GLEIM MCQs Flashcards
1
Q
What is an attest engagement?
A
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.
2
Q
What is the auditor’s main responsibility regarding Financial Statements?
A
The auditor’s responsibility for the financial statements he has audited is CONFINED to the expression of his or her opinion of them.
3
Q
Who establishes Generally Accepted Auditing Standards?
A
- Auditing Standards Board (ASB)
2. Public Company Accounting Oversight Board (PCAOB)
4
Q
What is the Public Company Accounting Oversight Board?
A
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.
5
Q
What is the Auditing Standards Board?
A
The ASB is the body designated to issue auditing standards, which are in the form of Statements on Auditing Standards (SASs).
6
Q
What is the purpose of establishing quality control policies and procedures for deciding whether to accept a new client?
A
- 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
7
Q
The purpose of a Financial Statement Audit is to:
A
Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error
8
Q
What are the differences between Unconditional and Presumptively Mandatory Responsibilites?
A
Unconditional Responsibilities- MUST doPresumptively- SHOULD do, exceptions exist
9
Q
What do the Standards for Accounting and Review Services provide standards for?
A
Compilations and Reviews…NOT attestation
10
Q
Which of the following services may an Accountant that is NOT independent provide?
A
Compilations but NOT reviewsReviews are Attestation Services, which require the accountant to be independent and provide assurance
11
Q
What do SSAEs cover?
A
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.
12
Q
What is a financial forecast?
A
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.
13
Q
What is pro forma information?
A
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.
14
Q
What is control risk?
A
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.
15
Q
What are personal financial planning engagements?
A
“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).
16
Q
What are potential consulting services that a CPA may perform?
A
(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.
17
Q
Define Assurance Services
A
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.
18
Q
How do assurance services differ from Consulting Services?
A
- 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
19
Q
What is the purpose of ElderCare?
A
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
20
Q
What is the purpose of SysTrust?
A
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.
21
Q
What is the purpose of WebTrust?
A
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
22
Q
What are the required necessary skills required to provide Elder Care Prime Plus Services?
A
- Knowledge of geriatric health issues2. Financial Management Skills3. Mediation Techniques
23
Q
What is the quality control element of human resources?
A
Establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work
24
Q
What are the elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures?
A
- Human Resources2. Monitoring3. Engagement Performance
25
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.
26
What are the audit quality control requirements contained in the SOX Act of 2002?
1. 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.
27
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
28
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.
29
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.
30
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
31
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.
32
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
33
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.
34
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.
35
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.
36
Which situations would justify departure from an Established GAAP accounting principle?
New Legislation
| Evolution of a New Form of Business Transaction
37
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.
38
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.
39
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
1. An audit or review of financial statements
2. 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
3. an examination of prospective financial information for that client
40
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.
41
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.
42
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?
43
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
44
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.
45
What are the Fundamental Principles of the IFAC Code of Ethics for Professional Accountants?
```
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
```
46
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)
47
What are the main Sarbanes Oxley Provisions?
1. Executives must certify the appropriateness of the financial statements
2. The act provides criminal penalties for fraud
3. Certain nonaudit services may NOT be provided to audit clients
4. Requires the rotation of the lead audit partner and the reviewing partner on audits of public clients every 5 years
48
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.
49
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.
50
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.
51
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.
52
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...
1. bookkeeping or other services related to the account records or Financial statements
2. design and implementation of financial info systems
3. appraisal or valuation services, fairness opinions
4. actuarial services
5. internal audit outsourcing services
6. MGMT functions or HR services
7. broker or dealer investment adviser services
8. legal services and expert services unrelated to the audit
9. any other service that the board determines is impermissable
Tax Services are permissable
53
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
54
Audit teams under IFAC are required to independnent of the audit during how long of a period?
The period covered by the financial statments
55
Before accepting an audit engagement, an auditor should make specific inquiries of the predecessor auditor regarding the predecessor's.....
1. facts that are relevant to the integrity of mgmt
2. disagreements with mgmt about acct and audit procedures
3. communications to those charged with governance
about fraud and compliance
4. Communications to mgmt and governance about significant deficiencies and material weaknesses
5. the predecessor's understanding as ot the reason for the change in auditors
56
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
57
What is the course of action for a Issuer CLient when it disagrees with an Independent Auditor?
1. Modify the stmts by expressing in the notes its viewpoint with regard to the significant matter
2. Ask the auditor to refer in the auditor's report to a client note in the stmts that discusses the client point of view
3. Engage another independent auditor
58
Under International Standards on Auditing, a successor auditor would normally become satisfied with opening balances by:
Reviewing the predecessor's working papers
59
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.
60
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
61
First-year initial audits when a new Auditor takes over involves the following additional planning considerations:
1. communication with predecessor auditor
2. Audit Procedures regarding opening balances
3. Assignment of firm personnel with appropriate qualifications
4. Procedures required by the firm's system of quality control for initial engagements
62
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:
1. characteristics of the engagement and reporting objectives
2. Appropriate materiality levels
3. areas of high risk of material misstatement
4. material client locations and use of component auditors
5. whether to seek evidence of the operating effectives of controls
6. relevant entity specific industry or financial developments
7. Audit Resoruces required
The more detailed audit plan is developed after the formulation of the overall audit strategy
63
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
64
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.
65
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.
66
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.
67
Risk Assessment Procedures
1. inquiries of management and others within the entity
2. analytical procedures
3. observation and inspection
68
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.
69
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.
70
Analytical procedures used to form an overall audit conclusion include:
1. adequacy of evidence regarding previously indentified unusual or unexpected balances
2. unusual or unexpected balances or relationships not previously noted
71
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
72
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.
73
Substantive Procedures
Substantive procedures are designed to detect material misstatements in assertions. They consist of tests of details and substantive analytical procedures
74
If conditions or circumstance differences adversely from expectations from Analytical Procedures....
This should cause the auditor to supstect that material misstatements may exist
75
Which analytical procedure suggests the existence of obsolete merchandse?
Decrease in the inventory turnover rate
76
Discussion Points for Audit Teams Regarding Fraud
1. factors that might create teh conditions for fraud or errors
2. how andwhere statements might be misstated
3. how assets might be misappropriated
4. how fraud could be concelead
5. how auditors might respond to fraud risks
77
What re some indications that Management might Intentionally manipulate financial stmts?
1. Management comp i sbased on unduly aggressive financial goals
2. excess interest in increasing stock price or earning trends through aggressive accounting practices
3. Mangers have made commitments to analysts or other users unrealistic forecasts
4. inappropriate means minimizing taxable arnings have been used
5. Domination of the decision process by one individual or a small group is a fraud risk factor
78
What are the 3 conditions that create an evnironment for fraud?
1. 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
3. an ability to rationalize the commision of fraud
79
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
80
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
81
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.
82
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).
83
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.
84
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:
1. the financial stmts as a whole
2. relevant assertions.
Risk assessment procedures include
1. inquiries of management and others within the entity
2. analytical procedures
3. observation and inspection
85
What are the 3 classifications of Misstatements?
1. factual
2. judgmental
3. projected
86
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
87
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
88
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
89
Control Risk and Inherent Risk share what in common?
They exist independently of the financial statement audit.
Detection Risk does NOT.
90
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
91
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
92
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
93
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
94
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:
1. To the SEC when the client reports an auditor change
2. To a successor auditor when the successor makes appropriate inquiries
3. To a government funding agency from which the client receives financial assistance
95
Misstatements that result from fraud or error could be...
1. an inaccuracy in obtaining or processing data on which the financial stmts are based
2. an omission of an amount or disclosure
3. a disclosure not presented in accordance with the applicable framework
4. an incorrect accounting estimate arising from overlooking or clearly misinterpreting facts
5. mgmt judgements about accounting estimates that the auditor considers unreasonable
6. management's selection or application of accounting policies that the auditor considers inappropriate
96
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
97
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
98
Response to fraud by the Auditor make take three forms of critical evaluation:
1. those having an overall effect on the audit
2. those involving changes in nature, timing and extent of audit procedures performed in response to specific risks
3. those that further address management override
99
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.
100
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.
101
How should an Independent CPA assess the competency of an Internal Auditor?
1. educational level and professional experience
2. professional certification and CE
3. audit policies, programs, and procedures
4. supervision and review of internal auditor's activities
5. practices regarding assignments
6. quality of documentation, reports and recommendations
7. evaluation of the internal auditors performance
102
When is objectivity promoted for Internal Auditor's?
1. when internal auditor's report to those charged with GOVERNANCE rather than management
2. are free of any conflicting responsibilities
3. work without constraints
4. are members of professional orgs that obligate them to be objective
103
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
104
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
105
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
106
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
107
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.
108
The agreement between an Auditor and a Specialist should include:
The agreement is included in the engagement letter
1. the nature, the objectives and scope of the work
2. the roles of the auditor and the specialist
3. the nature, timing, and extent of communications between the auditor and specialist
4. 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
109
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
110
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
111
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
112
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
113
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
114
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
115
How does an auditor identify and assess the risks of material misstatement for estimates?
Obtain an understanding of how MGMT developed its estimates
1. the relevant requirements of the applicable framework
2. how mgmt identifies factors that create a new for estimates
3. how mgmt makes estimates and the date on which they are based
116
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.
117
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
118
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
119
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.
120
Independence is not impaired when a member leases property in the following fashion...
1. it is an operating lease
2. the terms and conditions of the agreement are similiar to other leases
3. all amounts are paid in accordance with the lease
121
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
122
As the acceptable level of audit risk decreases, an auditor may
Modify the audit plan to obtain greater assurance from substantive testing by:
1. selecting a more effective audit procedure
2. applying procedures nearer to year end
3. Increasing the extent of particular tests
123
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.
124
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...
125
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.
126
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.
127
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
128
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
129
According to the SEC, members of an issuer's audit committee may not...
Accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board...
Each member of the audit committee must be a director of the issuer and otherwise be independent. Independence means (1) not receiving, other than for service on the board, any consulting, advisory, or other compensatory fee from the issuer (registrant) and (2) not being an affiliate of the issuer or any of its subsidiaries
130
An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it:
Changes the company's operating results from a new loss to net income
131
The objective of analytical procedures performed as risk assessment procedures is to
Enhance the auditor's understanding of the client's business...
1. improve the understanding of the client's business and significant transactions,
2. identify unsusual transactions or events and amounts, ratios, and trends that might indicate matters iwth audit ramifications
132
Types of known Misstatements
1. misapplication of accounting principles
2. inaccuracy in processing data
3. difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles
133
Which of the factors most likely would lead a CPA to reject a potential audit engagement?
It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial stmts
134
What are some examples of info raising questions about possible non compliance with laws and regs?
1. unauthorized or improperly recorded transactions,
2. a governmental investigation, violations reported by regulators,
3. large payments for unspecified services to consultants, excessive commissions or fees,
4. unusual cash payments or checks payable to cash,
5. unexplained payments to government officials or employees,
6. failure to file tax returns or pay governmental duties or similar fees.
135
The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the
Accounting and Review Services Committee
- senior technical committee authorized to issue pronounces in connection with the unaudited financial stmts or other unaudited financial info of a non issuer
136
Errors caused by Transactions in a batch computer system may NOT be detected immediately because:
There are time delays in a processing transactions in a batch system
137
Hot Site
A hot site is a service facility that is fully operational and is promptly available in the case of a power outage or disaster.
138
LAN NETWORKS
Local area networks are privately owned networks that provide high speed communication among nodes. They are usually restricted to limited areas, such as a particular floor of an office building
(WAN) Wide area networks provide lower speed communication because they are spread out among larger areas than LANs.
139
Check digit verification
Check digit verification is used to identify incorrect identification numbers. The digit is generated by applying an algorithm to the ID number. During input, the check digit is recomputed by applying the same algorithm to the entered ID number.
140
Edit Checks
test transactions prior to processing. Rejected transactions should be recorded in a file for evaluation, correction, and resubmission. Edit checks are applied to the sales transactions to test for completeness, reasonableness, validity, and other related issues prior to acceptance.
141
Preformatting...online data entry control
To avoid data entry errors in online systems, a preformatted screen approach may be used. It is a screen prompting approach that involves the display on a monitor of a set of boxes for entry of specified data items
142
With regards to Noncompliance with Laws
An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements.
143
Lines of Reporting Suitability
Lines of reporting can determine the ability of management or other employees to circumvent implemented controls
Reporting lines are part of the organization structure and affect the auditor's assessment of the RMMS
144
Independence is NOT impaired if:
The auditor's role is advisory
145
What management control method would most likely improvement MGMT's ability to supervise?
Establishing budgets and forecasts to identify variances from expectations
Performance reviews involve comparison of actual performance with budgets, forecasts, or prior performance. Identifying variances alerts management to the need for investigative and corrective actions. Such actions are necessary for effective supervision.
146
Positive Forms of Confirmation Requests
A positive confirmation request asks for a reply in all cases.
It may ask the confirming parties to state whether they agree with the information given or to provide information.
Positive confirmation requests obtain evidence only when responses are received.
147
Risk Assessment procedures to obtain audit evidence about the design and implementation of relevant controls may include:
1. inquiry of entity of personnel
2. observing the application of specific controls
3. inspecting documents and reports
4. tracing transactions
148
Contingent Fees
| dependent on finding a result
a member in public CPA practice cannot perform certain services fora contingent fee without impairing independence. These services include:
1. audits or reviews
2. an examination of prospective financial info
3. certain tax services
4. a compilation used by a third party that does NOT disclose the lack of independence in the report
149
Loans that impair independence between Auditor and Client:
Student Loans
Home Mortgage Loans
Personal Loans
***A secured auto loan is an EXCEPTION
150
Knowing Misrepresentations of Facts
Knowing Misrepsentations of facts include
1. knowingly making materially false and misleading entries in records
2. failing to make corrections in materially false or misleading stmts or records when the member has such authority
3. signing a document with materially false and misleading information
151
Assessing Internal Auditor Compentencies
(1) education and experience;
(2) professional certification and CPE;
(3) audit policies, programs, and procedures;
(4) practices regarding assignment of internal auditors; (5) supervision and review of their activities;
(6) quality of audit documentation, reports, and recommendations; and
(7) evaluation of internal auditors’ performance. An internal auditor’s access to information is related to objectivity
152
What does the CPA Performance Review do?
An evaluation of whether an entity has reliable measures of performance beyond the traditional financial statements.
CPA Performance Review evaluates whether an entity's performance measurement system contains relevant and reliable measures for assessing the degree to which the entity's goals and objects are achiveed.
It attempts to provide a more balanced scorecard than just the traditional financial statements.
153
Analytical Procedures used as risk assessment procedures should focus on:
Enhancing the auditor's understanding of the transactions and events that have occurred since the last audit
154
Financial Expert on Audit Committee Attributes and Experience
(1) education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor, or experience in one or more positions that involve the performance of similar functions;
(2) experience actively supervising such a person;
(3) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or
(4) other relevant experience
155
If a client has failed to comply with a law that has not been properly account for or disclose, the auditor should withdraw from the engagement if:
The effect of the non compliance on the financial stmts is material and the client refuses to accept the auditor's report as modified for the non compliance
156
Procedures for identifying related party transcations
1. minutes of the meetings of the board
2. filings with regulators
3. conflict of interest stmts
4. transcations with major customers suppliers lenders and borrowers
5. accounting records for large, unusual, non recurring transactions or balances
6. invoices of law firms
7. confirmations of compensating balance arrangements
157
Audit Risk
Audit Risk is the risk that the auditor expresses an inappropriate audit opinion when the financial stmts are materially misstated.
158
Which specific authorizations would be of concern to an auditor?
1. Granting of Credit
2. Shipment of Goods
3. Determination of discounts
159
The relevant accounts considered in the sales-receivables-cash receipts (revenue cycle)
1. cash
2. trade receivables
3. other receivables
4. allowance for bad debts
5. sales
6. sales returns
7. bad debt expense
160
A CPA member in public practice should be independent in fact and appearance when providing...
Audit and Other Attestation Services
161
Which of the following internal control activities most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared with daily postings to the AR ledger
162
Compatible duties of a Cashier
Recieves remittances from the mail room
| Prepares Daily Deposit Slip
163
What is the most effective way to conceal subsequent theft of cash receipts?
Understating the sales journal
The accounts will be incomplete but balanced and procedures applied to the accounting records will not detect the defalcation
164
Observation as a Risk Assessment Procedure
Performed to obtain an understanding of the entity and its environment, including its controls. It is also a test of controls.
165
What is effective controls upon receipt of cash?
Effective control of cash requires that receipts be recorded promptly.
For mail receipts, a listing a remittance advices by an employee not performing incompatible functions is a standard control procedure
166
What is the best protection for a company that wishes to prevent the lapping of trade accounts receivables?
Have customers send payments directly to the company's depository bank
167
To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?
To conceal a theft of customer payments on account, a bookkeeper debits sales returns and credits accounts receivable
168
Internal Control Objectives of the Revenue Cycle
Revenue cycle transactions are properly executed
Appropriate goods are ordered so that sales can be made
transactions relating to revenue are properly recorded
Custody over assets resulting from the revenue cycle is properly maintained
169
What is the most effective control in providing assurance that recorded purchases are free of material errors?
Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers
This procedure provides assurance that a valid transaction has occurred and that the parties have agree on the terms, such as price and quantity
170
Who reports directly to the CFO?
The Credit Manager
| Credit Manager should be responsible to one who has no vested interest in the granting of credit
171
Before sending or receiving EDI messages, a company should
Execute a trading partner agreement with each of its customers and suppliers...
172
The Sales Department should be responsible for which of the following activities:
Approval of the return of defective merchandise
173
To safeguard the assets through effective internal control, accounts receivable that are written off should be transferred to
Written off AR should be transferred to a separate ledger, this ledger should be maintained by the accounting department and periodically reviewed to determine if any of the accounts have become collectible
174
What is parallel simulation?
Auditing technique that processes client input data on a controlled, Auditor developed program under the auditor's control to test controls in the computer system
This is used to is to process actual client data and compare the outputs and exceptions report with those of the client’s application program.
An Integrated Test Facility (ITF), enters dummy transactions into the client's program
175
The total used as batch control to verify the accuracy of posting cash remittances:
Cash deposits plus discounts taken by customers = total reduction in AR for the batch processed
The control total for the posting of accounts receivable should be the total amount of reductions in accounts receivable.
176
The erroneous entry of a customer's name into the field that should contain the amount of the sale is detected by a:
Field Check.
This control identifies an alphabetic character in af ield that should contain only numeric characters
177
A validity check...
Can be used to determine the consistency of one field with another
178
In billing situations, which detective control methods can prevent billing errors...
Line Control Counts, which are compared to predetermined line control counts for each documet to detect missing lines
179
In an audit of financial stmts, an auditor's primary consideration regarding an internal control is:
Whether the control affects MGMT's financial stmt assertions
Tests of controls are designed to evalute the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level.
1. When the auditor's assessment of the RMMS at the revelant assertion level includes an expectation of the operating effectiveness of controls
2. Or substantive procedures alone do not provide sufficient appropriate evidence at the relevant assertion level
180
Assuming management responsibilities impair independence, but providing advice, research, and recommendations does not.
Assuming management responsibilities impair independence, but providing advice, research, and recommendations does not.
181
Decision Tables vs Program Flow Charts
A decision table identifies the contingencies considered in the description of a problem and appropriate actions to be take relevant to those CONDITIONS and ACTIONS
Flowcharts present the sequence of the actions described, A decision table does NOT present sequence
182
Audit plans should be designed so that
The auditor is responsible for collecting sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the opinion.
Audit plans describe the steps involved in that process. Thus the evidence should support the auditor's conclusions
183
Assertions about Account Balances
1. rights and obligations
2. existence
3. completeness
4. valuation and allocation
184
Analytical Procedures used in planning an audit should focus on:
Enhancing the auditor's understanding of the client's business
This understanding addresses the following:
(1) relevant external factors (including the financial reporting framework);
(2) the nature of the entity (operations, governance, investments, structure, and financing to understand transaction classes, balances, and disclosures);
(3) accounting policies;
(4) objectives, strategies, and business risks; and
(5) measurement and review of financial performance
185
“Our audit is subject to the risk that errors, fraud, or illegal acts, if they exist, will not be detected. However, we will inform you of any such matters that come to our attention.
This is a paragraph most likely from....
An Engagement Letter
The primary purpose of an engagement letter is to document in written form the agreement with the client about the services to be provided by the auditor. It sets forth the rights and responsibilities of the parties and the objective and scope of the audit
186
Which of the following analytical procedures most likely would be used during the planning stage of an audit?
Planning Analytical Procedure: Comparing current-year to prior-year sales volumes.
Risk Assessment Procedure: ****Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior year’s ratio.
187
What should the auditor be interested in reviewing from the predecessor auditor?
1. whether the opening balances of the current years statements are materially misstated
2. accounting policies are consistently applied
3. contingencies
188
Significant Deficiency vs Material Weakness
Less severe than Material Weakness
Material Weakness- deficiencies or or a combo of deficiencies that would result in a material misstatement of the financial stmts and cannot be prevented or detected
189
Type 2 Report
Expresses an opinion whether the controls described by management operated effectively, and includes thenumber and nature of control deviations.
OVER A PERIOD IN TIME SPECIFIED
190
Which of the following levels would most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment?
Risks of Material Misstatement would most likely be addressed at the Financial Statement Level
HOWEVER, the Nature, timing and extent of further audit procedures respond to the assessed RMMS at the assertion level
191
The audit plan is based on....
The overall audit strategy, it addresses,
The reporting objectives, the timing of the audit, areas of high risk, industry specific issues, and the audit resources required.
192
A decrease in the acceptable level of detection risk or a decrease in the amount of misstatements in a class of transactions than an auditor could tolerate
Will modify the auditor's plan to obtain greater assurance from substantive testing
1. selecting more effective audit procedures
2. applying procedures nearer to year-end or
3. increase the extent of particular test
193
For effective control in the Accounts Payable department, the client should
Establish the agreement of the vendor's invoice with the receiving report and purchase order.
They are responsible for matching the vendor's invoice against the corresponding purchase order and receiving report.
This procedure provides assurance that a valid transaction has occurred and that the parties have agreed on the terms, such as price and quantity
194
Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to
The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand
Effective purchasing departments should use the basic economic order quantity calculation that minimizes both the cost of owning and storing excess merch
195
To avoid potential errors and fraud, well-designed internal control in the accounts payable area should include a segregation of which of the following functions?
Cash disbursements and vendor invoice verification
The functions of cash disbursements (custody of assets) and invoice verification (recordkeeping) should be segregated for effective internal control. Invoice verification should be done by an employee outside the CFO’s department.
196
Closed-Loop Verification
The display of the amounts entered is an input control that permit visual verification of the accuracy of the input by the operator
197
How is the payroll function divided?
In principle, the payroll function should be divided into its authorization, recording, and custody functions.
Authorization of hiring, wage rates, and deductions is provided by human resources.
Authorization of hours worked (executed by employees) is provided by production.
Based upon these authorizations, accounting calculates and records the payroll. Based on the calculated amounts, the CFO prepares and distributes payroll checks.
198
The sampling unit in a test of controls pertaining to the occurrence of payroll transactions is:
Payroll register Entry
The payroll register entry is reconciled to time cards to test whether the recorded transaction actually occurred.
199
Which department would most likely approve changes in pay rates and deductions from employee salaries?
Human Resources
200
Which control activity would most likely prevent employee payroll fraud?
The human resources department promptly sends employee termination notices to the payroll supervisor
201
Which of the following controls is most effective in providing reasonable assurance that salary, wage, and benefit expenses are incurred only for work performed?
All time cards and reports are reviewed and approved in writing by immediate line supervisors having NO responsibilities for paycheck distribution
202
In the audit of which of the following types of rprofit oriented enterprises is the auditor most likely to place special emphasis on testing the controls over proper classification of payroll?
Manufacturing Organizations
A manufacturer is characteristically labor intensive with a high frequency and volume of payroll.
Payroll info is important in the cost of work in process, finished goods inventory, and costs of good sold.
203
What does a data dictionary provide?
The data dictionary is a file in which the records relate to specified data items.
It contains definitions of data records and files and the list of programs used to process them
204
What would be an effective internal control against the loss of trading securities?
An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities
205
If an independent trust agent is not employed, what should be done to safeguard marketable securities?
Two company officials have joint control of marketable securities, which are kept in a bank safe deposit box
206
Which of the following internal control activities would most likely be used to maintain accurate inventory records?
Periodic Inventory Counts are used to adjust the perpetual inventory records
207
Analytical procedures used as risk assessment procedures should focus on
Enhancing the auditor's understanding of the entity and its environment
208
Completeness assertion for purchases
Are purchased orders, receiving reports, and vouchers pre numbered and periodically account for?
209
A company’s labor distribution report requires extensive corrections each month because of labor hours charged to inactive jobs. Which of the following data processing input controls appears to be missing?
A validity test
Validity tests are used to ensure that transactions contain valid transaction codes
210
A systems flowchart is best described as:
A symbolic representation of a system or series of sequential processes
211
What is the process of evaluating Internal Controls?
1. Auditors should first obtain an understanding of controls relevant to the audit
2. Then evaluate the design, this considers whether the controls can effectively prevent, detect and correct, material misstatements
3. Next the auditor tests relevant controls to obtain sufficient appropriate evidence about their operating effectiveness, if The auditor tends to rely on internal controls in determining the nature, timing, and extent of substantive procedures. Substantive procedures alone cannot provide sufficient appropriate evidence at the relevant assertion level
212
Audit Plans
Basic tool used by the auditor to control the audit work and review the progress of the audit
Developed and documented based on the overall audit strategy.
More detailed than the audit strategy because it includes the nature, timing, and extent of work to be performed
Includes
1. Risk Assessment Procedures
2. Further audit procedures at the assertion level
3. other procedures to comply with GAAS
213
Professional Skepticism
1. a questioning mind
2. alertiness to conditions that may indicate material misstatement
3. critical assessment of audit evidence
214
A direct financial interest....
Impairs independence even if it is not material to the member's wealth
215
For a reporting entity that has participated in related party transactions that are material, the required disclosure is:
The nature of the relationship and the terms and manner of settlement
216
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the
A debit memo indicates a reduction in the amount owed to a vendor because goods have been returned. The debit memo authorizes the accounting department to debit the appropriate payable
217
The accounts receivable managers that have the ability to write off delinquent accounts....
has the ability to perpetrate fraud because he or she performs imcompatible functions.
Authorization and recording of transactions should be segregrated. Someone outside the AR department should authorize write offs
218
What is the most important control over acquisitions of property, plant, and equipment?
The use of a budget to forecast and control acquisitions and retirements alerts management to any transactions that are unusual, appear unnecessary, or are unauthorized
219
Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit?
Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud
Furthermore, if not already performed to determine the overall conclusion, analytical procedures related to revenue should be performed through the end of the period
220
With respect to fraud or error, the auditor should assess the risk that fraud or error may cause a material misstatement of the financial statements and should design the audit to:
The audit should be designed to provide reasonable assurance of detecting material fraud or error.
Searching is not enough
221
Fidelity bonds for employees that handle cash recipts
an employer may obtain a fidelity bond to insure against losses arising from fraud by the covered employees. Prior to issuing this form of insurance, the underwriters investigate the individuals to be covered. Also, employees should be informed that bonding companies are diligent in prosecuting bonded individuals who commit fraud.
222
A member may not disclose a clients confidential info without the client's consent UNLESS:
it is disclosed to
(1) comply with a valid subpoena or summons or with applicable laws and regulations,
(2) discharge his or her professional obligations,
(3) cooperate in an official review of his or her professional practice,
(4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.
223
What is a proxy server?
A firewall system that limits access to a computer by routing users to replicated web pages
Outsiders are directed there, and more important information is not available from this access point.
224
2 Main differences between Attestation Standards and Generally Accepted Auditing Standards
1. the attestation standards provide a framework for the attest function beyond historical financial stmts
2. The attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit opinion
225
Components of Internal Control
1. the control environment
2. risk assessment process
3. control activities
4. info systems
5. monitoring of controls
226
An auditor who discovers that a client’s employees have paid small bribes to public officials most likely would withdraw from the engagement if the
Employees actions affect the auditor's ability to rely on mgmt's representations
227
The sufficiency and appropriateness of audit evidence is a matter of:
Professional Judgement
The auditor uses professional judgement when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level.
228
The objective of tests of details of transactions performed as substantive procedures is to:
Detect material misstatements at the relevant assertion level.
229
In Determining whether transactions have been recorded,
This is a completeness assertion...
Utilizing the Original Source documents and tracing the transactions to the appropriate accounting records determines if they were recorded
230
Audit Evidence is more reliable when:
1. It is obtained from independent sources
2. Is generated internally under effective internal control
3. obtained directly by the auditor
4. documentary form
5. consists of original documents
231
Audit evidence includes
1. accounting records underlying the financial statmenets
2. minutes of meetings
2. external confirmations
3. analysts reports
4. comparable data about competitors
5. info obtained by the auditor from inquiries, observations, inspection, recalculation and reperformance, and analytical procedures
232
The most reliable documentation
Is created outside the entity and has never been within the client's control
233
Observation as audit evidence...
Most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place
234
Negative Confirmation requests may be used to reduce audit risk to an acceptably low level...
(1) the assessed risk of material misstatement is low,
(2) a large number of small homogeneous balances is involved,
(3) a very low exception rate is expected,
(4) the auditor has no reason to believe that the recipients of the requests are unlikely to consider them,
(5) the auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls
235
Confirmation of Customer's AR rarely provides reliable evidence about the completeness assertion because
confirmations of accounts receivable do not necessarily provide reliable evidence about the completeness assertion because customers may not be inclined to report understatements
236
Negative Forms of Confirmation Requests
Negative requests requires a response only if there is a discrepancy
Negative confirmation requests may be used to reduce audit risk when the
1. assessed risk of material misstatement is low
2. a large number of similiar SMALLER balances is involved
237
Positive Forms of Confirmation Requests
A positive confirmation request asks for a reply in all cases. It may ask the confirming parties to state whether they agree with the information given or to provide information.
Positive confirmation requests obtain evidence only when responses are received.
238
The purpose of Audit documentation
1. to provide sufficient and appropriate record of basis of the aduitor's report
2. evidence that the audit was performed in accordance with GAAS and other requirements
239
Trial balances include columns for:
Re classifications and adjustments
Reclassifications and adjustments are accumulated on the trial balance to reflect the final audited balances
240
The audit working paper that reflects the major components of an amount reported in the statements is:
The Lead Schedule
Help to eliminate detail from the auditor's working trial balance by classifying and summarizing similar or related items that are contained on the supporting schedules
A lead schedule contains the detailed accounts from the general ledger making up the line item total in the financial statements
241
What information would be included on the permanent section of audit documentation?
1. articles of incorporation, stock options, contracts and by laws
2. the engagement letter the contract between the auditor and the client
3. analyses of PPE equity, non current debt eetc
4. info concerning internal control, flowcharts, organizational charts and questionaires
242
PCAOB Requirements for Audit Documentation
1. demonstrate that the engagement complied with PCAOB standards
2. support the basis for conclusions about all relevant assertions
3. demonstrate the accounting records agree or reconcile with the financial stmts
243
Audit documentation is the property of the client or auditor?
Property of the auditor, copies of docs may be made available to the client if the validity and independence of the audit are not undermined
244
Specialized Audit Software
Is written to fulfill a specific set of audit tasks, written ina procedure oriented language
245
What is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?
Performance of audit tests on a continuous basis
The audit trail for electronic form may only be available for short time, therefore the auditor should time audit procedures to match availability and the use of embedded audit modules might serve this purpose
246
Generalized audit software is useful for...
Tests of Controls and Substantive Procedures
1. sampling and selecting items
2. testing extensions; footings and calculations
3. examining records
4. summarizing and sorting data
5. performing analytical procedures
247
CPA's may disclose confidential information in the following scenarios:
1. comply with a valid subpoena
2. discharge his or her professional obligations
3. cooperate in an official review of his or her professional practice
4. initiate a complaint with or response to any inquiry made by an appriopriate investigative agency
248
Auditing Interpretations in the form SAS's are issued by the Audit Issues Task Force of the Auditing Standards Board (ASB)....what is their purpose?
They are NOT standards
They are interpretative publications, which make recommendations for applying GAAS in specific situations
249
Conceptually Logical Approach to the Auditor's Consideration of Relevant Controls, 4 steps
1. Evaluate the design of relevant controls and determine whether they have been implemented
2. Asses the RMMs
3. Design Further Audit Procedures
4. Test Controls and evaluate Operating Effectiveness
250
If specific information that implies the existence of possible noncompliance with laws and regulations that could have a material effect on the financial statements comes to an auditor’s attention, the auditor should next...
Apply audit procedures specifically directed to ascertaining whether noncompliance has occurred.
251
Basic Premise underlying Analytical Procedures
Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary
Variability in these relationships can be explained by, for example unusual events or transcations, business or accounting changes, misstatement or random fluctuations
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When a management’s specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s work is acceptable if
The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.
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Auditor's responsibility for the observation of Inventory done by a Specialist
1. examine the specialist's program
2. observe its procedures and controls
3. make or observe some psyhical counts
4. recompute calculations
5. test intervening transactions
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Under SOX 2002, how often must a lead audit partner rotate on an issuer client?
Every 5 years with a 5 year time out period
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Prior to the audit, the auditor presents the overall audit strategy with the client's management, what is agreed upon at this meeting?
The auditor should, among other things, consider
(1) the work of the internal auditors and the extent of use of that work and
(2) the availability of client personnel and data (AU-C 300). Moreover, the premise of the audit includes management’s responsibility to provide unrestricted access to persons having necessary audit evidence (AU-C 200). Planning activities also include determining the nature and amount of audit resources to allocate to specific audit areas (AU-C 300).
Thus, the coordination of the assistance of the client’s personnel in data preparation is considered an overall audit strategy.
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In obtaining an understanding of internal control, the auditor may trace several transactions through the control process....what is the purpose of this?
The understanding should include information about the design of relevant controls and determining whether they have been implemented by the entity and by service organizations whose services are part of the entity’s information system.
Tracing a few transactions through the control process (a walkthrough) should provide that evidence. A walkthrough follows transactions from origination through the entity’s processes, including IT systems, until they are reflected in the entity’s financial records (AS No. 12).
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The successor auditor must do what first in obtaining information from the Predecessor CPA?
The successor Auditor must gain client permission first when engaging the predecessor auditor
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Controls within the computer processing activity may leave no visible evidence indicating that they were implemented and were effective...how should the auditor test the controls?
By reviewing transactions submitted for processing and comparing them with related output
259
What is the most effective control in providing assurance that recorded purchases are free of material errors?
Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers
260
Appropriate questions on an internal control questionnaire for Purchasing Transactions
Are an approved purchase requisition and a signed purchase order required for each purchase?
Are prenumbered purchase orders and receiving reports used and accounted for?
Are all goods received in a centralized receiving department and counted, inspected, and compared with purchase orders on recipt?
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Before sending or receiving EDI messages, a company should
Execute a trading partner agreement with each of its customers and suppliers...
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Negative confirmation requests for AR are used when...
The assessed risk of material misstatement relative to AR is low.
Negative confirmation requests are not used as the only substantive procedure addressing an assessed RMM at the assertion level unless
(1) the assessed RMM is low,
(2) the auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls,
(3) the population consists of many small homogeneous items,
(4) the expected exception rate is very low, and (5) the auditor has no reason to believe that recipients will not consider the requests
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An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements.
How should the audit team address the audit procedures to the increased risk?
Review the client's control procedures over the safeguarding of inventory and perform a physical inventory count on the last day of the current year
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What is parallel simulation?
Auditing technique that processes client input data on a controlled, Auditor developed program under the auditor's control to test controls in the computer system
This is used to is to process actual client data and compare the outputs and exceptions report with those of the client’s application program.
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What is the purpose of internal control?
The purpose of internal control is address business risks that threaten the achievement of the following entity objectives
1. reliability of financial reporting
2. effectiveness and efficiency of operations
3. compliance with laws and regulations
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Essential elements of the audit trail in an EDI system?
Network and sender-recipient acknowledgements
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Auditors should communicate that NO material weaknesses or significant defiencies exist to Corporate Governance?
Auditors are permitted to communicate in written form that NO material weaknesses exist.
However, communicating that no significant deficiencies is prohibited
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What is the auditor required to communicate to the an entity's audit committee?
The level of responsibility assumed by the auditor
Significant adjustments arising from the audit that were recorded by MGMT
The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates...
MGMT representations are NOT required to be reported to Governance or audit committee
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In considering if payroll transactions existed or occurred...an auditor would inquire and
Observe the segregation of duties concerning human resources responsibilities and payroll disbursement
270
What is the purpose of cash budgets?
Plans to Ensure that sufficient funds are available at all times to satisfy maturing liabilities
271
Permanent Section of the auditor's audit documentation usually contains:
1. articles of incorporation, share options, contracts and bylaws
2. engagement letter, which is the contract between auditor and client
3. analyses from previous audits of accounts of special importance
4. information about internal control
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Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?
A control should be implemented to prevent an invoice from being paid twice
This can be accomplished by canceling the voucher and supporting documents
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When the auditor obtains an understanding of controls revelant to audit, he performs risk assessment procedures to obtain evidence about their design and implementation....these include:
1. inquiries
2. observations of the application of the controls
3. inspection of documents and reports
4. tracing transactions through the financial reporting system
274
In a review of an EDI application using a third party service provider...the auditor should
Determine whether an independent review of the service provider's operation has been conducted
Verify that the service provider's contracts include necessary clauses, such a the right to audit
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Audit documentation should provide
1. a sufficient and appropriate record of the basis for the auditor's report
2. evidence that the audit was planned and performed in accordance with GAAS and legal and regulatory requirements
276
Which of the following in a predecessor’s audit documentation is the auditor least likely to be interested in reviewing?
Analysis of income statement accounts because they have no beginning balances
277
What should the auditor be interested in reviewing from the predecessor auditor?
1. whether the opening balances of the current years statements are materially misstated
2. accounting policies are consistently applied
278
Type 1 Report
A service auditor's type 1 report should contain the following:
A description of the service organization's description of controls at a SPECIFIC POINT IN TIME
Also a statement that the auditor did not test the effectiveness of the controls
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Type 2 Report
Expresses an opinion whether the controls described by management operated effectively, and includes thenumber and nature of control deviations.
OVER A PERIOD IN TIME
280
Which of the following levels would most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment?
Financial Statement Level
281
What are the three types of control totals for a Payroll Computer Application?
1. Record Counts- establish number of source documents
2. Financial Amt Totals- compute dollar or amount totals from source documents
3. Hash Totals- add numbers on input documents
282
Competence as an independent auditor includes:
Possessing the ability to supervise assistants
Consulting others if additional tech info is needed
having the tech qualifications to perform an engagement
Exercising Due professional care requires that the auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence.
283
What is tested when performing Syst Trust assurance?
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Online privacy
availability
security
processing integrity
confidentiality
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284
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?
A bank lockbox system
This ensures that cash receipts are not stolen by mail clerks or employees. Customer pmts are mailed to a post office box and collected directly by the bank
285
A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by
A CPA firm must have a system of quality control to provide reasonable assurance that the firm and its personnel
1. comply with professional standards
2. comply with applicable legal and regulatory requirements
3. issue appropriate reports
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Proper segregation of duties reduces the opportunities to allow any employee to be in a position to BOTH
Record and conceal fraudlent trasnactions in the normal course of assigned tasks
287
Entity Level Controls are such as:
Pertaining to the company's risk assessment process
Addressing policies over signficant risk management practices
Relating to the control environment
288
What do workpapers include and are they required to be furnished to the client?
A member’s working papers include, among other items, audit programs, analytical review schedules, statistical sampling results, analyses, and schedules prepared by the client at the request of the member. Working papers are the property of the member and need not be provided to the client unless required by (1) statute, (2) regulation, or (3) contract.
289
Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should
Consider whether the amounts of the year end balances selected for interim testing are reasonably predictable
290
Analytical Procedures are required when:
Exercising risk assessment procedures in the planning phase
Assisting in the forming an overall conclusion
NOT required for Substantive procedures but MAY be used
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Question: 27 It is important for the auditor to consider the competence of the audit client’s employees, because their competence bears directly and importantly upon the
Achievement of the objectives of internal control
292
Inherent risk and control risk differ from detection risk in which of the following ways?
Inherent risk and control risk exist independently of the audit
Detection is the only component of audit risk that can be changed at the auditor's discretion
293
What does General Controls include:
1. controls over data center and network operations
2. The procedures for acquiring, developing testing and approving systems or programs
3. controls over access to equipment and data files
294
If the auditors plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, they should assess the internal auditors’
Competence and objectivity
Assessing competence involves obtaining information about (1) education and experience; (2) professional certification and CPE; (3) audit policies, programs, and procedures; (4) practices regarding assignment of internal auditors; (5) supervision and review of their activities; (6) quality of audit documentation, reports, and recommendations; and (7) evaluation of internal auditors’ performance. Assessing objectivity includes obtaining information about (1) organizational status (the level to which the internal auditors report, access to those charged with governance, and whether these individuals oversee employment decisions related to the internal auditors) and (2) policies to maintain internal auditors’ objectivity concerning the areas audited (AU-C 610)
295
Ultimate purpose of understanding the entity, the environment, and assessing the risks of material misstatement is:
Is to contribute to the auditor's asssessment of the risk that material misstatements may exsit in fin stmts
296
Risks of Material Misstatements should be assessed in terms of:
Financial Stmt Assertions
297
Understanding of the components of internal control should documented:
Regardless of the amount of risk, overall responses to the risks should be documented as well
298
What are samples to test controls for?
intended to provide a basis for an auditor to conclude whether operating controls are OPERATING EFFECTIVELY
299
Tests of Controls address the following:
1. how they were applied at relevant times
2. by who and what means were they applied
3. consistency of their application
300
What are the steps to decide if an auditor should rely on internal controls?
1. identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls
301
What is the process of evaluating Internal Controls?
1. Auditors should first obtain an understanding of controls relevant to the audit
2. Then evaluate the design, this considers whether the controls can effectively prevent, detect and correct, material misstatements
3.
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In what situations would an auditor not test controls and only use Substantive Procedures?
Only perform substantive procedures if certain controls are not relevant
Test of controls may be inefficient
303
What are the tests of controls to ensure goods are shipped correctly?
Examine shipping documents for matching SALES INVOICES
304
What are some situations an auditor is likely to test internal controls for?
Is approval needed for buying and selling trading securities?
Separation of recording disbursements and reconciling the bank account
Comparison of receiving reports and vendors purchase orders
305
To test the effectiveness of controls:
Auditors can
1. use observation
2. re performance
3. inquiry of mgmt
4. inspection
5. re calculation
306
An auditor tests the segregation of duties related to INVENTORY by:
1. Personal Inquiry
| 2. Observation
307
What are Substantive Procedures?
Tests of details of transactions
Tests of controls...evaluation if internal controls are operating effectively
308
The extent of relevant substantive procedures maybe reduced when....
When controls are found to be effective
309
What is the combined audit approach?
tests of controls and substantive procedures
310
When RMMS in inventory is HIGH...
The acceptable level of detection risk for a given level of audit risk decreases
In this case, the auditor should change the nature, timing, or extent of substantive procedures to increase the reliability and relevance they provide
311
What is best practice for investigating Inventory?
Observation of inventory at YEAR END which provides more reliable and relevant evidence
312
When there is a HIGH RMM....the auditor should...
Increase extent of substantive procedures
Or Increase sample sizes
313
When analytical procedures peformed as Risk Assessment Procedures reveal no unexpected or unusual results...
Auditor may decide to reduce tests of details for a particular audit objective
314
What is auditing around the computer?
Manually re performing as of a moment in time comparing actual results with simulated results
315
What is the best way to test for unauthorized computer program changes?
Source Code Comparison program
316
What is the test data approach to testing an accting system?
Consists of one transaction for each valid and invalid condition that interests the auditor
317
What is an ITF, Integrated Test Facility?
allows fictitious and real transactions to be processed together WITHOUT THE KNOWLEDGE OF THE OPERATOR
318
What is an embedded audit module?
Captures data as transactions are processed and continuously tests.
319
What is parallel simulation?
Test of controls in a client's application program.
Compare actual client data and compare the output and exception report
320
What is the auditor's responsibility in regards to fraud?
To provide reasonable assurance of detecting material fraud or error, THAT IT WILL BE DETECTED
