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Audit > Module A > Flashcards

Module A Flashcards

0
Q

Attestation

A

Accounting service resulting in a report on subject matter

or Assertion about subject matter that is responsibility of another
Party

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1
Q

CSR

A

Corporate social responsibility

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2
Q

6 forms subject matter of an Attestation engagement can take

A 
1 historical/prospective performance/condition
2 physical characteristics
3 historical events
4 analyses
5 systems and processes
6 behavior
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3
Q

Subject matter of Attestation engagement:

Historical or prospective performance or condition example

A

Backlog data

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4
Q

Subject matter of Attestation engagement:

Physical characteristics 2 examples

A

1 Narrative descriptions

2 square footage of facilities

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5
Q

Subject matter of Attestation engagement:

Historical events example

A

Price of market basket of goods on certain date

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6
Q

Subject matter of Attestation engagement:

Analyses. Example

A

Break-even analyses

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7
Q

Subject matter of Attestation engagement:

Systems and processes example

A

Internal control

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8
Q

Subject matter of Attestation engagement:

Behavior 3 examples

A

1 corporate governance

2 compliance with laws and regulations

3 human resources practices

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9
Q

Responsible party, define, example

A

Person at client who is accountable for information

Ex. Company’s controller for financial information

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10
Q

During Attestation, What should the accountant obtain from a responsible party

A

Written evidence on party’s responsibility for subject matter

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11
Q

3 types of engagements in Attestation

A

1 examination

2 review

3 agreed upon procedures

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12
Q

Examination

A

Similar to audit but limited in terms of focus of engagement,
Procedures performed to represent high level of assurance

Accountants evaluate internal controls and asses risk of material
Misstatement, gather evidence about assertions, render opinion

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13
Q

Review

A

Provides only limited level of assurance

Procedures performed limited to inquiries and performing Analytical procedures, accountants may decide other procedures necessary

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14
Q

Agreed upon procedures (engagement)

A

Client delineates exactly what procedures it wants accountant to
Perform

Level of assurance varies depending on procedures requested

Ex. Restaurant manager may ask their accountant to classify and summarize customer comment cards, composer may ask accountant to verify mathematics on royalty report

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15
Q

Professional standards for performing attest engagements are provided by…

A

Statements on Standards for Attestation Engagements (SSAEs)

In AT section of AICPA’s Professional Standards

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16
Q

Attestation standards do not require evaluation of… (In contrast to auditing standards)

A

Internal controls

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17
Q

Appropriate financial reporting framework

A 
Financial reporting treatment (GAAP, IFRS) adopted by 
management and those charged in governance of financial 
statement preparation (when appropriate)

Is acceptable in view of nature of entity and objective of financial
Statements or required by law

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18
Q

Attestation engagements: 7 related to appropriate financial reporting framework

A 
1 agreed upon procedures
2 financial forecasts/projections
3 pro forma financial information
4 entity's internal control over financial reporting 
5 compliance Attestation
6 management's discussion and analysis
7 service organizations
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19
Q

Agreed upon procedures are not audits because they have…

A

Limited scope,

so reporting principles (assessing risk of material misstatement
or obtaining sufficient appropriate evidence for opinion) don’t apply

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20
Q

What is of the utmost importance in agreed upon procedures?

A

Clearly worded engagement letters delineating desired procedures
To be performed

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21
Q

Applying agreed upon procedures: reports are to be restricted to…

A

The specified users who participate in and take responsibility
For defining work of the engagement

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22
Q

Report of agreed upon opinion, how does it differ from standard audit report? 3 things

A

1 No overall opinion in report just findings from procedures described

2 Report identifies specified users

3 States it’s not an audit

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23
Q

Financial forecast

A

Prospective financial information based on expected conditions
And courses of action

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24
Q

Financial projection

A

Prospective financial information based on occurrence of 1 or
More hypothetical events that change entity’s existing business structure

Ex. New distribution center, potential new product line

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25
Q

Pro forma financial information

A

Shoes the effect of proposed or consummated transaction on
historical financial statements

As if transaction had already occurred by a specific date

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26
Q

Limited use vs. General use

A

Limited use = single user

General use = large number of users

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27
Q

Prospective financial information should disclose what 4 pieces of information in regards to generating prospective financial statements?

A

1 Significant accounting policies
2 procedures to generate statements
3 assumptions used (how they might be of limited use)
4 how actual events might not be consistent with assumptions

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28
Q

If the basis in prospective financial information is different from that used in historical financial statements, what needs to be shown?

A

A reconciliation of 2 bases needs to be shown

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29
Q

To perform an Attestation engagement on either prospective financial information or pro forma information, accountants must accomplish what 3 objectives?

A

1 evaluate preparation of financial information
2 evaluate support of underlying assumptions
3 evaluate presentation of information

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30
Q

According to Attestation standard 501, for accountant’s examination of entity’s internal controls, what does this standard call for?

A

Top down, risk based approach (similar to control testing covered
In ch. 5)

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31
Q

What 4 conditions must be met before accountants can conduct an examination on entity’s internal control?

A

1 management accepts responsibility for effectiveness of its internal
Control
2 management’s evaluation of control based on suitable criteria
(Ex. COSO report)
3 management’s evaluation of control supported by sufficient
evidence
4 management presents its assertion on effectiveness of its internal control in written report that accompanies accountants’ report

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32
Q

1) what do accountants report on?
2) example key question addressed?

Financial Forecast engagement

A

1) prospective info based upon future expected conditions

2) what will things look like if we continue along our expected
Path?

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33
Q

1) what do accountants report on?
2) example key question addressed?

Financial projection engagement

A

1 prospective information based upon hypothetical (what if) events

2 what will things look like if we choose a different path(s)?

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34
Q

1) what do accountants report on?
2) example key question addressed?

Pro forma engagement

A

1 Financial information based on historical info “as if” the event
Had previously occurred

2 what would things look like if actual events (ex. Merger) occurred
December 31 instead of January 15?

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35
Q

2 common types of compliance Attestation engagements accountants may accept?

A

1 entity’s compliance with requirements of laws and regulations

2 effectiveness of entity’s internal controls that ensure compliance
With requirements

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36
Q

Reviews of compliances are not…

A

Appropriate engagements

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37
Q

For compliance Attestation, what 3 conditions must be met?

A

1 management accepts responsibility for compliance

2 compliance or controls over compliance are capable of evaluation
And measurement against reasonable criteria

3 sufficient evidence available to support management’s evaluation

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38
Q

Attestation standards require accountants to consider what 3 types of risks in connection with examination engagements for compliance?

A

1 inherent risk

2 control risk

3 detection risk

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39
Q

Risk and materiality are as important in compliance Attestation as they are in…

A

Financial statement audits

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40
Q

2 prerequisites for compliance examination

A

1 due care

2 professional skepticism about noncompliance

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41
Q

Major steps in compliance examination:

Understand the specific compliance requirements and assess…

A

Planning materiality

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42
Q

Major steps in compliance examination:

Plan the engagement and assess…

A

Inherent risk

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43
Q

Major steps in compliance examination:

Understand relevant controls over…3

A

Compliance, assess control risk, design tests of compliance

With detection risk

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44
Q

Major steps in compliance examination:

Obtain sufficient evidence of compliance with specific requirements including…

A

A written letter of management representations

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45
Q

Major steps in compliance examination:

Consider subsequent events: subsequent information that bears on…

A

The management assertion and subsequent events of

noncompliance after the assertion date

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46
Q

Major steps in compliance examination:

Form an…

A

Opinion and prepare a report

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47
Q

Standard of compliance examination directly parallel those of…

A

Financial statement audits

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48
Q

The standard unmodified report in a compliance examination engagement express the accountants opinion as to…

A

Compliance

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49
Q

4 types of opinion reports accounts can issue for compliance examination?

A

1 unmodified report
2 report modified to disclosed noncompliance event
3 qualified report stating material noncompliance
4 adverse report stating that entity is not in compliance

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50
Q

What can accountants examine or review that usually accompanies audited financial statements in corporate annual reports?

A

Management’s discussion and analysis (MD&A)

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51
Q

What must auditors check in the MD&A?

A

Ensure info accompanying audited financial statements is

Consistent with them

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52
Q

Service organization

A

Provides services to user entities processes clients’ transactions
That are likely relevant to user entities’ internal control over financial
Reporting

Ex. Payroll processing companies, computerized information processing service centers, trust departments of banks, insurers that maintain accounting records for reinforce transactions, mortgage bankers, savings and loan associations, etc.

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53
Q

The fact that management is outsourcing some of its noncore functions does not absolve management for…

A

Internal control over those functions

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54
Q

Special purpose report on internal control SSAES 16 (formerly referred to as SAS 70 report)

A

Service organization’s auditors report on effectiveness of service organization’s internal control (on outsourced functions) to user
entities’ auditors

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55
Q

2 types of service organization reports

A

Type 1 report

Type 2 report

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56
Q

Service organization report: Type 1 report

A

Describes service organization’s internal controls placed in
operation at specific point in time

But does not report effectiveness of controls

57
Q

Service organization reports: type 2 report

A

Includes description of controls

Reports on service organization’s auditors’ testing of controls
Over minimum of 6 month period

58
Q

Are service auditors’ reports usually public reports?

A

No, only for user entities’ auditors to asses internal controls
At service organization

59
Q

As a condition of the engagement, management of the service organization is required to provide the auditor with a written assertion about what 3 things?

A

1 fairness of presentation of description of service organization’s
System
2 suitability of design controls to achieve related control objectives
3 operating effectiveness of those controls

60
Q

In a type 2 report, what does the service auditor express an opinion on? 2

A

1 fairness of description

2 suitability of design and operations of controls throughout
Period covered by report

61
Q

The service auditor should modify his report in what 2 conditions exist?

A

1 design deficiencies exist

2 user organizations would not be expected to have controls in
Place to mitigate design deficiencies

62
Q

SOCs

A

Service organization control reports

63
Q

SOC 1

A

Attestation report for controls over financial reporting

64
Q

SOC 2, 6 things

A

Report on controls of service organization relevant to security,
Availability, processing integrity, confidentiality or privacy

May be requested by user but doesn’t apply directly to user’s
Financial statements

65
Q

SOC 2 contents are the same as…

A

SOC 1 contents

66
Q

SOC 3

A

Trust services report

Used in marketing organizations’ control effectiveness

67
Q

An SOC 3 report basically covers the same subject matter as…

A

SOC 2, but in less detail

and in format that lends itself to general use report

68
Q

Management’s discussion and analysis description

A

Compared to rules and regulations by SEC

69
Q

Agreed upon procedures and type 1 and type 2 service reports, report distribution

A

Limited to participants in engagement

70
Q

Accounting and review services, define

Who requests this?

A

Lower level assurance than provided by an audit

May be requested by banks and other users

71
Q

Accounting and Review Service Committee (ARSC)

A

Has continuing responsibility for developing and issuing pronouncements of standards

concerning services and reports accountants may render in
Connection with unaudited financial statements

72
Q

What do the Accounting Review Services Commitee’s issued Statements on Standards for Accounting and Review Services (SSARS) apply to?

A

Apply to accountants’ services on unaudited financial statements
Of nonissuers

73
Q

Non issuers (according to SSARS)

A

All entities except those whose securities are registered under
The Securities Exchange Act of 1934

Or are required to file reports under the Securities Act of 1933

74
Q

Aside from SSARS, what also governs accountants’ services on unaudited financial statements of non Issuers?

A

AICPA’s Code of Professional Conduct and Statements on Quality Control Standards

75
Q

Review

A

Service performed by accountants to obtain limited assurance that
No material modifications should be made to financial statements

In order for statements to conform to applicable framework (GAAP)

76
Q

Review evidence is evidence required to provide limited assurance of 5 things?

A

1 inquiring of management
2 conducting analytical procedures
3 obtaining written representations from management
4 understanding of business
5 understanding of entity’s accounting system

77
Q

Professional standards require accountants to provide, what for a review engagement?

A

Adequate documentation

Describe procedures performed and results obtained

78
Q

For engagements that are less than an audit, how do accountant’s provide negative assurance?

A

“We are not aware of any material modifications” that are necessary
For financial statements to be in conformity with GAAP

79
Q

Positive assurance

A

Forthright and factual statement of auditors’ opinion based on
Audit

80
Q

When accountants perform review engagement, each page should be marked…

What does this indicate to users?

A

“See independent accountants’ review report.”

Indicates to users audit wasn’t performed

81
Q

Compilation 3 things

A

A write up

Accounting service where practitioner assists in assembling
information that is the representation of management in form
Of financial statements

but provides no assurance on accuracy or completeness of info

82
Q

When performing a compilation engagement, the accountant has no responsibility to…

A

Assess the conformity of entity’s financial statements with GAAP

83
Q

What 5 tasks must accountants do during a compilation?

A

1 obtain an engagement letter
2 understand the business
3 understand applicable accounting principles
4 read financial statements for errors
5 follow up with info that is incomplete or unsatisfactory

84
Q

What 2 procedures do accountants not need to perform during a compilation?

A

1 assess control risk

2 perform evidence gathering procedures

85
Q

In a compilation engagement, given the very limited procedures performed, accountants explicitly state that…

2) what does this signify? 2

A

No opinion and no assurance are expressed

1 Take no responsibility for report on fair presentation of financial
Statements in conformity with GAAP,

2 accountants don’t need to be independent to perform compilation

86
Q

3 types of reports on compiled financial statements can be issued

A

1 management/owners may not wish to present all footnote
Disclosures required by GAAP, account’s report notifies users
Of this
2 accounts state the reason for their lack of independence
3 management/owners choose to present complete with
disclosures required by GAAP

87
Q

If financial statements are not expected to be used by third party, accountants can perform compilation engagement in which…

2) What does this cause accountants to do?

A

No compilation report is necessary (referred to as plain paper engagements)

2) document understanding of entity on engagement letter

88
Q

During performance of compilation or review procedures, SSARS require accountants to establish an understanding with the entity in an engagement letter that the accountants will inform the appropriate level of management if any evidence of…

A

Fraud or illegal acts comes to accountants’ attention

Accountants need not report inconsequential illegal acts

89
Q

When successor accountant are performing the current year service, they can’t update the predecessors report. In this case what can successors request?

A

That predecessors reissue the prior report

And distribute it in the current report

90
Q

Other alternative for successor accountants who can’t update predecessors report. Successors can indicate the current report in a paragraph describing the predecessors report on the prior period.

What 4 items does this paragraph describe?

A

1 states prior year financials compiled/reviewed by other
accountants
2 gives date of previous report
3 describes compilation disclaimer or review report with negative
Assurance rendered last year
4 describes modifications written in prior year report

91
Q

Prescribed forms

A

If standard preprinted forms used by industry trade associations,
Banks, government agencies, etc. result in info

not be presented In conformity with financial reporting framework
Additional paragraph can be added to accountant’s compilation
Report

92
Q

Compilation and review engagements: communication with predecessor auditors

A

Not required for compilation and review engagements

93
Q

Additional paragraphs

A

Accountants can include additional paragraphs in their reports
To indicate protection going concern uncertainties or other matters

94
Q

Personal financial plans

A

Big source of business for CPA’s

Help client’s plan to reach their financial goals

95
Q

Objective of compilation

A

To present in the firm of financial statements information that
Is the representation of the management and owners

96
Q

Interim financial information

A

Financial info or statements covering period less than full year

Or for 12 month oversold ending on date other than entity’s
Fiscal year end

97
Q

Objective of Review of interim financial information

A

Provide accountants a basis for communicating whether material
Modifications should be made to conform with GAAP

similar to review of unaudited financial statements

98
Q

What does an interim review not require? 2

A

1 complete assessment of control risk each quarter
Nor
2 gather sufficient evidential matter to base opinion on

99
Q

The objective of an interim review of internal controls for public companies is to provide…

A

A basis for determining whether material modifications should
Be made

to determine management’s quarterly certifications about changes
In internal control

100
Q

Review procedures for interim financial information 6

A

1 analytical procedures
2 reading minutes
3 inquiring of management and obtaining written representation
About accounting issues
4 changes in internal controls
5 entity’s ability to continue as a going concern
6 reconciling accounting statements

101
Q

When is a written report required for interim financial statement reviews?

2) If a report is prepared, how should it be marked?

A

When entity refers to accountant’s review in writing

2) marked “unaudited”

102
Q

In form 10-Ks, companies provide summary of interim information for the entire year and what else?

A

Interim information for their fourth quarter

103
Q

Report on interim financial statements need not refer to reviewed information, unless…4

A

1 has not been marked unaudited
2 not in conformity with GAAP
3 is required and has been omitted
4 has not been reviewed by the accountant

104
Q

What opinion should auditor give on interim financial statements when they have not been marked “unaudited”?

A

Disclaim an opinion

105
Q

What opinion should auditor give when interim financial statements aren’t in conformity with GAAP?

A

Opinion not modified but departure discussed in separate

Paragraph

106
Q

3 special reports auditors may issue?

A

1 conducting engagements to report on specified elements,
Accounts or items of a financial statement
2 reporting on accounting using special purpose framework
3 reporting on requirements of appropriate financial reporting
Framework

107
Q

Specified elements, accounts or items report

A

User request audit on single account, element or financial statement

Ex. Auditors may be requested by creditors to render special
reports on Balance sheet only

108
Q

How is a special elements engagement different from an Attestation engagement?

A

Accountant follows fundamental auditing principles (instead of
Attestation standards) and express opinion if fairly stated in
accordance with GAAP

Auditor should consider any disclosures related to element

109
Q

Auditors cannot express an unmodified opinion on a single financial statement if they…

A

Expressed a disclaimer or adverse opinion on the complete

Set financial statements

110
Q

Special purpose frameworks AKA other comprehensive bases of accounting (OCBOA)

A

Small companies choose to report on framework other than
US GAAP or IFRS

refers to coherent accounting treatment

111
Q

4 kinds of special purpose frameworks

A

1 statements conforming to regulatory accounting rules
2 tax basis accounting
3 cash basis framework/modified cash basis framework
4 other method required for contractual purposes

112
Q

Cash basis framework accounting

A

No accruals

113
Q

Modified cash basis framework accounting

A

Limited accruals such as long term assets and liabilities or

Inventory

114
Q

Private Companies Practice Section (PCPS) of the AICPA Division for Firms has promoted special purpose reporting frameworks to its members to accomplish…

A

Simplified reporting

Less expensive to produce and easier to interpret

115
Q

Special purpose reporting framework, naming financial statements

A

Financial statements should not have same names as those under GAAP

EX. balance sheet should be called statement of assets and liabilities

116
Q

Special purpose frameworks do not reduce…

A

Disclosure requirements

117
Q

When special purpose frameworks are audited, the auditor’s report is modified in 4 ways?

A

1 introduction paragraph includes sentence that identifies special
Purpose framework basis of accounting
2 scope paragraph: “auditing standards generally accepted in
United States of America” not PCAOB standards
3 opinion sentence refers to special purpose framework instead
Of GAAP
4 emphasis of matter paragraph stating framework (unless prepared
Under regulatory basis)

118
Q

Special purpose framework: if financial statements prepared for regulatory basis for general use… 2

A

1 emphasis of matter paragraph isn’t required

2 auditors should provide 2 opinion paragraphs, 1 about financial
Statements prepared in accordance with GAAP and the other
In accordance with special purpose framework

119
Q

Disclosures in financial statements for special purpose framework 2

A

1 contain explanation of special purpose framework

2 describe how framework in general differs from GAAP

120
Q

Opinion shopping

A

Client looks for auditing firm that agrees with their accounting
treatment

Ex. Agrees with early revenue recognition, unwarranted expense or loss deferral

121
Q

Purpose of Reports on Application of Requirements of Appropriate Financial Framework (AU 915)

A

Create a barrier on opinion shopping

122
Q

AICPA’s Assurance Services Executive Committee (ASEC) identified what 5 megatrends that can affect CPA’s business?

A

1 shift from Industrial Age to knowledge age
2 information technology
3 globalization
4 demands for transparency and new focus on corporate
governance
5 new social structures

123
Q

Shift form the Industrial Age to the knowledge age

A

Current knowledge based economy emphasizes management
Of intangible assets

Decreases focus on physical assets (measured largely at historical
Cost), market values may differ from book values hindering
Optimal capital allocation

124
Q

Assurance services

A

Independent professional services that improve quality of

Information or its context for decision makers

125
Q

Assurance services are targeted towards…

A

Smaller groups of decision makers (instead of large group of

Investors and creditors as with the audit)

126
Q

eXtensible Business Reporting Language (XBRL)

A

SEC mandated, computer readable identifying tag for each

Individual item of data

127
Q

What does XBRL data allow computers to do? 7 things

A 
1 Treat data intelligently
2 Recognize info in XBRL document
3 Select it
4 Analyze it
5 Store it
6 Exchange it with other computers
7 Present it automatically in variety of ways for users
128
Q

What improvements does XBRL make with financial data? 5

A

1 greatly increases the speed of handling financial data
2 reduces chance of error
3 permits automatic checking of information
4 handle data in different languages
5 in different accounting standards

129
Q

Trust services

A

Set of professional Attestation and advisory functions based
On core set of principles and criteria

Addresses the risks and opportunities of IT-enabled systems
And privacy programs

130
Q

ASEC Trust Information Integrity Task Force primary focus’s 2?

A

1 Updating and maintaining Trust Services Principles and Criteria
(TSPC)

2 creating framework of principles and criteria to provide assurance
For integrity of information

131
Q

Practitioners use the following 5 principles and related criteria in the performance of trust services engagements

A 
1 security
2 availability
3 processing integrity
4 confidentiality
5 Privacy
132
Q

Principles and criteria for performance of trust service engagements:

Security

A

System is protected against unauthorized access (both physical
And logical)

133
Q

Principles and criteria for performance of trust service engagements:

Availability

A

System is available for operation and use as committed or

Agreed

134
Q

Principles and criteria for performance of trust service engagements:

Processing integrity

A

System processing is complete, accurate, timely and authorized

135
Q

Principles and criteria for performance of trust service engagements:

Confidentiality

A

Information designated as confidential is protected as committed
Or agreed

136
Q

Principles and criteria for performance of trust service engagements:

Privacy

A

Personal information is collected, used, retained, disclosed
And destroyed in conformity with entity’s privacy notice

And with criteria set forth in generally accepted privacy principles
Issued by the AICPA and CICA

137
Q

SysTrust Services

A

Assurance function that reviews an entity’s computer system to
Provide confidence to business partners and customers

Concerning security, privacy, confidentiality of info
And to system availability + processing integrity

138
Q

WebTrust Services

A

Assurance function designed to reduce the concerns of Internet
Users regarding the existence of company

And reliability if key business info placed on its website

139
Q

Sustainability AKA Corporate social responsibility

A

1 economic viability, 2) social responsibility and 3 environmental
Responsibility

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