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AUD 14 > Professional Responsibilities, IT, Audit Documentation, Gov, Quality Control (Ch 6) > Flashcards

Professional Responsibilities, IT, Audit Documentation, Gov, Quality Control (Ch 6) Flashcards

1
Q

What engagements are covered by the AICPA Code of Professional Conduct?

A

Covers all professional engagements and is the minimum standard of conduct

Member should additionally follow specific standards for a specific engagement

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2
Q

What must an accountant have under the AICPA Code of Professional Conduct?

A

Integrity
Objectivity
No Conflicts of Interest
No known misrepresentations of facts
No outsourcing of judgment

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3
Q

What are threats and safeguards to independence?

A

Safeguards > Threats - Independence

Threats > Safeguards - No Independence

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4
Q

What are the threats to independence?

A

Self-Review (Auditing own work)

Advocate of the Client

Adverse Interest (Lawsuit against Client)

Too familiar with Client - could impair the appearance of Independence to public

Undue influence on Client - On Board of Directors- exception being an Honorary board position

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5
Q

What are the Safeguards to independence?

A

Offset the threats

Safeguards are created by Legislation (SOX)- Client (Audit Committee)- Accounting Firm (Policies)

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6
Q

What are the characteristics of a Covered Member?

A

On the engagement team- have Significant influence on Audit- such as:

Reviewing Partner
Managing Partner in CPA Firm
Firm Personnel who does more than 10 hours of non-attest work (Income Taxes)
Partner sharing office with another Partner who oversees an engagement
Financial Interest in Client by Covered Member (Auditor on Engagement)

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7
Q

What are the requirements for a Covered Member?

A

No direct financial interest

No Material indirect financial interest

Firm personnel who are not Covered Members cannot own more than 5% of stock

Covered Member’s immediate family cannot own more than 5% of stock or be employed in Key positions. If Covered member is aware of this- it will impair independence.

Cannot make management decisions.

All requirements apply during the period of the professional engagement- and as long as they are a client.

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8
Q

What happens when a Covered Member disagrees with a Supervisor?

A

If Supervisor’s position is still GAAP/GAAS- defer to Supervisor

If Supervisor’s position is not GAAP/GAAS- report to higher levels of management

If management ignores you- consider leaving the firm

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9
Q

When is independence required?

A

Audit

Review

Attestation Engagement

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10
Q

What are the requirements for Non-attest engagements?

A

Agreement must be in writing.
Independence not required - Must state if you are not independent

Applicable engagements: Consulting- Compilation

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11
Q

Which standards apply to consulting engagements?

A

Consulting engagements are covered by Statements on Standards for Consulting Services (SSCS)

Requirements: Competence- Due Care- Planning- Supervision- Obtain Sufficient Data- Must Serve Client Interest- Must have written or oral agreement- must communicate with client.

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12
Q

List some common consulting engagements.

A

Advisory Services

Transaction Services

Management Consulting

Implementation Services

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13
Q

What is the rule concerning contingent fees for a covered member?

A

Not allowed if Member also performs services where independence is required

Commissions or referral fees for Covered Members are not allowed

Example - Audit firm gets a commission for recommending to Client that they implement a new A/P System…NOT Allowed

If a firm performing non-attest work doesn’t also perform Covered Member services (aka - Independence not
required)- then Firm can get a commission on referring products/services- but they must disclose to the Client

Tax Preparation - Payment according to refund amount is disallowed

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14
Q

When are contingent fees allowed?

A

When fees are structured relative to judicial proceedings.

Example: IRS audit- or filing an amended tax return subject to tax case with a different taxpayer.

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15
Q

How should recommendations and suggestions by a covered member to a client be handled?

A

Client must carry them out - covered member cannot perform management functions.

Client must assign someone of competence to oversee the non-attest engagement and CPA must be satisfied that this has occurred.

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16
Q

What are the requirements for Personal Financial Planning Engagements?

A

Must have definite objectives

Must have specific procedures planned

Must have a basis for recommendations

Must have recommendations communicated

Must have action steps to implement

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17
Q

When is a GAAP departure appropriate?

A

Departure from GAAP is appropriate if GAAP would cause Financial Statements to be misleading- then it must be explained/disclosed.

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18
Q

When may a covered member disclose confidential information?

A

Member may disclose confidential info when client isn’t following GAAP

OR

If they receive a subpoena - CPAs are not Attorneys- so there is no CPA-Client privilege

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19
Q

What is the effect of not returning all client-provided documents upon request?

A

This is an act discreditable.

You MUST return all documents the client gives you even if they don’t pay their bill.

If you create a document- however- like a work paper- you are not required to give the client a copy of papers you created if they haven’t paid their bill

They are the firm’s work papers- but are still confidential!

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20
Q

What are the rules with respect to CPA firm names?

A

CPA firm names must not be misleading.

If partner dies- remaining partner has two years to change name if partnership dissolved. If partner dies and more than one partner still remains (i.e. 1 dies and you still have 2 or more partners…you don’t need to change the name)

All Partners/Shareholders must be members of the AICPA in order to hold themselves out as members of the AICPA. Non-CPAs can be owners- but 2/3 of Ownership must be CPAs. Non-CPA owner must not be involved with the accounting- and is still bound by AICPA code of conduct- must maintain CPE requirements and have Bachelor’s degree.

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21
Q

What is the consequence of disclosing CPA exam material post-1996?

A

It is an Act Discreditable.

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22
Q

What are the consequences for a CPA who commits an Act Discreditable?

A

Licenses are granted at the State level
If State revokes certificate- AICPA Ban
Felony Conviction- AICPA Ban
Prepares Fraudulent Tax Return- AICPA Ban
Intentionally failing to file return- AICPA Ban
SEC can get involved with discipline

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23
Q

What are the functions of the PCAOB?

A

Monitors CPA Firms who audit SEC clients - All SEC Audit firms must register

Issues standards for firms to follow - usually stricter than AICPA standards

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24
Q

When is independence impaired under PCAOB standards?

A

If Client pays a contingent fee (i.e. based on outcome)

With Marketing or Planning engagements

Aggressive Tax Strategies

Firm does tax work for Client employee involved with audit oversight or their
family

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25
Q

Who must approve non-audit work performed by a firm for a client?

A

Client Audit Committee must approve non-audit work performed by Firm

Firm must disclose any potential independence issues to Audit Committee

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26
Q

Which organization is in charge of determining if federal funds are being misappropriated?

A

GAO - Government Accountability Office

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27
Q

What rules must auditors follow for governmental audits?

A

Auditors must follow both GAAS and GAS aka the Yellow Book materiality threshold is usually lower
More detail is required on working papers
More stringent CPE rules and requirements - 24 hours of continuing education must be related to governmental auditing every 2 years
Compliance with Regulations is a requirement of the Audit Report

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28
Q

Who created the International Auditing Standards?

A

The International Auditing and Assurance Standards Board (IAASB)

Member of the International Federation of Accountants (IFAC)

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29
Q

For whom were IAASB International Auditing Standards created?

A

IAASB standards are for countries that don’t have their own standards and help set the tone for the rest of the members who do have their own standards (AICPA)

IAASB doesn’t override member standards

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30
Q

What financial approach is used under IAASB audit standards?

A

IAASB standards are based on a risk assessment approach

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31
Q

How do IAASB audit standards compare to US audit standards?

A

IAASB - No Internal Control audits

IAASB - No Referencing another Audit Firm

IAASB - Less detailed documentation

IAASB - Required: obtain written fraud assessment

IAASB - Required: location of auditor’s home office

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32
Q

What are International Ethical Standards?

A

Standards set by International Ethics Standards Board for Accountants (IESBA)

Code of Ethics for Professional Accountants - Similar to AICPA Code of Professional Conduct

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33
Q

Which groups are covered under the three sections of the International Ethical Standards?

A

A) Covers all accountants

B) Covers Public accountants

C) Covers accountants in a business environment

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34
Q

What are the requirements for all accountants under the International Ethical Standards?

A

Accountants should have Integrity
Accountants should be Objective
Accountants should have Competence
Accountants should exercise Due Care
Accountants should maintain Confidentiality
Accountants should act Professionally

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35
Q

What questions should public accountants pose to themselves under the International Ethical Standards?

A

What are the threats/safeguards?
Does this new client threaten our ethics?
What are the conflicts of interest?
What are the threats/safeguards for offering a second opinion?
What are the threats/safeguards for receiving commissions or contingent fees?
Is our marketing truthful?
What are the threats/safeguards for receiving client gifts?
What are the threats/safeguards to objectivity?

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36
Q

When is an audit of IT NOT required?

A

Controls are redundant to another department

The system does not appear to be reliable and testing controls would not be an efficient use of time

Costs exceed benefit

37
Q

When can an audit of IT be performed without directly interacting with the system?

A

System isn’t complex or complicated

System output is detailed

38
Q

What is the role of a Database Administrator?

A

Maintains database

Restricts access

Responsible for IT internal control

39
Q

What is the role of a Systems Analyst?

A

Recommends changes or upgrades

Liaison between IT and users

40
Q

What is the role of the data Librarian?

A

Responsible for disc storage

Holds system documentation

41
Q

What is the benefit of Generalized Audit Software in an audit?

A

Uses computer speed to quickly sort data and files- which leads to a more efficient audit

Compatible with different client IT systems

Extracts evidence from client databases

Tests data without auditor needing to spend time learning the IT system in detail

Client-tailored or commercially produced

42
Q

What is a Relational Database?

A

Group of related spreadsheets

Retrieves information through Queries

43
Q

What is a Data Definition Language?

A

A language that defines a database and gives information on database structure.

It maintains tables- which can be joined together.

It establishes database constraints.

44
Q

What functions are performed by a Data Manipulation Language?

A

Maintains and queries a database

Auditor needs information- so client uses DML to get the information needed

45
Q

What functions are performed by a Data Control Language?

A

A Data Control Language controls a database and restricts access to the database.

46
Q

What are Check Digits?

A

A numerical character consistently added to a set of numbers.

It makes it more difficult for a fraudulent account to be set up or go undetected.

47
Q

What is the purpose of a Code Review?

A

A Code Review tests a program’s processing logic.

Advantageous because auditor gains a greater understanding of the program.

48
Q

What is the purpose of a Limit Test?

A

Examines data and looks for reasonableness using upper and lower limits to determine if data fits the correct range.

Did anyone score higher than 100%?

49
Q

What is the Test Data Method?

A

Auditor processes data with client’s computer - fake transactions are used to test program control procedures.

Each control needs to only be tested once

Problem with this method - fake data could combine with real data.

50
Q

How can Operating Systems Logs be utilized during an audit?

A

Auditor can review logs to see which applications were run and by whom.

51
Q

What is the purpose of Access Security Software?

A

Helpful in online environments

Restricts computer access - may use encryption.

52
Q

How can Library Management Software assist with an audit?

A

Library Management Software logs any changes to system/applications etc.

53
Q

How can Embedded Audit Modules in software be utilized in an audit?

A

Assist with audit calculations

Enable continuous monitoring in an audit environment that is changing

Weakness: requires implementation into the system design

Example: SCARF - Collects information based on some criteria and can be analyzed at a later time (necessary because the audit environment is continually changing)

54
Q

What is an Audit Hook?

A

An Audit Hook is an application instruction that gives auditor control over the application.

55
Q

What is the purpose of Transaction Tagging?

A

Transaction Tagging allows logging of company transactions and activities.

56
Q

How do Extended Records assist in audit trail creation?

A

Extended Records add audit data to financial records.

57
Q

How does Real Time Processing affect an audit?

A

Destroys prior data when updated

aka Destructive Updating

Requires well-documented Audit Trail

58
Q

What is the risk of auditing System outputs versus Application outputs?

A

If the auditor only audits the outputs of a computer system and doesn’t also audit the software applications- an error in the applications could be missed.

59
Q

What is a Compiler?

A

Software that translates source program (similar to English) into a language that the computer can understand

60
Q

How is Parallel Simulation utilized during an audit?

A

Client data is processed using Generalized Audit Software (GAS)

Sample size can be expanded without significantly increasing the audit cost

GAS output compared to client output

61
Q

What does auditing internal control in a company’s IT environment accomplish?

A

Plan the rest of audit- Shorter audit trails that may expire- Less documentation

Assess the level of Control Risk - Unauthorized access to systems or data is more difficult to catch

Systems access controls adds another layer to separation of duties analysis

Focus should be on the general controls- new systems development- current systems changes- and program or data access control or computer ops control changes

62
Q

What four perspectives are included in Balanced Scorecard?

A

Financial / Customer / Internal Business Processes / Learning and Growth

63
Q

Why was Balanced Scorecard created?

A

To measure Performance.

64
Q

What are Strategy Maps?

A

Diagrams of Strategic Cause and Effect Relationships.

65
Q

What is a Strategic Initiative?

A

A plan to achieve goals.

66
Q

What measures are used under Value-Based Management?

A 
Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow
67
Q

How is Return on Investment (ROI) calculated?

A

ROI : Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 : 60% ROI

68
Q

How is Residual Income calculated?

A

Operating Income - (Required Rate of Return x Invested Capital) : Residual Income

69
Q

What is another name for Required Rate of Return (RROR)?

A

RROR is also called ‘Cost of Capital’

70
Q

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

A

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

71
Q

How is Spread calculated?

A

Spread : ROI - Cost of Capital

72
Q

What is the primary point of Economic Value Added? How is it calculated?

A

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added : Operating Income After Tax - (Net Assets x WACC)

73
Q

How is Free Cash Flow calculated?

A 
Operating Income After Tax
\+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
\: Free Cash Flow
74
Q

What is measured by Six Sigma?

A

It measures a product versus its quality goal.

75
Q

What is the Asset Turnover Ratio?

A

Sales / Average Assets

76
Q

What does the Current Ratio tell us? How is it calculated?

A

Can the company pay their short-term liabilities?

Current Ratio : Current Assets / Current Liabilities

77
Q

What does the Debt to Equity Ratio tell us? How is it calculated?

A

How is the company financing its capital?

Debt to Equity Ratio : Total Debt / Total Equity

78
Q

What does the Debt to Total Assets ratio tell us? How is it calculated?

A

What proportions of the company’s assets are encumbered with debt?

Debt to Total Assets : Total Liabilities / Total Assets

79
Q

What does Gross Margin % tell us? How is it calculated?

A

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales

80
Q

What does Operating Profit Margin tell us? How is it calculated?

A

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin : Operating Profit / Net Sales

81
Q

How is Times Interest Earned calculated and what does it mean?

A

Can the company make their interest payments?

Times Interest Earned : Earnings Before Tax & Interest / Interest Expense

82
Q

What does Return on Assets tell us? How is it calculated?

A

What % return are the assets generating?

Return on Assets : Net Income (net of interest & taxes) / Average Total Assets

83
Q

How is Market/Book ratio calculated?

A

Market Value of Common Stock / Book Value of Common Stock

84
Q

What is Inventory Turnover and how is it calculated?

A

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory

85
Q

What is the Quick Ratio and how is it calculated?

A

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio : (Current Assets - Inventory) / Current Liabilities

86
Q

What is Average Collection Period- and how is it calculated?

A

How many days does it take the company to collect payment on A/R?

Average Collection Period : Average AR / Average Sales Per Day

87
Q

What is an Internal Failure?

A

Products have quality defects- but are caught BEFORE they leave the warehouse.

88
Q

What is an External Failure?

A

Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.

89
Q

What is Appraisal Cost?

A

Quality control- testing & inspection costs.

AUD 14 (6 decks)

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