GLEIM MCQs Flashcards
What is an attest engagement?
Attestation Engagements relate to services that practitioners provide beyond those on traditional historical financial statements.When a CPA issues an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party.
What is the auditor’s main responsibility regarding Financial Statements?
The auditor’s responsibility for the financial statements he has audited is CONFINED to the expression of his or her opinion of them.
Who establishes Generally Accepted Auditing Standards?
- Auditing Standards Board (ASB)
2. Public Company Accounting Oversight Board (PCAOB)
What is the Public Company Accounting Oversight Board?
The PCAOB was created by Sarbanes Oxley in 2002 In conjunction with the AICPA and ASB, establishes Auditing Standards by rule auditing, quality control, ethics, and independence.
What is the Auditing Standards Board?
The ASB is the body designated to issue auditing standards, which are in the form of Statements on Auditing Standards (SASs).
What is the purpose of establishing quality control policies and procedures for deciding whether to accept a new client?
- Considering the integrity of the client and risks involved
- The auditor is competent to do the job
- Auditor has necessary capabilities and resources
- Auditor is able to comply with applicable requirements
The purpose of a Financial Statement Audit is to:
Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error
What are the differences between Unconditional and Presumptively Mandatory Responsibilites?
Unconditional Responsibilities- MUST doPresumptively- SHOULD do, exceptions exist
What do the Standards for Accounting and Review Services provide standards for?
Compilations and Reviews…NOT attestation
Which of the following services may an Accountant that is NOT independent provide?
Compilations but NOT reviewsReviews are Attestation Services, which require the accountant to be independent and provide assurance
What do SSAEs cover?
The SSAEs cover attest engagements, including the 11 attestation standards; 1. agreed-upon procedures engagements;2. financial forecasts and projections;3. reporting on pro forma financial information;4. reporting on an entity’s internal control over financial reporting;6. compliance attestation; 7. management’s discussion and analysis.
What is a financial forecast?
A financial forecast consists of prospective financial statements, that is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.
What is pro forma information?
Pro Forma information shows what the significant effects on historical financial information would have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples could be a business combo, disposal of a segment, a change in the form or status of an entity, and a change in capitalization.
What is control risk?
Control risk is the risk that material misstatements that could occur in an assertion included in MD&A will NOT be prevented or detected on a timely basis by the entity’s internal control.
What are personal financial planning engagements?
“Personal financial planning engagements are only those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals.” The CPA is NOT responsible for (1) assisting the client to act on planning decisions, (2) monitoring progress in achieving goals, and (3) updating recommendations and revising planning decisions (PFP 100).
What are potential consulting services that a CPA may perform?
(1) analysis of an accounting system as an advisory service, (2) review of a client’s prepared business plan as a consultation, and (3) preparation of information for obtaining financing as a transaction service. Other possible services are implementation services, staff and other support services, and product services.
Define Assurance Services
The AICPA defines Assurance services as “independent professional services that improve the quality of information, or its context, for decision makers?” The main objective is to provide information that assists in better decision making.
How do assurance services differ from Consulting Services?
- They focus on improving information rather than providing advice.2. They usually involve situation in which one party wants to monitor another rather than the two-party arrangements common in consulting agreements
What is the purpose of ElderCare?
Reporting whether specified objectives are being met by caregivers.The fundamental purpose of ElderCare services is to gather evidence and report to concerned parties (e.g., adult children of an elderly parent) as to whether agreed-upon objectives have been met with regard to care delivery, such as medical, household, and financial services. Related services provided directly to the elderly person or to the other concerned parties may include oversight of investment of funds (but not making an investment of funds), assistance in the choice of caregivers, accounting for the elderly person’s income and expenses, and arranging for care and services, such as transportation, meal delivery, or placement in a retirement facility
What is the purpose of SysTrust?
The objective of SysTrust is an attestation report on Management’s assertion about the reliability of an information system that supports a business or a given activity. The CPA may report directly on the reliability of the system. This assurance service is designed to increase the comfort of management and other stakeholders relative to an information system.
What is the purpose of WebTrust?
attest engagement in which a CPA assesses a client’s commercial Internet site for compliance with principles, such as online privacy, security, processing integrity, availability, and confidentiality
What are the required necessary skills required to provide Elder Care Prime Plus Services?
- Knowledge of geriatric health issues2. Financial Management Skills3. Mediation Techniques
What is the quality control element of human resources?
Establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work
What are the elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures?
- Human Resources2. Monitoring3. Engagement Performance
What are the objectives of Supervision?
Establishing procedures for1. planning engagements 2. maintaining the firm’s standard of quality3. Reviewing documentation of the work performed and reports issued.
What are the audit quality control requirements contained in the SOX Act of 2002?
- The lead audit partner must rotate off the audit every 6 years2. The audit report must be reviewed and approved by a second partner3. The PCAOB will periodically inspect registered CPA firms.
Under PCAOB quality control standards applying to an audit the Engagement Quality Reviewer (EQR) evaluates:
The EQR evaluates the significant judgments made. This involves discussions with the engagement partner and other team members and reviewing whether the documentation supports the conclusions reached and appropriate responses to significant risksThe EQR must be a registered member of public accounting firm
An audit review in AS No. 10, considers whether,
1) the work supports the conclusions and is properly documented, (2) the evidence is sufficient and appropriate to support the auditor’s report,(3) the objectives of the procedures have been achieved.
What is the result of a difference of opinion about the results of an auditing procedure?
(1) conclusions should be documented and implemented,(2) the report should be released only after resolution of the matter. According to AS No. 10, in applying due professional care, each engagement team member has a responsibility to bring to the attention of appropriate persons any disagreements or concerns about accounting and auditing issues that (s)he believes are significant to the statements or the report regardless of how they may have arisen. The PCAOB’s AS No. 3 requires documentation of disagreements among members of the engagement team or with consultants about final conclusions on significant accounting or auditing matters.
When is independence impaired during an Engagement?
When a covered member has a direct or material indirect financial interest in the client.
When the firm and the client have a material cooperative arrangement
When does a nonattest service impair independence?
A Non-Attest service impairs independence if it involves the performance of an appraisal, valuation, or actuarial service using significant assumptions not determined or approved by the client.
What is a covered member?
(1) the traditional firm (the new firm),
(2) its owners,
(3) individuals employed or leased by the new firm, and (4) entities controlled by such persons.
The independence rules also apply in their entirety to
(1) direct superiors of a partner or manager who is a covered member and
(2) entities within the APS subject to significant influence by a direct superior
SEC rules for Audit Impairment vs AICPA Rules
Under the SEC Rules, an independent Auditor may not do any internal bookkeeping. This is used for Public Companies only.
Under the AICPA rules, an auditor may do some internal bookkeeping if it is just inputting Client approved transacations and entries, not changing any classifications or amounts.
When is Independence impaired due to Unpaid Audit Fees?
Audit fees that are long past due take on the characteristics of a loan.
Independence is impaired if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current year’s report date, remain unpaid when the current year’s report is issued.
When is independence impaired due to gifts?
Independence is impaired unless the value of the gift or entertainment from the attest client is clearly insignificant to the recipient(s).
Objectivity is impaired unless the gift or entertainment is reasonable in the circumstances. Integrity is impaired if the gift or entertainment violates (1) member or client policies or (2) laws or regulations.
Which situations would justify departure from an Established GAAP accounting principle?
New Legislation
Evolution of a New Form of Business Transaction
Who may a CPA Partnership disclose audit documentation without the client’s consent?
Audit Docs may be disclosed to another partner of the accounting firm without client’s consent because such info has not been communicated to outsides.
Which of the following is required for a CPA firm to deisgnate itself as “Members of the American Institute of CPAS”?
The Form of Organization and Name Rule states that a firm may not use the quoted deisnation unless of its CPA owners are members of the AICPA.
What does the Commissions and Referral Fees Rule prohibit?
It prohibits a member in public practice from recommending any product or service to a client when the firm performs
- An audit or review of financial statements
- a compilation of a financial statement that is reasonably expected to be used by a third party, if it does not disclose the CPA’s lack of independence
- an examination of prospective financial information for that client
Who must comply with the Code of Professional Conduct when a Member has an interest but does NOT control a tax prep business that is not a member of the AICPA?
Only the Member is subject to the Code if he or she does not Control the business…the entity and other employees/partners of the firm do not have to adhere to the code.
In what situation would a member of the AICPA be prohibited from practicing public accounting in an Alternative Proactice Structure?
If the majority of the firms financial interest’s are owned by NON-CPAS.
Who owns working papers?
The accountant owns the working papers but generally may not disclose them without the clien’ts consent or a court order?
When is recipt of a disclosed comission prohibited?
The Code prohibits contingent fees
(1) for the audit or review of a financial statement,
(2) for a compilation if a third party is reasonably expected to use the financial statement and the report does not mention the member’s lack of independence, (3) for an examination of prospective financial information,
(4) for the preparation of original or amended tax returns or claims for tax refunds. However, contingent fees may be accepted for other services.
Referral fees are allowed if they are disclosed to the client
What the SEC independence regulations?
Audit committees must preapporve the services performed by accountants (permissable nonaudit services and all udit, review, and attest engagements).
Approval must be based on detailed policies and procedures, or be explicit.
What are the Fundamental Principles of the IFAC Code of Ethics for Professional Accountants?
Integrity Objectivity Professional Competence and Due Care Confidentiality Professional Behaviour
What are threats to compliance with the Fund. Principles of the IFAC Code of Ethics?
Self-Interest (such as direct financial interest)
Self-Review (reporting on something they designed)
Advocacy (advocating in litigation)
Familiarity (family member is director)
Intimidation (threats)
What are the main Sarbanes Oxley Provisions?
- Executives must certify the appropriateness of the financial statements
- The act provides criminal penalties for fraud
- Certain nonaudit services may NOT be provided to audit clients
- Requires the rotation of the lead audit partner and the reviewing partner on audits of public clients every 5 years
How did SOX 2002 strengthen auditor independence?
By requiring that management of a public company to select auditors through audit committees. The audit committee is in charge of hiring the auditor to prevent Management from changing auditors to gain acceptance of some practice.
What powers do the PCAOB have in terms of punitive power?
The PCAOB has no injunctive power, but it may institute administrative proceedings.
It may seek disassociation of a person from a registered firm, suspension of the firm’s registration, or a penalty of up to $15 million.
What powers does the PCAOB possess?
Inspect large firms annually (quality control assessment)
Report Violations to the SEC and state authorities
All attestation engagements may be reviewed
(1) registering public accounting firms; (2) overseeing the audit of public companies (issuers) that are subject to the securities laws; (3) establishing or adopting standards on auditing, quality control, ethics, and independence; (4) inspecting audit firms every 3 years (1 year if the firm is large) to (a) examine selected audit and review engagements, (b) evaluate the system of quality, and (c) test audit, supervisory, and quality control procedures; and (5) conducting investigations and disciplinary proceedings involving, and imposing appropriate sanctions upon, registered public accounting firms and associated persons.
To ensure auditor independence from management, issuers follow the practice of:
Having the independent auditor report to an audit committee of outside members of the board of directors.
The SOX Act of 2002 prohibits the following NON Audit Services for a public issuer that is the audit client of a registered CPA firm…
- bookkeeping or other services related to the account records or Financial statements
- design and implementation of financial info systems
- appraisal or valuation services, fairness opinions
- actuarial services
- internal audit outsourcing services
- MGMT functions or HR services
- broker or dealer investment adviser services
- legal services and expert services unrelated to the audit
- any other service that the board determines is impermissable
Tax Services are permissable
Who established the PCAOB?
The SOX Act of 2002 established the PCAOB to oversee the audits of public companies that are subject to SEC laws.
The PCAOB is not an agency of the US Govt and its employees are not deemed to be officers or employees of the federal govt
Audit teams under IFAC are required to independnent of the audit during how long of a period?
The period covered by the financial statments
Before accepting an audit engagement, an auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s…..
- facts that are relevant to the integrity of mgmt
- disagreements with mgmt about acct and audit procedures
- communications to those charged with governance
about fraud and compliance - Communications to mgmt and governance about significant deficiencies and material weaknesses
- the predecessor’s understanding as ot the reason for the change in auditors
What is documented in the engagement letter?
1) Objective and scope of the audit
2) Responsibilities of the auditor and mgmt
3) inherent limitations of the aduit and internal control
4) applicable financial reporting framework
5) expected form and content of audit reports
The written agreement also includes, among other things, that management will give the auditor a letter confirming certain representations made during the audit
Also includes Fees for services & that mgmt is responsible for making all records available
Use of any special consultants like IT consultants
What is the course of action for a Issuer CLient when it disagrees with an Independent Auditor?
- Modify the stmts by expressing in the notes its viewpoint with regard to the significant matter
- Ask the auditor to refer in the auditor’s report to a client note in the stmts that discusses the client point of view
- Engage another independent auditor
Under International Standards on Auditing, a successor auditor would normally become satisfied with opening balances by:
Reviewing the predecessor’s working papers
When is a precondition present in an audit?
A precondition for an audit is mgmt’s agreement that it acknowledges and understands its responsibilities.
These include the preparation and fair presentation of the financial statements in accordance with the applicable framework. If not obtained, the auditor should not accept the engagement.
An internal audit evaluates risks and adequacy and effectiveness of controls regarding:
(1) the reliability and integrity of operational and financial information;
(2) the effectiveness and efficiency of operations;
(3) the safeguarding of assets;
(4) compliance with laws, regulations, and contracts
First-year initial audits when a new Auditor takes over involves the following additional planning considerations:
- communication with predecessor auditor
- Audit Procedures regarding opening balances
- Assignment of firm personnel with appropriate qualifications
- Procedures required by the firm’s system of quality control for initial engagements
What are the elements of an audit plan?
First….Developing an overall audit strategy
Understanding:
1. the size and complexity of the entity
2. The auditors previous experience with the entity
3. its internal control environment
Should also consider:
- characteristics of the engagement and reporting objectives
- Appropriate materiality levels
- areas of high risk of material misstatement
- material client locations and use of component auditors
- whether to seek evidence of the operating effectives of controls
- relevant entity specific industry or financial developments
- Audit Resoruces required
The more detailed audit plan is developed after the formulation of the overall audit strategy
As the acceptable level of detection risk decreases:
An auditor may change
1. Change the type so audit procedures and their combination
2, Change the timing of substantive procedures, such as from an interim date to year end
3. Change the extent of the testing such as by using a larger sample
What is the purpose of the schedule of uncorrected misstatements?
This schedule of uncorrected misstatements identifies for management and the auditor the potential cumulative financial statement effect of misstatements.
What is detection risk?
Detection risk is the risk that procedures performed to reduce audit risk to an acceptably low level will not detect a material misstatement
It relates to the nature, timing, and extent of audit procedures and is therefore the auditor’s risk.
For example, performing an audit procedure at an interim date instead of year-end increases detection risk because of the need to cover the interim period.
a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should
Obtain an understanding the entity and its environment and its internal control by performing RISK ASSESSMENT PROCEDURES.
Risk Assessment Procedures
- inquiries of management and others within the entity
- analytical procedures
- observation and inspection
A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard, which of the following inof sources would the CPA consult?
Practical guidance for accounting and auditing engagements can be found in various nonauthoritative publications.
One example is Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.
What considerations should be assessed with regards to the reliability of Data?
Sources of the Data
The conditions under which the data were gathered
(1) sources within the entity were independent of those who are responsible for the amount being audited,
(2) the data were subjected to audit testing in the current or prior year, and
(3) the data were obtained from independent sources outside the entity or from sources within the entity are more influential than the mode of processing.
Analytical procedures used to form an overall audit conclusion include:
- adequacy of evidence regarding previously indentified unusual or unexpected balances
- unusual or unexpected balances or relationships not previously noted
Which type of accounts tend to be more reliable and yield a higher level of evidence?
Relationships involving income statement accounts tend to be more predictable than relationships only involving only balance sheet accounts because Income statement accounts represent transactions over a period of time.
Also, accounts that involve management discretion like Advertising Expense are usually less predictable
Analytic procedures identify:
(1) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning or conducting the audit and (2) unusual or unexpected balances or relationships not previously detected.
Substantive Procedures
Substantive procedures are designed to detect material misstatements in assertions. They consist of tests of details and substantive analytical procedures
If conditions or circumstance differences adversely from expectations from Analytical Procedures….
This should cause the auditor to supstect that material misstatements may exist
Which analytical procedure suggests the existence of obsolete merchandse?
Decrease in the inventory turnover rate
Discussion Points for Audit Teams Regarding Fraud
- factors that might create teh conditions for fraud or errors
- how andwhere statements might be misstated
- how assets might be misappropriated
- how fraud could be concelead
- how auditors might respond to fraud risks
What re some indications that Management might Intentionally manipulate financial stmts?
- Management comp i sbased on unduly aggressive financial goals
- excess interest in increasing stock price or earning trends through aggressive accounting practices
- Mangers have made commitments to analysts or other users unrealistic forecasts
- inappropriate means minimizing taxable arnings have been used
- Domination of the decision process by one individual or a small group is a fraud risk factor
What are the 3 conditions that create an evnironment for fraud?
- incentives or pressures that give managers or employees the motive to commit fraud
2/ Opportunity such as ineffective controls or the ability to override controls - an ability to rationalize the commision of fraud
When should an auditor withdraw from an engagement?
The auditor could express a modified or adverse opinion
OR withdraw from the engagement if:
If the alleged noncompliance has a material effect on the financial statements
or
the client does not take the remedial action that the auditor considers necessary
When a Issuer refuses to take any action due to a fraud because they deem it immaterial….the AQuditor should reconsider…
The degree of reliability of the Mgmt Representation Letter
If specific information concerning noncompliance with laws and regulations comes to the auditor’s attention,
Then the auditor should apply audit procedures specifically directed to ascertaining whether an act of noncompliance has occurred.
Relevant audit evidence that will help a Successor auditor do an initial audit?
(1) the most recent audited statements,
(2) the predecessor’s report on them,
(3) the results of inquiry of the predecessor,
(4) a review of the predecessor’s audit documentation (AU-C 510).
Is it acceptable to carry out audit work prior to the balance sheet date?
Yes…much of the audit planning, including obtaining a sufficient understanding of internal control, assessing control risk, and the application of substantive tests to transactions can be conducted prior to the balance sheet date.
What is the purpose of Risk Assessment procedures?
Performed to obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement (RMMs) at the following levels:
- the financial stmts as a whole
- relevant assertions.
Risk assessment procedures include
- inquiries of management and others within the entity
- analytical procedures
- observation and inspection
What are the 3 classifications of Misstatements?
- factual
- judgmental
- projected
How is materiality determined for the financial statements as a whole?
The entity’s year to date financial results and position
Use of benchmarks as starting points,
ex…
categories of reported income
total equity
pre tax profit from continuing operations
net asset value
Materiality is a matter of….
Professional Judgement
about whether misstatements could reasonably influence the economic decisions of users as a group, given their common informational needs
Detection Risk
Detection risk is the risk that the procedures performed to reduce adult risk to an acceptably low level will NOT detect a misstatement that exists and could be materially individually or combined.
Set by the auditor…and can be changed. Inherent and Control risk
Control Risk and Inherent Risk share what in common?
They exist independently of the financial statement audit.
Detection Risk does NOT.
The auditor assesses the risks of material misstatement because they
Affect the level of detection risk that the auditor may accept.
Control and inherent risk are the components of the risk of RMM…the auditor determines the appropriate level of detection rs
Define Inherent Risk
Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or combined with other misstatement
What is done during a second or wrap-up audit review?
Analytical procedures should be used to assist the auditor to form an overall conclusion. The purpose of those procedures is to determine whether the statements are consistent with the auditor’s understanding of the entity
Analytical Procedures…
Determine whether the financial statements are consistent with the auditor’s understanding.
Analytical procedures used to form an overall conclusion should ordinarily include reading the financial statements and considering
(1) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning or conducting the audit, and
(2) unusual or unexpected balances or relationships not previously detected
When and who must an Auditor disclose a possible fraud too?
Ordinarily not part of the auditor’s job to report frauds to other parties other than Client’s senior mgmt
Exceptions:
- To the SEC when the client reports an auditor change
- To a successor auditor when the successor makes appropriate inquiries
- To a government funding agency from which the client receives financial assistance
Misstatements that result from fraud or error could be…
- an inaccuracy in obtaining or processing data on which the financial stmts are based
- an omission of an amount or disclosure
- a disclosure not presented in accordance with the applicable framework
- an incorrect accounting estimate arising from overlooking or clearly misinterpreting facts
- mgmt judgements about accounting estimates that the auditor considers unreasonable
- management’s selection or application of accounting policies that the auditor considers inappropriate
Auditor’s responsibility to detect fraud or error….
The auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.
1) understanding fraud, (2) discussing fraud risks with members of the engagement team, (3) obtaining information needed to identify fraud risks, (4) identifying those risks, (5) assessing fraud risks, (6) responding to the assessments, (7) evaluating evidence at the end of the audit, (8) making appropriate communications about fraud, and (9) documenting the consideration
Fraudulent financial reporting is most difficult to detect when committed by….
The level of involvement often influences the auditor’s ability to detect….
Higher level officers like Controllers can override controls with ease
Response to fraud by the Auditor make take three forms of critical evaluation:
- those having an overall effect on the audit
- those involving changes in nature, timing and extent of audit procedures performed in response to specific risks
- those that further address management override
If sufficient evidence cannot be collected to determine whether certain client activities are illegal or fraudulent…the audit must issue
the scope limitation requires a qualified opinion or a disclaimer, although a client-imposed scope limitation ordinarily results in a disclaimer.
Responsibilities of the Auditor
Reporting on the financial statements is the sole responsibility of the Independent Auditor, it is NOT shared with Internal Auditors
(1) assessments of RMMs, (2) materiality of misstatements, (3) sufficiency of tests performed, (4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor’s report always should be those of the auditor.
How should an Independent CPA assess the competency of an Internal Auditor?
- educational level and professional experience
- professional certification and CE
- audit policies, programs, and procedures
- supervision and review of internal auditor’s activities
- practices regarding assignments
- quality of documentation, reports and recommendations
- evaluation of the internal auditors performance
When is objectivity promoted for Internal Auditor’s?
- when internal auditor’s report to those charged with GOVERNANCE rather than management
- are free of any conflicting responsibilities
- work without constraints
- are members of professional orgs that obligate them to be objective
How is Internal Auditing different from other monitoring Controls?
Internal Audit uses a systematic and disciplined approach to planning, performing, supervising, reviewing, and documenting internal audit activities
Why should the independent auditor understand the internal audit function as it relates to internal control?
An internal audit function is one of many factors to be considered in determining the nature, timing, and extent of audit procedures
When should an auditor rely on the work of the internal audit function?
The auditor is most likely to rely on the work of the internal audit function when little or no judgment is required to evaluate audit evidence.
The more judgement is involved in planning and performing audit procedures or evaluating evidence, the higher the assessed risk of material misstatement at the assertion level.
The less the internal auditor’s organizational status and relevant policies and procedures support their objectivity and the lower their competence
An auditor refers to the findings of an auditor’s external specialist in the auditor’s report when…
The auditor should refer to a specialist when the auditor issues a modified opinion…
(qualified, adverse or disclaimer)
When the auditor issues a clean opinion
they should not refer to the specialist
The reference should also state that it does not reduce the auditor’s responsibility
What is the purpose of a management’s specialist?
To assist the client in preparing the financial statements
The management’s specialist is an individual or org. that possesses expertise in a field other than accounting or auditing.
The agreement between an Auditor and a Specialist should include:
The agreement is included in the engagement letter
- the nature, the objectives and scope of the work
- the roles of the auditor and the specialist
- the nature, timing, and extent of communications between the auditor and specialist
- the need for the specialist to observe confidentiality requirements
The agreement also includes confidentiality provisions of the relevant ethical requirements that apply to the auditor and also to the specialist
An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because:
The business structure may be deliberately designed to obscure related party transactions
What should an auditor do after it has identified a significant related party transaction outside the entity’s normal course of business?
Evaluate the business purpose of the transaction.
(1) the business purpose (or lack of a business purpose) implies that the transaction’s intent was fraudulent, (2) the terms are consistent with management’s explanations, and (3) the accounting and disclosure are appropriate
Which procedures would help an auditor identify related party transactions?
Reviewing confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties
An auditor most likely modifies an opinion regarding related party transactions when….
The stmts fail to substantiate the assertion that related party transactions were conducted on terms equivalent to those that prevail in arm’s-length transactions
What are the most common related party transactions?
(1) exchanging property for similar property in a nonmonetary transaction,
(2) borrowing or lending at rates significantly above or below market rates,
(3) selling realty at a price materially different from its appraised value,
(4) making loans with no scheduled repayment terms
What should an auditor do first to determine the existence of related parties?
Inquire about the existence of related parties from MGMT
regarding. ..
1. the identity of the entity’s related parties, including changes from the prior period
2. the relationships of the entity with those parties
3. the types and purposes of transactions with them
How does an auditor identify and assess the risks of material misstatement for estimates?
Obtain an understanding of how MGMT developed its estimates
- the relevant requirements of the applicable framework
- how mgmt identifies factors that create a new for estimates
- how mgmt makes estimates and the date on which they are based
Auditors evaluation of the reasonableness of accounting estimates…
Considers that mgmt bases it judgement on both subjective and objective factors
In evaluating the reasonableness of an accounting estimate, the auditor should obtain an understanding of how it was developed. The auditor then may use one of several approaches, or a combination, to evaluate reasonableness.
When auditing fair value estimates and disclosures, the auditor most likely should:
Use the understanding of the audited entity’s process for determining fair value estimates to assess the risks of material misstatement
When testing the entity’s significant assumptions for fair value estimates, the auditor should
Evaluate whether the assumptions individually and as a whole form a reasonable basis for the fair value estimates
When an omitted procedure exists, the auditor need NOT perform this omitted procedure if:
The results of alternative procedures that were performed compensate for the omission.
Independence is not impaired when a member leases property in the following fashion…
- it is an operating lease
- the terms and conditions of the agreement are similiar to other leases
- all amounts are paid in accordance with the lease
What action should be taken when a CPA is asked to audit the financial statements of a client whose fiscal year has ended?
Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion
As the acceptable level of audit risk decreases, an auditor may
Modify the audit plan to obtain greater assurance from substantive testing by:
- selecting a more effective audit procedure
- applying procedures nearer to year end
- Increasing the extent of particular tests
Financial Expert on the Audit Comittee must meet the following expectations
A financial expert must
(1) understand GAAP and financial statements;
(2) be able to assess the general application of GAAP in accounting for estimates, accruals, and reserves;
(3) have experience with financial statements with a breadth and level of complexity comparable to those of the registrant;
(4) understand internal controls and the procedures for financial reporting; and
(5) understand audit committee functions.
Working Papers created by the CPA…
Are property of the CPA, not the client…and do not have to be returned.
Records given to the CPA by the client must be returned however…
Analytical Procedures are most appropriate when testing which type of transaction?
Income Statement Accounts
Income Stmt Accounts tend to be more predictable than relationships involving only balance sheet accounts because they represent transactions over a period of time, but balance sheet accounts represent an amount at a moment in time.
A large number of bearer bonds on hand could mean…
Large purchases of bank checks or bonds payable to bearer are often an indication of illegal or suspicious activity.
Bearer instruments are negotiable by delivery alone, that is, without a signature. They are equivalent to cash. Thus, the holder has anonymity. They can be used to evade taxes or conceal business transactions.
Who should immaterial and material fraud be reported to?
Immaterial Fraud- to the appropriate level of management
Material Fraud- directly to those charged with Governance
Under the Private Securities Litigation Reform Act of 1995…
Accountants must report noncompliance to be the appropriate level of management and the audit committee unless it is clearly inconsequential. If senior management and the board fail to take action on reported material noncompliance and this failure will result in a departure from a standard report or resignation from the audit, the accounts should report their conclusions to the board immediately.
The board must report to he SEC within 1 business day
