MCQs

Question 1

Quality Control - Definition & PCAOB/AICPA

Answer 1

Quality control is a process to provide the firm with reasonable assurance that its personnel comply with the applicable professional standards.

The PCAOB has adopted the AICPA’s quality control standards.

Question 2

5 quality control elements of a system of quality control

Answer 2

1. independence, integrity and objectivity
2. personnel management
3. acceptance and continuation of clients
4. engagement performance
5. monitoring

Supervision and Review is a Component of
engagement performance

Question 3

Basic fundamental concept that underlies the audit process

Answer 3

Risk:

The acceptance by auditors that there is some level of uncertainty in performing the audit function.

Question 4

Which elements underlie the application of generally accepted auditing standards (particularly the standards of fieldwork and reporting)?

Answer 4

Materiality and Audit Risk

Audit planning involves developing an overall strategy related to collecting and evaluating the Evidence to be obtained.

By testing and understanding Internal Control, the auditors can assess whether it offers assurance that the financial statements will be free from Material errors and fraud.

These assessments enable the auditors to evaluate the Risks of material misstatement of the financial statements.

Question 5

Three General Standards

Answer 5

TIP

(1) adequate Training and proficiency
(2) Independence of mental attitude
(3) due Professional care

Question 6

Three Fieldwork Standards

Answer 6

PIE

(1) adequate Planning and supervision
(2) understanding entity/environment incl. Internal control
(3) sufficient appropriate audit Evidence

Question 7

The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and changes in cash flow is applied within the framework of

Answer 7

GAAP

Generally Accepted Accounting Principles.

Question 8

Independence problems - Covered Member, Immediate Family & Close Relatives

Answer 8

The covered member as well as a member of the person’’s immediate family (person’’s spouse and any dependents):

1. cannot have financial interest in the audit client
2. can work for the audit client as long as the position is not in a position (such as management) that influences the financial statements

A close relative (parent, sibling, nondependent child) can:

1. have a financial interest in an audit client as long as that interest is immaterial to the person
2. work for the audit client as long as the position is not in accounting or financial reporting (such as head of payroll accounting)

If the close relative works for the audit firm, the person is not a covered member unless:

1. the person works on the engagement team or
2. is in a position to influence the members of the engagement team or the audit

Question 9

Illustration of a liability to clients under common law

Answer 9

client sues auditor for not discovering a theft of assets by an employee

CPA had a duty to perform, which require him/her to exercise ‘due professional care’

the misappropriation of assets by one employee should have been uncovered through an audit program which revealed the lack of separation of duties with regard to the employee

Question 10

Unmodified audit report for a non-public company

Answer 10

Introductory, paragraph simply identifies the financial statements that were examined.

Other paragraphs outline:
Responsibilities of the parties
Standards that were followed
Nature and scope of an audit

Question 11

When those charged with governance do not take appropriate remedial action

Answer 11

may consider withdrawal from the engagement, if possible under applicable law/regulation

Question 12

suspected or identified noncompliance with laws and regulations (initial steps and subsequent procedures)

Answer 12

1. understand act/circumstance (consult with mgmt one level above the act, if unsatisfactory info then client arranged consultation with client’s legal counsel)
2. evaluate effect on FS

Procedures:

1. compare supporting docs with acctg records
2. confirm info with third parties
3. confirm proper authorization
4. apply procedures to identify occurrence of similar transactions

NOT personal misconduct by employees unrelated to business ops

Question 13

suspected or identified illegal acts (opinion modification, disclosure)

Answer 13

Qualitative - immaterial amount could lead to material
Quantitative - contingencies per noncompliance
Adequacy of disclosure
Implications on reliability of mgmt representations (material)

If material:

1. issue qualifiled or adverse depending on materiality
2. disclaim if materiality cannot be ascertained due to insufficiency of evidence
3. if modifications aren’t accepted, withdraw and communicate reason for w/d in writing to those charged with governance

If immaterial:

1. disclose to senior mgmt and those charge with governance
2. if no remediation, withdraw

Possible disclosure to third third parties (confidentiality generally precludes, consult with legal counsel):

1. under 8K to sec
2. under inquires from successor auditor
3. under subpoena
4. under requirements to funding (governmental) agency

Question 14

work or findings of specialist

Answer 14

1. accept unless determined unreasonable
2. additional procedures if materially different than FS assertions
3. unresolved, than seek another opinion (still not resolved then issue qualified or disclaimer of opinion)
4. only mention specialist if issuing a qualified or adverse opinion AND doing so will assist in understanding the reason for the qualification

Question 15

Why must opinion pertain to FS taken as a WHOLE?

Answer 15

to prevent misinterpretations regarding degree of auditor’s assumption of responsibility

Question 16

Client’s rights to working papers (versus work products or or member-prepared records)

Answer 16

Working Papers - belong to member and need not be provided to client unless imposed by state/federal statute, regulations or contractual agreement

Member-prepared records - may only be withheld for fees

Work Products - may be withheld for fees, incompletion, compliance with professional standards, or in light of outstanding litigation (once provided only required to provide again if natural disaster or act of war)

Records and products may be provided in any usable format (if requested exists then provide) and additional fees may be charged.

Question 17

Requests to change (audit to review/review to compilation)

Answer 17

Reasons:

1. change in circumstances
2. misunderstanding regarding nature of each engagement type
3. restriction on scope (imposed by client or due to circumstances)

Consider:

1. reason given, particularly scope limitation implications
2. additional effort require to complete original request
3. estimated additional cost to complete original request

Do not address change in resulting report

Question 18

Effect on Ratio of equal decrease in numerator and denominator

Answer 18

If ratio is greater than 1:1, ratio is increased

If ratio is less than 1:1, ratio is decreased

Question 19

Includes “objective of the engagement”

Answer 19

Auditor’s engagement letter

Question 20

Negative Assurance

Answer 20

nothing came to our attention that specified matters do not meet specified standards

limited to negative assurance when FS have not been audited

generally not used in opinion on financial statements (never in audit opinion)

used for: comfort letters, special reports, agreed-upon procedures, compliance (laws/regs/contracts)

Question 21

Procedures required regarding subsequent events (SE)

Answer 21

1. read & review interim FS
2. inquiries of mgmt/governance re:
   a. current status of tentative, preliminary, inconclusive data and
   b. any unusual adj since BS date
   c. changes in stock, debt, working capital
   d. substantial contingent liabilities/commitments
3. read meeting minutes (SH, BOD, OFF)
4. inquiries of legal counsel
5. observe SE
6. scan records for unusual transactions
7. obtain letter of rep on SE

Question 22

Considerations for Design and Performance of

Further Audit Procedures (responsive to assessed risks of material misstatement RMM at the relevant assertion level)

Answer 22

1. significance of risk
2. likelihood of material misstatement (MM)
3. characteristics of relevant transactions, balance, disclosure
4. nature of entity’s specific controls
5. whether evidence is expected to determine effectivity of entity controls regarding MM

Question 23

Restrictions not allowed for Review

Answer 23

Restrictions are not allowed on:
Scope of the Inquiry
Analytical Procedures

Review may be restricted to a single FS like BS

Question 24

When client presents photocopies in light of misplaced originals

Answer 24

Reevaluate risk of fraud
Design alternative tests for related transactions

Must determine reliability of the internally generated evidence in light of entity controls

Question 25

Inspect (physically) new additions to PPE

Answer 25

Test management's assertions of Existence

Question 26

When comparative FS include prior year by predecessor auditor whose report is not presented

Answer 26

indicate in introductory paragraph of auditor report include date and type of opinion from predecessor report not required to obtain representations from predecessor auditor on prior year statements

Question 27

Exceptions to loans regarding independence of covered members

Answer 27

Grandfathered loans Auto loans collateralized by auto Loans collateralized by cash surrender of insurance policy, cash deposits Credit card or overdraft reserve (current = $10,000 or less) Not allowed: personal, student, home mortgage

Question 28

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to

Answer 28

Statements on auditing standards, specifically require auditors to assess the risk of material misstatements due to: fraud and to consider that assessment in designing the audit procedures to be performed

Question 29

underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting

Answer 29

materiality and risk The standards of field work concern evidence accumulation and other activities during the actual conduct of an audit. It relates to understanding the of the client's environment which helps the auditor identify significant client business risks and the risk of significant misstatement in the financial statements. The reporting standards require the auditor to prepare a report on the financial statements, stating whether they are presented in accordance with GAAP. Decisions about how much and what types of evidence involve making decisions with regard to materiality and risk.

Question 30

Detection risk & Substantive Procedures

Answer 30

Inversely Related DR = Risk that the auditor's procedures will not detect an error in an account when in fact one exists. Auditor's assurance that there are no errors in an account balance is increased by the application of substantive procedures (SP), so the auditor's assessment of detection risk will decrease. Applying substantive tests as of an interim date rather than as of the year-end potentially increases the risk that misstatements that may exist will not be detected. To decrease detection risk, perform substantive tests at year end. As the acceptable level of detection risk decreases, the assurance provided from substantive tests should increase, so the amount of audit evidence the auditor accumulates will increase.

Question 31

Risk Assessment (RA) for financial reporting

Answer 31

RA - identification and analysis of risks relevant to the preparation of financial statements in conformity with GAAP. Auditor obtains knowledge about management's risk assessment through procedures performed to obtain an understanding of the Entity and its Environment, including Internal Controls.

Question 32

Impact on Audit Risk if Inherent Risk or Control Risk is higher than originally anticipated.

Answer 32

Discovery should have no impact on the desired level of Audit Risk Inherent Risk - the risk that a material misstatement might occur in accounting for a particular account or balance Control Risk - the risk that a material misstatement that actually occurs will be able to get through the reporting company’s internal control and wind up within the reported financial statements The two assessments of IR & CR are independent. Detection Risk - the likelihood that a material misstatement that is created and gets through the internal control systems will also get through the testing by the independent auditor. If either IR or CR is especially high, then enough substantive testing must be done by the auditor so that DR is reduced to compensate. so that overall audit risk remains unchanged. IR X CR X DR = AR

Question 33

Several factors determine the extent to which external users rely on a client's financial statements

Answer 33

1. Concentration of ownership 2. Types and amounts of liability 3. Client size

Question 34

Audit Program

Answer 34

A listing of all the things which the auditor will do to gather sufficient, competent evidence

Question 35

Reliance on the work of another auditor

Answer 35

May choose to do so Must inquire about their reputation Contact or visit if necessary to obtain sufficient info Includes service organizations

Question 36

Auditor's concern regarding stock options

Answer 36

proper authorization trace authorization to BOD vote

Question 37

If departures from GAAP are discovered in Review of nonissuer

Answer 37

Management should modify FS If refuse: modify report to adequately communicate deficiencies If modification is not sufficient: withdraw from engagement (cannot just disclaim).

Question 38

Reporting on Supplementary Information in relation to FS

Answer 38

in relation to FS Whole: evaluate presentation is it fairly stated in all material respects (EOM or separate report)

Question 39

Restricted and General Use

Answer 39

Restricted use - for one or more specified third parties due to possible misunderstanding when taken out of context for intended use General use is not restricted to specified parties Reports in conformity with applicable framework generally aren't restricted even if OCBOA

Question 40

Test data and payroll system

Answer 40

discover invalid employee ID numbers (input invalid numbers to test controls against it) Tests of approval, check cashing and unclaimed checks tested outside the PR system

Question 41

Qualified Opinion due to Scope Limitation

Answer 41

insufficiency of evidence

Question 42

Kiting

Answer 42

When money is moved from one account to another but the deposit and the withdrawal are recorded in different time periods to inflate the amount of cash being reported, the term “kiting” is used to identify that fraud. The treasurer of a company has stolen $10,000 in cash from the company. At the end of the year, he is afraid that he will be caught so he transfers $10,000 from one company bank account to another. He records the deposit on December 31 of the first year so that $10,000 cash is added. He does not record the withdrawal from the other account until January 1 of the second year. As a result, for one day, the company looks like it has $10,000 more than it really does.

Question 43

Auditor's Engagement Letter

Answer 43

1. services the auditor will perform 2. assistance or restrictions on the audit 3. auditor cannot guarantee that all acts of fraud will be discovered 4. management is responsible for maintaining effective internal control.

Question 44

internal controls consist of five interrelated components:

Answer 44

CRIME 1. Control activities - policies and procedures that help ensure that management directives are carried out. 2. Risk assessment - identification and analysis of relevant risks to achievement of its objectives. 3. Information and communication systems - support the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibility. 4. Monitoring - asseses the quality of internal control performance over time. 5. control Environment - sets the tone of the organization.

Question 45

Procedures for evaluating management identification of accounting estimates that could be material to the financial statements

Answer 45

Assertions embodied in FS Evaluate information obtained in performing other procedures, such as: 1. changes in the entity's business, operating strategy, industry 2. changes in methods of accumulating information 3. litigation, claims, assessments, other contingencies 4. reading meeting minutes (stockholders, directors, committee) 5. regulatory or examination reports, supervisory correspondence, etc. from applicable regulatory agencies Inquire of management about the existence of circumstances that may indicate the need to make an accounting estimate.

Question 46

IT application controls.

Answer 46

Input controls Processing controls Output controls

Question 47

IT general controls

Answer 47

1. program change controls 2. controls that restrict access to programs or data 3. controls over the implementation of new releases of packaged software applications 4. controls over system software that restrict access to or monitor the use of system utilities that could change financial data or records without leaving an audit trail

Question 48

Management Representation Letter (Interim?)

Answer 48

``` Interim: Financial information Internal control Fraud or suspected fraud at the entity Completeness of information Recognition, measurement, and disclosure Related party transactions Subsequent events ``` Representation letters: appear on the client's letterhead addressed to the auditor dated as of the date of the auditor's report signed by client (responsible officials/president & CFO)

Question 49

10 generally accepted auditing standards, approved and adopted by the AICPA. Three categories: (no longer AICPA but PCAOB?)

Answer 49

general standards standards of fieldwork standards of reporting Review Services (SSARS) are not GAAS

Question 50

A member of a registered public accounting firm that participated on the engagement becomes employed with the client in a significant accounting position (CEO, CFO, controller, CAO, or equivalent position)

Answer 50

Firm is prevented from conducting the audit for a one-year period

Question 51

The auditor responds to risks of material misstatement due to Fraud in the following three ways:

Answer 51

A response that has an overall effect on how the audit is conducted—that is, a response involving more general considerations apart from the specific procedures otherwise planned A response to identified risks involving the nature, timing, and extent of the auditing procedures to be performed A response involving the performance of certain procedures to further address the risk of material misstatement due to fraud involving management override of controls, given the unpredictable ways in which such override could occur

Question 52

Prior to seeking approval of certain tax services from the audit committee, a registered public accounting firm must:

Answer 52

Describe in writing the scope/fee structure of services Discuss potential effects on independence Document substance of the discussion Public Company Accounting Oversight Board (PCAOB) Rule 3524

Question 53

SEC Form S-1

Answer 53

Issue new securities

Question 54

Reasonable assurance regarding professional standards

Answer 54

System of Quality Control | AICPA Statements on QC

Question 55

Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS)

Answer 55

minimum standards of performance, in exercising due professional care by the auditor, that must be achieved on each audit engagement.

Question 56

A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include

Answer 56

Inquiry of third parties, such as the prospective client's bankers and attorneys, about information regarding the prospective client and its management.

Question 57

objective of an operational audit

Answer 57

Specific operating units are functioning efficiently and effectively often performed by internal auditors

Question 58

Transactions selected for testing are not supported by proper documentation

Answer 58

Auditing standards states that if a condition or circumstance differs adversely from the auditor's expectation, the auditor needs to consider the reason for such a difference. consider whether material misstatements exist in an entity's financial statements

Question 59

auditor's responsibility for supplementary information, such as segment information, which is outside the basic financial statements, but required by the FASB

Answer 59

auditor has no responsibility to audit information outside the basic financial statements has some responsibility regarding such information extent varies with the nature of the information Required Supplementary Information (FASB,GASB) - apply certain limited procedures and report deficiencies or omissions not required to test transaction details and balances for material misstatements

Question 60

CPA firms registered with the Public Company Accounting Oversight Board (PCAOB) are subject to periodic inspections

Answer 60

inspection process by the PCAOB takes the place of peer review Firms that audit more than 100 companies are inspected annually The rest inspected every three years.

Question 61

In registering with the Public Company Accounting Oversight Board (PCAOB), a CPA firm must provide significant information

Answer 61

1. List of all audit clients who issue securities 2. Pending criminal actions against the firm 3. Annual fees from each client issuer divided between audit and non-audit services. 4. List of all accountants participating in the audit of each client that is an issuer of securities. 5. Statement on QC policies MORE 3622.02

Question 62

Form 8-K

Answer 62

filed with SEC to report significant events that are of interest to public investors. Include: acquisition or sale of a subsidiary, a change in officers or directors, an additional product line, change in auditors

Question 63

Early appointment of the auditor

Answer 63

enables a more sufficient audit to be planned

Question 64

A covered member

Answer 64

1. any individual on the audit engagement team, 2. anyone who can influence either the engagement or the members of the engagement team, 3. the partners in the office in which the engagement is primarily performed. 4. any individual that provides ten or more hours of non-attest services to the client covered members must abide by specific independence rules toward the audit client

Question 65

independence impaired with respect to client

Answer 65

1. Client is behind on its audit fees 2. Audit client initiates a lawsuit against the auditor 3. Auditor initiates a cross claim against client management No independence problem: 1. covered member receives an unsolicited financial interest, such as the inheritance, if disposes of it within 30 days 2. operating leases and claims against clients for immaterial amounts and related to non-audit matters 3. suit is not against each other or likely to be

Question 66

"grandfathered" loan

Answer 66

Failure to make payments on a loan obtained prior to client audit relationship no longer qualifies as a "grandfathered" loan under the AICPA guidelines.

Question 67

Department of Labor (DOL) guidelines on covered members

Answer 67

sets independence standards for audits of employee benefit programs for US firms stricter than those of the AICPA partner in another office not involved is a "covered" if he participates in benefit plan under audit

Question 68

state board of accountancy

Answer 68

accountants in public practice must adhere to their requirements may revoke his CPA license (not AICPA)

Question 69

must should may might could

Answer 69

unconditional presumptively mandatory (document/justify departure) no requirement

Question 70

Auditing Statements of Position

Answer 70

issued by the AICPA interpretive publications for guidance, not auditing standards with requirements for auditors

Question 71

Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 7 - Reviewing Partners

Answer 71

must possess the same level of knowledge and competence that would qualify him or her to serve as the audit partner on the engagement under review provide concurring approval of issuance of the audit report only if not aware of a significant engagement deficiency after conducting review in accordance with professional standards firm may only allow clients to use the audit report after reviewing auditor provides concurring approval of issuance during review, focus on evaluating the engagement team's judgments and related conclusions during the audit

Question 72

GAO threats to independence

Answer 72

``` Self Interest (financial/other) Self Review (failure to properly evaluate results) Bias (promote a position) Familiarity (close relationship) Undue Influence Mgmt Participation Structural Threats ```

Question 73

Review of pro forma financial info

Answer 73

Include reference to historical financial info (audited or reviewed FS) from which derived Provided negative assurance regarding pro forma effect of transaction or event to historical FS

Question 74

SOX 2002, Sec 407 financial expert

Answer 74

understands GAAP & FS experience in prep or audit of FS experience with internal accounting controls understand audit committee functions

Question 75

Governmental Audit & Internal Control

Answer 75

Reports on IC Understanding of relevant IC Determined whether IC placed in operation

Question 76

Title IV SOX FS requirements

Answer 76

reflect: all material correcting adjustments material off-BS items nothing untrue and no material omissions on pro forma info

Question 77

required communication with those charged with governance

Answer 77

disagreements with management regardless of whether satisfactorily resolved

Question 78

10 conditions for agreed-upon procedures

Answer 78

independent agreed upon w/specified parties specified parties responsible for sufficiency include summary of significant assumptions criteria (suitable/available to specified parties) agreed upon criteria expectation of reasonably consistent findings expected existence of evidence to provide reasonable basis agreed-upon materiality limits use restricted to specified parties

Question 79

Management assertions with regard to financial reporting are made in relation to three broad areas;

Answer 79

(1) transaction-related events; (2) account-balances; and (3) presentation and disclosure. Management makes no assertions about internal control. Assertions about internal control are made when the CPA has been hired to provide a report on internal control.

Question 80

Public Company Accounting Oversight Board (PCAOB) Rule 3525 requires the registered public accounting firms

Answer 80

1. describe in writing the scope of the services, 2. discuss potential effects on independence, and 3. document the substance of the discussion with the audit committee.

Question 81

Required Supplementary Information (RSI),

Answer 81

The auditor has an obligation to apply limited procedures to and report deficiencies in the required supplementary information (RSI), as the information is considered by the Government Accounting Standards Board (GASB) to be an essential part of the financial reporting package. The CPA should 1. inquire of management and consider if the information is consistent with the audited financials and other information obtained during the audit. 2. consider whether or not the RSI should be covered in the representation letter from management. There is no need to apply substantive tests of transactions to the supplementary information.

Question 82

Under Section 11 of the Securities Act of 1933, a CPA who certifies financial statements will not be liable to a purchaser of the security if

Answer 82

he or she can prove due diligence. Due diligence is the reasonable professional standard of care that would relieve a person of liability under the 1933 Act on a registration statement that contained untrue statements of a material fact or omissions of a material fact.

Question 83

At the minimum, a compilation documentation should include:

Answer 83

1. engagement letter, 2. any significant findings or issues, and 3. communications regarding noncompliance with laws and regulations and fraud that have come to the accountant's attention

Question 84

The auditor's standard report does not include an expression related to the consistent application of an applicable financial reporting framework if

Answer 84

(a) no change in accounting principles has occurred, or (b) there has been a change in accounting principles or the method of their application, but the effect of the change is not material.

Question 85

A review does not contemplate

Answer 85

obtaining an understanding of the entity's internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; Materiality or other procedures ordinarily performed in an audit.

Question 86

A review engagement under SSARS requires

Answer 86

1. analytical procedures 2. independence 3. limited assurance that there are no Material Modifications that should be made to the financial statements. (not aware of material modifications to conform with GAAP)

Question 87

When reporting on financial statements of a regulatory entity that are prepared in accordance with the requirements of financial reporting provisions of a government regulatory agency to whose jurisdiction the entity is subject,

Answer 87

the auditor may report on the financial statements as being prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. Reports of this nature, however, should be issued only if the financial statements are intended solely for filing with one or more regulatory agencies.

Question 88

AU-C 450.04 defines misstatement as

Answer 88

“a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework.” (known) and (likely) misstatements.

Question 89

The extent and nature of the risks to internal control associated with IT vary depending on the nature and characteristics of the entity's information system. The auditor should consider

Answer 89

1. whether the entity has responded adequately to the risks arising from IT by establishing effective controls, including effective general controls upon which application controls depend. 2. controls over IT systems are effective when they maintain the integrity of information and the security of the data such systems process. does not matter if controls are manual or automated

Question 90

Nonroutine transactions

Answer 90

unusual due to size unusual due to nature occur infrequently

Question 91

To understand internal control,

Answer 91

an auditor needs to read or hear a description of the policies and procedures that describe the controls used. Tests of details (substantive tests), such as performing analytical procedures and test counts, will determine the accuracy of account balances but will do little to help an auditor understand an internal control structure concerning inventory balances.

Question 92

A change in accounting principle

Answer 92

“is a change from one accounting principle in accordance with the applicable financial reporting framework to another accounting principle in accordance with the applicable financial reporting framework when (1) two or more accounting principles apply or (2) the accounting principle formerly used is no longer in accordance with the applicable financial reporting framework. A change in the method of applying an accounting principle also is considered a change in accounting principle.” (AU-C 708.A4) Changes in accounting principle having a material effect on the financial statements for an audit require the addition of an Emphasis-of-Matter paragraph in the independent auditor's report. EOM is not required for a compilation or a review. Changes in accounting principles need to be disclosed, but the SSARSs do not directly address any report modifications for them.

Question 93

Attribute sampling

Answer 93

test compliance with the control To determine sample size for attribute sampling: 1. Reliability level (allowable risk of assessing control risk too low). 2. Sampling Table 3. Estimate likely Rate of Deviation (population occurrence rate in percent) 4. Define maximum Tolerable Deviation Rate. DRES

Question 94

The auditor's overall responses to address the assessed risks of material misstatement at the financial statement level may include the following:

Answer 94

1. Emphasizing professional skepticism 2. Assigning more experienced staff or specialists 3. Providing more supervision 4. Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed

Question 95

The auditor's SPECIFIC responses to address the assessed risks of material misstatement at the financial statement level may include the following:

Answer 95

substantive responses further audit procedures test of controls

Question 96

The auditor should obtain a sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit of financial statements and to determine whether they have been implemented. The auditor should use such knowledge to:

Answer 96

identify types of potential misstatements, consider factors that affect the risks of material misstatement, and design tests of controls, when applicable, and substantive procedures.

Question 97

content of the representation letter

Answer 97

written representations are considered complementary evidence in support of various assertions but not substitutes for other auditing procedures

Question 98

Audit documentation (working papers)

Answer 98

This documentation: 1. to provide the principal support for the auditor's report and opinion 2. to aid the auditor in both the planning and the supervision of the audit 3. to assist the audit team in proving that the audit was conducted in accordance with generally accepted auditing standards Property of the independent auditor and is not attended to assist the company's management.

Question 99

Appropriate evidence

Answer 99

Relevant and Reliable. The auditor's direct personal knowledge obtained through physical examination, observation, recalculation, reperformance, inspection is more reliable than information obtained indirectly. external > internal

Question 100

A U.S. entity prepares its financial statements in conformity with accounting principles generally accepted in another country. These financial statements will be included in the consolidated financial statements of its non-U.S. parent. Before reporting on the financial statements of the U.S. entity, the auditor practicing in the United States should:

Answer 100

obtain written representations from management of the U.S. entity regarding the purpose and uses of the financial statements

Question 101

On receiving a client's bank cutoff statement, an auditor most likely would trace:

Answer 101

prior-year checks listed in the cutoff statement to the year-end outstanding checklist. A cutoff bank statement is a record of transactions for a specific period (less than the full-month reporting period) that is requested by the auditor from the bank.

Question 102

auditor's required communication with those charged with governance

Answer 102

include management changes in the application of significant accounting policies

Question 103

analytical procedures on the client's operations

Answer 103

Analytical procedures consist of evaluations of financial information made by a study of various relationships among both financial and nonfinancial data to identify unusual transactions, events, amounts, ratios , trends and balances that may indicate a high level of risk for a material misstatement analytical procedures help determine where further investigation is warranted

Question 104

nonfinancial information an auditor considers in performing analytical procedures during the planning phase

Answer 104

analytical procedures are concerned with plausible relationships generally use data aggregated at a high level square footage of selling space to compare retail revenues and expenses to industry figures and prior year performance

Question 105

analytical procedures in the overall review stage

Answer 105

assist the auditor in assessing conclusions reached and in evaluating the overall financial statement presentation. The results of the review may indicate that additional evidence may be needed.

Question 106

Analytical review procedures

Answer 106

Substantive tests | designed to evaluate the reasonableness of financial information

Question 107

example of entity process that facilitates auditor analytical proceures

Answer 107

The use of a standard cost system that produces variance reports allows the auditor the opportunity to compare the output from the standard cost system with the financial information presented by management

Question 108

liabilities significantly lower than expected

Answer 108

Purchases and cash payments affect the liability balance Sales and cash collections unlikely to impact liabilities.

Question 109

increase in the age of accounts receivable

Answer 109

credit terms have been loosened so that customers with less money are able to buy on credit economic times are bad, so peopletend to pay more slowly and the number of bad accounts goes up lapping (money from a customer is stolen), money from a second customer is diverted into the account of the first customer and the age longer if receivables sold (before collected) the age is shorter

Question 110

Decrease in A/R Turnover

Answer 110

Sales/ Accounts Receivable a consignment sale recorded as a sale at the time of shipment instead of when the goods are actually sold Increases both Sales and A/R to decrease ratio turnover ratio larger: customers pay quicker sales figure is increased but not accounts receivable sales stays the same but accounts receivable goes down

Question 111

no record is made of this inventory purchase

Answer 111

goods (and the related debt) cost of goods sold not affected, so gross profit is correct Inventory and accounts payable are too low by the same amount so working capital and current ratio are correct inventory turnover = COGS/average inventory average inventory too low cost of goods sold is correct inventory turnover too high

Question 112

Title IV of Sarbanes-Oxley

Answer 112

requires financial statements reflect all material correcting adjustments material off-balance-sheet transactions, arrangements, obligations, and other relationships any pro forma information does not contain untrue statements or omissions of material facts.

Question 113

Responsibilities of the PCAOB include

Answer 113

1. register public accounting firms. 2. establish or adopt standards relating to the preparation of audit reports for issuers. 3. conduct inspections of registered public accounting firms 4. conduct investigations and disciplinary proceedings 5. promote high professional standards ``` 6. enforce compliance with: Sarbanes-Oxley Act rules of the PCAOB professional standards securities laws ```

Question 114

The Comprehensive Budget Omnibus Reconciliation Act (COBRA)

Answer 114

requires employers to offer former employees continued benefits after they leave a position for a certain period of time employees are normally responsible for the insurance premiums.

Question 115

The auditor should communicate with those charged with governance (the audit committee):

Answer 115

the auditor's responsibilities under generally accepted auditing standards, an overview of the planned scope and timing of the audit, and significant findings from the audit.

Question 116

The significant findings from the audit that should be communicated with audit committee include:

Answer 116

the auditor's view about qualitative aspects of the entity's significant accounting practices, significant difficulties encountered during the audit, uncorrected misstatements (that are not trivial), disagreements with management, other findings or issues that the auditor believes to be significant or relevant to the audit committee's oversight of the financial reporting process, material, corrected misstatements that were brought to the attention of management as a result of audit procedures, representations the auditor is requesting from management, management's consultations with other accountants about accounting and auditing matters, and significant issues arising from the audit that were discussed with management. the effect of significant mgmt policies in emerging areas without authoritative guidance

Question 117

internal auditors

Answer 117

work may affect the nature, timing, and extent of the audit, including: 1. procedures the auditor performs when obtaining an understanding of the entity's internal control 2. procedures the auditor performs when assessing risk 3. substantive procedures the auditor performs

Question 118

Section 403 of Title IV of the Sarbanes-Oxley Act (SOX)

Answer 118

Disclosures of Transactions Involving Management and Principal Stockholders: any person directly or indirectly the beneficial owner of more than 10% of any class of any equity security or is a director or an officer of the issuer must file statements required by SOX and the SEC.

Question 119

Section 402 of Title IV of the Sarbanes-Oxley Act (SOX)

Answer 119

Enhanced Conflict of Interest Provisions: unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.

Question 120

Section 404 of Title IV of the Sarbanes-Oxley Act (SOX)

Answer 120

Management Assessment of Internal Controls: an internal control report must be filed with each annual report Management must acknowledge responsibility for establishing and maintaining adequate internal control.

Question 121

Section 406 of Title IV of the Sarbanes-Oxley Act (SOX)

Answer 121

Code of Ethics for Senior Financial Officers: requires disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not) Any change in or waiver of this code requires disclosure as well. Promote: 1. honest/ethical conduct 2. full, fair, accurate, timely, understandable disclosures 3. compliance with applicable gov't rules/regs

Question 122

Controls addressing risks of material misstatements due to fraud and controls identified to address management override should be evaluated. Controls that may address these risks include:

Answer 122

1. controls over significant, unusual transactions, particularly those that result in late or unusual journal entries, 2. controls over journal entries and adjustments made in the period-end financial reporting process, 3. controls over related party transactions, 4. controls related to significant accounting estimates, and 5. controls that mitigate incentives for, and pressures on, management to falsify or inappropriately manage financial results.

Question 123

Prior to accepting an initial engagement pursuant to the standards of the PCAOB, a registered public accounting firm must:

Answer 123

1. describe, in writing, to the audit committee of the issuer, all relationships between the registered public accounting firm or any affiliates of the firm and the potential audit client or persons in financial reporting oversight roles at the potential audit client that, as of the date of the communication, may reasonably be thought to bear on independence; 2. discuss with the audit committee of the issuer the potential effects of the relationships described above on the independence of the registered public accounting firm, should it be appointed the issuer's auditor; and 3. document the substance of its discussion with the audit committee of the issuer.

Question 124

The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility and would normally not be permitted due to confidentiality. Under certain circumstances, however, the auditor may be required to disclose information to outside parties.

Answer 124

These circumstances could be: 1. to comply with legal and regulatory requirements, 2. to respond to a successor auditor, 3. when subpoenaed, and 4. in accordance with grant requirements when clients receive governmental assistance.

Question 125

Regarding fraud, the auditor should:

Answer 125

1. communicate to those charged with governance all fraud involving senior management and fraud that causes a material misstatement (not inconsequential acts), 2. report to those charged with governance and management any significant deficiencies due to risks of material misstatement due to fraud, and 3. inform the appropriate level of management of evidence that fraud has occurred, even if the matter is inconsequential.

Question 126

The auditor's understanding of the entity and its environment consists of an understanding of the following aspects:

Answer 126

Industry, regulatory, and other external factors Nature of the entity Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements Measurement and review of the entity's financial performance Internal control, which includes the selection and application of accounting policies The relevant industry, regulatory, and other external factors include industry conditions, such as the competitive environment, supplier and customer relationships, and technological developments; the regulatory environment, which encompasses, among other matters, relevant accounting pronouncements, the legal and political environment, and environmental requirements affecting the industry and the entity; and other external factors, such as general economic conditions.

Question 127

According to AU-C 240.17, the auditor should inquire of management about the following regarding fraud:

Answer 127

1. Whether management has knowledge of any fraud or suspected fraud affecting the entity 2. Whether management has a process for identifying, responding to, and monitoring the risks of fraud in the entity, including any specific risks of fraud that management has identified or that have been brought to its attention 3. Management's communication, if any, to those charged with governance regarding its processes for identifying and responding to the risks of fraud 4. Management's communication, if any, to employees regarding its views on business practices and ethical behavior

Question 128

Assertions

Answer 128

not techniques for gathering evidence

Question 129

Techniques for gathering evidence

Answer 129

``` Inquiry Calculation Confirmation Anaylsis Inspection Comparison ```

Question 130

Independence and Compilation

Answer 130

independence not required disclose (reason not required)

Question 131

Objective of Compilation

Answer 131

Present representations of Mgmt in the form of FS without offering any assurance

Question 132

NOT required for Compilation

Answer 132

``` Inquiry of Mgmt* Analytical Procedures* Assurance (not offered/allowed)* Independence* Mgmt Representation Letter* ``` Understanding of Internal Control Assessing Fraud Risk Testing Accounting Records *Required for Review

Question 133

Required for Review

Answer 133

Inquiry of Mgmt (stated) Analytical Procedures (stated) Limited Assurance (not aware of Material Modification to comply with GAAP-stated) Independence Mgmt Representation Letter Due Professional Care General understanding of the nature of entity accounting principles and practices

Question 134

Required for Compilation

Answer 134

``` General understanding of the nature of entity operations (accounting principles and practices): Nature of Transactions Form of Accounting Records Stated Qualifications of Acctg Personnel Acctg Basis Form/Content of FS ```

Question 135

Special Reports

Answer 135

``` FS special purpose/not GAAP specified elements, accounts, items (separate engagement, restricted use) compliance w/contracts or regs prescribed forms/schedules condensed FS application of acctg principles letters for UW ```

Question 136

Notification of 3P if client refuses to disclose new facts/impact

Answer 136

only if FS misleading new info, lack of cooperation, report no longer applicable need not detail specifics of refusal

Question 137

Standard review report not adequate to indicate deficiencies for departures from GAAP

Answer 137

withdraw from engagement | no further services concerning FS

Question 138

The most important purpose in an audit of confirmation

Answer 138

Prove that the balance (and the debtor) actually do exist. Takes considerable time, so performed early in audit unless serious problems are expected Positive confirmations ask for a response in all cases Better testing technique than negative confirmations Used when risk like internal control risk is high Collection of a balance indicates it did exist and is collectible, so auditors review cash collections in the period right after the end of the year

Question 139

Using the work of a specialist in an audit

Answer 139

CPAs cannot be expected to have unlimited knowledge on all possible topics. CPA needs to be well aware of all assumptions and methods used by the specialist in doing the assigned work. Auditor is not capable of reviewing all the work of the specialist or a specialist would not be needed. Specialist does not have to be independent but the CPA’s reliance should be guarded if independence is lacking.

Question 140

Review of the previous audit work papers

Answer 140

is allowed but that cannot be the only procedure carried out to establish the opening balances.

Question 141

1. Quality Control 2. Planning and performance 3. Audit objective

Answer 141

1. QC - leadership, ethical requirements, acceptance/continuance of clients/engagements, human resources, performance, monitoring. 2. P&P - Audit risk, materiality, and statistical sampling techniques 3. AO - opinion on FS (fairness, in all material respects, the financial position, results of operations, and cash flows in conformity with an applicable financial reporting framework), specific per mgmt assertions, compliance with laws and regulations

Question 142

mean-per-unit estimation

Answer 142

Statistical/Variables sampling plan In statistical sampling, quantify relevant factors: 1. Variability increases, the sample size must increase 2. Risk of Incorrect Acceptance (risk that sample supports conclusion that account balance is not materially misstated when it is materially misstated), increase the size of the sample to reduce 3. Nature/Characteristics of population affect sample size Statistical sampling: calculate sampling risk quantitatively. make objective statements about population on the basis of the sample Professional judgment used to determine the sample size, whether statistical or nonstatistical

Question 143

existence of related parties

Answer 143

1. borrowing or lending on an interest-free basis or significantly above or below market rates, 2. selling real estate at a price significantly different from appraised value, 3. exchanging property for similar property in a nonmonetary transaction, or 4. making loans with no scheduled terms for when or how the funds will be repaid.

Question 144

Report issued on Significant Deficiencies/Material Weaknesses relating to an Internal Control observed during a financial statement Audit

Answer 144

1. statement restricting the distribution of the report. 2. statement that auditor's consideration of internal control was to express an opinion on the financial statements and not to provide assurance on the internal control 3. statement that the auditor is not expressing an opinion on the effectiveness of internal control; 4. statement that the auditor's consideration of internal control was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses; 5. definitions of material weakness and significant deficiency; and 6. identification of matters considered to be significant deficiencies and material weaknesses.

Question 145

Threats to independence - GAO

Answer 145

Apply Safeguards

Question 146

Audit engagement for whichthe acceptable levels of both audit risk and materiality are lower,

Answer 146

the auditor will plan more work on individual accounts in order to find Smaller errors.

Question 147

Analytical procedures have the highest level of evidence when they use direct predictable relationships within financial statements. Example.

Answer 147

The amount of Interest Expense is directly related to balances and rates of interest bearing accounts and notes payable.

Question 148

Misstatements can be caused by

Answer 148

1. Inaccuracy in gathering/processing Data 2. Difference in presentation from GAAP 3. Omission of FS element, account, or item 4. Disclosure that is not in conformity with GAAP 5. Omission of a Disclosure required by GAAP 6. Incorrect accounting Estimate 7. Unreasonable/Inappropriate management Judgment regarding an accounting estimate

Question 149

A normal distribution

Answer 149

is a bell-shaped curve, with the distribution center at the population mean, and requires only knowing the mean and the standard deviation.

Question 150

The standard deviation

Answer 150

is used to measure the extent to which the values of the items are spread about the mean.

Question 151

The mean

Answer 151

is a measure of central tendency obtained by totaling all the values and dividing by the number of items.

Question 152

Materiality

Answer 152

The determination of materiality requires auditor judgment. Quantitative - expressed in number terms (the amount of misstatement that would influence the economic decisions of users) Qualitative - (such as key disclosures or items related to laws and regulations that are less than the material amount)

Question 153

service auditor procedures

Answer 153

1. visiting the service auditor 2. discussing the audit procedures and results, 3. reviewing the audit programs of the service auditor, 4. reviewing the workpapers of the service auditor. Uses for several processes: review report on controls to obtain understanding of controls in place in the operation of services

Question 154

A disclaimer of opinion

Answer 154

expression of no opinion. (AU-C 700.03) A disclaimer of opinion is warranted when Restrictions on the Scope of the audit are so severe, whether client imposed or due to other reasons, that the auditors are unable to obtain Sufficient Appropriate audit Evidence to enable them to form an opinion.

Question 155

risk of material misstatement

Answer 155

1. complexity and subjectivity associated with process, 2. availability and reliability of relevant data, 3. number and significance of assumptions made, and 4. degree of uncertainty associated with assumptions.

Question 156

Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a follow-up study to its 1987 report entitled Fraudulent Financial Reporting: 1987–1997, An Analysis of U.S. Public Companies

Answer 156

outlining year-end testing procedures including: A. tests of transaction cutoffs. B. tests of transaction terms/account valuation for end-of-period accounts. C. tests to ensure a baseline level of internal control.

Question 157

Define Appropriateness of Audit Evidence

Answer 157

Competency both relevant and reliable

Question 158

assertions about classes of transactions and events for the period under audit

Answer 158

Transactions and events that have been recorded have occurred and pertain to the entity. Transactions and events have been recorded in the proper accounts. Amounts and other data related to transactions and events have been recorded appropriately.

Question 159

rules of the AICPA Code of Professional Conduct must be observed even by a member who is not in public practice

Answer 159

In the performance of any professional service, a member shall maintain 1. objectivity and integrity, 2. shall be free of conflicts of interest, and 3. shall not knowingly misrepresent facts or subordinate his or her judgment to others

Question 160

substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items when past experience indicated numerous pricing and extension errors - statistical sampling

Answer 160

Ratio estimation sampling based on ratios between audited amounts and recorded amounts. most efficient when the ratio is not equal to one. numerous usable results that would produce the most precise evaluation most effective when calculated audit amounts are approximately proportional to the client's book amounts.

Question 161

For the accounting firm to continue to provide audit service to the client, Title II (Independence Rules) Section 203 SOX states that the lead audit partner must rotate out

Answer 161

Audit Partner Rotation: at least every five years to promote independence of the audit firm

Question 162

Date on reissued report of FS

Answer 162

same as original

Question 163

acceptability of financial reporting framework

Answer 163

purpose users mgmt. determination applicable framework acceptable

Question 164

mitigating factors (going concern)

Answer 164

asset disposal borrow money/restructure debt reduce/delay expenditures increase ownership equity

Question 165

documentation of uncorrected misstatements

Answer 165

1. the amount below which they are trivial 2. all accumulated misstatements and if corrected 3. conclusion as to materiality individually or in the aggregate

Question 166

compilation OCBOA

Answer 166

disclose OCBOA in report

Question 167

Review predecessor auditor working papers related to

Answer 167

internal control | contingencies

Question 168

Possible result of violations of auditing and related professional practice standards

Answer 168

disciplinary proceedings by PCAOB

Question 169

once related party transactions are identified

Answer 169

determine if approved by those charged with governance

Question 170

report OCBOA

Answer 170

standard audit report modified opinion for departures from GAAP additional paragraph regarding conformity with OCBOA

Question 171

service auditor/auditor's report

Answer 171

should not be referenced no division of responsibility since service auditor did not examine client FS

Question 172

report on supplementary information

Answer 172

Other Matter following Opinion | or Separate Report

Question 173

client will not allow inquiry of legal counsel

Answer 173

material scope limitation | disclaimer of opinion

Question 174

compilation documentation

Answer 174

engagement letter significant findings/issues communications of noncompliance and/or fraud

Question 175

CPA firm - entity formation

Answer 175

any form in which CPA's maintain ownership, rights and professional matters

Question 176

addressee for auditor report

Answer 176

company that engaged auditor | stockholders, BOD

Question 177

to express opinion on employee profit participation

Answer 177

must also audit employer FS

Question 178

registered firms and associated persons independence

Answer 178

during professional and audit engagement period

Question 179

Obtain a sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit of financial statements and to determine whether they have been implemented to:

Answer 179

1. identify types of potential misstatements, 2. consider factors that affect the risks of material misstatement, and 3. design tests of controls, when applicable, and substantive procedures.

Question 180

underwriter a comfort letter containing comments on data that have not been audited

Answer 180

negative assurance on compliance as to form

Question 181

The understanding with the client regarding services to be performed during an engagement includes

Answer 181

that the objective of the audit is the expression of an opinion on the financial statements. responsibilities of management for: financial statements, adjustments to correct material misstatements establishing and maintaining effective internal control, ensuring that the entity complies with the laws applicable to its activities, making all financial records available to the auditor, providing the auditor with a letter confirming representations made to the auditor during the audit. auditor's responsibilities, including: conducting the audit in accordance with GAAS obtaining understanding of internal control sufficient to plan the audit and determine the nature, timing, and extent of the audit procedures

Question 182

appropriateness of audit evidence

Answer 182

Competency both relevant and reliable

Question 183

When obtaining written client representations, materiality limits do not apply to:

Answer 183

Irregularities in financial statements (intentional misstatements or omissions of amounts or disclosures) Client representation letter states that there have been no irregularities involving management or employees who have significant roles in the internal control structure.

Question 184

audit procedures for estimated contingencies

Answer 184

gather sufficient appropriate evidence to provide reasonable assurance that all estimates material to the financial statements have been made—completeness. consider the consistency of processes and assumptions understand how the estimates were derived gather sufficient appropriate evidence to provide reasonable assurance that such estimates are presented in accordance with US GAAP assess the reasonableness of management's judgments, which would include the determination of whether a contingency is reasonably possible, probable, or remote

Question 185

Audits of entities receiving federal financial assistance usually have the following common elements:

Answer 185

Auditors must follow GAAS and GAS Auditor's consideration of internal control is to include obtaining and documenting an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance. Auditor issues a report on the consideration of internal control. Auditor determines and reports on whether funds are administered in accordance with applicable laws and regulations.

Question 186

Two types of misstatements are relevant to the auditor's consideration of fraud-misstatements

Answer 186

Misstatements arising from: 1. fraudulent financial reporting 2. misappropriation of assets

Question 187

Communicating significant deficiencies in the design of internal control when reporting under Government Auditing Standards.

Answer 187

to specific legislative and regulatory bodies

Question 188

Auditor may be engaged to perform which services in relation to Prospective financial statements expected to be used by a third parties.

Answer 188

examination, compilation, (inquiries re: acctg principles appropriate, or agreed-upon procedure

Question 189

If the client refuses to disclose the newly discovered facts and their impact on the financial statements to persons known to be currently using or likely to use the financial statements, all of the following steps should be taken by the accountant:

Answer 189

(a) notification to the client that the accountant's report must no longer be associated with the financial statements (b) notification to the regulatory agencies having jurisdiction over the client that the accountant's report should no longer be used, and (c) notification to each person known to the accountant to be using the financial statements that the financial statements and the accountant's report should no longer be used.

Question 190

quality control requirement under Government Auditing Standards

Answer 190

provide the CPA's most recent external quality control review report to the party contracting for the audit

Question 191

unable to obtain audited FS of consolidated investee

Answer 191

material scope limitation | qualified opinion

Question 192

prepare FS audit for consolidated non US, non GAAP

Answer 192

Either: modified US style report to comply or report form of non US country

Question 193

Communicate to those charged with governance (IFRS)

Answer 193

auditor responsibilities planned scope and timing significant timing auditor independence

Question 194

UW requests comfort letter

Answer 194

UW must provide required representation letter otherwise no comfort letter (another form of letter may be provided)

Question 195

Entity's risk assessment process

Answer 195

Entity's identification, analysis and management of risks relevant to financial statement presentation

Question 196

Auditor's risk assessment process

Answer 196

Auditor's evaluation of the likelihood that material misstatements in FS could occur.

Question 197

Financial Forecast vs. Projections

Answer 197

Both are prospective standard forecast report: compilation is limited to information that is the management's representation and does not include evaluation of the support of the assumptions underlying the forecast Projections contain one or more hypothetical assumptions Projections are restricted to limited use only while forecasts may be used for general or restricted use.

Question 198

Verify Completeness assertion for inventory

Answer 198

Prenumbered receiving reports | Periodically reconciled

Question 199

Auditor's required compliance with which standards

Answer 199

All standards (GAAP, GAAS, GAGAS) Competence, skills, technical knowledge, experience

Question 200

vouchers payable

Answer 200

match invoice to RR approve voucher via authorized employee indicate asset/expense debits (proper classification) NOT accounting for unused purchase orders and receiving reports

Question 201

Primary supervisory responsibility of auditor with final responsibility

Answer 201

to explain to staff accountants how results of procedures performed should be evaluated

Question 202

Reporting on condensed FS

Answer 202

indicate if fairly stated in all material aspects in relation to complete FS same requirements/guidance as Interim reporting

Question 203

Section 105 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB)

Answer 203

may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards. Possible disciplinary actions include: temporary suspension permanent revocation of registration temporary or permanent suspension of persons; temporary or permanent limitation on activities, functions, or operations of the firm; civil monetary penalties; censure; additional professional education or training; and any other sanction provided for in the PCAOB rules. PCAOB will strictly sanction intentional or knowing conduct, including reckless conduct, that results in violations and repeat violations.

Question 204

Engagement letter

Answer 204

objectives of the engagement, responsibilities of management, responsibilities of practitioner, limitations of the engagement, identification of the applicable financial reporting framework, and reference to the expected form and content of any reports to be issued by the auditor. Information about fees and billing may be included but is not required.

Question 205

The Securities Act of 1933:

Answer 205

is concerned with preventing fraud in securities sales.

Question 206

An auditor may provide an issuer client any of the following nonaudit services without impairing independence and without obtaining the preapproval of

Answer 206

nonaudit services with revenues in aggregate of less than 5% of the total revenues paid by the issuer to the auditor during the fiscal year in which the nonaudit services are provided nonaudit services that were promptly brought to the attention of, and approved by, the audit committee prior to the completion of the audit services that the issuer did not recognize as nonaudit services at the time of the engagement all nonaudit services, except those that fall under the de minimis exception, need to be preapproved by the audit committee MAY NOT PROVIDE nonaudit services to perform financial information systems design and implementation

Question 207

The introductory paragraph contains three important facts

Answer 207

1) It states that an audit was conducted and indicates which financial statements are covered in the financial report; 2) It contains a statement that the financial statements are the responsibility of management; and, 3) It identifies the auditor's responsibility to express an opinion on the financial statements.

Question 208

An auditor who performs an audit of a public company must make reference to standards

Answer 208

issued by the Public Company Accounting Oversight Board (PCAOB) in the scope paragraph of the audit report.

Question 209

Pervasiveness

Answer 209

the extent to which the exception affects different elements of the financial statements.

Question 210

PCAOB Auditing Standard No. 5 requires

Answer 210

the audit of internal control over financial reporting to be integrated with the audit of the financial statements.

Question 211

Both disclaimers and adverse opinions are used:

Answer 211

Only when a condition is highly material. Adverse opinion - financial statements do not present fairly the financial position, results of operation, and cash flows of the client in conformity with U.S. GAAP. (result from very material departures from GAAP Disclaimers of opinion - in rare circumstances, auditors issue when a material uncertainty affects the financial statement

Question 212

A material misstatement has been found but it is not so serious as to necessitate an adverse audit opinion.

Answer 212

Thus, the auditor will provide an opinion qualification that indicates that the statements are presented fairly "except for" the problem difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made financial statements, including footnotes, fail to disclose information that is required by GAAP - qualified or adverse qualified - additional paragraph describing the nature of the omitted disclosures, and opinion paragraph includes the phrase "except for the omission of the information discussed in the preceding paragraph."

Question 213

statement required in the scope paragraph of a standard report

Answer 213

"An audit also includes assessing the accounting principles used and the significant estimates made by management..."

Question 214

Date on separate reports based on audits of an issuing company's internal control over financial reporting and its financial statements.

Answer 214

last day of audit responsibility for the CPA. the last day of field work is used for all audit work whether it is on the financial statements or the internal control

Question 215

A company issues audited financial statements under circumstances which require the presentation of a statement of cash flows but refuses to present a statement of cash flows

Answer 215

statement of cash flows is required by U.S. GAAP omission results in a qualified opinion omission of a disclosure (normally auditor must provide) entire statement - auditor not required to create information provided is not wrong as a result of the omission, so an adverse opinion cannot be given

Question 216

basic financial statements

Answer 216

1. balance sheet, and statements of: 2. income, 3. retained earnings, and 4. cash flows

Question 217

A CPA firm is associated with the financial statements of a company but is not independent.

Answer 217

A disclaimer of opinion is issued that states that the firm is not independent and, therefore, has no opinion.

Question 218

The audit report for a company that has publicly traded shares (sometimes known as an "issuer") has several paragraphs.

Answer 218

The first is the introductory paragraph which identifies the financial statements being audited and discloses the responsibilities of both the management and the independent auditor. The second paragraph is the scope paragraph which outlines the work performed by the independent auditor. (planning and performing the audit to obtain reasonable assurance, examining evidence supporting amounts and disclosures, and assessing the accounting principles) The third paragraph is the opinion paragraph which provides the level of assurance being given by the auditor.

Question 219

CPA is aware of a material misstatement, but an audit has not been performed, no opinion can be given.

Answer 219

The nature and extent of the problem must be described in the report and then a disclaimer is rendered.

Question 220

Auditor looks at evidence on a test basis.

Answer 220

items are studied in samples | size of these samples is sufficient to be able to provide the reasonable assurance

Question 221

preparing an unmodified audit report for a company that is privately-held. To whom should the report be addressed:

Answer 221

primary users of the report | board of directors and the stockholders

Question 222

The audit report for a nonissuer must have headings to indicate the purpose of each section and they include

Answer 222

Management’s Responsibility for the Financial Statements Auditor’s Responsibility, and Opinion

Question 223

“Our responsibility is to express an opinion on these financial statements based on our audit.” appears where (public, nonpublic)

Answer 223

The Public Company Accounting Oversight Board sets the standards for public companies and has maintained the traditional audit report where the auditor’s responsibility is stated at the end of the first paragraph. The Auditing Standards Board sets standards for nonpublic companies and has created a new standard report where the auditor’s responsibilities are spelled out at the beginning of the third paragraph.

Question 224

“the acceptable level of detection risk increases.”

Answer 224

more reliance on the entity's internal control requires less assurance from substantive testing allows the nature, timing, and extent of substantive tests to be lessened timing of substantive tests could be shifted from year-end to an interim date.

Question 225

Section 103 of SOX Title I, “Auditing, Quality Control, and Independence Standards and Rules,”

Answer 225

(PCAOB) has the authority to set, amend, update, and modify auditing, quality control, and ethics standards.

Question 226

When there is a departure from GAAP,

Answer 226

the auditor must decide whether to issue either a qualified opinion or an adverse opinion.

Question 227

Unexpected relationships still exist at the review stages of an audit

Answer 227

additional tests of details are required

Question 228

understanding of control activities

Answer 228

utilized to determine areas that need attention

Question 229

establish quality control policies to provide assurance related to agreed-upon procedures engagements - Standards for Attestation Engagements (SSAE),

Answer 229

independent from the client and other specified parties

Question 230

an auditor can verify the reliable operation of programmed controls by:

Answer 230

manually comparing detail transaction files used by an edit program to the program's generated error listings to determine that errors were properly identified by the edit program. constructing a processing system for accounting applications and processing actual data from throughout the period through both the client's program and the auditor's program. periodically submitting auditor-prepared test data to the same computer process and evaluating the results. CANNOT manually re-perform, as of a point in time, the processing of input data and compare the simulated results to the actual results.

Question 231

Obtain sufficient knowledge of the communication component to understand how the entity communicates financial reporting roles and responsibilities and significant matters relating to financial reporting.

Answer 231

This component of internal control involves communication: 1. with personnel regarding their roles and responsibilities in the internal control structure, 2. with personnel about how their activities in the financial reporting system relate to others, 3. with personnel about how and to whom to report financial reporting exceptions, and 4. between management and those charged with governance, as well as third parties such as regulatory authorities.

Question 232

allowance for sampling risk

Answer 232

the difference between the upper precision limit and the sample deviation rate

Question 233

Requirements of GAGAS

Answer 233

The Government Accountability Office (GAO) requires auditors who spend 20% or more of their time performing government audits to have 80 hours of CPE every two years directly related to government auditing (also called “Yellow Book” hours). A firm must have a system of quality control in place to assure compliance with professional standards and legal and ethical requirements. The quality control system should address, among other areas, human resources policies and procedures. An external peer review is required at least once every three years.

Question 234

The risk of material misstatement of accounting estimates increases with increases in the:

Answer 234

1. complexity and subjectivity of the estimation process, 2. lack of availability and reliability of relevant data, 3. number and significance of the assumptions that are made, and 4. degree of uncertainty associated with the assumptions.

Question 235

The primary responsibility for the prevention and detection of fraud

Answer 235

is given primarily to those charged with governance and management. Management, with the oversight of those charged with governance, must place an emphasis on fraud prevention. The internal auditor's responsibility comes into play for the detection of fraud, not its prevention.

Question 236

AU-C 210.09

Answer 236

states that the auditor should establish an understanding with the client regarding the services to be performed for each engagement and should document the understanding through a written communication with the client.

Question 237

AU-C 210.10

Answer 237

states that these matters should be communicated in the form of an engagement letter.

Question 238

AU-C 315.33

Answer 238

states that the auditor should document the significant risks identified and related controls evaluated.

Question 239

Single Audit Act Amendments of 1996,

Answer 239

Under the “percentage of coverage rule”, select and test major programs (account for at least 50% of the federal funding spent by that entity) When an entity qualifies as low risk, the scope of audits under the “percentage of coverage” can be reduced to as low as 25% of the federal funding spent by the entity. auditor considers materiality in relation to each major federal financial assistance program consider the nature of the noncompliance and the amount affected by the noncompliance in relation to the nature and amount of the major federal financial assistance program under audit

Question 240

permanent workpaper files

Answer 240

items that remain relatively unchanged year to year includes analysis of capital stock and owner's equity

Question 241

Predecessor auditor reissues compilation

Answer 241

1. read current FS and successor's current year report 2. compare prior to current 3. obtain letter regarding any material matter he is aware of regarding prior

Question 242

Date on audit report

Answer 242

no earlier than date of sufficient evidence (no longer last date of fieldwork) close to report release date

Question 243

Engagement to audit only one FS

Answer 243

acceptable limited reporting objectives (access to all information underlying all basic FS?)

Question 244

SOX 201

Answer 244

Services outside scope of auditors: 1. bookkeeping 2. financial information system design 3. appraisal/valuation/fairness/contribution-in-kind 4. actuarial 5. internal audit 6. mgmt/hr 7. broker/dealer, investment advisor/banking 8. legal/expert 9. others by reg Tax planning is allowed

Question 245

SOX 202

Answer 245

Preapproval Requirements audit/nonaudit services by audit committee approval waiver if ALL are true: total annual rev <= 5% total rev issuer pd to auditor not recognized as nonaudit at engagement promptly approved

Question 246

auditor lacks independence

Answer 246

no opinion may be expressed disclaim

Question 247

FASB and material departures from GAAP

Answer 247

not allowed under any circumstances must modify opinion still allowable under GASB and FASAB (justified = unmodified/explanatory paragraph)

Question 248

Management refusal to acknowledge responsibility for fair presentation of FS in conformity with GAAP

Answer 248

Scope limitation Sufficient to preclude unmodified opinion Must modify (qualified/adverse)

Question 249

Qualified opinion resulting from scope limitation

Answer 249

explanatory paragraph preceding opinion paragraph reference explanatory paragraph in scope and opinion paragraph

Question 250

attorney's response

Answer 250

limited to matters to which attorney has given substantive attention in the form of legal representation

Question 251

Substantial client-imposed scope restrictions

Answer 251

disclaimer of opinion when materiality is in question

Question 252

Report on Agreed-Upon Procedures

Answer 252

1. statement on restriction for use by specified parties 2. disclaimer on sufficiency of procedures (responsibility of specified parties) 3. not an examination so no opinion

Question 253

Independence & GAS

Answer 253

1. conceptual framework 2. guidance for audit orgs located w/in audited entity 3. nonaudit requirements 4. guidance on documentation

Question 254

responsibilities for specialist

Answer 254

1. obtain understanding of methods/assumptions 2. tests of data per control risk assessment 3. evaluate findings and support of FS assertions

Question 255

OCBOA and Review

Answer 255

permissible review report communicates use of OCBOA FS include: 1. description of OCBOA (summary of sig policies, differences from GAAP) 2. disclosures Mgmt does not need to justify use of OCBOA in rep letter

Question 256

Risk Assessment prodecures

Answer 256

obtain audit evidence re design/implementation of controls: Inquiry (not sufficient on its own) Observation Inspection Tracing

Question 257

going concern

Answer 257

Auditing standards require that the auditor evaluate whether a substantial doubt exists about the client's ability to continue as a going concern for a period of time not to exceed one year from the date of the financial statements being audited. If that degree of uncertainty exists, a qualified opinion is not appropriate. Instead, an extra paragraph is added after the opinion paragraph to alert readers to the problem. Auditors are not required to perform procedures specifically designed to test the going concern assumption. If entity's disclosures regarding its ability to continue as a going concern are inadequate, misleading, or depart from U.S. GAAP, a qualified or adverse opinion should be issued.

Question 258

indicators of going concern issues

Answer 258

recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and/or adverse key financial ratios information about litigation, claims, and assessments that could possibly cause the entity to cease to exist denial of usual trade credit from suppliers

Question 259

Auditor, as a result of the report or findings of a specialist, decides to add explanatory language to the auditor's report regarding a going concern issue,

Answer 259

may refer to and identify the specialist in that auditor's report.

Question 260

Substantial doubt about the entity's ability to continue as a going concern. Auditor's considerations relating to management's plans for dealing with the adverse effects

Answer 260

plans to dispose of assets, reduce expenditures, restructure debt, and increase ownership equity

Question 261

If EOM, extra paragraph is added at the end of the audit report to emphasize a matter of importance,

Answer 261

no related change is made in the wording of any of the other three paragraphs

Question 262

EOM vs OM

Answer 262

emphasis-of-a-matter - information about some aspect of the financial information included within the statements. other-matter - information about some aspect of the financial information that is not explicitly included in the financial statements

Question 263

examples of nonroutine or nonsystemic transactions

Answer 263

intercompany transactions large revenue transactions at period-end may indicate a risk of material misstatement

Question 264

planning an integrated audit, the auditor should evaluate the following matters:

Answer 264

Prior knowledge of the company's internal control Industry reporting, economic, laws/regs, tech changes Business organization, operating characteristics, capital Extent of any recent company, operations, or IC changes Preliminary judgments about materiality, risk Control deficiencies previously communicated Legal or regulatory matters of which company is aware Type and extent of available evidence Preliminary judgments about effectiveness of IC Relevant public information Risks evaluated as part of client acceptance/retention Relative complexity of the company's operations

Question 265

Entity-level controls include:

Answer 265

controls related to the control environment, controls over management override, the company's risk assessment process, centralized processing/controls (shared service enviro), controls to monitor results of operations, controls to monitor controls, internal audit, committee, controls over the period-end financial reporting process, policies that address sig business control/risk mgmt

Question 266

Title III, Section 303 of SOX

Answer 266

Civil Proceedings deals with any action taken to fraudulently coerce, manipulate, or mislead the auditor. prohibits any director or officer from acting in this manner, as well as anyone acting under their direction. Refusal to answer auditor questions honestly could be considered an attempt to mislead the auditor.

Question 267

Stale and Aged Checks appear in Bank Reconciliation

Answer 267

Potential Issue

Question 268

Analytical Procedures

Answer 268

Indicate areas of potential problems Results affect NATURE of further procedures

Question 269

Material Weakness in Internal Control

Answer 269

Adverse Opinion on IC

Question 270

No assurance from mgmt on IC but test reveal no material weakness

Answer 270

Unqualified Opinion on IC

Question 271

Communication that 1) no significant deficiencies or 2) material weaknesses were identified?

Answer 271

1) not allowed | 2) allowed

Question 272

Compilation Report

Answer 272

1. compiled FS 2. in accordance with SSARS 3. limited to presenting FS - the representation of mgmt 4. not audited or reviewed 5. no opinion/assurances mgmt responsible DIM for IC relevant to fp of FS objective to assist mgmt to present FS w/o assurance that no mat mod should be made to FS mgmt may elect no disclosures then disclose: lack of independence (not reason), last paragraph BOA must then be disclosed in report

Question 273

PPS Sampling

Answer 273

Reliability Factor (chart - Risk of Incorrect Acceptance, # Errors allowed) Sample Size = Pop BV x RF/TE - #E Sampling Interval = Pop BV/Sample Size

Question 274

Reference made in the opinion rendered by the auditor of the group financial statements to work of component auditor

Answer 274

Division of the work between the auditor of the group financial statements and the work performed by the component auditor Mentions the report of the other auditor in the auditor's Responsibility paragraph (amount of the division) and the Opinion paragraph OR Assume full responsibility, no reference is made to the component auditor

Question 275

Successor auditor to publish comparative financial statements

Answer 275

Intro paragraph: 1. identify previous FS 2. previous opinion 3. date of previous report NOT name of predecessor auditor

Question 276

Add extra paragraph to end of otherwise standard report

Answer 276

EOM/EM substantial doubt as to gc change from one allowable GAAP matter to another

Question 277

Before reissuing an auditor report, predecessor auditor should

Answer 277

obtain a letter of representations from the successor auditor

Question 278

Group FS GAAP, but chooses to reference subsidiary audit of financial statements prepared according to IFRS

Answer 278

must be converted to US GAAP for consolidation purposes. auditor of the group statements must disclose its responsibility for evaluating that conversion process

Question 279

The auditor of the group financial statements is required to

Answer 279

set materiality levels and determine risk (assessment) for all components that go into creating the reported financial statements.

Question 280

Component

Answer 280

a piece of a company that maintains its own separate financial information: one account (inventory, for example, or accounts receivable) a single operation or a subsidiary auditing procedures can be separated from the remainder of the group financial statements

Question 281

Group Audit Engagement Team

Answer 281

Partners, including group engagement partner, and staff 1. establish the overall group audit strategy, 2. communicate with component auditors, 3. perform work on the consolidation process, and 4. evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements. Any auditors who are involved with the client but do not meet the definition of a member of the group engagement team are considered to be Component Auditors. CA frequently work with other auditing firms but can be members of the same firm as the group audit engagement team.

Question 282

Other CPA firm not acting as an auditor but rather carrying out one particular procedure.

Answer 282

Reference can only be made to work done by a component auditor when an audit is performed. Reader of the audit report cannot be expected to understand the division of responsibility if only specific procedures are performed.

Question 283

two types of reports that a service organization may request from its auditor

Answer 283

type 1 report: report on management's description of a service organization's system and the suitability of the Design of controls type 2 report: report on management's description of a service organization's system and the suitability of the Design and Operating effectiveness of controls type 1 - disclaim an opinion on the operating effectiveness of controls. (no test for reasonable assurance that control objectives achieved during the period under audit)

Question 284

Review report and supplementary info

Answer 284

1. state the other data was subjected to the inquiry and analytical procedures applied in the review of the basic financial statements and provide the same negative assurance as the basic financial statements or 2. state that the other data has not been subjected to those procedures but has been compiled from information that is the representation of management and the accountant does not express an opinion or provide any assurance on the data

Question 285

Internal Auditor: 1. Objectivity 2. Competence 3. Quality/Effectiveness (of work)

Answer 285

1. impartial/operates free of conflicts of interest Understand the organizational status: a. reports to one with ability to consider/act upon findings b. reports directly/regularly to those charged w/governance c. those charged w/governance oversee employment decisions regarding IA 2. professional certifications 3. consistency of reports with results of work performed and appropriateness of conclusions

Question 286

in-house legal counsel may relay information pertaining to such matters as

Answer 286

litigation, compliance with laws and regulations, knowledge of fraud/suspected fraud affecting the entity, warranties, post-sales obligations, arrangements (such as joint ventures) w/partners, and meaning of contract terms

Question 287

Sec 11(a) Securities Act of 1933

Answer 287

Shifts burden from investor to CPA who audits FS associated with registration statement and sued by acquirer of securities misstatement immaterial not misleading due diligence re: audit

Question 288

Section 409 of Title IV of the Sarbanes-Oxley Act (SOX)

Answer 288

Real Time Issuer Disclosures disclose to the public on rapid/current basis additional information on material changes in financial condition or operations

Question 289

Providing Access to or Copies of Audit Documentation to a Regulator

Answer 289

Federal Agencies (FDIC. OTS, HUD, Labor, REA) State insurance/utilities Health care authorities NOT IRS

Question 290

IFAC

Answer 290

International Federation of Accountants standards/guidance organizations, firms, practices promote value of accountants public interest issues

Question 291

To accept an engagement to examine MD & A,

Answer 291

Statements on Standards for Attestation Engagements: CPA, audited the FS to which the MD & A applies, understand the required elements of the rules and regulations adopted by the SEC in relation to the MD&A (includes adopted elements/not conformity )

Question 292

MD&A

Answer 292

narrative explanation of the financial results as reported in the financial statements filed with the SEC

Question 293

compensating balance arrangements and nonmonetary transactions

Answer 293

obscure the forms of transactions, suspect in regards to related party transactions

Question 294

after identifying related party transactions,

Answer 294

obtain an understanding of the business purpose of the transactions

Question 295

note states that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction

Answer 295

qualified or adverse opinion unsubstantiated disclosure generally not possible to determine whether a particular transaction was consummated on terms equivalent to those with unrelated parties

Question 296

high risk of material misstatement

Answer 296

expand substantive testing or select more effective substantive tests NOT increase of tests of controls

Question 297

information from marketing, sales, or production personnel

Answer 297

changes in the entity's marketing strategies, sales trends, production strategies, or contractual arrangements with the entity's customers

Question 298

materiality levels

Answer 298

are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Question 299

Compilation (OCBOA & No disclosures)

Answer 299

may compile financial statements that omit all footnote disclosures footnotes to the financial statements disclose the basis of accounting in preparing the financial statements CPA must then disclose the basis of accounting followed in the compilation report

Question 300

Failure by the client's management to provide a representation letter covering all of the periods under review

Answer 300

precludes the completion of a review may issue a compilation report

Question 301

Special reports,

Answer 301

special purpose include: OCBOA FS (cash/tax/contractual/regulatory) specified elements, accounts, items of a financial statement; compliance (contractual agreements/regulatory requirements; financial information presented in prescribed forms/schedules emphasis-of-a-matter paragraph include a paragraph that states the basis of presentation and refers to the note in the financial statements that discusses the basis of presentation and describes how that basis differs from GAAP

Question 302

Reports on preprinted forms

Answer 302

type of special report GAAS - not satisfied with the wording, it should be reworded

Question 303

When an auditor is engaged to report on selected financial data that are included in a client-prepared document that contains audited financial statements,

Answer 303

report limited to data derived from audited financial statements. If also derived from other information, the auditor's report should specifically identify the data on which he/she is reporting

Question 304

cash-basis financial statements

Answer 304

Assets and liabilities arising from cash transactions, and revenue collected and expenses paid "Balance Sheet," "Income Statement," etc. - terms associated with GAAP

Question 305

report on agreed-upon procedures

Answer 305

include: procedures performed related findings

Question 306

Form 8-K.

Answer 306

reportable disagreement make a report to the SEC relating to noncompliance with laws and regulations that has a material effect on the financial statements. may be necessary if the auditor withdraws from the engagement because the board of directors has not taken appropriate remedial action.

Question 307

expression related to the consistent application of an applicable financial reporting framework

Answer 307

The auditor's standard report does not include if (a) no change in accounting principles has occurred, or (b) there has been a change in accounting principles or the method of their application, but the effect of the change is not material

Question 308

When the auditor reissues a report of the financial statements,

Answer 308

the independent auditor has no responsibility to make further investigation or inquiry as to events which may have occurred during the period between the original report date and the date of the release of additional reports.

Question 309

third party use of prospective financial statements is expected, an accountant may not accept an engagement to

Answer 309

Perform a review.

Question 310

AR 100.41 states, Each page of the financial statements reviewed by the accountant should include a reference, such as,

Answer 310

"See Accountant's Review Report."

Question 311

The accountant performing a review is required to obtain

Answer 311

a letter of representation from members of management who the accountant believes are responsible for and knowledgeable, directly or through others in the organization, about the matters covered in the representation letter. Normally, the CEO and the CFO sign the representation letter. A representation letter is not required for a compilation engagement.

Question 312

Inquiries and analytical procedures ordinarily performed during a review of a nonpublic company's financial statements include

Answer 312

inquiries concerning the company's procedures for recording and summarizing transactions. NOT include obtaining corroborating audit evidence, management's assertions about continued existence, or company's attorney's opinion concerning contingencies

Question 313

For a review, to draw attention to any material departure from U.S. GAAP

Answer 313

CPAs are required to include an extra explanatory paragraph in their report

Question 314

According to the AICPA's SSARSs, engagement planning should include

Answer 314

1. establishing an understanding with management in an engagement letter, 2. obtaining an understanding of the client and its industry, and 3. considering the scope of the engagement in meeting the client's needs. Review procedures primarily consist of inquiry and analytical procedures, not detailed tests of transactions and balances.

Question 315

SAS retention period for audit documentation

Answer 315

not less than 5 years

Question 316

to express opinion on A/R balance when disclaimer or modified opinion on FS

Answer 316

present A/R report separately special report not a piecemeal opinion

Question 317

supplementary info in compilation or review

Answer 317

refer to the data in FS report or issue separate report on it

Question 318

Planning a review of an audit client's interim financial statements

Answer 318

Read documentation of preceding year's audit/reviews of prior current year interim period(s) and corresponding prior year interim period(s) Read most recent annual and comparable prior interim period financial information Considering the results of any audit procedures performed with respect to the current year's financial statements Inquire of management about changes in the entity's business activities, the identity/nature of related party transactions and whether significant changes in internal control have occurred subsequent to the preceding annual audit or prior review of interim financial information

Question 319

Application controls

Answer 319

performed by IT (automated) or by individuals When performed by people interacting with IT, they may be referred to as user controls. designed to achieve specific control objectives related to specific accounting tasks. pertain to the processing of individual applications. are manual or automated procedures that operate at a business process level

Question 320

The auditor should develop auditing procedures based on the auditor's understanding of the entity and its environment, including

Answer 320

the composition of revenues, specific attributes of the revenue transactions, and unique industry considerations.

Question 321

The auditor is required to communicate certain matters to those charged with governance. (audit committee) including:

Answer 321

auditor's responsibility under GAAS auditor's views about significant accounting policies mgmt judgments/process for significant estimates, significant adjustments (material, corrected mistmts), uncorrected, nontrivial misstatements/effect on opinion, other mgmt info included in FS, disagreements with management (resolved or not), mgmt consultation with other accountants, major retention RMM issues discussed with management, difficulties encountered caused by management.

Question 322

audit strategy

Answer 322

determines the characteristics of the engagement, defines its scope, allows the auditor to determine key dates/objectives, and considers materiality, areas of higher RMM audit strategy helps the auditor assign resources

Question 323

audit plan

Answer 323

more detailed than the audit strategy includes the nature, timing, and extent of procedures to be performed by audit team members to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level

Question 324

Audit evidence about control risk is obtained by

Answer 324

performing tests of controls that evaluate the effectiveness of specific controls ``` Methods of determining the effectiveness of the design and operation of a control include: inquiry, inspection, observation, reperformance ```

Question 325

substantive tests include

Answer 325

analytical procedures (planning, substantive testing, final review, calculations by the auditor, and confirmation process (highly reliable evidence obtained from external, independent third parties)

Question 326

An examination of prospective financial statements involves:

Answer 326

evaluating the preparation evaluating the support underlying the assumptions, evaluating the presentation for conformity with AICPA issuing an examination report.

Question 327

In designing a written audit plan, specific audit objectives should be established. Audit objectives are related primarily to

Answer 327

financial statement assertions, which can be classified according to categories: ``` Occurrence Completeness Accuracy Cutoff Classification Existence Rights and obligations Valuation and allocation AU-C 315.A114 ``` Audit procedures that will achieve the audit objectives are detailed in the audit plan. Timing of audit procedures and the cost-benefit of gathering evidence are considered in audit planning. Audit techniques are selected in performing the audit work.

Question 328

why perform a walkthrough of transactions

Answer 328

understand the full process determine effectiveness of the control NOT to verify accuracy regarding single transaction type

Question 329

NOT in a Review

Answer 329

inquiry as to integrity of mgmt/control procedures permission to contact predecessor auditor assess risk of material misstatement

Question 330

Significant deficiencies in the design or operation of the internal control structure that come to the auditor's attention (reportable conditions) and Government Auditing Standards

Answer 330

require that these deficiencies be reported to the auditee and to the appropriate officials of the organizations requiring or arranging for the audits, including legislative and regulatory bodies

Question 331

When the auditor has noted reportable conditions in a financial statement audit conducted in accordance with Government Auditing Standards,

Answer 331

the auditor's report on the internal control structure should contain: a description of the scope of the auditor's work, stating that the auditor obtained an understanding of the design of relevant policies and procedures, determined whether these policies and procedures have been placed in operation, and assessed control risk

Question 332

The audit of recipients of federal financial assistance conducted under Governmental Auditing Standards auditor responsibility to audit and report on compliance

Answer 332

recipient has a legal obligation to spend monies in accordance with applicable laws and regulations, the auditor has the responsibility to audit and report on compliance including material instances of fraud and illegal acts that were discovered assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements determines whether the federal financial assistance has been administered in accordance with applicable laws and regulations

Question 333

Government auditing standards and quality control

Answer 333

each audit organization conducting government audits should have an appropriate internal quality control system in place and participate in an external quality control review program CPA seeking to enter into a contract to perform an audit subject to government auditing standards should provide the CPA's most recent external quality review report to the party contracting for the audit

Question 334

issues Government Auditing Standards

Answer 334

GAO sometimes referred to as the “Yellow Book.”

Question 335

GAO: 3 types of threats to independence

Answer 335

organizational (same reporting unit as an audited entity) external personal (connection to or interest in the audited entity)

Question 336

GAO presumption of independence

Answer 336

federal employee auditing a state government program legislative auditor auditing a judicial branch program head audit organization elected by voters

Question 337

Government Auditing Standards require regarding internal controls that auditor "include in their report on the financial statements either:

Answer 337

(1) description of the scope of the auditors' testing of internal control…s and the results of those tests or an opinion, if sufficient work was performed, or (2) reference to a separate report(s) containing that information..."

Question 338

detect whether payroll data was altered during processing

Answer 338

Use test data to verify the performance of edit routines

Question 339

working trial balance resembling the financial statements

Answer 339

begins with the client's unadjusted balances contains columns for reclassifications and adjustments as a result of the audit indicates the adjusted ending balances format provides a transaction trail from the client's account balances to the audited financial statements

Question 340

Low assessment of risk associated with other relevant substantive procedures and sample size

Answer 340

smaller

Question 341

Smaller expected value of misstatements and sample size

Answer 341

smaller

Question 342

accountant issues to an underwriter a comfort letter containing comments on data that have not been audited

Answer 342

Negative assurance on the capsule information

Question 343

The objective of pro forma financial information

Answer 343

to show what the significant effects on historical financial information might have been had a consummated or proposed transaction occurred at an earlier date In a review report, the accountant should 1. identify the pro forma information, 2. refer to the financial statements from which the historical information is derived and 3. state whether such financial statements were audited or reviewed, 4. state that the review was in accordance with AICPA standards, 5. explain the objective of pro forma information and its limitations, and 6. provide negative assurance regarding the pro forma information

Question 344

An examination of prospective financial statements (PFS) is a professional service that involves

Answer 344

(1) evaluating the preparation of the prospective financial statements, (2) evaluating the support underlying the assumptions, (3) evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines, and (4) issuing an examination report, NOT a compilation report

Question 345

The standard report on the examination of prospective financial statements includes:

Answer 345

(1) n identification of the prospective financial statements presented, (2) a caveat that the prospective results may not be achieved and (3) a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. NOT an audit, (no reference to GAAS)

Question 346

Statements on Standards for Accountants' Services on Prospective Financial Information

Answer 346

forecasts take the form of historical financial statements 1. caveat as to the ultimate attainment of the forecasted results 2. statement that the CPA assumes no responsibility to update the report for events occurring after the date of the report. 3. opinion as to whether the forecast is fairly presented. (no need to explain what the information is since the forecast represents financial statements)

Question 347

financial forecasts or other prospective financial statements

Answer 347

An accountant may be engaged to examine, compile, or apply agreed-upon procedures

Question 348

An examination of a financial forecast involves

Answer 348

evaluating: preparation of the forecasted statements, support underlying the assumptions presentation for conformity with AICPA guidelines and issuing an examination report

Question 349

pro forma financial statements

Answer 349

historical statements that have been changed to show the impact that would have occurred as a result of a proposed event

Question 350

A report on the Operating Effectiveness of internal controls

Answer 350

1. opinion that the description of the controls is a fair presentation of the system in place 2. opinion that the controls tested operated effectively throughout the period 3. opinion that the controls were designed suitably to provide reasonable assurance that control objectives would be achieved if such controls were operating effectively

Question 351

A report on the Adequacy of the Design of internal controls

Answer 351

I. statement that the distribution of the report should be restricted to the service organization, user firms, and the independent auditors of user firms IV. A disclaimer of opinion on the operating effectiveness of the internal controls

Question 352

Rule 302 of the AICPA Code of Professional Conduct

Answer 352

prohibits contingent fees that are based on the findings of the work of a CPA. Contingent fees are allowed in certain types of tax matters such as an IRS examination where the final outcome is set by an independent party. The work is not being performed for the benefit of the public in any way but rather the final judgment is made by the IRS, a party that is unrelated to the reporting company and does not care whether the CPA is independent.

Question 353

AU-C 320.09 states that performance materiality is

Answer 353

“the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.”

Question 354

After the auditor assesses control risk, the auditor may desire a further reduction in the assessed level of control risk for some assertions.

Answer 354

1. The auditor would then decide if it is likely that additional evidential matter could be obtained to support a lower assessed level of control risk for these assertions. 2. If yes, and it is likely to be efficient to obtain such evidential matter, the auditor would then perform additional tests of controls. 3. Next, whether the auditor performed additional tests of controls or not, the auditor would document the basis for conclusions about the assessed level of control risk and design substantive tests.

Question 355

primary emphasis by auditors when assessing internal control

Answer 355

internal control over Classes of Transactions (NOT Account Balances because accuracy of these accounting system outputs depends heavily on the accuracy of inputs and processing )

Question 356

obtain an understanding of a client's internal control structure, including knowledge about the design of relevant policies, procedures and records and whether they have been placed in operation by the entity

Answer 356

to identify types of material misstatements, | consider factors that affect the risk of material misstatements, and design substantive tests

Question 357

reasonable assurance

Answer 357

the cost of an entity's internal control should not exceed the benefits derived

Question 358

According to the Comittee of Sponsored Organizations (COSO) framework, the seven factors of the control environment are:

Answer 358

I see ham bone. I (I) see (C) ham (HAM) bone (BO) I - Integrity and ethical values C - Commitment to competence H - Human resource policies and practices A - Assignment of authority and responsibility M - Management's philosophy and operating style B - Board of directors or audit committee participation O - Organization

Question 359

Even the best-designed internal control systems are subject to failure due to:

Answer 359

human error, faulty judgment, collusion, management override

Question 360

When financial statements are submitted for the use of management only,

Answer 360

not required to (may choose to) issue compilation report each page of the financial statements should include a reference restricting their use (e.g., “Restricted for Management's Use Only”).

Question 361

Financial statements can be projected into future years if certain assumptions are made.

Answer 361

perform procedures to evaluate assumptions NOT: explain the differences between historical and projected, refer to the auditor's report or include an opinion on going concern

Question 362

Per ISA 260, objectives of an auditor when communicating to those charged with governance.

Answer 362

communicate responsibilities of the auditor in relation to the audit, and planned scope/timing obtain information relevant to the audit provide timely observations significant and relevant to their responsibility to oversee the financial reporting process NOT providing pay rate and estimation information which is part of engagement

Question 363

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a follow-up study to its 1987 report entitled Fraudulent Financial Reporting: 1987–1997, An Analysis of U.S. Public Companies, outlining year-end testing procedures of particular importance, including:

Answer 363

tests of transaction cutoffs. tests of transaction terms and account valuation for end-of-period accounts tests to ensure a baseline level of internal control

Question 364

Parallel simulation

Answer 364

auditor uses client data and auditor-controlled software to obtain output and compare to the client output. Differences indicate potential weaknesses or problems with the client's software. Sample size can be greatly expanded with minimal additional colst

Question 365

Test data

Answer 365

introduced into the client's computer system using the same program to operate the application being tested not under the auditor's control, as it uses the client's actual program

Question 366

review of program logic

Answer 366

provide information about the design of the automated controls does NOT assist the auditor with testing the operating controls of the computer system

Question 367

integrated test facility

Answer 367

introduces a fictitious entity (such as a fake employee or customer) with real entries in the master files of the client's computer system. The auditor then compares the processing of data through the fictitious entity with what should be there in order to test that the data processing is reliable. Like the test data (or test deck) approach, an integrated test facility uses the client's system and is not under the auditor's control.

Question 368

use in determining the auditor's preliminary judgment about materiality

Answer 368

financial statements of the prior year

Question 369

engaged to review financial statements becomes aware of a departure from GAAP

Answer 369

disclose the departure in a separate paragraph of the review report

Question 370

standard report on a compilation of prospective financial statements does include:

Answer 370

statement that compilation of projection is limited in scope disclaimer of responsibility to update the report for events occurring after report date separate paragraph describing limitations on usefulness NOT limited assurance that the results may be achieved

Question 371

Discovery sampling

Answer 371

used when the auditor believes that the population occurrence rate is near zero meant to find at least one occurrence when the auditor expects none a special case of attribute sampling

Question 372

Input controls relate most appropriately to

Answer 372

rejection, correction, and resubmission of data that was initially incorrect.

Question 373

There are four basic categories of input to be controlled:

Answer 373

transaction entries, file maintenance transactions, inquiry transaction entries, and error correction transactions

Question 374

Edit checks on transaction entries

Answer 374

type of input control test transactions prior to processing and are designed to ensure that invalid inputs are rejected. A file of all rejected sales transactions is the only output pertaining to input controls. All of the other alternatives are examples of processing controls.

Question 375

design and perform further audit procedures that are responsive to the assessed risks of material misstatement at the relevant assertion level

Answer 375

consider significance of the risk, likelihood that a material misstatement will occur, characteristics of the relevant class of transactions, account balance, or disclosure involved, nature of the specific controls used by the entity and whether they are manual or automated, and whether the auditor expects to obtain audit evidence to determine if the entity's controls are effective in preventing and detecting material misstatements.

Question 376

voucher ordinarily replaced by another voucher in the random sample if voided voucher

Answer 376

has been properly voided.

Question 377

design deficiency

Answer 377

necessary control is missing or not properly designed

Question 378

Risk assessment

Answer 378

consider threats to organization's objectives in the areas of: operations, financial reporting and compliance with laws and regulations procedures: Inquiries of management and others within the entity. Analytical procedures. Observation and inspection

Question 379

The auditor uses the assessed level of control risk to

Answer 379

determine the acceptable level of detection risk for financial statement assertions

Question 380

substantive tests

Answer 380

Auditing procedures designed to detect misstatements include tests of details and analytical procedures

Question 381

prevent fictitious employees and/or fictitious salary rates

Answer 381

new hires, terminations of employees, and salary rates approved by the personnel department, who informs the payroll department/employee supervisor timely basis

Question 382

to reduce scope of tests of asset acquisitions

Answer 382

internal audit procedure: periodic inspection of physical equipment and comparison to what is recorded

Question 383

internal control and “information and communication"

Answer 383

``` ability of the accounting system to generate reliable information and convey it in a timely manner to those parties within the organization that need it ```

Question 384

understanding of the design of the controls: | techniques

Answer 384

questionnaire, flowchart, or narrative only one is necessary although sometimes the techniques are grouped together if the system is particularly complex

Question 385

A CPA has no need to test the operating efficiency of an internal control unless

Answer 385

it is well designed. Based on this preliminary assessment, the auditor wants to rely on the control so that control risk can be assessed at a lower level and the necessary amount of substantive testing is reduced. There is no potential benefit unless the control risk is well designed so only in that case will the auditor move on to do the testing for operating efficiency.

Question 386

Integrated test facility

Answer 386

create a small subsystem within the regular EDP system Dummy files and records are appended to existing client files and fictitious test transactions, specifically coded to correspond with the dummy files and records, are introduced into a system together with actual transactions.

Question 387

General accounting dept.

Answer 387

responsible for journalizing and posting all summary transactions General accounting serves as the last check on accounting records; it has no connection to assets or transactions.

Question 388

Auditors obtain information about internal control by

Answer 388

inquiry of appropriate personnel, observing control activities and operations as they are performed, and inspecting various entity documents and records

Question 389

general control policies and procedures

Answer 389

automatic reorder points establishment of requirements to be met in determining a customer's credit limits establishment of sales prices

Question 390

Inventory turnover ratio =

Answer 390

Cost of goods sold/Average inventory

Question 391

According to AU 325, significant deficiencies and material weaknesses in internal control of a public company must be communicated

Answer 391

in writing | to the audit committee of the board of directors. -

Question 392

Significant deficiencies

Answer 392

adversely affect a company's ability to perform its accounting functions and result in more than a remote likelihood that a misstatement that is more than inconsequential will not be prevented or detected and rather flow through to the financial statements. Ex: lack of objectivity by those responsible for accounting decisions would affect management's ability to produce financial statement free from material errors

Question 393

AU 380 requires that when the auditor is aware of such consultation with another CPA,

Answer 393

the auditor should discuss with the audit committee his/her views about significant matters that were the subject of such consultation.

Question 394

two possible types of control deficiencies in an audit of a company's internal control in connection with its financial reporting under the standards of the Public Company Accounting Oversight Board (PCAOB)

Answer 394

Design way by which the system with its policies and procedures was designed did not accomplish what it was supposed to accomplish. Control operation of one or more controls people may be performing their tasks in a deficient manner

Question 395

A practitioner may examine and report on management's assertion about the effectiveness of an entity's internal control structure if

Answer 395

Management accepts responsibility for the effectiveness of the entity's internal control structure, evaluates the effectiveness of the entity's internal control structure, presents its written assertion about the effectiveness of the entity's internal control structure

Question 396

monitoring a firm's accounting and auditing practice,

Answer 396

consider: firm's management, environment in which the firm practices, and environment in which the client operates

Question 397

AU-C 725.03 states that the objective of the auditor, when engaged to report on supplementary information in relation to the financial statements as a whole,

Answer 397

(a) evaluate the presentation of the supplementary information in relation to the financial statements as a whole and (b) report on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements taken as a whole.

Question 398

AU-C 450.12 states that the auditor should include in the audit documentation:

Answer 398

amount below which misstatements would be regarded as clearly trivial; all misstatements accumulated during the audit and whether they have been corrected; and conclusion about whether uncorrected misstatements are material, individually or in aggregate NOT the size and nature of the misstatement

Question 399

A standard compilation report implies

Answer 399

that substantially all disclosures required by GAAP are included in the financial statements

Question 400

The standard compilation report explicitly states

Answer 400

accountant has not reviewed or audited the financial statements financial statements may be used to obtain credit if a standard compilation report is issued. limitation to presenting information that is the representation of management (“Management is responsible for the preparation and fair presentation of the financial statements…”)

Question 401

Probability-proportional-to-size (PPS) sampling

Answer 401

excludes zero and negative balances in its sample selections and in evaluating results.

Question 402

classical variables sampling would have an advantage over PPS sampling because

Answer 402

variables sampling does not require special design considerations for inclusion of zero and negative balances PPS sampling would require a special design to include negative and zero balances

Question 403

Statistical sampling

Answer 403

based on the laws of probability, quantitatively (mathematically) measure the sampling risk provide the auditor with an objective basis for evaluating sample results nonstatistical sampling does not quantify sample risk.

Question 404

Projecting error rates based on sample results

Answer 404

relates more to tests of controls than to analytical procedures

Question 405

In estimation sampling for attributes, what must be known to evaluate the sample results?

Answer 405

1. an estimation of the population misstatement based upon the number of misstatements in the sample, 2. average misstatement size, 3. individual misstatements in the sample and 4. sample size

Question 406

In a test of controls,

Answer 406

the auditor takes a sample, determines the sample deviation rate, compares this rate to the maximum rate he can tolerate and still rely on the control, and decides whether to rely on the control as planned or not

Question 407

Increasing the estimated occurrence rate

Answer 407

will directly increase the sample size (all other factors remaining the same)

Question 408

rate of occurrence of errors is 3% error rate in the population is

Answer 408

Probably about 3%

Question 409

considered in determining the sample size for a test of controls

Answer 409

Tolerable rate. Acceptable risk. Expected population deviation rate. NOT Population size (little or no effect except for very small populations)

Question 410

An increase in the tolerable rate of deviation

Answer 410

would allow a reduction in sample size.

Question 411

As the likely rate of deviation decreases,

Answer 411

the auditor may decrease the planned sample size.

Question 412

The allowable risk of assessing control risk too low

Answer 412

has an inverse effect on sample size.

Question 413

Variables sampling

Answer 413

used when an amount (such as a dollar figure) is being estimated. Mean-per-unit and probability-proportional-to-size sampling are specific types of variables sampling.

Question 414

attribute sampling estimates

Answer 414

a percentage, often an error rate

Question 415

for sample for substantive test of details, consider

Answer 415

relationship of sample to audit objective preliminary estimates of materiality levels allowable risk of incorrect acceptance characteristics of the population (items comprising balance or class of transaction)

Question 416

The initial sample size for audit sampling is determined by four factors:

Answer 416

population size; the tolerable exception rate; the auditor's measure of sampling risk, defined as the acceptable risk of assessing control risk too low (ARACR); and the estimated population exception rate. Population size is not nearly as significant a factor as the others and typically can be ignored, especially for large populations.

Question 417

The risk of incorrect acceptance and the risk of assessing control risk too low relate to

Answer 417

the effectiveness of an audit | in detecting an existing material misstatement

Question 418

allowance for sampling risk

Answer 418

difference between: deviation rate of the sample and possible upper rate for the population

Question 419

upper deviation rate of the population is lower than the auditor’s tolerable deviation rate

Answer 419

control risk appears to be acceptably low

Question 420

Statistical sampling techniques indicate

Answer 420

the possible upper rate of deviation of the population

Question 421

basis for a statistical sampling test

Answer 421

Judgments such as the expected error rate and the maximum tolerable rate

Question 422

If an error rate is being estimated,

Answer 422

this testing falls under sampling for attributes.

Question 423

Sampling for variables

Answer 423

attempts to estimate a total such as an account balance.

Question 424

Sample size varies directly with

Answer 424

the expected error rate. Thus, the more expected errors, the larger the sample size, and the less expected errors, the smaller the sample size.

Question 425

Sample size varies inversely with

Answer 425

the tolerable error rate. The larger the rate that you can tolerate, the smaller the sample size will be. The smaller the rate you can tolerate, the larger the sample size will be.

Question 426

Ratio estimation sampling technique is based on

Answer 426

comparing: the ratio of the book value to the audited value of the sampled items; method can not be used when there is no book value with which to make the comparison

Question 427

The use of ratio estimation sampling technique is most effective when

Answer 427

the calculated audit amounts are approximately proportional to the client's book amounts When audit differences are approximately proportional to account size, the standard deviation of the ratio is small and this results in a relatively small required sample size.

Question 428

stratified sampling techniques to be most applicable to

Answer 428

accounts receivable customers will have a great deal of variation in amounts, minimize the effect on sample size of the variation within the population. emphasize the larger account balances by stratifying the population dividing a population into several smaller populations based on dollar amounts reduces the variability of each of these smaller populations so that the overall sampling size can be smaller saving time and cost

Question 429

Monetary unit sampling is the most commonly used statistical method of sampling for tests of details of balances because

Answer 429

it has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars reduces the cost bc several sample items are tested at once increases the likelihood of selecting high dollar items from the population being audited

Question 430

determine the projected error of misstatement of a PPS (dollar unit sampling) sample

Answer 430

When an account recorded amount exceeds the sampling error and recorded amount is in excess of the sampling interval, the projected error equals the actual misstatement

Question 431

When using probability-proportional-to-size (PPS) sampling, the auditor controls the risk of incorrect acceptance by

Answer 431

specifying a risk level when planning the sample

Question 432

when the sampling interval exceeds the account's recorded amount, t

Answer 432

the projected error is determined , first by dividing the amount of misstatement by the recorded amount [($5,000-$4,000) /$5,000 = 0.2] The result times the sampling interval is the projected error. [0.2 x$10000 = $2,000]

Question 433

Embedded audit modules

Answer 433

coded into a client's application to collect data for the auditor.

Question 434

Snapshot applications

Answer 434

capture screen images.

Question 435

Integrated data checks and test data generators

Answer 435

involve auditor-controlled fictitious data.

Question 436

generalized computer audit program

Answer 436

allows the auditor to independently process and verify client electronic data processing records

Question 437

test data approach

Answer 437

validates the processing of accounting data by the client's EDP equipment. a known outcome is compared with the processing outcome to validate the processing of data.

Question 438

data control group and systems analyst

Answer 438

DCG - review output and control its distribution SAD - designs and evaluates systems and prepares program specifications for programmers. These two functions should be separated.

Question 439

Control over access to electronic data processing (EDP) programs

Answer 439

a general control test control over access by examining client records documenting the use of EDP programs

Question 440

Systems development and data processing

Answer 440

separate functions reporting to a single manager ``` system development includes: systems analysis, systems programming, applications programming and database administration ``` ``` data processing includes: data preparation, operations, data library and data control ```

Question 441

physical access controls

Answer 441

Clamps or chains to prevent removal of hard disks or internal boards, regular backup and control over access from outside ``` prevent damage or other loss including: theft, unauthorized access, by disgruntled employees or others NOT online or electronic fraud ```

Question 442

examples of IT controls

Answer 442

``` Requiring applications to be adequately tested before use, backup of files, control access to appropriate users, adequate documentation, and application controls ``` NOT Printer logs, decision trees and local area networks

Question 443

Processing Integrity

Answer 443

principle of the AICPA's Trust Services Framework ``` requires that the system processing is: complete, accurate, timely and authorized ```

Question 444

information systems department - two distinct functions

Answer 444

systems development data processing

Question 445

systems analyst

Answer 445

analyzes the user environment and requirements and may recommend changes to the current system, the purchase of a new system or design a new system responsible for ensuring programming and end user needs are met systems flowchart is a tool or diagram used by the systems analyst to define system requirements

Question 446

systems programmer

Answer 446

responsible for: implementing, modifying and debugging the software required to interface with the hardware. Examples include: operating systems, telecommunications monitoring and database management systems

Question 447

Operator

Answer 447

``` responsible for daily computer operations of both the hardware and software mounts tapes, supervises operations on a console, accepts inputs and distributes outputs ``` has documentation available to run programs but is not responsible for detailed program information

Question 448

Applications Programmer

Answer 448

responsible for writing testing and debugging applications software

Question 449

Database Administrator or DBA

Answer 449

responsible for maintaining the database and restricting access to the database to authorized users only.

Question 450

End User

Answer 450

responsible for the data NOT programs that run the data

Question 451

At a minimum, an attempt should be made to segregate what three IT functions?

Answer 451

programming, operations and data library (POD) ``` Ideally, also: analysis, design database administration help desk ```

Question 452

smaller systems

Answer 452

a firm may purchase auditor may be familiar with purchased software "exception reports" may be standard and well tested

Question 453

larger systems

Answer 453

may develop their own auditor may not be familiar with "in house" developed software although exception reports may exist, controls should be tested to a greater extent

Question 454

audit trail

Answer 454

record left by the accounting information system of movements in individual transaction data that provides a trail of the processing of transactions and other events allows for means to trace back to individual business events from the general ledger may start from the moment data about the event is entered into the system until the final entry is made in the financial statements. may enable the tracing of the movement in data from the time the order is placed by the customer until the time the payment data is entered in the general ledger accounts discover fraud acts as a deterrent to perpetration of such acts. monitor system and data produced, and answer queries by tracking a specific transaction through the accounting records or tracing a transaction back to the original source and observing how it is processed

Question 455

Three main types of system documentation used by auditors and analysts

Answer 455

(a) Data Flow Diagrams (DFDs) that illustrate the system components and functions, data flows among the components and sources, destinations and storage of the data (b) System Flowcharts that illustrate Informational Processes (such as logic flows, inputs, outputs, data storage), Operational Processes (such as physical flows) and (c) Entity Relationship Diagrams that illustrate the system's key entities and the relationships among those entities

Question 456

input validation or edit controls include

Answer 456

``` Preprinted forms, check digits, control., batch and proof totals; hash totals, record counts limit or reasonable tests menu driven input, field and validity checks, missing data and field size checks logic checks redundant data checks and closed loop verification ``` NOT segregation controls, physical access controls and hardware and software access controls

Question 457

output control activities

Answer 457

Checks of computer output against source documents, control totals or other input Reviewing computer logs Policies and procedures that document authorized users and receipients of data

Question 458

Limit test

Answer 458

high and low barriers

Question 459

hash total

Answer 459

any mathematical summation of a piece of information that would not otherwise be computed except for control purposes

Question 460

Nonprofit organizations are required to have a single or program-specific audit under OMB Circular No. A-133 if the organization expends

Answer 460

$500,000 or more in a year in federal awards

Question 461

A CPA provides an entity with controllership or other management services that include the submission of financial statements. The CPA is required to follow the provisions of Statements on Standards for Accounting and Review Services when:

Answer 461

the CPA is not a stockholder, partner, director, officer, or employee of the entity.

Question 462

The Government Accountability Office (GAO) specifies four interrelated sections with respect to independence:

Answer 462

1. A conceptual framework 2. Guidance for audit organizations that are structurally located within the entities they audit 3. Requirements when performing nonaudit services 4. Guidance on documentation

Question 463

overall responses to address the assessed risks of material misstatement

Answer 463

Emphasizing the need to maintain professional skepticism in gathering and evaluating audit evidence Assigning more experienced staff or those with specialized skills such as specialists Providing more supervision Incorporating additional elements of unpredictability in the selection of further audit procedures Specific responses: substantive, further audit procedures, and test of controls

Question 464

Significant risks

Answer 464

require special audit consideration, a matter for the auditor’s professional judgment Include: estimates identified as having high estimation uncertainty unusual, infrequent, or sizable transactions changes in inventory significant related party transactions related to recent economic/accounting, developments, risk related to judgmental matters manual intervention for data collection/processing, or when the calculation is complex

Question 465

Calculate Projected Error using PPS

Answer 465

Compare each Recorded Amt to each Audited Amt If Recorded Value < Sampling Interval Tainting % = (Recorded Amt - Audited Amt)/Rec Amt Tainting % x Sampling Interval = Projected Error If Recorded Value > Sampling Interval Tainting % = 0 Actual Misstatement = Projected Error Total Projected Error = Sum of individual Projected Errors

Question 466

auditor required to determine acceptability of financial reporting framework applied to special-purpose financial statements by

Answer 466

obtaining understanding of: purpose of FS intended users mgmt's determination of applicable framework

Question 467

Adjustments are only recorded for

Answer 467

items equal to or exceeding materiality.

Question 468

PPS - Sample Size

Answer 468

(Pop Book Value x Reliability Factor)/ | Tolerable Error-Expected Misstatement

Question 469

PPS - Sampling Interval

Answer 469

Pop Book Value/ | Sample Size

Question 470

Change in auditing procedure brought about as a result of the 1136 Tenants Corp. case

Answer 470

engagement letters between the CPA and client were strongly recommended for all engagements, especially unaudited engagements clearly define the intent of the engagement, the CPA's responsibilities, and any restrictions imposed on the CPA

Question 471

independent auditor is required to create

Answer 471

``` written documentation that includes specified information about an upcoming audit engagement to ensure that both parties understand the nature of the work to be performed, the assurance to be given, and the responsibilities of both parties ``` NO specific format (contract or engagement letter) is required

Question 472

PCAOB entity type/funding

Answer 472

private-sector, non-profit corporation, created by the Sarbanes-Oxley Act not a government agency self-funded from charges to the companies being regulated PCAOB is under the oversight and the enforcement authority of the SEC (appropriate gov't control)

Question 473

Inspections by PCAOB

Answer 473

takes the place of peer review which was not working Firms that audit: > 100 issuers = inspected annually < = 100 = inspected every three years

Question 474

Per PCAOB, management responsibility of issuers for the effectiveness of the company’s internal control over its financial reporting

Answer 474

accept responsibility for internal control evaluate it each year, documenting the results prepare a written assessment of the internal control NOT provide a written plan each year for updating the internal control over the financial reporting process

Question 475

Per PCAOB, dates on report on internal control and report on FS

Answer 475

last day of audit responsibility for the CPA Consequently, the LAST DAY OF FIELD WORK is used for ALL audit work whether it is on the financial statements or the internal control.

Question 476

Per PCAOB, two possible types of control deficiencies

Answer 476

Design - relates to the way by which the system with its policies and procedures was designed (may not accomplish what it was supposed to) Operations - deficiency in the operation of one or more controls. (people may be performing their tasks in a deficient manner)

Question 477

auditor uncovers a material weakness in internal control that cannot be rectified before the end of the audit work

Answer 477

adverse opinion should be rendered to properly alert all parties interested in the financial statements of the issuing company

Question 478

(PCAOB) definition of a material weakness in internal control

Answer 478

Paragraph number 10 of PCAOB Standard 2 A significant deficiency (or a combination of significant deficiencies) in internal control that results in more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected

Question 479

Auditor is prohibited from performing all of the following services for issuer audit clients

Answer 479

Valuation services to support litigation of the firm that is unrelated to the audit Actuarial services on the firm's defined benefit pension plan Design services for the firm's accounting information system Tax advisory services ALLOWABLE

Question 480

Per Sarbanes-Oxley Act, both the lead audit partner and reviewing partners are required to be rotated off of a public company audit

Answer 480

at least once every five years. There is not currently a requirement for CPA firms themselves to rotate off of a public company audit.

Question 481

Per PCAOB, the reviewing partner

Answer 481

is required to possess the level of knowledge and competence related to accounting, auditing, and financial reporting that would be required to serve as the audit partner on the audit under review evaluate the engagement team's judgments and related conclusions during the audit may only allow clients to use the audit report after providing concurring approval of issuance provide concurring approval of issuance of the audit report only if not aware of a significant engagement deficiency after conducting review in accordance with professional standards

Question 482

When determining a sample size for a test of controls, the auditor should consider

Answer 482

tolerable rate of deviation from the controls (%), likely rate of deviations (%), and allowable risk of assessing control risk too low (reliability level).

Question 483

The auditor's standard report states that

Answer 483

``` financial statements present fairly, in all material respects, an entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles accepted in the United States of America. ``` identifies the financial statements audited in an opening paragraph, describes the nature of an audit, and expresses the auditor's opinion in a separate opinion paragraph.

Question 484

For an unmodified opinion, each of the following items must be satisfied:

Answer 484

A title must include the word “independent.” Financial statements identified were audited. Financial statements are the responsibility of the company's management. Auditor responsible for expression of an opinion on financial statements. Audit conducted in accordance with GAAS and should identify the United States of America as the country of origin of those standards. Audit includes examining evidence, assessing principles and significant estimates, and evaluating overall statement presentation. An opinion about whether the financial statements are presented fairly, in all material respects, in conformity with GAAP.

Question 485

Section 408 of the Sarbanes-Oxley Act (SOX)

Answer 485

“Enhanced Review of Periodic Disclosures by Issuers” dictatesSEC to review disclosures w/ special attn to those who: issue material restatements of FS experience significant volatility in stock price, have largest market capitalization, are emerging companies w/ disparities in P to E ratios, have operations that significantly affect material sector

Question 486

Section 208 of the Sarbanes-Oxley Act

Answer 486

prevents public accounting firms in violation of SEC or Public Company Accounting Oversight Board (PCAOB) rules from preparing or issuing any audit report with respect to that issuer.

Question 487

(GAGAS) - must have a system of quality control, including external peer reviews to occur

Answer 487

at least every three years

Question 488

Per IFRS ISA 260, four matters must be communicated to those in charge of governance:

Answer 488

The auditor's responsibilities in relation to the financial statement audit The planned scope and timing of the audit Significant timing of the audit Auditor independence

Question 489

Before applying principal substantive tests to the details of accounts at an interim date

Answer 489

consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Question 490

basic fundamental concept that underlies the audit process

Answer 490

Risk It is the acceptance by auditors that there is some level of uncertainty in performing the audit function.

Question 491

The International Ethics Standards Board for Accountants (IAESB) operates within

Answer 491

the International Federation of Accountants (IFAC)

Question 492

threats to the fundamental principles contained in the IFAC Code of Ethics' conceptual framework

Answer 492

familiarity threat, self-interest threat, and intimidation threat Financial-interest threat is NOT included within this conceptual framework.

Question 493

Under the IFAC Code of Ethics, a Professional Accountant in Business/PAB must

Answer 493

consider safeguards to threats to the fundamental principles that should be upheld by accountants report accurately only further a firm's legitimate interests

Question 494

materiality and schedules presented as accompanying information

Answer 494

accompanying information schedules would not affect how materiality is measured.

Question 495

exceptions that would not impair independence.in performing tax services for persons in financial accounting oversight roles

Answer 495

the person is only in the oversight role because they serve on the board of directors. the person's relationship to the audit client is through an affiliate, and the financial statements of the affiliate are not material to the consolidated financial statements. the person in the financial accounting role is not in that role prior to a hiring, promotion, or change in employment event.

Question 496

IFAC's mission is to serve the public interest by

Answer 496

contributing to the development, adoption, and implementation of high-quality standards and guidance; facilitating the adoption and implementation of high-quality standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to high-quality practices by professional accountants; promoting the value of professional accountants worldwide; and speaking out on public interest issues.

Question 497

Performance materiality

Answer 497

amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances, or disclosures.

Question 498

test the operating effectiveness of controls

Answer 498

inquiry combined with inspection, recalculation, or reperformance

Question 499

internal control is a process effected by

Answer 499

those charged with governance, management, and other personnel

Question 500

form and extent of documentation related to risks identified and controls are influenced by

Answer 500

the nature, size, and complexity of the entity and its environment, including its internal control; the availability of information from the entity; and the specific audit methodology and technology used in the course of the audit The timing of the audit does NOT change the form or extent of controls-related documentation

Question 501

Based on Rule 3521 of the Public Company Accounting Oversight Board,

Answer 501

contingent fees and commission will result in a lack of independence for the registered public accounting firm.

Question 502

auditor's report under OMB Circular A-133 on nonprofit organizations expending federal awards, would include

Answer 502

significant deficiencies. material noncompliance with the provisions of laws, regulations, contracts, or grant agreements. known questioned costs when likely questioned costs are greater than $10,000 for a type of compliance requirement for a major program. NOT a disclaimer of opinion about whether all questioned costs have been reported.

Question 503

detection risk is inversely related to

Answer 503

the assurance provided by substantive tests detection risk is a function of the effectiveness of an auditing procedure and of its application

Question 504

Effective internal control provides

Answer 504

more assurance about the reliability of audit evidence.

Question 505

Audit evidence is usually

Answer 505

persuasive (influencing or causing a person to believe by appealing to understanding), rather than convincing (a concept of criminal law: “beyond a reasonable doubt”). Thus professional judgment is required in the evaluation of the reliability and sufficiency of audit evidence.

Question 506

A large number of bearer bonds on hand

Answer 506

represents the highest risk of a misstatement arising from misappropriations of assets.

Question 507

Section 104 of SOX Title I,

Answer 507

“Inspections of Registered Public Accounting Firms,” PCAOB) has the mandate and authority to conduct compliance inspections of each registered public accounting firm. Firms that audit more than 100 issuers are inspected annually. Firms that audit 100 or fewer issuers are inspected every three years.

Question 508

attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices

Answer 508

WebTrust

Question 509

CPA can disclose confidential information is with the client's consent. The exceptions to client's consent are:

Answer 509

a peer review by a state CPA society or state board of accountancy. a subpoena or court summons to release confidential information. an inquiry that is made by a recognized investigatory body. NOT a letter to the client from the IRS

Question 510

examination of long-term debt

Answer 510

Examination of bond trust indenture rights and obligations and presentation and disclosure verifies the obligation as it is shown, its validity, and that either none of the covenants are violated or proper disclosure has been made

Question 511

five different circumstances under which the auditor's report would be designated a special report:

Answer 511

1. Financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles 2. Specified elements, accounts, or items of a financial statement 3. Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements 4. Financial representations to comply with contractual agreements or regulatory provisions 5. Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report

Question 512

company's stock record books are maintained by an outside registrar or transfer agent

Answer 512

transfer agent would have evidence of shares issued and outstanding, and names of those persons who own stock. The outside registrar would not have records on dividends, stock subscriptions receivable, or stock rights and warrants.

Question 513

report for a performance audit of a governmental entity in accordance with Government Auditing Standards

Answer 513

the objectives, scope, and methodology of the audit, the audit results, including findings, conclusions, and recommendations, as appropriate, a reference to compliance with generally accepted government auditing standards, the views of responsible officials, and if applicable, the nature of any privileged and confidential information omitted. A concurrent opinion on the historical financial statements is NOT the objective of the performance audit and is NOT required.

Question 514

An entity must have a single audit in any year when:

Answer 514

the entity spends more than $500,000 in federal awards, grants, or funds, the entity spends funds from one or more than one federal program, and if the entity only expends funds from one program, it “may” be eligible for a program audit versus a single audit.

Question 515

An embedded audit module

Answer 515

enables continuous monitoring and analysis of transaction processing, including the functioning of processing controls.

Question 516

Mapping

Answer 516

is a technique for determining whether a computer program contains any unexecuted code that should be examined.

Question 517

Retrieval and analysis programs such as generalized audit software

Answer 517

offer the features and flexibility suitable for verifying the correctness of information on a computer file.

Question 518

The snapshot method

Answer 518

is a technique utilized to capture and print all data pertinent to the analysis of a specific moment in the processing cycle.

Question 519

The objective of tests of details of transactions performed as tests of controls

Answer 519

is the same as that of any test of controls: to evaluate whether controls operated effectively.

Question 520

The objective of tests of details of transactions performed as substantive tests

Answer 520

is to detect material misstatements in the account balances of the financial statements.

Question 521

bank cut-off statement

Answer 521

If the checks do not clear in a reasonable period of time, it means the payment was recorded but possibly was not sent to the recipient. The company gets to reduce its liability balance so that it reports a lower amount of liabilities without actually losing any of its cash.

Question 522

Management must represent (regarding uncorrected misstatements)

Answer 522

no uncorrected misstatements are included in the financial statements and the effects of any uncorrected misstatements aggregated by the auditor during the engagement are immaterial to the financial statements.

Question 523

The auditor should test the design effectiveness of IT controls by

Answer 523

determining whether the controls, if they are operated as prescribed, satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements in the financial statements.

Question 524

It is not appropriate to provide an opinion that current assets are fairly stated and disclaim an opinion on the financial statements taken as a whole due to a scope limitation because

Answer 524

it may tend to overshadow the auditor's disclaimer of opinion.

Question 525

The auditor must identify the relevant assertions by determining the source of likely potential misstatements in each

Answer 525

significant class of transactions, account balance, and presentation and disclosure.

Question 526

Because the income statement covers a time period and the balance sheet covers a specific point in time, relationships involving income statement items

Answer 526

are much more predictable.

Question 527

precision

Answer 527

possible error in either direction in variables sampling calculated using the point estimate of the population and a formula involving the standard deviation and confidence level desired to derive a plus and minus interval from the point estimate interval is called a precision interval

Question 528

In statistical audit sampling, the precision is

Answer 528

the allowance for sampling risk or sampling error, the risk that when testing is restricted to a sample, the conclusion derived from the sample differs from the conclusion that would have been reached if the entire population had been tested a measure of the difference between a sample estimate and the corresponding population characteristic at a specified sampling risk. usually measured using a table or software and is based on sample size and sample results at the auditor's specified risk of assessing control risks too low. cannot be measured in nonstatistical sampling

Question 529

Analytical procedures

Answer 529

assist the auditor in planning the nature, timing, and extent of other auditing procedures, do NOT assist with the preliminary judgment about materiality.

Question 530

When making the decision of whether to apply analytical procedures or tests of details to a certain account balance or class of transactions, the auditor should consider the:

Answer 530

nature of the assertion, plausibility and predictability of the relationship, availability and reliability of data, and precision of the expectation. The availability of documentary evidence (for example, if it is available only for a short period of time) would cause the auditor to change the timing of substantive tests instead of the nature of the tests. Each account balance or class of transactions should be addressed individually when determining the nature of the tests to be performed, rather than making the decision based on the overall number of estimates in the financial statements or on the number of transactions before or after year-end.

Question 531

AU-C 230 requires the auditor to document

Answer 531

who performed the audit work and the date such work was completed, who reviewed specific audit documentation and the date of such review, and the identifying characteristics of specific items tested when performing tests of operating effectiveness or substantial tests of details does NOT require the auditor to include copies of client invoices

Question 532

a standard cost system is

Answer 532

a budgeted unit cost system designed to alert management when actual costs of production differ from expected costs, the plausible relationshipsof analytical procedures have been established, and variances from them would alert the auditor to potential problems

Question 533

Inquire of management to obtain evidence about the occurrence of subsequent events

Answer 533

Whether any substantial contingent liabilities or commitments existed at the date of the balance sheet being reported on or at the date of inquiry Whether there was any significant change to the date of inquiry in the capital stock, long-term debt, or working capital The current status of items, in the financial statements being reported on, that were accounted for on the basis of tentative, preliminary, or inconclusive data Whether any unusual adjustments had been made during the period from the balance sheet date to the date of inquiry

Question 534

Kiting

Answer 534

receipt date per bank is | recorded in the accounting period before the disbursement date