section 5.2: Internal Control Components

What are the components of Risk Assessment in Internal Control?

A
  • Identify risks relevant to the preparation of the financial statements
  • Estimate their significance
  • Assess the probability
  • Decide about responses to them
  • Corporate restructurings may cause a change in the level of risk in the entity
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55
Q

Section 5.2: Internal Control Components

What are the components of Monitoring internal control?

A
  • Monitoring ongoing activities (i.e. supervision)
  • The actions of internal auditors
  • Consideration of communications from external parties (i.e. customer complaints)
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56
Q

Section 5.2: Internal Control Components

What are the components of the Information System of Internal Control?

A
  • Physical and hardware components
  • Software
  • People
  • Procedures
  • Data
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57
Q

Section 5.3: Understanding Internal Control

What understanding of an entity’s information system should an auditor obtain?

A
  • Processes used to prepare significant accounting estimates
  • Classes of significant transactions
  • How the transactions are recorded
  • If the transactions are electronic or manual
  • How the transactions are captured
  • Controls over journal entries
  • Design of the controls included in the internal control components
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58
Q

Section 5.3: Understanding Internal Control

What are the steps in performing risk assessment procedures to evaluate the design of relevant controls and determine if they have been implemented?

A

“DADE”
* Determine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented
* Assess the risks of material misstatement
* Design further audit procedures
* Evaluate the operating effectiveness of relevant controls.

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59
Q

Section 5.3: Understanding Internal Control

What are the risk assessment procedures an auditor should do to evaluate the design of relevant controls?

A
  • Inquiries
  • Observations
  • Inspection of documents and reports
  • Tracing transactions
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60
Q

Section 5.3: Understanding Internal Control

What is the primary purpose of an auditor to trace several transactions through the control process?

A

To determine whether the controls have been implemented

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61
Q

Section 5.5: Internal Control and Information Technology

What is included in general controls?

A
  • Controls over operations are effective and efficient
  • The procedures used to acquire, test, develop, etc.
  • Access of the equipment and data
  • Documenting and approving programs and changes to programs
  • Control over data center and network operations
  • Systems software acquisition and maintenance
  • Access security
  • Application system acquisition, development, and maintenance.
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62
Q

Section 7

A
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63
Q

Section 7.1: Purchases Responsibilities/Organizational Structure

What is the systems process for purchases and payables?

A
  1. Inventory Control: Authorizes a purchase requisition to the purchasing and accounts payable departments.
  2. Purchasing: Creates a purchase order based on the requisition with the approved vendor.
  3. Receiving: Receives a blind copy of the purchase Order
  4. Vendor: Receives the purchase order
  5. Vendor: Ships Goods
  6. Receiving: Receives the goods and compares the information on the packing slip with the purchase order
  7. Receiving: Creates a receiving report
  8. inventory Control: Updates inventory records based on receiving report.
  9. Accounts Payable (Vouchers Payable): Receives receiving report and enters information in the A/P file for payment.
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64
Q

Section 7.1: Purchases Responsibilities/Organizational Structure

What are the responsibilities of the accounts payable (vouchers payable) department for effective internal control?

A

Matching the vendor’s invoice against the corresponding purchase order and receiving report.

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65
Q

Section 7.1: Purchases Responsibilities/Organizational Structure

What would be the segregation of duties in accounts payable to avoid potential areas of fraud?

A
  • Cash disbursements
  • Vendor invoice verification
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66
Q

Section 7.1: Purchases Responsibilities/Organizational Structure

What are the responsiblities of the purchasing agent?

A
  • Approves the appropriate vendor
  • Receives a requisition request once inventory levels fall below the reorder point
  • Enters the invoice information into the invoice program to test the information against that in the open purchase order file
  • Receives the invoice from vendor and enters invoice information into the invoice program
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67
Q

Section 7.1: Purchases Responsibilities/Organizational Structure

What is considered the best evidence of the transfer of accountability for incoming material from the receiving department to other departments or activities?

A

An authorized signature on the transfer form

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68
Q

Section 7.4: Payroll Responsibilities/Organizational Structure

What internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

A
  • Time tickets should specifically identify labor hours as direct or indirect
  • Compare daily journal entries with the factor labor summary
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69
Q

Section 7.6: Other Cycles

What test of controls would be included for raw materials in production?

A
  • Examine prenumbered requisitions for proper authorizations, quantities, descriptions and dates
  • Reperformance of relevant activities and client controls
  • Examining material requisitions
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70
Q

Section 7.6: Other Cycles

Which controls are appropriate for property, plant, and equipment?

A
  • Detailed property records and physical controls over assets
  • Written policies for capitalization and expenditure and review of application of depreciation methods
  • Proper authority for acquisition and retirement of assets
    Disposal of fully depreciated assets is not a control
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71
Q

Section 7.6: Other Cycles

What is the most important control over acquisitions of property, plant, and equipment?

A
  • Using a budget to forecast and control acquisitions and retirements
  • This control will alert management to any transactions that are unusual, appear unnecessary, or are unauthorized.
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72
Q

SECTION 8

A
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73
Q

Section 8.1: Assessing Risks of Material Misstatement (RMMs)

Why may an auditor not place a reliance on controls for some assertions?

A
  • The auditor believes that the controls are likely to be ineffective
  • Performing only substantive procedures would effectively reduce audit risk to an acceptably low level
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74
Q

Section 8.2: Auditor’s Response to Risks

What audit procedures should be combined with other audit procedures when testing the operating effectiveness of controls?

A

From Most Effective to Least Effective:
* Reperformance of a control
* Inspection of relevant documentation
* Observation
* Inquiry (Combined with other audit procedures i.e. observation and inquiry, etc.)

Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.

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75
Q

Section 8.2: Auditor’s Response to Risks

What is the difference between test of controls and test of details?

A

Test of Controls:
* Testing that controls are operating effectively
* Overreliance is considered
* Yes or No answer

Test of Details:
* Testing for specific management assertions

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76
Q

Section 8.2: Auditor’s Response to Risks

What are included in test of controls?

A

Reperformance
Observation

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77
Q

Section 8.2: Auditor’s Response to Risks

What procedures are used in tests of controls?

A
  • Tracing
  • Examining
  • Reperforming
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78
Q

Section 8.2: Auditor’s Response to Risks

What are test of details?

A
  • The auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels to design and perform further audit procedures
  • Tests of details are substantive procedures
  • They should be performed for all relevant assertions related to each material transaction class, balance, and disclosure
  • The auditor’s objective is to obtain sufficient appropriate evidence to form an opinion on whether statements are materially misstated
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79
Q

Section 8.2: Auditor’s Response to Risks

What are examples of overall responses to assessed RMM?

A
  • Professional skepticism
  • Increased supervision
  • Assignment of staff with more experience and expertise
  • Greater unpredicability of audit procedure choices
  • Changing nature, timing and extent of audit procedures
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80
Q

Section 8.2: Auditor’s Response to Risks

What are the components of the Nature, Extent and Timing of substantive testing?

A
  • Nature: The auditor takes a more effective approach to testing (change in controls, change the level of the test from negative confirmations to positive confirmations)
  • Extent: The extent is the amount. The auditor increases the quantity of the testing (i.e. the balance on the account is larger)
  • Timing: The auditor changes the timing of the substantive test (i.e. interim inventory count to end of year count)
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81
Q

Section 8.2: Auditor’s Response to Risks

What will an auditor normally find in performing tests of controls?

A

The rate of deviations in the sample exceeds the rate of error in the accounting records

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82
Q

Section 8.2: Auditor’s Response to Risks

What should an auditor do if the audit risk is low?

A
  • Detection risk is low
  • Risk of Material Misstatement is high
  • A lower acceptable level of audit risk indicates a need for more persuasive audit evidence
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83
Q

Section 8.2: Auditor’s Response to Risks

Why should an auditor decide to perform only substantive procedures for certain assertions?

A
  • The auditor believes that the controls are not relevant to the assertions
  • Testing of controls may be inefficient
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84
Q

Section 8.2: Auditor’s Response to Risks

What shold an auditor do when the client does not have any procedure manuals or flowcharts?

A

Adopt a substantive approach

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85
Q

Secton 8.3: Assessing Risk in a Computer Environment

What are the advantages and disadvantages of the Test Data Approach?

A

Advantages
* This approach directly tests specific controls
* The auditor can create a dummy transaction specifically designed to test the transaction

Disadvantages
* Test processing is done at only one moment in time, but not throughout the year with the system.

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86
Q

Secton 8.3: Assessing Risk in a Computer Environment

What is the difference between an Integrated Test Facility (ITF) and the Test Data Approach?

A
  • ITF requires the auditor to create a dummy record within the client’s actual system
  • Test data approach has the auditor create a set of dummy transactions for testing a particular transaction
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87
Q

Secton 8.3: Assessing Risk in a Computer Environment

What are the advantages and disadvantages of Integrated Test Facility?

A

Advantages
* It tests the actual program in operation.

Disadvantages
* It requires considerable coordination.
* The dummy transactions must be purged prior to internal and external reporting.

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88
Q

Secton 8.3: Assessing Risk in a Computer Environment

What are the advantages and disadvantages of the Embedded Audit Module?

A

Advantages
* It permits continuous monitoring of online, real-time systems.

Disadvantages
* Audit hooks must be programmed into the operating system and applications program.

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89
Q

Secton 8.3: Assessing Risk in a Computer Environment

What are the advantages and disadvantages of parallel simulation?

A

Advantages
* Since the testing does not occur with the actual system, the transactions throughout the period may be processed and the results can be compared with the client’s results.
* Provides Assurance that edit checks have been applied during the period.

Disadvantages
* Cost of obtaining the program and the coordination effort required to obtain transactions to reprocess.

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90
Q

Secton 8.3: Assessing Risk in a Computer Environment

How does an auditor obtain evidence that user identification and password controls are functioning as designed?

A

Examine a sample of password holders and access authority to determine whether they have access authority incompatible with their other responsibilities

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91
Q

SECTION 9

A
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92
Q

Section 9.1: Communicating Internal Control Related Matters Identified

What should be included in the communication of significant control deficiencies?

A
  • Purpose of the Audit was to report on the financial statements, not to provide assurance on internal control
  • Definition of Significant Deficiency
  • Definition of Material Weakness
  • Report of any significant deficiencies or material weaknesses
  • Restricted Report
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93
Q

Section 9.1: Communicating Internal Control Related Matters Identified

What is the level of importance between a significant deficiency and a material weakness

A

A material weakness is more severe than a significant deficiency

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94
Q

Section 9.1: Communicating Internal Control Related Matters

What is a design deficiency?

A

The control is operating effectively
* Is the control satisfying the objective?
* Can the control prevent, detect or correct fraud or errors that can result in a material misstatement?
* Is there documentation regarding the operation?
* Is the control operating when observing the performance?

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95
Q

Section 9.1: Communicating Internal Control Related Matters

What are the questions to identify an design deficiency?

A

How do these controls look on paper?
Were they designed to complete the objective?

Procedures to Test to I/C Design:
* Walkthrough
* Inquiry
* Observe
* Inspect documentation

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96
Q

Section 9.1: Communicating Internal Control Related Matters

What is an operating deficiency?

A

Are the controls working as intended?

Procedures to test I/C Operating Controls:
* Observation
* Inspection of documentation
* Recalculation and reperformance of the control (This is the most persuasive test)

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97
Q

Section 9.1: Communicating Internal Control Related Matters

What are examples of internal control operational failures?

A
  • Failure to reconcile accounts
  • Management override of internal controls
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98
Q

Section 9.2: The Auditor’s Communication with Governance

What matters is an auditor required to communicate to those charged with governance?

A

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process.

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99
Q

Section 9.3: Reporting on an Entity’s Internal Control

What are examples of entity-level controls?

A
  • Control environment
  • Controls over management override
  • Monitoring results of operations
  • Controls over period-end financial reporting process
  • Monitoring other controls
  • Risk assessment process
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100
Q

Section 9.3: Reporting on an Entity’s Internal Control

When would an auditor issue an adverse opinion in a report on internal control?

A
  • When a material weakness is discovered
  • The auditor believes that the internal control is not effective
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101
Q

Section 9.3: Reporting on an Entity’s Internal Control

What would an auditor evaluate when planning an engagement to audit the effectiveness of the entity’s internal control in an integrated audit of a nonissuer?

A
  • Preliminary judgments about the effectiveness of internal control
  • Type of available evidence pertaining to the effectiveness of the entity’s internal control
  • Extent of recent changes in the entity and its operations
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102
Q

Section 9.4: Service Organizations

What is an auditor’s responsibility concerning making reference to service provider’s report?

A
  • An auditor is not responsible for including a reference to the service provider’s report if the service auditor was not responsible for examining any portion of the user entity’s financial statements.
  • The user auditor should not refer to the service auditor if the user auditor issued an unmodified report
  • If the user auditor’s opinion is modified, the service auditor’s work may be referred to if it is relevant to understanding the modification
103
Q

Section 9.4: Service Organizations

What is the difference between SOC Type 1 and Type 2 Reports?

A

SOC Type 1
* Includes a disclaimer of opinion related to the operating effectiveness of internal controls
* Contains and opinion on whether management’s description of the system is fairly stated
* Reports at a specific point in time
* Further audit testing is required by the user auditor

SOC Type 2
* Reports on the design and operating effectiveness of internal control
* Contains and opinion on whether management’s description of the system is fairly stated
* Report is based over a period of time
* The user auditor can reduce its overall control risk assessment

104
Q

Section 9.4: Service Organizations

In the integrated audit, how does an auditor evaluate whether the service auditor’s report on controls provides sufficient appropriate evidence?

A
  • Assess the results of the test of controls
  • Assess the service auditor’s opinion on the operating effectiveness of the controls
  • The service auditor’s professional competence and independence
  • The adequacy of the standards under which the report was issued
105
Q

Section 9.4: Service Organizations

What should an auditor consider in the planning stages regarding internal controls of the organization?

A

The auditor should determine whether management has adequately described complementary user controls

106
Q

SECTION 10

A
107
Q

Section 10.1: Nature, Sufficiency, and Appropriateness

When is audit evidence more reliable?

A
  • Obtained from independent sources
  • Generated internally under effective internal control
  • Is obtained directly by the auditor
  • Is in documentary form, whether paper, electronic, or other medium
  • Consists of original documents
108
Q

Section 10.1: Nature, Sufficiency, and Appropriateness

What audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?

A
  • Direct observation is the most reliable
  • Inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control
109
Q

Section 10.2: External Confirmations

What is the difference between a positive confirmation, a negative confirmation and a blank confirmation?

A
  • A positive confirmation requires a reply no matter if there is balance due or not.
  • A negative confirmation asks for a reply only if the client disagrees with the information
  • A blank confirmation requires the client to enter the information as it does not include any information that needs to be verified.
110
Q

Section 10.2: External Confirmations

When should negative confirmations be used?

A
  • When the acceptable audit risk is high
  • The assessed risk of material misstatement is low
  • When many there is a small number of accounts that have small balances
  • A very low exception rate is expected
  • The auditor has no reason to believe that the recipients of the requests are unlikely to consider them
  • The auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls
111
Q

Section 10.2: External Confirmations

When would a blank form of accounts receivable confirmation be used?

A

Recipients are likely to sign other types of positive confirmations without careful investigation

112
Q

Section 10.3: Audit Documentation

When is specific documentation sufficient when reviewing audit evidence?

A
  • The specific document should be identified
  • It should refer to a note without explicitly stating a number in the audit documentation
113
Q

Section 10.3: Audit Documentation

What is the purpose of a lead schedule?

A
  • Lead schedules are summaries of detailed schedules
  • Examples include summarized banking information and listing of individual A/R accounts.
114
Q

Section 11

A
115
Q

Sections 11 and 12

What are the objectives of the assertions?

A

Completeness: Do the applicable balances contain all of the transactions in the period?
Occurrence: Did the transaction occur in the reporting period?
Existence: Are the transactions valid as of the reporting date?
Rights and Obligations: Is the entity responsible for the obligation?
Valuation, allocation and accuracy: Are the amounts recorded appropriately?

116
Q

Section 11.1: Substantive Testing of Sales and Receivables

Assertion Testing for Sales and Receivables

A

Completeness
* Compare subsidiary ledger to the general ledger
* Account for numerical sequence of shipping documents and invoices
* Compare shipping documents with sales invoices and journal entries
* Analytical Procedures

Accuracy, Valuation and Allocation
* Obtain management representations about sales and receivables
* Compare general ledger and financial statement balances
* Age the accounts receivable
* Trace subsequent cash receipts

Existence
* Confirmation
* Vouch recorded A/R to shipping documents

Rights and Obligations
* Ask management if any receivables have been factored or pledged
* Track cash receipts to see if the company is depositing and collecting cash into the company account

Occurrence
* Vouching from ledger to customer orders and shipping documents

117
Q

Section 11.1: Substantive Testing of Sales and Receivables

What is the best way to test for overstatement/understatement of sales?

A

Overstatement:
* Vouch the sales account to the shipping documents because their may not be supporting documentation from the sale
* Test for Existence: Accounting records with source documents

Understatement:
* Shipping documents to sales invoices
* Test for Completeness: Source documents to accounting records

118
Q

Section 11.1: Substantive Testing of Sales and Receivables

What does it mean when the A/R turnover increases?

A

The higher the turnover ratio, the faster the business is collecting its receivables.

119
Q

Section 11.1: Substantive Testing of Sales and Receivables

What is the best way to determine the collectibility of A/R?

A
  • Review cash collections to find out if the receivable was paid.
  • Collectibility is based on the valuation assertion
120
Q

Section 11.1: Substantive Testing of Sales and Receivables

Why is trend analysis used as substantive testing?

A
  • Trend analysis is used because it shows an assumption of how the company performs either in side-by-side basis (i.e. quarterly) or through industry trends
  • It can help determine if any unusual transactions have occurred.
121
Q

Section 11.2: Substantive Testing of Cash

Assertion Testing for Cash

A

Completeness
* For cash receipts, trace the daily remittance list to the last validated deposit ticket
* For cash disbursements, determine last check written and trace to the accounting records
* Analytical Procedures

Accuracy, Valuation and Allocation
* Compare daily remittance listings with deposits, journal entries and ledger postings
* Compare general ledger and financial statement balances
* Review currency and hedge holdings

Existence
* Counting cash
* Obtaining bank confirmations
* Performing bank reconciliations
* Examining cutoff bank statements
* Preparing schedules of interbank transfers
* Preparing proofs of cash

Rights and Obligations
* Tracking cash receipts to determine that an entity is collecting and depositing the proceeds into bank accounts

Occurrence
* Vouching a sample of recorded sales transactions to customer orders and shipping documents

Cutoff
* Recording of cash receipts to accounts receivable
* The auditor should inspect and trace the daily remittance list for several days prior to and after year end

122
Q

SECTION 12

A
123
Q

Section 12.1: Substantive Testing of Accounts Payable and Purchases

What is most important for an auditor who is auditing a public warehouse?

A
  • Inspection of receiving and issuing procedures in order to disclose for unrecorded liabilities
  • Shipping orders and receiving reports that are not reflected in the records suggest that transactions are not being properly recorded.
124
Q

Section 12.1: Substantive Testing of Accounts Payable and Purchases

How does an auditor determine whether all merchandise for which the client was billed was received?

A

Review the vendor invoices to trace them to the receiving report

125
Q

Section 12.1: Substantive Testing of Accounts Payable and Purchases

How does an auditor search for unrecorded liabilities?

A
  • Compare cash payments with the liability trial balance
  • Review the receiving report for items received before year end but not recorded
  • Vouch cash disbursements with receiving reports and vendor’s invoices
  • When a public warehouse is used, the auditor will inspect receiving and issuing procedures to determine if there are any unrecorded liabilities
126
Q

Section 12.1: Substantive Testing of Accounts Payable and Purchases

Assertion Testing for A/P

A

Completeness
* Unvouchered payables
* Source documentation to ledger
* Analytical Procedures

Accuracy, Valuation and Allocation
* Obtain management representations about purchases and payables
* Compare general ledger and financial statement balances
* Ratios

Existence
* Confirmation

Rights and Obligations
* Get management representation about the nature of recorded payables

Occurrence
* Vouching from ledger to documentation

127
Q

Section 12.2: Substantive Testing of Inventory

Assertion Test for Inventory

A

Completeness
* Analytical procedures (i.e. ratios, vertical analysis, nonfinancial information)

Accuracy, Valuation and Allocation
* Compare recorded costs with current costs to replace the goods
* Calculate the turnover ratio
* Test costs of manufactured items

Existence (Validation)
* Observation
* Using prenumbered tags and summary sheets
* Performing test counts
* Inventories held in public warehouses
* Vouch items listed on listing schedule to inventory tags and the auditor’s recorded count sheets

Rights and Obligations
* Vouch recorded purchases to documentation
* Consider consigned goods

Occurrence
* Vouch sample of purchases to documentation
* Vouch sample of recorded cost of sales to documentation

128
Q

Section 12.2: Substantive Testing of Inventory

How is a turnover formula used in an assertion?

A
  • A turnover is used to determine the accuracy, valuation and existence assertion
  • For inventories, it identifies slow-moving, excess, defective or obsolete items in inventory
129
Q

Section 12.3: Substantive Testing of Property, Plant, and Equipment

What does an auditor do when few property and equipment transactions occur during the year?

A
  • Perform extensive tests of current year property and equipment transactions
  • The auditor also may not rely on controls after obtaining an understanding of internal control
130
Q

Section 12.3: Substantive Testing of Property, Plant, and Equipment

How does an auditor test for unrecorded assets?

A
  • Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities
  • Select items of equipment from the accounting records and then locate them during the plant tour
131
Q

Section 12.3: Substantive Testing of Property, Plant, and Equipment

How should an auditor test when equipment is under a finance lease?

A

The auditor should review the interest rate used in discounting the future lease payments

132
Q

Section 12.3: Substantive Testing of Property, Plant, and Equipment

Assertion Testing for PP&E

A

Completeness
* Analytical procedures
* Reconciliation of subsidiary and general ledgers
* Analyze repairs and maintenance

Accuracy, Valuation and Allocation
* Inspect records of purchases
* Vouch additions and disposals
* Test depreciation

Existence
* Inspect plant additions
* Physically examines new additions listed on an analysis of plant and equipment
* Ratio Analysis (i.e. gross manufacturing equipment cost to units produced)
* Obtain a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service

Rights and Obligations
* Examine titles and leases
* Inspect insurance policies

Occurrence
* Test of authorization, execution, recording and custody of transactions

133
Q

Section 12.4: Substantive Testing of Investments

Assertion Testing for Investments

A

Completeness
* Analytical procedures
* Reconciliation of subsidiary and general ledgers with control accounts
* Evaluate contracts and agreements
* Compare expected returns with the amounts actually recorded

Accuracy, Valuation and Allocation
* Recalculate interest revenue
* Compare general ledger balances with financial statement balances
* Vouch recorded amounts for securities to market quotations
* Determine unrealized gains and losses are properly accounted for
* Determine transfers between categories are reported at fair value
* Inspect records and documents
* Obtain audited financial statements from the investees if using equity method
* Evaluate goodwill for impairment

Existence
* Physically inspect and count securities
* Confirm securities

Rights and Obligations
* Trace dividend and interest revenue

Occurrence
* Vouch recorded costs to documentation

134
Q

Section 12.5: Substantive Testing of Noncurrent Debt

How does an auditor audit for unrecorded noncurrent debt?

A
  • Compare interest expense with the bond payable amount for reasonableness
  • The recorded interest expense should reconcile with the oustanding debt
  • If the interest expense is overstated, then an unrecorded noncurrent liability may exist
135
Q

Section 12.5: Substantive Testing of Noncurrent Debt

What step does an auditor perform to audit noncurrent debt?

A

Correlating interest expense recorded for the period with outstanding debt

136
Q

Section 12.5: Substantive Testing of Noncurrent Debt

What is a bond identure?

A
  • A bond trust indenture is the contractual agreement between the bondholders and the bond issuer.
  • A bond issuer normally employs the services of an independent financial institution as trustee
  • It contains:
    1. The date of issue and the date of maturity of the bond issue.
    2. The amount of the bonds
    3. Interest rates
    4. Payment dates
    5. Descriptions of collateral
    6. Provisions for conversion or retirement
    7. Trustee duties
    8. Sinking-fund requirements
    9. Restrictions on the borrower
137
Q

Section 12.5: Substantive Testing of Noncurrent Debt

What analytical procedure that an auditor most likely would use while auditing a company’s notes payable?

A
  • Compare prior-period amounts recorded for notes payable with current amounts
  • Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded
138
Q

Section 12.5: Substantive Testing of Noncurrent Debt

Assertion Testing for Non-Current Debt

A

Completeness
* Analytical ratios (i.e. Debt-to Equity ratios)
* Reconciliation of subsidiary and general ledgers with control accounts

Accuracy, Valuation and Allocation
* Make inquiries of management
* Compare the general ledger balances with the financial statement balances
* Vouch recorded debt to debt instruments
* Test amortization

Existence
* Confirm debt

Rights and Obligations
* Evaluate existing agreements
* Examine Bond trust indentures

Occurrence
* Review contracts and agreements

139
Q

Section 12.6: Substantive Testing for Equity

Assertion Testing for Equity

A

Completeness
* Analytical procedures
* Reconciliation of subsidiary and general ledgers with control accounts

Accuracy, Valuation and Allocation
* Make inquiries of management regarding equity related actions, activities and balances
* Compare the general ledger balances with the financial statement balances
* Trace entries to equity accounts
* Test sales of treasury stock
* Net income has been closed to retained earnings

Existence
* Confirm shares issues and outstanding
* Inspect stock certificates held by treasury
* Inspect stock certificate book

Rights and Obligations
* Inspect the articles of incorporation and bylaws

Occurrence
* Vouch entries to supporting documents

140
Q

Section 12.7: Substantive Testing of Payroll

What procedure would an auditor do to detect fraud by preparing erroneous W-2 forms?

A

Multiply the applicable FICA rate by each individual’s gross annual taxable earnings

141
Q

Section 12.7: Substantive Testing of Payroll

Assertion Testing for Payroll

A

Completeness
* Perform analytical procedures
* Reconcile payroll tax expense and payroll tax returns

Accuracy, Valuation and Allocation
* Make inquiries
* Compare the general ledger balances with the financial statement balances
* Trace costs to inventories
* Recalculate pension and OPEB costs

Existence
* Observe distribution of paychecks

Rights and Obligations
* Inspect cancelled checks

Occurrence
* Vouch a sample of employee transactions

142
Q

SECTION 13

A
143
Q

Section 13.1: Consideration of Litigation, Claims, and Assessments

Which of the following statements from an attorney’s letter would require more clarification?

A
  • Without Merit. No liability expected, so no additional clarification necessary
  • Action will not result. No liability expected, so no additional clarification necessary
  • Nominal in amount. Possible liability for an immaterial amount. No additional clarification necessary

Problems establishing liability = Clarification needed
Settled for less than damages claimed = Clarification needed
Meritorious defenses to this action = Clarification needed

144
Q

Section 13.1: Consideration of Litigation, Claims, and Assessments

What would be included in legal counsel’s response to an auditor’s request?

A
  • The legal team would provide an explanation regarding any limitations on the scope of the response
  • The letter of inquiry would include a statement regarding the nature and reasons for any limitation on legal counsel’s response
145
Q

Section 13.2: Subsequent Events and Subsequently Discovered Facts

What procedures should an auditor perform in order to obtain evidence about subsequent events?

A
  • Reading the latest subsequent interim statements, if any
  • Inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters
  • Reading the minutes of meetings of owners, management, and those charged with governance
  • Obtaining a letter of representations from management
  • Inquiring of legal counsel
  • Obtaining an understanding of management’s procedures for identifying subsequent events.
146
Q

Section 13.2: Subsequent Events and Subsequently Discovered Facts

What is the difference between subsequent events and subsequently discovered facts?

A
  • Subsequent events occur between the date of the financial statements and the date of the auditor’s report
  • Subsequently discovered facts become known to the auditor after the date of the auditor’s report
147
Q

Section 13.3: Written Representations

What are the materiality limits in regard to the management representation letter?

A
  • Materiality limits are usually set by the auditor in order to efficiently perform the audit
  • Materiality limits would ordinarily apply to related party transactions
148
Q

Section 13.3: Written Representations

What should be included in the management representation letter with regard to uncorrected misstatements?

A
  • Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole
  • A list of the immaterial missstatements is attached to the representation letter
149
Q

Section 13.4: Auditor’s Consideration of an Entity’s as a Going Concern

What should an auditor do if they have substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time?

A

Considering the adequacy of disclosure about the client’s possible inability to continue as a going concern

150
Q

SECTION 14

A
151
Q

Section 14.1: Sampling Fundamentals

What’s the difference between sampling for attributes and sampling for variables?

A

Sampling for Attributes
* Used for testing of controls
* Actual deviation rate > Tolerable deviation rate = Increased Risk
* Overreliance/Underreliance
* Effectiveness of Controls
* Assessing control risk to low

Sampling for Variables
* Used for testing of details
* Actual Misstatements > Tolerable Misstatements = Increased Risk
* Incorrect Acceptance/Incorrect Rejection
* Efficiency of Controls
* Assessing control risk too high

152
Q

Section 14.1: Sampling Fundamentals

What is block sampling?

A

Block sampling randomly selects groups of items as sampling units instead of individual units.

153
Q

Section 14.1: Sampling Fundamentals

When is Monetary-Unit Sampling Used?

A
  • For accounts subject to the risk of overstatement (e.g., assets)
  • If few misstatements are expected
  • Does not require a measure of variance to determine the sample size or interpret the results
  • This method is based on the Poisson distribution to approximate the binomial distribution
154
Q

Section 14.1: Sampling Fundamentals

Why may a stratified mean-per-unit (MPU) sampling be more efficient than unstratified MPU?

A

Produces an estimate having a desired level of precision with a smaller sample size

155
Q

Section 14.1: Sampling Fundamentals

What is the difference between Mean-per-Unit and monetary-unit sampling?

A

Mean per unit is based on samples
Monetary unit is based on dollars

156
Q

Section 14.1: Sampling Fundamentals

What is Unrestricted Random Sampling?

A

Unrestricted random sampling is when each item in the population has an equal or nonzero chance of being selected.

157
Q

Section 14.1: Sampling Fundamentals

What is systematic sampling?

A
  • Systematic sampling is based on a certain number.
  • The items should be arranged randomly
  • The value of the number selected is computed based on the population and the number of sampling units.
158
Q

Section 14.1: Sampling Fundamentals

What is an advantage of statistical sampling over nonstatistical sampling?

A

Since sufficiency is based on the quantity of evidence, using statistical sampling helps the auditor to measure the sufficiency of the evidence

159
Q

Section 14.1: Sampling Fundamentals

What is random sampling?

A
  • Large Population
  • Each unit has the same signifance
160
Q

Section 14.1: Sampling Fundamentals

What is ratio sampling?

A
  • Audit calculated amounts are proportional to client carrying amounts.
  • This results in a smaller precision
161
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

How is the allowance for sample risk calculated?

A

Achieved upper deviation limit
(Sample deviation rate)

162
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

What’s the difference between sampling and non-sampling risk?

A

Does the conclusion only effect the sample? = Sample Risk
Does the conclusion effect past the sample? = Non-Sampling Risk

163
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

What is sampling risk?

A
  • Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion if the same audit procedure were applied to every item in the population
  • Underreliance is one aspect of sampling risk
  • An example of sampling risk is the auditor coming to the wrong conclusion based on sample data
164
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

When statistical sampling is used to test the effectiveness of controls, what are the results from the auditor’s procedures?

A
  • The relation of the population deviation rate to the tolerable rate
  • Attribute sampling allows the auditor to estimate the occurrence rate of deviations
  • Allows the auditor to determine the relation of the estimated rate to the tolerable rate
165
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

What causes and incorrect acceptance (effectiveness) when testing controls?

A

Auditor’s sample deviation rate < the tolerable misstatement

True deviation rate > the tolerable misstatement.

166
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

What causes an underrealiance in attibute sampling of test of controls?

A
  • The deviation rate in the auditor’s sample is greater than the tolerable popular deviation rate
  • The deviation rate in the population is less than the tolerable population deviation rate
167
Q

Section 14.2: Statistical Attribute Sampling in Tests of Controls

Attribute Sampling Example

A

Expected Error Rate
Increases from 2% to 3%; Sample Size increases

Tolerable Deviation Rate
Increases from 5% to 6%; Sample size decreases

Allowable Level of Sampling Risk
Decreases from 90% to 95%; Sample size increeases

168
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What is the effect on sample size with respect to the population size in variable sampling?

A
  • For smaller populations, 200 - 2,000, sample size is reduced by the effect of population size
  • For larger populations, the population size has little effect on the sample size
169
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What is dual-purpose testing?

A
  • Duel purpose testing uses both attribute and variable testing.
  • It is used when a deviation from a control is acceptable.
  • It may require substantive testing
  • The sample size is larger of the two samples.
170
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What is the calculation to determine the Point Estimate?

A

Number of items in a population
x Average Amount Based on Sample

171
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What is the calculate for the Population Misstatement?

A

Point Estimate
(Client Established Amount)

172
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What are the steps to calculate Mean-Per-Unit?

A

Step 1: Calculate the Point Estimate (Extending the Average)
Step 2: Calculate the Estimating the Population Misstatement
Step 3: Calculate the Margin of Error

173
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What is the calculate to determine the Margin of Error?

A

Number of Items in Population
x Average Deviation Amount

174
Q

Section 14.3: Classical Variables Sampling (Mean-per-Unit)

What are the four factors are considered in determining the sample size for mean-per-unit estimation?

A
  • Population Size
  • Estimate of Population Variation (Standard Deviation)
  • Risk of Incorrect Rejection
  • Tolerable Misstatement
175
Q

Section 14.4: Monetary-Unit Sampling (MUS)

How is the projected misstatement calculated when the recorded amount is greater than the sampling internval in Monetary-Unit Sampling?

A

If the recorded amount is greater than the sampling interval, then the projected misstatement will be the recorded amount of the item.

176
Q

Section 14.4: Monetary-Unit Sampling (MUS)

How is the sampling interval calculated?

A

Two Types of Calculation
* Tolerable Misstatment/Confidence Factor
* (Tolerable Misstatement - (Anticipated Misstatement x Expansion Factor)) / Confidence Factor

177
Q

Section 14.4: Monetary-Unit Sampling (MUS)

How is the MUS sample size calculated?

A

Recorded Amount of Population / Sampling Interval

178
Q

SECTION 15

A
179
Q

Section 15: Reports

What types of reports are issued when there is pervasive issues?

A

Adverse: Pervasive and material misstatement to the Financial Statements
Qualified: Pervasive and not a material misstatement to the Financial Statements
Qualified: Pervasive and not a material misstatement to the scope of the audit
Discontinued: Pervasive and material misstatement to the scope of the audit

180
Q

Section 15.1: The Auditor’s Reporting Responsibility

What is the objective of the audit of GAAP-based financial statements?

A
  • The objective of the audit is to express an opinion on the fairness of the financial statements
  • The auditor’s judgment regarding the financial statements is applied within the framework of GAAP.
181
Q

Section 15.1: The Auditor’s Reporting Responsibility

What financial information must be must disclosed in audited financial statements?

A
  • Changes in method in accounting inventory
  • Pledged assets
  • LIFO Reserves
182
Q

Section 15.2: The Auditor’s Report

What is a critical audit matter (CAM)?

A

A critical audit matter (CAM) is any matter resulting from the audit of the issuers financial statements that:
* Is either communicated, or must be communicated to the audit committee.
* Relates to material accounts and disclosures (i.e. possible material loss).
* Involves challenging, subject or complex auditor judgement.
* A possible material loss due to an uncollectible receivable

183
Q

Section 15.3: Addressing and Dating the Report

When does an auditor decide whether to dual date the audit report?

A

The auditor is willing to extend the audit procedures

184
Q

Section 15.3: Addressing and Dating the Report

When would audited financial statements be marked as “Unaudited”?

A

When an event occurs after the date of the original auditors report

185
Q

Section 15.4: Qualified Opinions

What type of report will an auditor issue if they were unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary?

A
  • Qualified or disclaimer, depending on pervasiveness
  • Auditor is unable to obtain sufficient audit evidence
186
Q

Section 15.4: Qualified Opinions

What causes a Qualified Opinion?

A

A qualified opinion is issued when:

  • There is a material misstatement related to specific amounts in the financial statement that is not pervasive.
  • Circumstances not controlled by the entity
  • Circumstances related to the nature or timing of work due to the late engagement.
  • Limitations imposed by management.
  • Unjustifed change in accounting principle
  • Scope limitation
  • Omitting a financial statement from the audit (i.e. Statement of Cash Flow).
187
Q

Section 15.4: Qualified Opinions

What type of opinion is expressed when the financial statements are materially, but not pervasively, misstated?

A

Qualified opinion

188
Q

Section 15.5: Adverse Opinions

What are the causes of an adverse opinion?

A

Sufficient evidence is obtained to conclude the that financial statements are materially misstated and pervasive.

189
Q

Section 15.6: Disclaimers of Opinion

What type of opinion is expressed if the client refuses the suggestions of an auditor in regard to disclosure of the financial statements?

A
  • An adverse opinion will be issued if the financial statements lack adequate disclosure, and the client refuses to the auditor’s suggestions to correct the issue.
  • The disclaimer of opinion should include a description of the departure, which should state the nature of the departure and the effects on the financial statements, as well as any other necessary information.
190
Q

Section 15.6: Disclaimers of Opinion

What type of opinion is expressed if the client refuses to include one of the financial statements (i.e. cash flows)?

A
  • The auditor should provide the information in the report, but they are not required to prepare the report.
  • A qualified opinion is issued because of material misstatement
  • The reason for the qualified opinion is explained in a separate paragraph of the report
191
Q

Section 15.6: Disclaimers of Opinion

What causes a disclaimer of opinion?

A
  • The auditor cannot obtain sufficient appropriate evidence, which results in the financial statements being materially misstated and pervasive.
  • A scope limitation that results from circumstances not controlled by the entity.
  • A scope limitation because of circumstances related to the nature of timing of the work (i.e. unable to confirm beginning inventory).
  • A scope limitation due to limits imposed by management
  • The auditor is unable to determine information due to an employee fraud scheme
192
Q

Section 15.6: Disclaimers of Opinion

What should an auditor do when they suggest appropriate revisions to the financial statements for an issuer, but management refuses to accept the CPA’s suggestions?

A
  • Under PCAOB standards, the auditor discloses the departure in the report
  • If possible, the auditor should describe the nature of the departure from GAAP in the report and state the effects on the financial statements
193
Q

SECTION 16

A
194
Q

Section 16.1: Group Audits and Component Auditors

What are the responsibilities of the group engagement team in regard to the component auditor?

A
  • The group engagement team should have an understanding of the component auditor’s professional competance and compliance with ethical requirements.
  • Confirm that the component auditor meets the same ethical requirements as the group engagement team.
195
Q

Section 3.6: Consideration of Fraud in a Financial Statement Audit

How should an auditor identify and assess risks that may result in material misstatements due to fraud in a financial statement audit?

A

Evaluating whether the entity’s related controls have been suitably designed and implemented

196
Q

Section 16.2: Consistency of Financial Statements

What is a change in reporting entity?

A

A change from presentation of statements of individual companies to presentation of consolidated statements

197
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is included in the Emphasis-Of-Matter paragraph?

A
  • An event that has, or will have, a significant effect on the entity’s financial position (i.e. a departure from GAAP to prevent missleading reports).
  • A material change in an accounting principle occurs
  • An uncertainty related to a future outcome (i.e. litigation)
  • Significant transactions with related parties
  • Unusually important subsequent events
  • A major catastrophe that has a significant impact on the financial position
198
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

How are emphasis paragraphs reported for an issuer (PCAOB)?

A

Under PCAOB, an emphasis paragraph is
* Never required
* Not a substitute for Critical Audit Matters (CAM)
* Not referred to in the opinion section

199
Q

SECTION 17

A
200
Q

What are the types of audit procedures and reports used for Other information, RSI, Supplemental Information (SI), and Summary Financial Reports?

A

Interim Financial Information (IFI)
* Review Report
* To determine whether material modifications that should be made for such information to conform with the applicable financial reporting framework.
* Limited procedures (i.e. inquiries, analytical procedures, and obtaining written representations from management)

Other Information
* Read for consistency with the financial statements
* Material misstatements and inconsistencies are reported in the Other Information section of the auditor’s report
* Included in the auditor’s report under the Other Information section

RSI
* Apply limited procedures
* In a seperate section in the auditor’s report

Supplemental Information (SI) in Relation to the Financial Statements as a Whole
* Audit
* Either a separate section in the report or a separate report

Summary Financial Reports
* Is the information in the report consistent with the financial statements?
* A seperate report is issued that refers to the audit report
* States the opinion about consistency and complete audited financial statements

201
Q

Section 17.2: The Auditor’s Responsibilities to the Annual Report

What is the purpose of including Other Information in the annual report?

A

Other information contains financial and nonfinancial information that are not reported on the audited financial statements.

Examples include
* Annual Report to Owners
* Management Report on Operations
* Selected Quarterly Data
* Financial Summaries
* CEO’s Letter in the Annual Report

202
Q

Section 17.2: The Auditor’s Responsibilities to the Annual Report

What should an auditor do when management refuses to correct a material misstatement in other information?

A
  • Aware governance and/or counsel
  • Withhold the report
  • Withdraw from the engagement

The auditor does not modify the opinion

203
Q

Section 17.3: Required Supplementary Information (RSI)

What is included in the RSI Section of the Auditor’s Report?

A

A section after the opinion paragraph is added for the RSI
* RSI reference and the applicable reporting framework.
* Statement that the RSI is the responsibility of Management
* Statement that the auditor has applied procedures in accordance with GAAS
* Statement that the auditor does not express an opinion or provide any assurance on the RSI

204
Q

Section 17.4: Supplementary Information in Relation to the FS

What is the basis of the procedures used to express an opinion on supplementary information?

A

The materiality level used for the audit of the financial statements

205
Q

Section 17.4: Supplementary Information to the Financial Statements

What are management’s responsibilities surrounding supplementary information (SI)?

A
  • Preparing SI in accordance with applicable criteria
  • Providing written representations
  • The auditor’s report on the SI with the SI and the audited statements are included in the report packet
206
Q

Section 17.4: Supplementary Information to the Financial Statements

When auditor is engaged to report on statistical data presented with audited financial statements, what type of data should be used?

A

The statistical data should be limited to data derived from the entity’s audited financial statements

207
Q

Section 17.5: Engagements to Report on Summary Financial Statements

What procedures are performed by an auditor in an engagement to report on supplementary financial statements?

A
  • Determine whether the summary statements agree with the related information in the audited statements.
  • Determine that information in the summary statements can be recalculated based on the related information in the audited statements
  • Comparing the summary statements with the related information in the audited statements
  • Evaluate whether the summary statements are prepared in accordance with the applied criteria applied by management
  • Obtain a representation letter from management
208
Q

Section 17.5: Engagements to Report on Summary Financial Statements

What type of report is isueed for summary financial statements?

A

An opinion on whether the summary financial statements are consistent, in all material respects, with the audited financial statements that the summary financial statemens are based on

209
Q

Section 17.6: Financial Statements Prepared in Another Country

What is included in the auditor’s report for financial statements prepared in accordance with a reporting framework generally accepted in another country and intended for use in the U.S.?

A
  • An emphasis-of-matter paragraph identifying the reporting framework used in the preparation of the financial statements
  • An emphasis-of-matter paragraph indicating that the framework differs from accounting principles generally accepted in the U.S.
  • The auditor should report using the U.S. form of report
210
Q

Section 17.6: Financial Statements Prepared in Another Country

What are the types of reports that are appropriate to issue when an audit is prepared for outside the US?

A
  • A U.S. form of report modified to report on the financial reporting framework of the parent’s country
  • The report form of the parent’s country
211
Q

Section 17.7: Reports on Application of Requirements (AU-C 915)

When are the standards for AU-C 915?

A
  • By an accountant in public practice
  • Applies to an actual transaction given specific facts and circumstances of a specific entity.
  • Addresses whether a reporting framework applies to a proposed transaction involving facts or circumstances of a specific entity.
  • Addresses how a completed transaction of a specific entity may be accounted for under the existing reporting framework.
  • Does not apply to a current, or continuing, auditor
  • Independence is not required, but must disclose the lack of independence
212
Q

Section 17.7: Reports on Application of Requirements (AU-C 915)

How should AU-C 915 be applied?

A
  • Applied by the reporting accountant (not an employee or continuing accountant)
  • A written report based on the application of requirements of a financial reporting framework to a specific transaction
  • Reports on circumstances of a specific entity or type of report that may be issued on a specific entity’s statements
  • Applies to oral advice that is considered an important factor
213
Q

Section 17.8: Special Purpose Frameworks Audits

When issuing and audit report on a special purpose framework, what if the statements are not suitably titled?

A

If the auditor believes that the statements are not suitably titled.

  • The auditor should disclose any reservations in a basis for qualified opinion section.
  • The auditor will qualify the opinion.
214
Q

Section 17.9: Key Audit Matters (KAM)

What are key audit matters (KAM)?

A
  • Key audit matters are generate for non-issuers
  • Key audit matters are matters that are most significant in the current period audit.
  • Key audit matters are based on the auditor’s professional judgement.
  • The communication of key audit matters gives users more information to facilitate their understanding of matters that may affect the entity, the statements or the audit.
215
Q

Section 17.9: Key Audit Matters (KAM)

What should an auditor consider in determining key audit matters?

A
  • Areas of higher assessed risks of material misstatements.
  • Significant risks
  • Significant auditor judgements about areas involving significant management judgements.
  • The audit effect of significant events or transactions during the period.
216
Q

SECTION 18

A
217
Q

Section 18.2: Preparation of Financial Statements (AR-C 70)

What is management’s responsibility in the engagement letter as it relates to the preparation of financial statements?

A
  • Management’s agreement about certain matters
  • It acknowledges and understands its responsibilities
  • Accuracy and completeness of records
  • The accuracy of significant judgments it provides for the preparation of the financial statements
218
Q

Section 18.2: Preparation of Financial Statements (AR-C 70)

What is the purpose of a preparation service under SSARs?

A
  • A preparation service allows the accountant to generate financial statements and release them to the client or third parties without a report.
  • Each page should stated that the prepare provides no assurance.
  • Independence is not required, and does not need to be reported to management
219
Q

Section 18.2: Preparation of Financial Statements (AR-C 70)

What are the accountant’s responsibilities when engaged to prepare financial statements?

A
  • A statement on each page that no assurance is provided
  • The agreed-upon terms of the engagement should include identification of the applicable financial framework to be used
  • The engagement documentation should include the engagement letter and a copy of the prepared financial statements
220
Q

Section 18.2: Preparation of Financial Statements (AR-C 70)

When does the Preparation of financial statements according to AR-C 70 apply?

A
  • When an accountant in public practice is engaged to prepare financial statements
  • The determination of whether the accountant has been engaged to prepare financial statements depends on the services requested
  • Assisting the the preparation is not applicable
221
Q

Section 18.3: Compilation of Financial Statements (AR-C 80)

What does the guidance of a compilation apply to?

A
  • Prospective financial information
  • Proforma financial information
  • Other historical financial information
222
Q

Section 18.3: Compilation of Financial Statements (AR-C 80)

What is the objective of a compiliation of financial statements?

A
  • To apply accounting and financial reporting expertise to assist management in the presentation of financial statements
  • No assurance is provided
223
Q

Section 18.3: Compilation of Financial Statements (AR-C 80)

What is included when an accountant compiles the financial statements of a nonissuer?

A
  • The accountant does not express an opinion or a conclusion
  • The accountant does not provide any form of assurance on the statements
224
Q

Section 18.4: Review of Financial Statements (SSARS)

What type of analytical procedures are performed in an nonissuers review of financial statements?

A
  • Read the financial statements to confirm that they conform with GAAP
  • Reconcile the financial statements with the accounting records
  • Obtain written representation from management
  • Comparison of current and prior year account balances
  • Compare current year budget to forecast
  • Industry benchmarks
225
Q

Section 18.4: Review of Financial Statements (SSARS)

What is included in the review report of a nonissuers financial statements?

A
  • For a review, an accountant expresses a conclusion, not an opinion. An opinion is issued for audits.
  • The accountant expresses limited assurance on the financial statements
  • A review is substantially less in scope than an audit
  • Information about subsequent events
  • “…not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.”
226
Q

Section 18.5: Compilation of Pro Forma Financial Information (PFFI)

What are the reporting components of the PFFI compilation?

A
  • Independence: Not required, but lack of requires a modification to the report
  • Complete financials must be included with the PFFI
  • A summary of significant assumptions must be included with the PFFI
  • Based on historical information that might have resulted if the transaction occurred earlier
  • The statements must have been reviewed, compiled or audited in order to be included in the document.
  • The accountant assists management to present the PFFI.
227
Q

SECTION 19

A
228
Q

Section 19.1: Concepts Common to All Attestation Engagements (AT-C 105)

What documentation is required for an Examination under SSAE?

A

Required documentation for an examination is the same as for an audit

  • A description of the nature, timing and extent of the procedures performed.
  • Specific items or matters tested are identified
  • Who performed the work
  • The date the work was completed
  • Who reviewed the work
  • The date and extent of the review
229
Q

Section 19.1: Concepts Common to All Attestation Engagements (AT-C 105)

What happens if a responsible party who is not the engaging party refuses to provide a written assertion for an attestation examination or review?

A
  • The auditor discloses the refusal in the report
  • Restrict the use of the report to the engaging party
230
Q

Section 19.1: Concepts Common to All Attestation Engagements (AT-C 105)

When are assertions required?

A

Examination
* Is it a direct examination? No
* Is it a forecast? Yes

Reviews
* Is the client the responsible party? Yes. The written assertion is required by the responsible party
* Is the responsible party not the client? The non-client provides the assertion, but they do not need to supply a written assertion

Agreed-Upon Procedures
* No assertion required

231
Q

Section 19.2: Examination Engagements (AT-C 205 and AT-C 206)

When will a a practitioner disclaim an opinion on an examination of prospective financial statements?

A

The practitioner cannot perform certain procedures that are necessary to complete the engagement

232
Q

Section 19.3: Review Engagements Under SSAE (AT-C 210)

In an attestation review engagement, which party is responsible for the representation letter?

A
  • The responsible party is responsible for the written letter of representations.
  • If the engaging party is not the responsible party, then the practitioner should obtain written representations from both parties.
233
Q

Section 19.4: Agreed-Upon Procedures Engagements (AT-C 215)

If an auditor of a nonissuer concludes that reasonable justification exists to change an audit engagement to an agreed-upon procedures engagement, then should be included in the report?

A
  • The auditor should not include a reference to the original audit engagement but may include a reference to procedures that have been performed
  • The report will state the results of applying agreed-upon procedures to specific subject matter should be in the form of procedures and findings
  • All findings should be reported, and any agreed materiality limits should be described
234
Q

Section 19.5: Prospective Financial Information (AT-C 305)

What is the difference between a financial projection and a financial forecast?

A

Financial Projections

  • A financial projection is based on estimates of conditions that are be based on one or more hypothetical assumptions.
  • Reporting is for limited use
    ** Reviews are not reported**

Financial Forecasts
* Based on historical information
* A financial forecast is based on assumptions based on conditions that are expected to exist and courses of action expected to be taken.
* Only examination reports are for general use
Reviews are not reported

235
Q

Section 19.5: Prospective Financial Information (AT-C 305)

What is a hypothetical assumption?

A

A hypothetical condition is an assumption made contrary to fact, but which is assumed for the purpose of discussion, analysis, or formulation of opinions

236
Q

Section 19.6: Reporting on Pro Forma Financial Information (AT-C 310)

What are the conditions that must be met in regard to the historical financial statements when reporting on pro forma financial information?

A
  • For an examination, which is similar to an audit, the related historical financial statements must have been audited.
  • For a review, the related historical financial statements must have been either audited or reviewed.
237
Q

Section 19.7: Compliance Attestation (AT-C 315)

What is the auditor’s objective when performing an engagement to examine an entity’s compliance with specified laws, regulations, rules, contracts, or grants?

A
  • A compliance attestation provides a legal determination of an entity’s compliance
  • Express an opinion about whether
    1. The entity complied, in all material respects, with the specified requirements
    2. Management’s assertion about compliance with specified requirements is fairly stated in all material respects
238
Q

Section 19.8: Management’s Discussion and Analysis (AT-C 395)

What is MD&A Control Risk?

A

In relation to MD&A, control risk is the risk that material misstatements may occur because the entity’s internal control did not detect the MD&A misstatement in a timely manner.

239
Q

Section 19.8: Management’s Discussion and Analysis (AT-C 395)

What are the assertions related to MD&A?

A

Occurrence
* The reported transactions occurred in the year reported

Consistency with the financial statements
* The MD&A is a written assertion that may be examined or reviewed by the practitioner.
* Whether the historical financial statement amounts are accurately derived from statements and related records.
* Reported transactions, events and explanations are consistent with the statements.
* Nonfinancial data have been accurately derived from related records.

Completeness. Descriptions of transactions and events in order to understand the entity’s:
* Financial condition
* Changes to the transactions or events
* Results of operations
* Capital committments included in the MD&A

Presentation and disclosure

240
Q

SECTION 20

A
241
Q

Section 20.1: Government Auditing Standards

What are the elements of a finding in a financial audit under GAGAS?

A
  • Criteria: The requested expectation
  • Condition that a situation exists
  • Cause reason for the explanation for the condition
  • Effect or potential effect
242
Q

Section 20.1: Government Auditing Standards

What is included in a report of internal control in GAGAS?

A
  • A description of the scope of the auditor’s testing of compliance with laws and regulations.
  • A description of significant deficiencies and material weaknesses in internal control

The report on internal control provides does not provide an opinion

243
Q

Section 20.1: Government Auditing Standards

When may an auditor be required to report fraud and noncompliance directly to parties external to the audited governmental entity?

A

If the entity still does not report the noncompliance to the outside entity

244
Q

Section 20.1: Government Auditing Standards

What government management function would cause the CPA to be impaired?

A

Developing entity program policies

245
Q

Section 20.1: Government Auditing Standards

What Governmental nonaudit services violate the overarching principles?

A
  • Operate the audited entity’s information technology system
  • Perform internal audit services
  • Prepare accounting records
246
Q

Section 20.1: Government Auditing Standards

What are types of significant deficiencies that would be reported on compliance with laws and regulations during a financial statement audit under GAGAS?

A
  • Significant deficiencies and material weakness in internal control
  • Instances of fraud and noncompliance with provisions of laws and regulations that have a material effect on the audit, as well as cause attention to those charged with governance.
  • Noncompliance with provisions of contracts and grant agreements that has a material effect on the audit.
  • Abuse that has a material effect on the audit.
247
Q

Section 20.1: Government Auditing Standards

What are examples of attestation engagements under Government Auditing Standards?

A
  • Reporting on the reliability of performance measures
  • Internal control over financial reporting
  • Compliance with requirements of specified laws, regulations, policies, contracts, or grants
  • MD&A
248
Q

Section 20.1: Government Auditing Standards

What type of reports are issued under GAGAS?

A
  • Financial statement audit
  • Written report on internal control over financial reporting

The report on internal control provides does not provide an opinion

249
Q

Section 20.1: Government Auditing Standards

What is a performance audit under GAGAS?

A

Performance audits include economy and efficiency audits.

Groups included in performance audits consist of:
* Government entities, programs, activities and functions
* Government assistance administered by contractors, not-for-profit entities and other nongovernmental activities.

250
Q

Section 20.1: Government Auditing Standards

What are the components of a performance audit under GAGAS?

A
  • Program effectiveness and results
  • Economy and efficiency
  • Internal control
  • Compliance with legal requirements
  • Providing prospective analysis, guidance and summary information.
251
Q

Section 20.2: Compliance Audits

What is the main objective of a government compliance audit?

A
  • To obtain sufficient appropriate evidence in order to form an opinion on the compliance
  • To express an opinion whether the entity maintained compliance with applicable requirements
  • The auditor follows the auditing standards of GAAS, but uses judgement to adapt the standards in order to perform an audit on compliance
252
Q

Section 20.3: Federal Audit Requirements and the Single Audit Act

What is an auditor required to do when auditing a nonfederal entity’s administration of a federal award pursuant to a major program under the Single Audit Act?

A
  • Obtain evidence related to compliance
  • Express or disclaim an opinion on compliance
253
Q

Section 20.1: Government Auditing Standards

What is a performance audit under GAGAS?

A

Performance audits include economy and efficiency audits.

Groups included in performance audits consist of:
* Government entities, programs, activities and functions
* Government assistance administered by contractors, not-for-profit entities and other nongovernmental activities.

254
Q

Section 20.3: Federal Audit Requirements and the Single Audit Act

What is the single audit act?

A
  • The emphasis of the audit is on major programs related to federal awards administered by nonfederal entities that expends $750,000 or more in federal awards in one fiscal year.
  • Audit is in accordance with GAO and OMB Requirements.
  • The auditor determines on whether a deficiency in internal control is a signficiant deficiency or a material weakness in relation to the type of compliance.
  • The auditor should identify all significant deficiences and material weaknesses.

Audit (23 decks)

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