Financial Statement Audits

Question 1

define financial accounting

Answer 1

focueses primarily on preparation and distribution of general purpose, historical FS, which are representation of mgt

Question 2

purpose of audit

Answer 2

to provide fs users with opinion by cpa on whether fs are presented fairly in all material respects, in accordance with applicable financial reporting framework. cpa’s opinion enhances the degree of confidence that intended users can place in fs

Question 3

financial reporting framework

Answer 3

set of criteria used to determine measurement, recognition, presentation and disclosure of all material items appearing in fs

Question 4

which particular accounting standards must be followed under the label of us gaap by - federal governmental entities

Answer 4

follow pronouncements of the Federal Accounting Standards Advisory Board FASAB

Question 5

which particular accounting standards must be followed under the label of us gaap by - state and local governmental entities

Answer 5

follow pronouncements of Governmental Accounting Standards Board GASB

Question 6

which particular accounting standards must be followed under the label of us gaap by other entities, such as corporation

Answer 6

follow pronouncements of the Financial Accounting Standards Board FASB

Question 7

standards applicable to evaluating auditor’s performance outside of the us

Answer 7

International Standards of auditing ISAs are issued by the International Auditing and Assurance Standards Board, an audit related standard setting body within the International Federation of Accountant, IFAc

Question 8

standards applicable to evaluating auditor's performance 
within the US for 
governmental entities
public companies
private companies

Answer 8

governmental entities - when required by law, regulation or agreement, Generally Accepted Government Auditing Standards GAGAS issued by US government Accountability Office GAO are applicable
public companies - PCAOB
Private Companies - Standards of the AICPA’s aAuditing Standards Board are applicable, these pronouncements collectively are referred to by AICPA as GAAS

Question 9

AICPA has replaced its SAS to be similar to

Answer 9

ISA issued by IFAC of IAASB

Question 10

AICAP also replaced its use of 10 criteria formerly known as Generally accepted Auditing standards with

Answer 10

7 principles to provide a framework of understanding and explaining an audit
-are not requirements
-have no authoritative status
intended to be helpful framework for audit standard setting

Question 11

the seven principles are organized around four primary themes

Answer 11

purpose/premise
responsibilities
performance
reporting
pr - pr

Question 12

responsibilities principle

Answer 12

takes place of what previously was called general standards:
responsible for having appropriate competence and capabilities to perform audit;
complying with relevant ethical requirements;
maintaining professional skepticism
exercising professional judgment
throughout the planning and performance of audit

Question 13

performance principle

Answer 13

takes place of what previously was called fieldwork standards governing cpa’s evidence gathering activities
-to express an opinion, cpa obtains reasonable assurance about whether FS as whole are free from material misstatemetns, whether due to fraud or error

Question 14

-to obtain reasoanble assurance, which is a high, but not absolute level assurance , cpa:

Answer 14

• plans work and propely supervises any assistants
• determines and applies appropriate materiality level or levels throughout audit
• identifies and assesses risks of mm, whether due to fraud or error, based on understanding of entity’s and its environment, including entity’s IC
• obtains sufficient appropriate audit evidence about whether mm exist, through designing and implementing appropriate responses to assessed risks

Question 15

cpa is unable to obtain absolute assurance that the fs are free from mm because of inherent limitations, which arise from:

Answer 15

nature of fin reporting
nature of audit procedures
need for audit to be conducted within a reasonable period of time and so as to achieve balance between benefit and cost

Question 16

based on evaluation of audit evidence obtained, auditor expresses, in form of a written report,

Answer 16

an opinion in accordance with auditor’s findings, or states that opinion cannot be expressed. the opinion states whether FS are presented fairly, in all material respects, in accordance with applicable financial reporting framework.

Question 17

statements on auditing standards SAS

Answer 17

sas constitute gaas and must be followed by auditors when aicpa auditing standards are applicable (specifically the Rule of Conduct, Compliance with Standards, of AICPA code of professional conduct requires that auditors adhere to standards promulgated by Auditing Standards Board). Under clarified auditing standards, any reference to GAAS now specifically means this authoritative body of professional standards SAS issued by the Auditing Standards Board

• cpa is expected to have sufficient knowledge of SAS to identify those applicable to audit
• cpa should be prepared to justify any departures from SAS
• materiality and audit risk also underlie application of SAS, particularly those related to performing audit (evidence gathering) and reporting

Question 18

categories of professional requirements

various aicpa standards (sas, ssae, ssars and sqcs) distinguish between two types of professional requirement:

Answer 18

• unconditional requirement - must comply with requirement without exception indicated by must
• presumptively mandatory requirement - in rare circumstances, cpa may depart from such requirement, but must document justification for departure of how alternate procedures performed were adequate to meet objective of requirement (should).
• explanatory material is descriptive guidance within body of standards that does not impose on requirement (indicated may, might, could) in applicable standards

Question 19

relationship of gaas to sqcs

Answer 19

an individual audit engagement is governed by gaas, whereas cpa firm’s collective portfolio of accounting and auditing services (sometimes called the A&A practice, which involves entities FS and involves public interest) is governed by AICPAs SQCS. SQCS are issued by Aicpa’s auditing standards board. Relevant aicipa guidance applicable to an individual adult engagement is provided by AU220

Question 20

focus of the system of quality control

Answer 20

cpa firm is required to have “system of quality control” for its accounting and auditing services (covering audit, attestation, compilation and review services; not applicable to tax or counseling services) to provide reasonable assurance that eng are performed in accordance with professional standards and applicable regulatory and legal requirements, and that the issuance of reports are appropriate in the circumstance

Question 21

nature and scope

Answer 21

policies and procedures will vary with circumstances (firm size and number of offices, complexity of services offered, and level of experience of professional staff)

Question 22

inherent limitations

Answer 22

similar to any internal control system, a quality control system provides “reasonable” (a high but not absolute) assurance, reflecting implicit cost-benefit trade off

Question 23

six elements of quality control system

Answer 23

1. leadership responsibilities for quality
2. relevant ethical requirements
3. acceptance and continuance of client relationships and engagements
4. human resources
5. engagement performance
6. monitoring

Question 24

leadership responsibilities for quality

Answer 24

element of quality control system
policies and procedures should promote an internal culture that emphasizes a commitment to quality (sometimes called “tone at the top) for an individual audit engagement, the engagement partner should take responsibility for overall audit quality, although performance of certain procedures may of course be delegated to other members of the engagement team

Question 25

relevant ethical requirements

Answer 25

element of quality control system
policies and procedures should address independence of personnel as necessary (should obtain written confirmation of compliance with independence requirements from all appropriate personnel at least annually)

Question 26

acceptance and continuance of client relationships and engagements

Answer 26

element of quality control system
policies and procedures should carefully assess risks associated with each engagement (including issues related to management integrity) and the firm should only undertake engagements that can be completed with professional competence

Question 27

human resources

Answer 27

element of quality control system
policies and procedures should address important personnel issues (including hiring, assignments to engagements, professional development and cpe and promotion decisions)

Question 28

what is the purpose of AU220 quality control for an engagement conducted with accordance with gaas is to assist cpa in

Answer 28

implementing firm’s quality control procedures specifically at engagement level. this pronouncements states that auditor’s objective is to implement quality control procedures at engagement level that provide reasonable assurance that the audit complies with professional standards and applicable requirements and auditor issues an appropriate report

Question 29

engagement performance

Answer 29

element of quality control system
policies and procedures should focus on compliance with all applicable firm and professional standards and applicable regulatory requirements, and encourage personnel to consult as necessary with professional (or other) literature or other human resources within or outside the firm for appropriate guidance

Question 30

monitoring

Answer 30

element of quality control system
policies and procedures should provide an ongoing assessment of the adequacy of the design and operating effectiveness of the system of quality control. controls that are effective at one point in time, may deteriorate over time owing to neglect or changed circumstances. it is important that controls are property monitored so that timely adjustments can be made as necessary to keep quality control policies and procedures working effectively over time

Question 31

differences of opinion

Answer 31

the form should establish policies and procedures for dealing with and resolving differences of opinion within the engagement team, with those consulted, and between the engagement partner and the engagement quality control reviewer (including that the conclusions reached are documented and implemented and that the report is not released until the matter is received)

Question 32

documentation of the operation of quality control policies and procedures

Answer 32

firms should establish policies and procedures requiring appropriate documentation of operation of each element of system of quality control

Question 33

the main difference between the clarified SAS and Corresponding International Standard on Auditing

Answer 33

SAS requires that quality control review must be completed before engagement parter releases auditor’s report, whereas ISA requires that quality control review be completed before eng partner dates the auditor’s report.

Question 34

engagement planning process

Answer 34

decide whether to accept or continue the eng - recall quality control standards regarding client acceptance/continuance issues
perform risk assessment procedures to address risks on mm, whether due to error or fraud’
evaluate requirements for staffing or supervision
prepare required written audit plan (sometimes called audit program) that specifies the nature, timing and extent of auditing procedures for every audit area (which is usually prepared after control risk has been assessed, so that detection risk can be appropriately set in each audit area)

Question 35

internal audit considerations

Answer 35

obtain understanding of internal control of planning purposes as required, emphasizing the assessment of risk of mm in individual audit area and document the understanding of internal control
if contemplating reliance on certain identified internal control strengths as a basis for reducing substantive testing, auditor must then perform appropriate tests of control to determine that those specific controls and operating effectively, that is working as intended

Question 36

substantiative audit procedures

Answer 36

evidence gathering procedures whose purpose is to detect mm, if there are any
analytical procedures
test of details

Question 37

analytical procedures

Answer 37

those evidence-gathering procedures that suggest reasonableness (or unreasonableness) based upon a comparison to appropriate expectations or benchmark, such as prior year’s FS, comparability to industry data (including rations) or other interrelationships involving financial and/or financial data

Question 38

test of details

Answer 38

those evidence gathering procedures consisting of either of two types
test of ending balances
test of transactions

Question 39

test of ending balances

Answer 39

where the final balance is assessed by testing the composition of year end balance (testing a sample of individual customers’ account balances that make up the general ledger accounts receivable control account balance)

Question 40

test of transactions

Answer 40

where final balance is assessed by examining those debits and credits that caused the balance to change from last year’s audited balance to the current year’s balance

Question 41

reporting process

Answer 41

conclusions are expressed in writing using standardized language to avoid miscommunication

Question 42

under aicpa’s clarified standards, auditor’s report has been reformatted and expanded to reflect four main sections

Answer 42

1. introductory paragraph
2. management responsibility for the financial statements
3. auditors responsibility
   4 opinion

Question 43

introductory paragraph

Answer 43

identifies nature of eng and entity’s fs involved (1 sentence)

Question 44

management’s responsibility for the financial statements

Answer 44

1 sentence - states that mgt is resp for fair presentation of the fs and implementation of ic

Question 45

auditor’s responsibility

Answer 45

I. 3 sentences
-responsibility to express opinion
-conducted audit in accordance with gaas
-plan and perform audit to provide reasonable assurance
II. 5 sentences
-perform procedures to obtain evidence about amounts and disclosures
-procedures depend on auditor’s judgment, including assessment of risk of mm whether due to fraud or error
-in making those risk assessments, auditor considers IC
-auditor expresses no such opinion
-audit includes evaluating appropriateness of accounting policies used to reasonableness of sig acct estimates
III. 1 sentence
-expressing auditor’s belief that audit evidence is sufficient and appropriate to provide a basis for opinion

Question 46

opinion paragraph

Answer 46

1 sentence

expresses the auditor’s opinion that fs are fairly stated in conformity with gaap or other framework

Question 47

introductory paragraph - actual wording

Answer 47

we have audited the accompanying fs of abc company, which comprise the bs as of 12/31/17 and 2016, and the related statements of income, changes of stockholders equity and cf for the yers then ended, and the related notes to fs

Question 48

management resp for fs - actual wording

Answer 48

management is responsible for preparation and fair presentation of these fs in accordance with gaap in usa; this includes DIM of IC relevant to preparation and fair presentation of fs that are free from mm, whether owing to fraud or error

Question 49

auditor’s responsibility - actual wording - first paragraph

Answer 49

1. our responsibility is to express an opinion on these fs based on our audits. 2. we conducted our audits in accordance with auditing standards generally accepted in usa 3. those standards require that we plan and perform audit to obtain reasonable assurance about whether fs are free from mm.

Question 50

auditor’s responsibility - actual wording - second paragraph

Answer 50

4. audit involves procedures to obtain audit evidence about amounts and disclosures in fs. 5. procedures selected depend on auditor’s judgment, including assessment of risks of mm of the fs, whether owing fraud or error. 6. in making those risks assessments, auditor considers IC relevant to entity’s preparation and fair presentation of fs in order to design audit procedures that are appropriate in circumstances, but not for the purpose of expressing opinion on effectiveness of entity’s internal control. 7. accordingly we express no such opinion. 8. audit also includes evaluating the appropriateness of accounting policies

Question 51

auditor’s responsibility - actual wording - third paragraph

Answer 51

9. we believe that audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

Question 52

opinion paragraph - actual wording

Answer 52

in our opinion, the fs referred to above present fairly, in all material respects, the financial position or abc company as of 12/31/17 and 12/31/16 and the results of their operations and their cash flows for years then ended in accordance with gaap in usa

Question 53

aicpa statements o standards for accounting and review services ssars

Answer 53

these standards are applicable when cpa is associated with fs of private company, but that association is something less than a full scope audit engagement

Question 54

compilation

Answer 54

occurs when cpa is engaged simply to assemble into fs format the financial records of a private company without expressing any degree of assurance on reliability of those fs

Question 55

review

Answer 55

occurs when cpa is engaged to provide a lower level of assurance on fs of a private company by performing limited procedures, including reading fs, performing analytical procedures, and making appropriate inquiries of client personnel

Question 56

aicpa’s statements on standards for attestation engagements ssae

Answer 56

these are applicable when cpa provides assurance about written representations or subject matter other than historical fs (management may make representations about its superior product performance that may be made more reliable by cpa’s independent verification and report

Question 57

understanding with client

Answer 57

when associated with fs subject matter, aicpa professional standards require cpa to establish understanding with entity involved as to services to be rendered and parties’ respective responsibilities. cpa must document that understanding a written engagement letter between cpa and client entity. this should not be surprising, since public interest is associated with such fs subject matter

Question 58

levels of assurance for audit

Answer 58

audit conveys a high level of assurance about the reliability of fs, and is expressed as positive assurance in the form of an opinion (recall that the SASs apply to audits of non-issuers)

Question 59

levels of assurance of review

Answer 59

review conveys a lower level of assurance about fs (for private company under AICPA’s SSARS

Question 60

levels of assurance for compilation

Answer 60

compilation conveys no assurance about the reliability of fs (for private companies under AICPA’s SSARS)

Question 61

other attest engagements

Answer 61

cpa may convey either a high or moderate level of assurance about non-financial statement representations under ssae. (subject matter of eng involves somtheing other than historical fs, hence more flexibility exists to negotiate with entity about level of assurance to be conveyed and/or procedures to be used as basis for conclusions)

Question 62

written management letter must be obtained for the following engagements

Answer 62

audit
review
compile
entity’s fs under aicpa professional standards

Question 63

pcaob’s five primary responsibilities

Answer 63

1. registration of public accounting firms
2. inspections of registered public accounting firms
3. standard setting
4. enforcement
5. funding

Question 64

pcaob’s responsibiltiy - inspections of registered public accounting firms

Answer 64

pcaob is directed to conduct continuous program of inspections that assess compliance with soa, pcaob rules and sec and standards

• firms that provide audit reports for at least 100 issuers - pcaob inspects annually
• firms that provide audit reports for fewer than 100 issuers - pcaob must inspect every three years

Question 65

pcaob standard setting responsibility

Answer 65

pacaob is directed to establish auditing and related attestation, quality control, ethics and independence standards and rules to be used by registered public accounting firms in the preparation of of audit reports for issuers (office of the chief auditor and the standing advisory group SAG assist pcaob in establishing such auditing and professional practice

Question 66

pcaob enforcement - responsibility

Answer 66

pcaob has broad authority to investigate registered public accounting firms and persons associated with such firms

• pcaob rules require cooperation by registered public accounting firms and associated persons - must produce documents and provide testimony as directed (pcaob may also seek information from others, including clients of registered firms)
• pcaob sanctions may range from revocation of a firm’s registration or barring a person from participating in audits of public companies to lesser sanctions such as monetary penalties or imposition of remedial measures, including additional training or new quality control procedures

Question 67

pcaob - funding - responsibility

Answer 67

pcaob’s budget is funded by -registration and annual fees from public accountinf firms
-an annual accounting support fee assessed on issues (based on their relative monthly market capitalization)

Question 68

purpose of the legislation - sox

Answer 68

to address a series of perceived corporate misconduct and alleged audit failures and to strengthen investor confidence in integrity of US capital markets

Question 69

sox consists of

Answer 69

11 titles, the first four of which are directly applicable to auditors

Question 70

title I of sox

Answer 70

established by pcaob, gave standard setting authority to pcaob (regarding auditing, quality control, and independence standards) and created its role in overseeing the accounting firms required to register with pcaob

Question 71

title II of sox

Answer 71

established independence requirements for external auditors, which addressed perceived conflicts of interest (limiting non-audit services, establishing a five year rotation for the audit partner and review partner, and restricting members of the audit firm from taking key management positions (including ceo, cfo, controller, or cao) during the one year period preceding audit engagement

Question 72

what services are cpas prohibited from providing under sox

Answer 72

bookkeeping or other services related to accounting records.
financial information system design and implementation
appraisal or valuation services
actuarial services
internal audit outsourcing services
management functions or HR
broker or dealer investment advisor
legal services and expert services unrelated to audit

Question 73

title III of sox

Answer 73

established requirements related to corporate responsibility to make executives take responsibility for the accuracy of financial reporting (including a requirement for certification by entity’s principal offices) and to make it illegal for management to improperly influence the conduct of an audit

Question 74

title IV of sox

Answer 74

addressed a variety of enhanced financial disclosures. the most well known of which deals with required internal control reporting (sections 404) among other matters

Question 75

applicability of standard

Answer 75

requires an engagement quality review (and concurring approval of issuance) for engagement conducted under pcaob standards

• for an audit
• for review of interim fs
• for attestation eng regarding compliance reports of brokers and dealers (or review eng regarding exemption reports of brokers and dealers)

Question 76

reference to component auditor should not be made unless:

Answer 76

• component has performed audit in accordance with gaas/pcaob
• component auditor’s report is not restrictive
• if different framework - measurement, recognition, presentation and disclosure are similar - group eng team obtained sufficient appropriate evidence to evaluate adjustments

Question 77

what information is referenced on report when component is mentioned

Answer 77

• component was audited by component auditor
• magnitude of portion
• describe framework used, if different - auditor is taking responsibility for evaluating appropriateness of adjustments

Question 78

does isa permit auditor’s report on group fs

Answer 78

isa do not permit auditor’s report on group fs to make reference to component auditor unless required by law or regulation

Question 79

which paragraphs are modified on report when component auditor is mentioned

Answer 79

auditors responsibility P

opinion P

Question 80

when is EOM paragraph used?

Answer 80

• going concern
• justified change in accounting principle
• change in audit opinion
• special purpose framework
• uncertainty related to outcome of unusually important litigation or regulatory action
• major catastrophe significantly affecting fs
• significant related party tx
• unusually important subsequent event
• subsequently discovered facts lead to change in audit opinion

Question 81

when is OM paragraph used?

Answer 81

• restricts use of report
• subsequently discovered facts lead to change in audit opinion
• fs of py were audited by predecessor and predecessor audit report is not reissued
• CY fs audited and presented in comparative form with compiled or reviewed fs
• cy audited in comparative form with py fs not audited, compiled or reviewed
• prior to audit report date, cpa identifies material inconsistency in other information that is included in a document containing audited fs that requires revision of other information and mgt refuses to make revision
• cpa chooses to report on suppl info presented with fs in auditor’s report rather than separate report
• to refer required supplementary information
• to restrict use of cpa’s report when special purpose financial statements are preapred, except when regulatory basis fs are intended for general use
• report on compliance is included in auditor’s report on fs
• to describe reasons why cpa cannot withdraw from engagement when cpa is unable to obtain sufficient appropriate audit evidence due to mgt imposed scope
• law regulation or generally accepted practice require or permit auditor to provide further explanation of cpa’s responsibilities
• cpa has been engaged to report on more than one set of fs when each set of fs has been prepared in accordance with different framework