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CPA: Audit > Introduction > Flashcards

Introduction Flashcards

1
Q

Can Officers who are members of the Board of Directors be a member of the Audit Committee?

A

No, the Audit Committee must be independent from management.

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2
Q

Who selects the auditor?

A

The Audit Committee

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3
Q

In order to make inquiries of the predecessor auditor, what is needed first?

A

Client permission

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4
Q

What are the 6 steps of an audit?

A
  1. Planning
  2. Environment / Internal Control
  3. Risks / Design further audit procedures
  4. Perform further audit procedures
  5. Complete the audit
  6. Opinion
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5
Q

Can you accept an engagement without being familiar with the industry?

A

YES, but you can’t start the audit until you get up to date with the industry.

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6
Q

Who are “those charged with governance”?

A

Board of Directors & Audit Committee

-includes those who oversee obligations, financial reporting process, strategic direction,

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7
Q

If the client is an issuer, what type of audit is required?

A

Integrated Audit

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8
Q

What is an integrated audit?

A

financial statements + internal controls

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9
Q

Fieldwork involves what 3 steps?

A

Planning

Evidence gathering

Internal Control

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10
Q

Planning stage includes what steps?

A
  • Reading RECORDS related to the company
  • DISCUSS with other personnel in our firm and the client’s firm (internal auditors)
  • ANALYTICAL procedures (read quarterly stmts, ratio, trend analysis)
  • Get familiar with client ESTIMATES
  • ENGAGEMENT LETTER
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11
Q

Can the engagement letter be completed orally?

A

NO, must be written. Auditors draft. Management signs.

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12
Q

What letter is signed at the end of the audit by management?

A

Management Rep Letter

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13
Q

Is an audit designed to detect errors that are immaterial to the financial statements?

A

No, only MATERIAL errors.

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14
Q

What are some things that should be included in the engagement letter?

A
  • LIMITATIONS: Not designed to detect IMMATERIAL errors
  • Mgmt is responsible for INTERNAL CONTROL/ FOLLOWING LAWS
  • FRAUD may exist and not be detected
  • FEE
  • PAYMENT SCHEDULE
  • REP LETTER at the end of audit
  • Involvement of SPECIALISTS
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15
Q

What letter is at the beginning of the audit, what letter is at the end?

A

Beginning: ENGAGEMENT

End: MGMT REP LETTER

E comes before R in alphabet

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16
Q

Is the auditor allowed to own 1 share of a company they are auditing?

A

No, not even 1 share.

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17
Q

Is materiality a factor in determining auditor independence when it comes to a direct financial interest?

A

No, the auditor and their immediate family may not even own 1 share.

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18
Q

Can a member of HR in the CPA firm own a share of the client’s stock.

A

NO. They are considered a covered member. They can influence the engagement team.

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19
Q

Who is considered “immediate family” for determining who cannot have a direct financial interest in the client?

A

A spouse and any dependents.

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20
Q

Can a spouse or a child work for a client?

A

Yes, as long as they don’t have any impact on the financial statements.

Ex: Daughter can work at Chipotle as cashier. Can’t work in Corporate as VP of Accounting.

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21
Q

Can a close relative own stock in client?

Who is considered a close relative?

A

Parent, sibling, child who is not a dependent

Can own stock, as long as it is not material to them.

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22
Q

6 inter-related elements of QUALITY CONTROL

A

Human Resources

  • Engagement / Client Acceptance
  • Leadership responsibilities
  • Performance of the engagement
  • Monitoring
  • Ethical requirements
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23
Q

6 inter-related elements of QUALITY CONTROL

Describe Human Resources

A
  • Recruitment/Hiring
  • Capabilities/Competencies
  • Assigning personnel to engagements
  • Professional development
  • Performance evaluation
  • Compensation & development
24
Q

6 inter-related elements of QUALITY CONTROL

ENGAGEMENT CLIENT ACCEPTANCE / CONTINUANCE

A
  • Determine whether or not to perform audit
  • Client reputation
  • Credit rating
  • Looking at financial statements to determine if client can be audited
25
Q

6 inter-related elements of QUALITY CONTROL

LEADERSHIP RESPONSIBILITIES

A

If they talk about someone with the CPA Audit firm who is communicating their responsibility to the rest of the firm

-Appropriate experience, ability, authority

26
Q

6 inter-related elements of QUALITY CONTROL

PERFORMANCE

A

Procedures in place to achieve a consistently high level of performance

  • standardized audit documentation
  • appropriate supervision
  • appropriate review of work
  • maintaining confidentiality
  • consulting with experts/specialists
  • providing a means to resolve differences of opinion
27
Q

6 inter-related elements of QUALITY CONTROL

MONITORING

A

Ongoing consideration/evaluation of firm’s quality control.

  • Has CPA firm complied with professional standards?
  • External monitoring (PCAOB, peer review)
28
Q

6 inter-related elements of QUALITY CONTROL

ETHICAL REQUIREMENTS

A

Maintain public confidence in the profession.

  • Independence
  • Unbiased
  • Professional skepticism
  • Own any shares
  • Family members in key positions
29
Q

What is the purpose of an audit?

A

Provide f/s user with an opinion on whether the f/s are presented FAIRLY in all MATERIAL RESPECTS with the reporting framework.

30
Q

Do quarterly statements get audited?

A

No, the 1st 3 quarters get reviewed

31
Q

Can you accept an engagement if you do not have knowledge of the accounting principles in an industry? How about if you do not know the auditing procedures for that industry?

A

Yes and yes, but you must acquire the knowledge prior to BEGINNING the audit.

32
Q

Ever since the Sarbanes Oxley Act, public accounting firms must register with the ______ in order to audit a public company.

A

PCAOB

33
Q

If an audit procedure is deemed “unconditional”, what does that mean?

A

Must be performed no matter what.

34
Q

The SEC requires a public company to release their financial statements how often?

A

3 months.

35
Q

Does the PCAOB publish “auditing standards” or “accounting standards”?

A

AUDITING standards

36
Q

Who does the PCAOB report to? Is it a government agency? Who pays for the PCAOB?

A

Reports to the SEC, however it is NOT a government agency. It is funded by fees from registered CPA firms.

37
Q

IF an auditing standard is considered p_______ m_______, it should be complied with unless the auditor has a good reason for not complying.

A

presumptively mandatory

38
Q

What set of statements does an auditor have to comply with for an audit of a NON-issuer?

A

Statements of Auditing Standards published by the Auditing Standards Board for Audits of Non-Issuers (AICPA)

39
Q

What set of statements does an auditor have to comply with for an audit of an issuer?

A

PCAOB Standards for Audits of Issuers

40
Q

Does the CPA need to understand the internal audit’s techniques in order to accept an engagement?

A

No

41
Q

Generally Accepted Auditing Standards

for audits of non-issuers are issued by:

A

The AICPA’s “Auditing Standards Board” (ASB) in the form:

Statements on Auditing Standards

42
Q

If a CPA needs to gain an understanding of a client’s industry, where could that information come from?

A
  • financial analysts who cover the industry
  • trade or economic journals
  • reports by banks/rating agencies
43
Q

If the CPA firm decides there is reasonable justification for changing the terms of an audit, what must be done?

A

IF there is reasonable justification, the new terms must be documented on the engagement letter.

44
Q

The term reasonable assurance includes an understanding that there is a ____ likelihood that material misstatements will not be prevented or detected on a timely basis.

A

The term REASONABLE ASSURANCE includes an understanding that there is a REMOTE likelihood that material misstatements will not be prevented or detected on a timely basis.

45
Q

An audit _______ refers to acts performed by the auditor in gathering evidence to support the audit opinion.

A

An audit PROCEDURE refers to acts performed by the auditor in gathering evidence to support the audit opinion.

46
Q

Audit ______ measure the quality of the auditor’s performance.

A

Audit STANDARDS measure the quality of the auditor’s performance.

47
Q

If a generally accepted auditing standard is considered “presumptively mandatory”, what does that mean?

A

The auditor should comply with the standard, OR must clearly document the reason for the departure.

48
Q

What term refers to an objective and unbiased view with respect to the client?

A

Professional Skepticism

49
Q

When auditing a NON-issuer, does the CPA need to report on internal controls?

A

No, only fair presentation of financial statements is reported on. Integrated audits are not required for NON-issuers.

50
Q

What describes, to the best of a responsible party’s knowledge:

an entity’s expected financial position, results of operations, and cash flows?

A

PROSPECTIVE financial statements

51
Q

Does high turnover prevent an auditor from accepting an engagement?

A

NO, but it is a fraud risk factor. Does not indicate fraud. Can still accept engagement.

52
Q

If a potential client has a high risk for intentional manipulation to the financial statements, should they accept the engagement?

A

No, because it indicates that management lacks integrity.

53
Q

Is obtaining a collateralized loan from a financial institution client okay?

A

Yes. But if it were not collateralized, general loan, WOULD impair independence.

54
Q

If the client threatens to terminate the covered member’s firm after DISAGREEMENT over accounting principles, this is referred to as:

A

undue influence threat

55
Q

With regard to prospective financial statement, a practitioner SHOULD NOT ACCEPT an engagement to examine a forecast or projection UNLESS

A

the responsible party has agreed to disclose the significant assumptions.

56
Q

What standards apply to an Agreed Upon Procedures engagement?

A

SSAE

57
Q

According to SSAE, “presumptively mandatory” requirements are indicated by the word “the CPA ____”

A

According to SSAE, “presumptively mandatory” requirements are indicated by the word “the CPA should”

this allows for rare exceptions but are usually followed

CPA: Audit (9 decks)

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