First AUD Flashcards

Question

CHATGPT: Qualified Opinion: If the issue is not pervasive (limited in scope or impact), the auditor may issue a qualified opinion, stating that, except for the specified issue, the financial statements present fairly.

Answer 1

CHATGPT: Adverse Opinion: If the issue is pervasive (widespread) and significantly affects the financial statements as a whole, the auditor issues an adverse opinion, stating that the financial statements do not present a fair and accurate picture of the company. Disclaimer of Opinion: If there is a pervasive scope limitation (e.g., insufficient evidence), the auditor may disclaim an opinion, meaning they cannot form any opinion about the financial statements. Example: Non-pervasive Issue: A company fails to report a small number of transactions, but the rest of the financial statements are unaffected. This may lead to a qualified opinion. Pervasive Issue: A company fails to follow accounting standards across multiple areas of their financial statements, resulting in a major misrepresentation of the financial position. This may lead to an adverse opinion because the issues are widespread and significantly impact the financial statements as a whole.

Answer 2

KEY AUDIT MATTERS are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the FS of the current period. These matters were adressed in the context of our audit of the FS as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. E.g. KAMr are complex issues, judmentally difficult, required audit attention. ORDER OF KAMs listed is a JUDGEMENT DECISION. KAMs section can be added anywhere in the report after the 2nd section. (OPINION section and BASIS for OPINION SECTION) KAMs should NOT include the matters giving rise to: 1. A QUALIFIED OPINION - should be referenced in the BASIS for OPINION section for further explanation 2. SUBSTANTIAL DOUBT existing about an entity's ability to continue as a going concern *Should be referenced elsewhere in the report.

Answer 3

Audit Documentation (Working Papers) The principal record of procedures performed, evidence obtained, and conclusions reached; also called "working papers" or "workpapers." Audit Evidence The underlying information used by the auditor in reaching audit conclusions. The information corroborates or contradicts assertions in the financial statements. Audit Objectives Goals of audit testing, developed in light of financial statement assertions. Audit Plan A listing of audit procedures necessary to accomplish the objectives of the audit; required for every audit. Audit Risk The risk that an auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated. Audit Risk of Noncompliance The risk that the auditor may unknowingly fail to appropriately modify the opinion on compliance in a compliance audit. It comprises the risk of material noncompliance and detection risk of noncompliance.

Answer 4

OPINION and BASIS FOR OPINION

Answer 5

FS or GAAP issues = Adverse opinion

Answer 6

IDENTIFICATION OF CAMs (IPAD): 1. Identify each CAM in the audit report 2. Describe the PRINCIPAL CONSIDERATIONS that led the audiot to determine a CAM 3. Describe how the CAM was ADDRESSED in the AUDIT 4. Refer to the relevant FS accounts and disclosures A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.

Answer 7

ISSUER: (CRITICAL AUDIT MATTERS) CAMS are REQUIRED for an ISSUER (when an unqualified/qualified opinion is issued): 1. Opinion on the FS 2. Basis for OPINION 3. CRITICAL AUDIT MATTERS The auditor's report must include any CAMs arising from the current period's audit of the financial stateemnts. Report wording in opinion section and basis for opinin section is often boiler plate and does not provide much visibility into the audit. The CAM section provides more visibility into the more challenging areas of the audit.

Answer 8

The following non-issuer headings will change when modified opinions are isued: 1. OPINION 2. BASIS FOR OPINION

Answer 9

Unmodified/Unqualified (CLEAN=FS free from material misstatements in all respects) opinion 1. Sufficient evidence 2. Follows GAAP 3. Immaterial or no issues

Answer 10

MANAGEMENT RESPONSIBILITES: 1. Determine the applicable FIN REPORTING framework and prepare an adequate description of the framework for inclusion in the FS 2. Designing and Implementing programs and controls to prevent, deter and detect fraud. INTERNAL CONTROL helps in Preventing, detecting and correcting MISTATEMENTS on a timely basis.

Answer 11

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatement whether caused by error or fraud.

Answer 12

In the FS, including accompanying notes fail to disclose info that is required by GAAP, the auditor should express a QUALIFIED OR ADVERSE OPINION, depending on PERVASIVENESS. An auditor of a nonissuer concludes that a client's illegal act, which has a material effect on the FS, has not

Answer 13

Unqualified, Unmodified.

Answer 14

RESULTS IN DISCLAIMER ______________________________ 1. Not independent 2. Unaudited FS 3. Refusal of management to provide written representation and/or to acknowledge its responsibility for the fair presentation of the FS in conformity with GAAP (may also withdraw) A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and relates to accounts or disclosures that are material (not immaterial) to the financial statements. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves a particularly complex judgment made by the auditor (not a complex transaction made by management.)

Answer 15

The REASONS for the inability to obtain sufficient appropriate audit evidence should only be described in the Basis for Qualified Opinion section of the auditor's report and the Management's Responsibility section should remain unchanged. The reasons for the inability to obtain sufficient appropriate audit evidence should be described in the BASIS for Qualified Opinion section of the auditor's report.

Answer 16

Management’s refusal to provide written representations (a type of audit evidence) is a significant client-imposed restriction on the audit, which may result in a disclaimer of opinion. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality. An auditor may issue a qualified or disclaimer of opinion when an auditor is unable to obtain sufficient appropriate audit evidence. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and a qualified or disclaimer of opinion may be appropriate

Answer 17

A justified departure from GAAP results in the addition of an emphasis-of-matter paragraph to the unmodified opinion.

Answer 18

PRIOR YEAR FS REVIEWED OR COMPILED 1. When the current period FS were reviewed or compiled and the report of the PRIOR PERIOD is not reissued, the auditor should include an other-matter paragraph (non-issuer) or explanatory paragraph (issuer) that includes: (a) The service (review or compilation) performed in the prior period (b) The date of the prior period report (c) a description of any material modifications described in the report. (d) A statements that the service was less in scope than an audit and does not provide the basis for expressing an opinion on the FS as a whole (review) or (d) A statement that no opinion or other form of assurance is expressed (compilation)

Answer 19

UNMODIFIED (a DEPARTURE from US GAAP is permissible when circumstances indicate that a financial presentation in accordance with US GAAP would be misleading.

Answer 20

The word INDEPENDENT should be included in the report TITLE and not the OPINION PARAGRAPH in an auditor's report. A description of the auditor's responsibility would be included in a SEPARATE PARA stating the auditor's responsibility rather than in the opinion paragraph. An indication of mgt's responsibility for the fair presentation of the FS should be included in a separate PARA explaining mgt's responsibility rather than in the opinion para. Emphasis of matter paragraphs are used when required by SAS or when the auditor believes they are necessary. They are used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users' understanding of the FS. This para does not affect the auditor's opinion.

Answer 21

explicitly represented in the Auditor's responsibility section of the nonissuer audit report.

Answer 22

Within the Auditor's Responsibility section of the report, the following statement is explicitly made: "Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements." The consistency of the application of accounting principles is implicit while the examination of EVIDENCE on a test basis is explicitly stated in the Auditor's Responsibility section.

Answer 23

The auditor's report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. The auditor may not have received sufficient appropriate evidence by the last day of fieldwork. For example, the partner's review of the audit evidence may take place after the last day of fieldwork. The final assembly of the audit file often occurs after the date of the audit report. This assembly may occur up to 45 or 60 days following the report release date for issuers and nonissuers, respectively. Audit documentation may be completed after the date of the audit report. Generally, changes to audit documentation after the date of the audit report are administrative in nature. For example, the auditor may sort and cross-reference workpapers.

Answer 24

The CPA's report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors.

Answer 25

The audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: "Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement.. The audit report does not state that the auditor evaluated the overall internal control. The correct statement is "In performing an audit in accordance with GAAS, we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstance..." The audit report does not state "The financial statements are consistent with those of the prior period." Consistency is implicitly reported; only if there is an inconsistency is an explicit statement included

Answer 26

In an auditor's report, there is a section for explicitly stating both management and the auditor's responsibilities related to the audit.

Answer 27

GAAS = The Basis for Opinion section would refer to GAAS rather than GAAP. GAAS = The Auditor's Responsibility section of the report would refer to GAAS rather than GAAP. GAAS = . The Auditor's Responsibility section would refer to GAAS rather than GAAP, which the Management's Responsibility section would include a reference to GAAP.

Answer 28

An auditor reporting on the audit of financial statements of an issuer is required to refer to PCAOB standards. There is no requirement to reference GAAS. An auditor reporting on the audit of financial statements of an issuer should indicate in the audit report that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.

Answer 29

OPINION ______________________________ DISCLAIMER = MATERIAL AND PERVASIVE

Answer 30

1. Time constraints 2. Inability to obtain sufficient appropriate audit evidence, such as: (a) inability to observe inventory (b) inability to confirm receivables (c) inability to obtain audited FS of a consolidated investee (d) Restrictions on the use of auditing procedures (e) Inadequacy of accounting records (f) Refusal of client's attorney to respond to inquiry

Answer 31

1. Not independent 2. Unaudited F/S 3. Refusal of mgt to provide written representation and/or to acknowledge its responsibility for the fair presentation of the FS in conformity with GAAP (may also withdrawal) 4. Audit/Evidence issue - CEO is unwilling to sign the mgt representation letter. 5. Audit/EVIDENCE issue - The client refuses to permit the auditor to confirm certain AR or apply alternative procedures to verify their balances.

Answer 32

1. Don't follow GAAP 2. Inappropriate accounting principles 3. Unreasonable estimates 4. Inadequate disclosure 5. Incorrect numbers 6. No reasonable justification for change in accounting principles 7. GAAP issues

Answer 33

1. Sufficient evidence 2. Follows GAAP 3. Immaterial or no issues

Answer 34

When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor's opinion should state "In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . ."

Answer 35

A material change in accounting principle would result in the addition of an emphasis-of-matter paragraph to the unmodified opinion.

Answer 36

Substantial doubt with regard to the entity's ability to continue as a going concern should be disclosed in either an emphasis-of-matter paragraph (optional when doubt is alleviated) or a separate section of the auditor's report (doubt remains) appended to an otherwise unmodified (unqualified) opinion. The client's refusal to provide access to the minutes of the Board of Directors' meetings would result in a disclaimer of opinion.

Answer 37

1. Observe technical stds 2. Observe ethical stds (e.g. Code of professional conduct) 3. Strive to improve competence (professional education) 4. Perform duties diligently

Answer 38

e.g. 2011 - qualified opinion 2010 - unmodified opinion

Answer 39

Reporting with predecessor auditors In determining if previously presented financial statements are still appropriate as issued, the predecessor auditor should: 1. Read the statements for the current period 2. Compare the audited statements with the current period statements 3. Obtain a letter of representation from the successor auditor stating whether the successor auditor's audi revealed any matters that may have a materal effect on the statements reportedon by the predecessor auditor. 4. OBTAIN a letter of representaton from management stating whethr ny previous management representations have change or whether any subsequent events have occurred that may require adustment or disclosure in the reissued FS

Answer 40

COMPONENT - An entity or business activity that prepares Financial info that is included in the group FS COMPNENT AUDITOR: An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit.

Answer 41

E.g. PY FS are restated to conform with GAAP e.g. a previous report that was qualified or adverse due to a departure from GAAP would no longer be appropriate in the event of the restatement of the PY's FS to be in conformity wit GAAP.

Answer 42

AUDITOR'S RESPONSIBILITIES 1. Maintaining PROFESSIONAL SKEPTICISM 2. Complying with relevant ethical requirements 3. Exercising professional judgment throughout the planning and performance of the audit 4. Obtaining sufficient appropriate audit evidence 5. Complying with GAAS (AUDITING STANDARDS) The auditor should neither assume that mgt is DISHONEST nor assume UNQUESTIONED HONESTY. A belief that management is honest and has INTEGRITY does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less than persuasive evidence. Example of impediments 1. Unconscious human bias 2. DEV of inappropriate level of trust or confidence in mgt, which may result in the auditor not taking as questioning a stance as needed. 3. Pressure to avoid potential negative interactions with or consequences to individuals whom auditors know (e.g. mgt ) instead of representing the int of investors. 4. scheduling and workload demands, which may result in auditors making shortcuts in judgement, such as seeking audit evidence that is easier to obtain rather than evidence that is more reliable and relevant or giving more weight to supporting evidence without considering contrary evidence.

Answer 43

MONITORING The monitoring component or function of the internal control framework is designed to ensure that controls continue to operate effectively. Monitoring of internal control effectiveness is done to provide an assessment of the performance of the system of internal control over time. Monitoring is designed to ensure that controls operate effectively. . Periodically comparing and updating the mission vision and values of a not-for-profit could best be classified as a monitoring activity. Monitoring is the process that assesses the quality of control performance over time. Monitoring may include, among other things, the evaluation of communications from external parties such as customers, regulatory agencies, and external auditors.

Answer 44

material misstatements

Answer 45

less than $100 million in annual revenue

Answer 46

To be filed within 35 days AFTER THE AUDIT REPORT If incuded with reg statemnt - muat

Answer 47

MODIFY auditor's responsibility section in the case of DISCLAIMER , since there are lot of things that we could not do or complete due to incomplete info?

Answer 48

The auditor's report gives credibility to the FS. The auditor's as a group independent of mgt, have an objective view and can report on a company's activities without bias or conflict of interest. FS of an enterprise are prepared by the mgt of the enterprise NOT the independent auditor.

Answer 49

THe overall objectives of the auditor when conducting an ERISA plan FIN STATEMENT Audit are: 1. Accept an ERISA plan audit engagement when the basis upon which it is to be performed has been agreed upon through establishing whether the preconditions for the audit are present.

Answer 50

non-public entity

Answer 51

Involvement of another auditor does not prevent the issuance of an unmodified opinion.

Answer 52

BOD or Audit Committee (may also refer to members of the entity's legal structure, external parties such as legal committees)

Answer 53

not make significant audit decisions,

Answer 54

management

Answer 55

The engagement letter would include the scope of the audit and the scope of any additional services to be provided by the auditor to the entity. The engagement letter is a means by which the parties agree to the terms of the engagement.

Answer 56

Chatgpt Audit = Reasonable assurance, detailed testing, auditor opinion. Review = Limited assurance, analytical procedures, no opinion, just a statement of no material misstatements.

Answer 57

Management Decision: In cases where a full audit isn’t required by law (for example, smaller private companies or certain non-public organizations), the company’s management and board can choose to have a review done instead of an audit. They might make this decision to save costs, simplify the process, or for other business reasons. However, they must still ensure that their financial statements comply with relevant accounting standards and regulations.

Answer 58

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, the current auditor should review the risk assessment of the opening balances of the financial statements.

Answer 59

MANAGEMENT SPECIALIST- Hired by client to assist entity in preparing the FS

Answer 60

It came in Trupti's exam

Answer 61

Management override

Answer 62

Internal Audit function is part of MONITORING

Answer 63

The control environment component of the internal control integrated framework includes such principles as commitment to competency, accountability, and organizational structure, etc. The risk assessment component of the internal control integrated framework includes such principles as specify objectives, identify/analyze risks, and consider fraud and control changes. The risk assessment component of the COSO framework includes principles associated with management's consideration of the risk of material misstatement, not the assurance that controls continue to operate effectively. The control activities component of the internal control integrated framework includes such principles as deployment of policies and procedures and the selection and development of controls around information technology. The information and communication components of the COSO framework consider those systems that identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives, not the assurance that controls operate effectively. The information and communication component of the internal control integrated framework includes such principles as internal and external communication as well as obtaining and using information

Answer 64

The "tone at the top" represents the culture of an organization in terms of the standards related to controls and conduct that senior management and the board of directors set for an entity. When employees are focused on doing the right thing, when management quickly addresses and resolves issues, and when fairness and honesty prevail in dealings with internal and external people, a positive tone for the organization is established.

Answer 65

General controls are designed to ensure that an organization's control environment is stable and well-managed. Information-processing controls can be automated or manual, and apply to the processing of information and transactions to help ensure transactions occurred, are authorized, and are completely and accurately processed and reported.

Answer 66

Communication should be made within 60 days (FOR NON ISSUER) of the report release date. (14 DAYS FOR ISSUER)

Answer 67

EXTERNAL FACTORS - Business cycles, regulatory factors, industry factors

Answer 68

Respond with financial level response (i.e. increase level of supervision)

Answer 69

Inherent risk * Control risk Assertion - COVERUP

Answer 70

Drafting the audit plan 1. OBJECTIVE - All AR exist 2. ASSERTION - Existence 3. AUDIT PROCEDURE - Confirm(NATURE) 25 (EXTENT) AR as of 12/31/year 1 (TIMING)

Answer 71

1. Used to detect material misstatements to transaction classes, account balances, and disclosures. 2. Includes other audit procedures required by GAAS (i.e. letter of lawyer inquiry) Test of Details - Applied to transaction classes, account balances and disclosures. Consist of audit procedures used to gather evidence to support the account balances as reflected in the financial statements. SUBSTANTIVE ANALYTICAL PROCEDURES 1. Evaluations of Fin Information made by a study of plausible relationships among both Financial and nonfinancial data 2. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor.

Answer 72

1. HUMAN resources 2. Engagement/Client Acceptance and Continuance 3. Leadership Responsibilities 4. Performance of the engagement 5. Monitoring 6. Ethical Requirements

Answer 73

1. Complexity 2. Subjectivity 3. Change 4. Uncertainty 5. Mgt bias or fraud risk 6. Significance 7. Volume or lack of uniformity

Answer 74

computerized and manual environments

Answer 75

Assertion level in the context of auditing refers to the specific representations made by management in the financial statements regarding the accuracy and completeness of the financial information. These assertions are made about individual transactions, account balances, and disclosures in the financial statements. When auditors perform their work, they need to test these assertions to determine whether the financial statements are fairly presented in accordance with the applicable accounting framework (e.g., GAAP or IFRS). These assertions help auditors identify areas where misstatements might occur and guide the audit process. The key assertions typically covered during an audit include: Existence (or Occurrence) Meaning: The items or events actually exist or have occurred. Example: The company’s reported assets, like inventory, actually exist at the balance sheet date. Completeness Meaning: All transactions, balances, and disclosures that should have been included are indeed included. Example: All liabilities are reported and none are left out. Rights and Obligations Meaning: The entity has the legal rights to the reported assets, and it is obligated for the reported liabilities. Example: A company reports ownership of its property and has responsibility for any reported debts. Valuation or Allocation Meaning: The amounts are properly valued and recorded in the correct accounting period. Example: Inventory is valued correctly based on its cost or market value, and no overstatements are made. Presentation and Disclosure Meaning: The financial statements are properly classified, described, and disclosed in accordance with the applicable financial reporting framework. Example: The financial statements clearly present the entity’s activities, and all required disclosures are made, such as contingent liabilities or related-party transactions. Accuracy Meaning: Transactions and events have been recorded at the correct amounts. Example: The sales figures recorded reflect the accurate amount billed to customers. By evaluating these assertions, auditors assess whether the financial statements present a true and fair view of the company's financial performance and position. The assertion level is crucial for auditors to focus their testing on areas of high risk or potential misstatements.

Answer 76

1. CUTOFF - Cutoff A financial statement assertion in the "transactions and events" category indicating that transactions and events have been recorded in the correct accounting period.

Answer 77

All material matters have been adequately disclosed to the AUDITOR

Answer 78

engagement letter - mandatory

Answer 79

Cutoff Bank Statement A bank statement sent directly to the auditor, usually shortly after period end. Cutoff Testing An examination of transactions occurring several days before and several days after year-end, to ensure that they were recorded in the proper accounting period. Defalcation (Misappropriation of Assets) Theft of an entity's assets when the effect of the theft causes the financial statements not to be presented in conformity with GAAP. Walk-Throughs Procedures performed by the auditor around the flow of data from origination to final disposition to obtain an understanding of the system and controls. Working Papers (Audit Documentation) The principal record of procedures performed, evidence obtained, and conclusions reached; also called "workpapers" or "audit documentation." Yellow Book A publication of the U.S. Government Accountability Office (GAO), entitled "Government Auditing Standards," which represents the source of GAGAS.

Answer 80

Procedures to test OPERATING effectiveness: 1. INQUIRIES 2. OBSERVATION 3. INSPECTION 4. REPERFORMANCE Used exclusively for testing operating effectiveness.

Answer 81

E.g. Interim testing period

Answer 82

every third year

Answer 83

1. Test of details - Applied to transaction classes, account balances, and disclosures Consist of audit procedures used to gather evidence to support the account balances as reflected in FS. 2. Substantive Analytical procedures - Evaluations of FI made by a study of plausible relationships among both financial and nonfinancial data. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor.

Answer 84

materiality

Answer 85

Less complex indicators" 1. Fewer business lines 2. More centralized accounting functions 3. Few levels of management

Answer 86

1. Risk assessment Procedures 2. Further Audit procedures - further into 2 categories - A. TEST OF CONTROLS (if applicable) and B. SUBSTANTIVE PROCEDURES (required)

Answer 87

1. Nature refers to the type of procedure that's going to be performed 2. Extent refers to number of items 3. Timing refers to the testing period or testing as of date.

Answer 88

Tolerable Misstatement (Issuer)

Answer 89

1. Inaccuracies in the collection of processing of data 2. Departures from GAAP 3. Omissions 4. Inappropriate selection or application of accounting policies 5. Inappropriate classification, aggregation, or disaggregation of information

Answer 90

1. FACTUAL (about which there are no doubt) 2. JUDGEMENTAL (differences arising from the judgments of mgt, including those concerning recognition, measurement, presentation, and disclosure in the FS(including the selection or application of accounting policies that auditor considers unreasonable or inappropriate) 3. PROJECTED (These are the auditor's best estimate of misstatements identified in audit samples to the entire population from which the samples were drawn.)

Answer 91

The components of audit risk may be assessed either: 1. Quantitatively (e.g. as a %); or 2. Nonquantitatively (e.g. High, medium, low, etc.)

Answer 92

Fraud Triangle 1. Incentives/Pressures - a reason to commit fraud. e.g. excessive pressure for mgt to meet aggressive goals 2. Opportunity - a lack of effective controls. Example -weak controls over cash (no locks on cash register) 3. Rationalization/Attitude - an attempt to justify fraudulent behavior. Example includes: Disregard for authority (i.e. known history of violations of securities law)

Answer 93

Total transactions = Total revenue

Answer 94

Report in Other Matter Paragraph

Answer 95

Examination can be an assertion based examination or a direct examination

Answer 96

1. COMPLETENESS - all account balances, transactions, and disclosures that should have been recorded and included in the FS. 2. CUTOFF- Transactions - Transactions have been recorded in the correct accounting period. 3. VALUATION, ALLOCATION AND ACCURACY - Account balances, transactions and disclosures are recorded and described fairly and measured at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. 4. EXISTENCE AND OCCURRENCE - Account balances exist, and transactions that have been recorded and disclosed have occurred and pertain to the entity. 5. RIGHTS AND OBLIGATIONS - The entity holds or controls the rights to assets and liabilities are the obligations of the entity. Account balances and disclosures. 6. UNDERSTANDIBLITY OF PRESENTATION AND CLASSIFICATION- Transactions have been recorded in the proper accounts and appropriately aggregated or disaggregated. Fin Information is appropriately presented and descibed and disclosures are clearly expressed and understandable in the context of the applicable financial reporting framework.

Answer 97

Inverse relation

Answer 98

Inherent risk is a component of audit risk and not of detection risk. Detection risk is a component of audit risk and not vice versa.

Answer 99

The effect that independent impairments if present will have on the expected form of the accountant's report.

Answer 100

Non issuers = 60 days after report release date, 5 years

Answer 101

1. Evaluate his competence and objectivity 2. Assess the risk of material misstatement with the subject matter 3. Understand and evaluate the external IT auditor's or specialist's work 4. Verify any relationships with the client are appropriate

Answer 102

1. CONTROL baseline - Understand internal controls (I/C) system and develop baseline 2. Change IDENTIFICATION - identify changes in I/C effectiveness through ongoing and/or separate evaluations 3. Change management - Implement I/C Changes are needed. 4. Control revalidation/update Develop new baseline after I/C revisions

Answer 103

IT Is LESS SEVERE than a MATERIAL WEAKNESS.

Answer 104

Auditors cannot/do not express an opinion

Answer 105

CEO, CFO, Controller, Director of internal audit

Answer 106

LAGGING INDICATORS - inventories to sales ratios, prime rate charged by banks

Answer 107

Contraction - Decrease in economic activity, when the economy is contracting

Answer 108

. In every audit, the auditor should obtain a sufficient understanding of the design of relevant controls pertaining to financial reporting in each of the five internal control components.

Answer 109

Computing Corp. violated the preventive control of segregation of duties. To implement this control, organizations identify job role functions that have conflicts of interest or functions that should otherwise not be performed by the same person because that could lead to fraudulent behavior or errors. If Janice is both a security administrator and a programmer, she would have the ability to create an application that circumvents network security protocols, violating the control of segregation of duties.

Answer 110

An auditor is not required to evaluate operating effectiveness as part of understanding the system of internal control. Tests of controls are performed when the auditor's risk assessment is based on the assumption that controls are operating effectively or when substantive procedures alone are insufficient (e.g., when the entity makes extensive use of information technology).

Answer 111

PERSONAL, ORGANIZATIONAL and EXTERNAL

Answer 112

Yellow book

Answer 113

GAO rules (Govt Accountability office)

Answer 114

A risk that a misstatement can go undetected

Answer 115

Training, knowledge and experience

Answer 116

STRUCTURAL THREAT - GAO

Answer 117

risk of material misstatement is low

Answer 118

e.g. assertions/ claims made by another party. examination/forecasts 1. examination 2. reviews 3. agreed upon procedures

Answer 119

COVERED member

Answer 120

Blank confirmations require the customer to input the amount that they owe the company (your audit client). Blank forms will often provide a greater amount of assurance; however, they will often result in lower responses as people are less likely to make the effort to fill them out. Blank confirmations provide the highest level of assurance.

Answer 121

Fraud Triangle

Answer 122

DISCLOSED.

Answer 123

Voucher Packets A group of matched documents related to a particular purchase (i.e., a requisition, purchase order, receiving report, and vendor invoice)

Answer 124

Undue Influence Threat The threat that external influences or pressures will affect an auditor's ability to make independent and objective judgments. Unmodified Opinion - MN An auditor's report for a nonissuer stating that the financial statements are presented fairly in all material respects in accordance with the applicable financial reporting framework. Unqualified Opinion - IQ An auditor's report for an issuer stating that the financial statements are presented fairly in all material respects in accordance with the applicable financial reporting framework. Updated Report A report on previously issued financial statements that takes into consideration information that the accountant has become aware of during the current engagement, and includes any necessary revisions to the original report. Upper (Maximum) Deviation Rate In sampling, the sum of the sample deviation rate and the allowance for sampling risk. User Auditor The auditor of a company that makes use of an outside service organization. Qualified Opinion An auditor's report stating that "except for" the effects of the matter(s) to which the qualification relates, the financial statements are presented fairly, in all material respects. Quality Control System - 5 ELEMENTS A system designed to ensure that services are competently delivered and adequately supervised. A firm's quality control system is composed of five elements of engagement quality: acceptance and continuance of clients and engagements; independence, integrity, and objectivity; monitoring; personnel management; and engagement performance. Questioned Costs Expenditures deemed to be non-allowable, undocumented, or unreasonable for reimbursement under a grant.

Answer 125

add EMPHASIS MATTER para

Answer 126

Other matter PARA

Answer 127

Qualified opinion e.g. GAAP DEPARTURE Does not issue/omit cash flow statement

Answer 128

Recurring transactions after year-end are a usual business occurrence. Related party transactions would most likely be nonrecurring.

Answer 129

To be assured beyond a reasonable doubt would require that the auditor test near or at 100% of the items in the population for a given audit procedure. This is not practical in many cases.

Answer 130

Sampling internal control

Answer 131

Audit Strategy An overall plan for the audit, typically used to develop the more detailed audit plan. Audit Trail Evidence indicative of the sequential flow of accounting operations. Auditing Procedures Tasks performed to accomplish the objectives of the audit. Bank Confirmation An independent bank verification of year-end bank balances; also may provide information regarding loans, contingent liabilities, discounted notes, pledged collateral, and guarantees or security agreements. Bank Reconciliation A schedule that compares the cash balance reported by the bank with the cash balance reported by the client, and explains any differences. Bank Transfer Schedule A schedule that itemizes transfers of cash among banks, including the record date per the client and the transaction date per the bank. Bias Threat The threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective. Bill of Lading A shipping document issued by a carrier evidencing receipt of goods and terms of transport. Blank Confirmation A confirmation in which the recipient is requested to fill in the balance. Capsule Financial Information Unaudited summarized interim information for subsequent periods. Combined Approach An audit approach in which both tests of the operating effectiveness of controls and substantive procedures are used. If controls are operating effectively, less assurance will be required from substantive procedures. Common Size Financial Statements Restated financial statements in which each balance sheet component is expressed as a percentage of total assets, and each income statement component is expressed as a percentage of total revenue. = IS = % of TOTAL REVENUE; BS = % of TOTAL ASSETS Compilation An engagement in which an accountant presents in the form of financial statements information that is the representation of management. Completeness A financial statement assertion appearing in all three assertion categories and indicating that all transactions, events, assets, liabilities, and equity interests that should have been recorded have been recorded, and that all disclosures that should have been included in the financial statements have been included. Compliance Audit An attest engagement under GAAS (and sometimes GAGAS) in which the auditor reports on whether the entity or compliance audit client(s) complied, in all material respects, with the compliance requirements applicable to its programs. Additional Single Audit Act requirements may apply. Component An entity or business activity that prepares financial information that is included in the group financial statements in the audit of a nonissuer. Component Auditor An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit of a nonissuer. A component auditor may be part of the group engagement partner's firm, a network firm, or another firm. Components of Internal Control Interrelated elements of the system of internal control used to achieve an entity's objectives; control components consist of: control environment, risk assessment, information and communication systems, monitoring, and (existing) control activities. Concurring Approval of Issuance Approval of the issuance of the engagement report granted by the engagement quality reviewer under PCAOB standards. A firm cannot give an issuer permission to use the engagement report until concurring approval of issuance has been granted. Condensed Financial Statements Historical financial information that is presented in less detail than a complete set of financial statements, in accordance with an appropriate financial reporting framework. Condensed financial statements may be separately presented as unaudited financial information or may be presented as comparative information. Confidence Level (also called Reliability) In sampling, a measure of how certain the auditor wants to be that his or her results are accurate. Note that the confidence level plus the risk of being ineffective equals 100 percent. Confirmation A direct written response to the auditor from a third party, either in paper form or by electronic or other medium. Consigned Goods Goods belonging to one party that are held for sale by another party; the seller does not pay the owner until the goods have been sold. Consistency A measure of the comparability of financial statements from one year to the next. Contingency An event that may, but is not certain to, occur. A loss contingency that is probable and that can be reasonably estimated should be reflected in the accounts.

Answer 132

Attributes of Risk Four characteristics used in analyzing risk: type, significance, likelihood, and pervasiveness.

Answer 133

spreadsheet, data mart data - structured data

Answer 134

Scatter plots - analyzing relationships

Answer 135

Propotional make up of analysis of category of population

Answer 136

A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques.

Answer 137

. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.

Answer 138

Dollar unit sampling or In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable misstatement, risk of incorrect acceptance (reliability factor), and the recorded amount of the population being sampled.

Answer 139

An other-matter paragraph is used to refer to matters other than those presented or disclosed in the financial statements.

Answer 140

. If substantial doubt remains, a separate section should be added to the auditor's report with the heading "Substantial Doubt About an Entity's Ability to Continue as a Going Concern." If management's plans alleviate the substantial doubt, an emphasis-of-matter may be added (optional). When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and that doubt remains (is not alleviated by management's plans) and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. A separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern," rather than an emphasis-of-matter paragraph, should be added to the auditor's report. This paragraph should include the phrases "substantial doubt" and "going concern." If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the separate going concern section included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included.

Answer 141

Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion.

Answer 142

Risk of incorrect rejection: Deciding from the sample that the balance is materially misstated when it is really correct; affects audit efficiency.

Answer 143

Risk of assessing control risk too high: The risk that the assessed level of control risk is greater than the true risk, which is caused by thinking that the control is less effective and reliable than it really is; affects audit efficiency.

Answer 144

1. Risk of assessing control risk too low (inverse relationship) 2. Tolerable deviation rate (inverse relationship) 3. Expected deviation rate (direct relationship) 4. Population size (not an issue if the population is large)

Answer 145

(The upper deviation rate is the sample deviation rate plus an allowance for sampling risk)

Answer 146

Substantive procedures include both tests of details and substantive analytical procedures. Substantive procedures are required for all relevant assertions related to each significant transaction class, account balance, and disclosure item. An auditor would most likely respond to a heightened assessed risk of material misstatement by using substantive tests of details at period end, when appropriate. Substantive analytical procedures are often used when there is a large volume of predictable transactions and when the risk of material misstatement is low.

Answer 147

If the auditor determines that testing the operating effectiveness of controls would not be efficient, he or she may choose to use only substantive procedures to evaluate specific assertions and risks.

Answer 148

e.g. A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice.

Answer 149

A dual-purpose test is defined as a test of controls that is performed concurrently with a test of details on the same transaction.

Answer 150

Substantive procedures are always be necessary for all assertions relevant to material transaction classes, account balances, and disclosures. Assuming inventory is material, tests of controls alone would not be sufficient.

Answer 151

Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance. Note that inquiry alone is not sufficient as the auditor should use a combination of procedures.

Answer 152

Calculation is used as a substantive test rather than as a test of controls. Confirmation represents a substantive test rather than a test of controls.

Answer 153

. A substantive procedure test the dollar amount of an account, balance, or disclosure. A test of controls is where the auditor tests controls that exist at the client. A combined approach refers to the auditor performing both a test of controls and a substantive procedure.

Answer 154

The auditor most likely would perform tests of controls at period end because it provides greater assurance. Testing at interim is often performed when the risk of material misstatement is low.

Answer 155

If the auditor determines that testing the operating effectiveness of controls would not be efficient, he or she may choose to use only substantive procedures to evaluate specific assertions and risks.

Answer 156

If it would take less time or be more efficient to perform substantive tests than it would to perform tests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronic processing), the auditor would not be likely to test controls.

Answer 157

Substantive auditing procedures provide the audit evidence that an auditor needs in order to opine on the financial statements. Substantive procedures include substantive analytical procedures and tests of details. These types of procedures are performed in a financial statement audit but not in the audit of internal control.

Answer 158

Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance. Note that inquiry alone is not sufficient as the auditor should use a combination of procedures.

Answer 159

Tests of controls are required to support the auditor's assumption that controls are operating effectively. Obtaining an understanding of each of the five components of internal control is required before making an assessment of control risk. The entity's accounting system (part of the information and communication component) and control environment are part of the five components. Considering whether control activities can have a pervasive effect on financial statement assertions is part of the auditor's risk assessment process.

Answer 160

CONTROL/OPERATING EFFECTIVENESS OF OPERATION - Reperformance of a control by the auditor is used to evaluate the effectiveness of the operation of that control. Inquiry, observation, inspection, recalculation, and reperformance are procedures used to test operating effectiveness of controls. SUBSTANTIVE PROCEDURES - Confirmation, verification, and analytical procedures are substantive procedures. Recalculation related to the BALANCE of accounts is a substantive procedure. Recalculation related to a CONTROL would help the auditor obtain evidence of the control's effectiveness.

Answer 161

Analytical procedures do not provide evidence about the operating effectiveness of a control. However, analytical procedures may be used in the testing phase of the audit as a substantive procedure to provide evidence about the dollar balance of an account.

Answer 162

Full employment

Answer 163

High unemployment, high inflation

Answer 164

A characteristic of statistical sampling is it uses the laws of probability to select a sample. A characteristic of statistical sampling is each item in the sample has an equal probability of being selected.

Answer 165

Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size.

Answer 166

In both statistical and nonstatistical sampling, the sample size is determined based on the sampling risk that the auditor is willing to accept based on their professional judgment.

Answer 167

The risk of incorrect acceptance is a sampling risk related to the effectiveness of an audit.

Answer 168

Detection risk is not associated with the efficiency of an audit and is not a sampling risk. Detection risk is the risk that the auditor will not detect a material misstatement that exists in a relevant assertion.

Answer 169

Preliminary judgments about materiality levels might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls. The auditor’s desired level of detection risk might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls.

Answer 170

Consumer price index measures rate of inflation.

Answer 171

Government Accountability Office. Governmental Auditing Standards (the Yellow Book)

Answer 172

For example, the analytical procedure may consist of reviewing changes in account balances from the prior year to the current year using the unadjusted trial balance, and for others, it may be a more detailed analysis of a monthly or quarterly financial statement. Analytical procedures may be done using a variety of tools or techniques, including automated tools, such as a spreadsheet or a more sophisticated form of software used for performing audit data analytics.

Answer 173

During planning, the auditor is specifically required to perform analytical procedures related to revenue in order to identify unusual or unexpected relationships that might indicate material misstatement, including material misstatement due to fraud. The auditor should also take into account analytical procedures performed during interim reviews (if performed).

Answer 174

High level review with an intention of inspection e.g. auditors scanned the repairs account to find unusually large amounts.

Answer 175

$$ amount = SUbstantive procedure

Answer 176

INDIRECT FINANCIAL INTEREST

Answer 177

Lapping A scheme whereby a current receipt of cash (or a check) is stolen. To prevent detection, a subsequent receipt is applied to the previously unrecorded customer account. A lockbox system is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts.Lock Box-A system in which customers send their payments directly to the bank, preventing access by company employees. The use of prenumbered remittance advices is not effective in preventing theft of receipts by employees because it does not prevent employee access to cash receipts. While the performance of monthly bank reconciliations is a good control, it would not be effective in preventing the theft of receipts because it does not prevent employee access to cash receipts. (It might, however, be effective at detecting a theft that has already occurred). Daily deposit of cash receipts is not an effective control for preventing theft of receipts by employees because it does not prevent employee access to cash receipts. Logical Control A control that addresses the authorization for access to computer programs and data files.

Answer 178

Lead Auditor The accounting firm that bears responsibility for issuing the auditor’s report. The lead auditor supervises the work of other auditors involved in the audit of an issuer and determines whether to divide responsibility. Letter of Audit Inquiry A direct letter sent to the client's attorney detailing any pending or threatened litigation matters and requesting the attorney to provide his or her evaluation directly to the independent auditor. Limited Use Report A report that is intended only for specified parties.

Answer 179

IT Auditor Someone possessing specialized knowledge in information technology (IT) participating in the audit. Hypothetical Transaction A transaction not involving the facts or circumstances of a specific entity.

Answer 180

PROHIBITED Contingent fee Contingent fees are prohibited for audits of a client's financial statements. Contingent fees are not allowed for a review engagement of a client's financial statements. Contingent fees are prohibited for an examination of a prospective client's financial information.

Answer 181

Statements on Standards for Accounting and Review Services (SSARS) are applicable for a compilation of a nonissuer. Statements on Auditing Standards (SAS) apply to audit engagements for nonissuers. Statements on Standards for Attestation Engagements (SSAE) provide guidance for attestation engagements for issuers and nonissuers. Generally accepted auditing standards (GAAS) apply to audit engagements for issuers and nonissuers. (SAS provide guidance on GAAS for auditors of nonissuers and the PCAOB provides guidance on GAAS for issuers.)

Answer 182

A compilation of financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS) presents information that is the representation of management in the form of financial statements. A compilation does not provide assurance on the financial statements. A compilation of financial statements is not limited to presenting accounting data that conforms to a special purpose framework. A compilation of financial statements may present accounting data that conforms to frameworks other than special purpose frameworks, such as GAAP. A compilation of financial statements is not limited to presenting unaudited financial statements that omit substantially all required GAAP disclosures. Compilation of financial statements also includes compiling financial statements that present all required GAAP disclosures. A compilation of financial statements is not limited to presenting supplementary information that has been subjected to inquiry and analytical procedures. Supplementary information may or may not be subjected to compilation procedures, and compilation engagements do not require analytical procedures.

Answer 183

SSARS applies to the preparation of financial statements that are presented "alongside" the entity's tax return. Note: SSARS would not apply if the preparation of the financial statements with the tax return were solely for submission to taxing authorities.

Answer 184

The accounting and review services committee is the authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of a nonissuer (i.e., an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities). Choice "A" is incorrect. The Financial Accounting Standards Board (FASB) is responsible for GAAP standards. Choice "B" is incorrect. The General Accounting Office (GAO) is responsible for audit standards under the federal "Single Audit Act." Choice "D" is incorrect. The Auditing Standards Board (ASB) is responsible for auditing standards under GAAS.

Answer 185

Continuing Accountant An accountant with whom the client has an ongoing relationship, as opposed to an accountant hired only to report on the application of accounting principles. Control A policy or procedure that an entity establishes to achieve control objectives. Control Deficiency A weakness that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Control Environment The tone of an organization, including management attitude, participation of those charged with governance, organizational structure, and human resource policies. Control Risk The risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity's system of internal control. Control Risk of Noncompliance The risk that noncompliance with a compliance requirement that could be material will not be prevented or detected on a timely basis by an entity's system of internal control. Controlled Processing - ACTUAL PROCESSING RUN A form of parallel simulation in which the auditor observes an actual processing run and compares the actual results to the expected results based on the auditor's own program. Controlled Reprocessing - ARCHIVED COPY A form of parallel simulation in which the auditor uses an archived copy of the program in question (generally the auditor's control copy) to reprocess transactions. The results are then compared with the results from the normal processing run. Corroborating Evidence Support that gives validity to recorded accounting data. Credit Memo = AR An internal document used to indicate a credit to a particular account, typically accounts receivable.

Answer 186

COMPILATION, REVIEW and AUDIT - Attest engagements

Answer 187

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because the auditor cannot infer that all nonrespondents have verified their account information. Negative confirmations returned do produce information (e.g., errors noted in accounts) that can be statistically quantifiable.

Answer 188

When there are unreturned positive confirmations of accounts receivable, the auditor would first respond by sending second confirmation requests.

Answer 189

he auditor would only increase detection risk in response to a decrease in inherent and/or control risks, which is not the case here. Additionally, confirmation relates to the existence assertion, not the valuation assertion.

Answer 190

Purchase orders should be issued by the purchasing department, not the accounts payable department. Internal control is enhanced if check mailing is performed by the treasury (cash disbursements) department. Mailing disbursement checks and remittance advices should be controlled by the employee who signs the check last. This employee is generally in the treasury department. Approving the vouchers for payment and matching the receiving report, purchase orders, and vendor's invoices are functions of the vouchers payable department. When a mechanical check-signing device is used, there is generally dual control. One person maintains possession of the device itself, and the other controls the signature plates. The person with possession of the device would not mail disbursement checks, since mailing should be done by the last check signer.

Answer 191

The purchasing department is responsible for preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment. Once signed, the check should be mailed to the payee by the check signer or an employee operating under the supervision of the check signer to prevent defalcations of checks. Generally this occurs in the treasurer's department. The check signer should have access to supporting documentation so that it can be reviewed before the check is signed. Under an effective system of internal control, the accounts payable clerk should ensure that supporting documents (invoice, receiving report, and purchase order) are in agreement before the voucher is submitted for payment.. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be resubmitted for payment.

Answer 192

In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.

Answer 193

Allowance for Sampling Risk In sampling, a "cushion" for protection against undetected deviations that is added to the sample deviation rate to arrive at the upper deviation rate.

Answer 194

Analytical Procedures Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.

Answer 195

Attest Engagements An engagement in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, that is the responsibility of another party.

Answer 196

The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank. Choice "A" is incorrect. Purchase commitments are not typically confirmed on an accounts payable confirmation request. Choice "C" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank) and inventory on consignment (confirmed with the consignee) are not confirmed together. Choice "D" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not typically confirmed along with trade accounts receivable.

Answer 197

The SEC has strongly recommended that companies establish audit committees, but does not require this action-NOT MANDATORY by SEC. Choice “A” is incorrect. The use of an audit committee does strengthen the public’s sense of the independence of the external auditor. Choice “B” is incorrect. Large accounting firms strongly support the function of an audit committee. Choice “D” is incorrect. The New York Stock Exchange requires listed companies to have audit committees.

Answer 198

Same CPA firm that audits financials will take care of your assessment of internal control. due to cost benefit analysis

Answer 199

Internal control - main role is to detect, prevent and correct errors/frauds. Internal Monitoring is for MONITORING that internal controls are present and are functioning effectively.

Answer 200

A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected/corrected.

Answer 201

For nonissuers, if an auditor has communicated other deficiencies in a prior period and management has chosen not to correct the deficiencies for cost or other reasons, the auditor need not repeat the communication in the current period.

Answer 202

The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

Answer 203

The auditor should not indicate to management that no significant deficiencies were noted during the audit, as this might cause misinterpretation of the auditor's responsibility in such cases.

Answer 204

Communication of a significant deficiency and material weakness (even though corrected during the audit) is required to be reported in writing to management and those charged with governance by the report release date, with a window extending 60 days beyond the report date being acceptable. Earlier communication is also acceptable and is not required to be in writing; however, this does not negate the requirement for eventual written communication of all significant deficiencies and material weaknesses.

Answer 205

Tests of controls are designed and applied to evaluate the risk of financial statement misstatement, and to determine the nature, timing, and extent of substantive tests to be performed. They are not designed to discover significant deficiencies in internal control.

Answer 206

UNAUDITED - The Statements on Standards for Accounting and Review Services (SSARSs) is the appropriate authoritative literature for unaudited financial statements or information of a nonissuer. ATTESTATION Engagements - The Statements on Standards for Attestation Engagements (SSAEs) is the appropriate authoritative literature for attestation engagements.

Answer 207

PCAOB Standards require Jackson to perform an integrated audit, which includes audits of both the financial statements and the effectiveness of internal control. PCAOB Standards require the same auditor to perform the audit of the financial statements and the audit on the effectiveness of internal control. An audit of internal control is required, regardless of the type of opinion rendered on the financial statements.

Answer 208

Periodic comparison of actual assets with amounts shown in the accounting records is a control activity related to the existence of specific assets. It is not an entity-level control. Risk assessment process controls, biannual distribution of the code of conduct, and period-end financial reporting controls are considered entity-level controls, as they have a pervasive effect on a company’s internal control.

Answer 209

The "top-down approach" used during an audit of internal control over financial reporting begins by understanding the overall risks to internal control over financial reporting at the financial statement level.

Answer 210

An entity-level control exists independently of the audit. Controls over the completeness of deposited cash relates to controls at the account level and NOT ENTITY Level. The evaluation of risk factors is the same for both an audit of the financial statements and an audit of internal control. Confirmation is an audit procedure that is performed during substantive procedures. Operating effectiveness of controls can be tested through inspection, reperformance, or recalculation. OPERATING EFFECTIVENESS = INSPECTION, REPERFORMANCE OR RECALCULATION DESIGN EFFECTIVENESS = Recalculation is NOT Included.

Answer 211

In a financial statement audit, communication of significant deficiencies must be made within 60 days of the report release date, whereas in an audit of internal control, the communication must be made by the report release date. An auditor’s consideration of internal control in a financial statement audit is more limited than that of an auditor engaged to examine the effectiveness of internal control. An opinion on financial statements is over a period of time, and an opinion of internal control is at a point in time. In a financial statement audit, communication of significant deficiencies should include restricted use language, whereas in an audit of internal control, no restriction on the use of the report is required.

Answer 212

NON-ISSUER - COMBINED report on ICFR (Nonissuer) 1. Opinions on the FS and ICFR 2. Basis for opinion 3. MGT Responsibilities for the FS and ICFR 4. Auditor's responsibilities for the audits of the FS and ICFR 5. Definition and inherent limitations of ICFR 6. Report on other legal and regulatory requirements 7. Report on audit of ICFFR 8. Basis for adverse opinion on ICFR (if applicable)