Financial Statement Audits

Question 1

List some benefits of an audit to a private company (also known as a nonissuer).

Answer 1

1) More favorable cost of capital; 2) Insights into adequacy of internal controls; and 3) Benchmark an entity’s performance with other similar entities.

Question 2

Who is primarily responsible for the fairness of an entity’s financial statements?

Answer 2

Management. The financial statements are the representation of management.

Question 3

What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards?

Answer 3

The Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board.

Question 4

Define “Generally Accepted Accounting Principles (GAAP).”

Answer 4

The standards by which the quality of the financial statements is judged.

Question 5

What is the auditor’s primary role?

Answer 5

To provide an impartial (independent) assessment of the reliability of management’s financial statements.

Question 6

In the U.S.A, who issues auditing standards applicable to audits of governmental entities?

Answer 6

U.S. Government Accountability Office (GAO).

Question 7

In the U.S.A, who issues auditing standards applicable to audits of public companies (also known as issuers)?

Answer 7

Public Company Accounting Oversight Board (PCAOB).

Question 8

In the U.S.A, who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?

Answer 8

AICPA’s Auditing Standards Board.

Question 9

Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.

Answer 9

1) Purpose
2) Premise
3) Responsibilities
4) Reasonable assurance
5) Performance requirements to achieve reasonable assurance
6) Inherent limitations
7) Reporting

Question 10

Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.

Answer 10

1) Purpose/premise
2) Responsibilities
3) Performance
4) Reporting

Question 11

Identify the topics associated with the three general standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 11

1) Training
2) Independence
3) Due professional care

Question 12

Identify the topics associated with the three field work standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 12

1) Planning and supervision
2) Internal control
3) Evidence

Question 13

Identify the topics associated with the four reporting standards for Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 13

1) GAAP
2) Consistency
3) Disclosure
4) Opinion

Question 14

What type of professional requirement is indicated by the word should in AICPA professional standards?

Answer 14

Presumptively mandatory requirement.

Question 15

What type of professional requirement is indicated by the word must in AICPA professional standards?

Answer 15

Unconditional requirement.

Question 16

What is meant by the term interpretive publications?

Answer 16

These consist of the appendices to the SASs, auditing interpretations of the SASs, the AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.

Question 17

What is meant by the term engagement quality control review?

Answer 17

A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)

Question 18

Services for which a CPA firm is required to have a sytem of quality control.

Answer 18

Audits, attestation, compilation and review services. (Not applicable to tax or consulting services.)

Question 19

Who is responsible for the administration of a quality control system?

Answer 19

May be vested in one person but everyone shares responsibility.

Question 20

List the six elements of a quality control system.

Answer 20

1) Leadership responsibilities for quality within the firm; 2) Relevant ethical requirements (especially independence); 3) Acceptance and continuance of client relationships; 4) Human resources; 5) Engagement performance; 6) Monitoring

Question 21

List the four basic steps in the audit process.

Answer 21

Planning
Internal Control Consideration
Substantive Audit Procedures
Reporting.

Question 22

What are some considerations that must be given by the auditor during the planning phase of the audit?

Answer 22

Determine whether to accept or continue the audit engagement
Assess the risk of material misstatement
Evaluate requirements for staffing and supervision
Prepare the required written audit program (also called the “audit plan”).

Question 23

What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?

Answer 23

Obtain the required understanding of the design of internal control for planning purposes.
Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls.

Question 24

List the two types of substantive audit procedures.

Answer 24

Analytical Procedures

Tests of details.

Question 25

List the two types of test of details.

Answer 25

Tests of ending balances

Tests of transactions.

Question 26

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

Answer 26

n unmodified auditor’s report is presented in 4 sections:
An introduction (1 sentence).
Management’s responsibility section (1 sentence).
Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
Opinion (1 sentence).

Question 27

Prior to the clarified auditing standards, how was an Unqualified Audit Report structured?

Answer 27

An unqualified audit report was presented in three paragraphs:
Introduction (three sentences),
Scope (five sentences), and
Opinion (one sentence).

Question 28

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

Answer 28

Unmodified
Qualified
Adverse
Disclaimer.

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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

Question 31

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

Answer 31

Scope limitation (material and pervasive effect).

Question 32

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

Answer 32

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 33

What is a Compilation?

Answer 33

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 34

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

Answer 34

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

Question 35

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

Answer 35

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