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Question 1

six elements of a quality control system.

Answer 1

Leadership responsibilities for quality within the firm
Relevant ethical requirements (esp independence)
Acceptance and continuance of client relationships
Human resources
Engagement performance
Monitoring.

Question 2

What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?

Answer 2

Understanding vs. testing

Obtain the required understanding of the design of internal control for planning purposes.
Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls.

Question 3

What matters are typically addressed in an engagement letter?

Answer 3

The objective and scope of the audit;
The auditor’s responsibilities;
Management’s responsibilities;
A statement about the inherent limitations of an audit;
A statement identifying the applicable financial reporting framework;
Reference to the expected content of any reports to be issued; and
Other matters, as warranted (e.g., fees, etc.).

Question 4

Identify some activities associated with pre-engagement activities.

Answer 4

Perform appropriate procedures to address the quality control issues associated with the acceptance/continuance of the audit engagement;
Evaluate the audit team’s compliance with relevant ethical requirements (especially independence issues); and
Establish an understanding in writing of the terms of the engagement.

Question 5

When might an auditor have a duty to inform others outside of the audited entity of illegal acts known to the auditor?

Answer 5

In response to a valid subpoena;
To comply with applicable legal and regulatory requirements;
To respond appropriately to successor auditor’s inquiries when the former client has given permission to the predecessor;
To report illegal acts to the applicable funding agency under the requirements of government auditing standards.

Question 6

Unqualified opinion

Answer 6

The unqualified opinion has no reservations concerning the financial statements. This is also known as a clean opinion meaning that the financial statements appear to be presented fairly.

Question 7

Qualified opinion

Answer 7

This means that the auditor has taken exception to certain current-period accounting applications or is unable to establish the potential outcome of a material uncertainty.

Question 8

Disclaimer opinion

Answer 8

This is a special type of audit report that should be issued when the auditor permits his or her name to be associated with financial statements that were not examined in accordance with generally accepted auditing standards.

Question 9

Adverse opinion

Answer 9

This is a type of audit opinion which states that the financial statements do not fairly present the financial position, results of operations, and changes in financial position, in conformity with generally accepted accounting principles.

Question 10

Reference specialist in audit report if

Answer 10

opinion is qualified/modified

Question 11

Identify 3 procedures an auditor might perform to obtain an understanding of internal controls?

Answer 11

Inquiry of appropriate personnel
Observation of client’s activities
Review entity’s documentation of internal controls.

Question 12

Identify 2 reasons for assessing control risk at the maximum level.

Answer 12

The auditor believes that the design of internal control is ineffective; or
The auditor believes that reliance on internal control (and performing applicable tests of control) is not an efficient audit strategy compared to a wholly substantive audit approach.

Question 13

ultimate purpose of assessing control risk

Answer 13

Risk that material misstatements exist in the financial statements.

Question 14

The auditor would properly choose a wholly substantive audit approach

Answer 14

when the wholly substantive audit approach is more efficient.

Question 15

7 principals / Clarity Project

Answer 15

AICPA

Question 16

10 commandments

Answer 16

PCAOB

TID PIE GCDO

Question 17

TID

Answer 17

General standards - training, independence, and due care

Question 18

PIE

Answer 18

standards of fieldwork - planning and supervision, internal control, and evidence

Question 19

GCDO

Answer 19

Reporting standards - GAAP, consistency,disclosure, and opinion

Question 20

SSAR

Answer 20

Aicpa’s statements on stds. for acct. and review services - applicable when CPA is associated with FS of private companies but that assoc is something less than a full scope audit engagement

Question 21

Attributes sampling

Answer 21

sampling for purposes of deciding whether internal controls are working as designed (tests of controls)

Question 22

Variables sampling

Answer 22

sampling for purposes of deciding whether account balances (such as inv or rec) are fairly stated (substantive tests of details)
sampling for purposes of estimating the dollar balance for an account or financial statement element.

Question 23

Define “Type 1 Error.”

Answer 23

The risk of under-reliance on controls (that is, the risk of assessing control risk too high); or incorrect rejection of the fairness of an account balance. (The AICPA considers this an error related to efficiency.)

Question 24

Define “Type 2 Error.”

Answer 24

The risk of over-reliance on controls (that is, the risk of assessing control risk too low); or incorrect acceptance of the fairness of an account balance. (The AICPA considers this an error related to effectiveness.)

Question 25

Stratification

Answer 25

purpose is to reduce the overall variability within a population.

Question 26

List the five categories of general controls.

Answer 26

Organization and operation
Systems development and documentation
Hardware and systems software
Access
Data and procedures.

Question 27

List the alternatives to the unmodified audit report.

Answer 27

Qualified,
Adverse,
Disclaimer of opinion.

Question 28

What is the meaning of an unmodified audit report?

Answer 28

The financial statements are fairly stated according to GAAP (or other applicable accounting framework), and the auditor expresses no reservations.

Question 29

What type of report should the auditor express when a scope limitation is viewed as material, and pervasive?

Answer 29

disclaimer of opinion

Question 30

Other information

Answer 30

info other than the fin statements and the auditor’s report that is included in a document containing audited fin statements and the auditor’s report (can be fin and non-fin info, but excludes required supplementary info)

Question 31

Alert is required when:

Answer 31

1. the subject matter is based on criteria that is only suitable for/available to a limited number of users
2. the matters are presented in a by-product report that is not the primary objective of the engagement

Question 32

What is meant by the term “applied criteria” in connection with summary financial statements?

Answer 32

The criteria applied by management in the preparation of the summary financial statements.

Question 33

reporting accountant

Answer 33

An accountant, other than a continuing accountant, who prepares a written report or provides oral advice on the application of the requirements of an applicable financial reporting framework to a specific transaction or on the type of report that may be issued on a specific entity’s financial statements.

Question 34

When deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what 3 matters should the auditor consider?

Answer 34

The purpose for which the financial statements are prepared;
The intended users of the financial statements; and
The steps taken by management to determine that the framework is acceptable in the circumstances.

Question 35

What is meant by the term special purpose framework?

Answer 35

A financial reporting framework other than GAAP that is one of the following bases of accounting:
Cash basis;
Tax basis;
Regulatory basis, or
Contractual basis.

Question 36

Type 1 Report

Answer 36

This refers to a report on management’s description of a service organization’s system and the suitability of the design of internal controls at the service organization – whether the control policies and procedures are suitably designed and placed in operation.

Question 37

Type 2 Report

Answer 37

This refers to a report on management’s description of a service organization’s system and the suitability of the design and operating effectiveness of internal controls at the service organization – whether the policies and procedures are suitably designed and working effectively to provide reasonable assurance of achieving the stated control objectives.

Question 38

What is the purpose of a “pro forma” financial statement?

Answer 38

The purpose is to show the significant effects on historical financial information associated with a transaction (actual or proposed) had the transaction occurred at an earlier date.

Question 39

Positive vs negative assurance

Answer 39

Positive assurance is when the auditor can state an opinion that the financial statements are presented fairly in conformity with U.S. GAAP (audit work was completed, we are reasonably assured). The opposite is negative assurance, where the auditor is not aware of material misstatements, but we did not do a full audit (usually used in reviews).

Question 40

Assurance services

Answer 40

Independent professional services that improve the quality or context of information for decision makers.

Question 41

List the five primary responsibilities of the PCAOB.

Answer 41

Registration of public accounting firms;
Inspection of registered public accounting firms;
Standard setting;
Enforcement;
Funding.

Question 42

purpose of SOX 2002

Answer 42

The purpose is to address a series of perceived corporate misconduct and alleged audit failures (including Enron, Tyco, and WorldCom, among others) and to strengthen investor confidence in the integrity of the U.S. capital markets.

Question 43

Differentiate between the American Institute of Certified Public Accountants’ (AICPA) and the Public Company Accounting Oversight Board’s (PCAOB) requirements regarding “retention” of audit documentation.

Answer 43

aicpa = 5 years
pcaob = 7 years

Question 44

AICPA vs PCAOB

Answer 44

AICPA issues ASB and is for non-issuers of 5 years and as 13 assertions in 3 categories
PCAOB issues Risk Assessment and is for issuers of 7 years and has 5 F/S assertions

Question 45

What governmental body oversees the Public Company Accounting Oversight Board (PCAOB)?

Answer 45

The SEC

Question 46

IFAC vs AICPA

Answer 46

IFAC is more principals based and covers all accountants

AICPA is more rules based and covers only accountants in public practice