Financial Statement Audits

Question 1

What are the six elements of a Quality control system?

Answer 1

A. Leadership responsibilities for quality
B. Relevant ethical requirements
C. Acceptance and continuance of client-relationships and engagements.
D. Human resources
E. Engagement performance
F. Monitoring

Question 2

Evidence gathering procedures whose purpose is to detect material misstatements if there are any?

Answer 2

Substantive Audit procedures

Question 3

Name two type of substantive audit procedures

Answer 3

1. Analytical procedures

2. Tests of detail: a) tests of ending balances b) tests of transactions

Question 4

What does the engagement letter document?

Answer 4

The engagement letter documents the understanding between the auditor and the client regarding the nature and timing of the services to be performed, expected fees and the basis for billing, the responsibilities of the auditor, the client’s responsibilities in preparing for the audit, and the need for other services to be performed.

Question 5

How is an auditor’s unmodified audit report structured under the clarified auditing standards?

Answer 5

An unmodified auditor’s report is presented in 4 sections:

1. An introduction (1 sentence).
2. Management’s responsibility section (1 sentence).
3. Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
4. Opinion (1 sentence).

Question 6

List the reason(s) for which an entity may receive an adverse opinion.

Answer 6

Misstatement, such as a GAAP departure (material and pervasive effect).

Question 7

List the reason(s) for which an entity may receive a disclaimer of opinion.

Answer 7

Scope limitation (material and pervasive effect).

Question 8

List the four types of opinions that an auditor may give on financial statements.

Answer 8

1. Unmodified
2. Qualified
3. Adverse
4. Disclaimer

Question 9

List the reason(s) for which an entity may receive a qualified opinion.

Answer 9

1. Misstatement, such as a GAAP departure (material, not pervasive effect)
2. Scope limitation (material, not pervasive effect).

Question 10

List the four basic steps in the audit process.

Answer 10

1. Planning
2. Internal Control Consideration
3. Substantive Audit Procedures
4. Reporting.

Question 11

To what services are Statements on Standards for Accounting and Review Services (SSARs) applicable

Answer 11

Statements on Standards for Accounting and Review Services are applicable to reviews and compilations of the financial statements of private companies, that is, non-issuers.

Question 12

What is a Compilation?

Answer 12

A compilation is an assembly of the financial records of a private company into a financial statement format without expressing any degree of assurance on the reliability of those financial statements.

Question 13

What type of assurance is associated with a “review” of an entity’s financial statements?

Answer 13

Negative assurance, which is considered a moderate level of assurance.

Question 14

What type of assurance is associated with an “audit” of an entity’s financial statements?

Answer 14

Positive assurance. Positive assurance is considered a high level of assurance.

Question 15

True or False: A written engagement letter must be obtained for engagements to audit, review, or compile an entity’s financial statements under AICPA Professional Standards.

Answer 15

True