Risk Assessment

Question 1

Control Environment

Answer 1

The overall tone of the organization

Question 2

Risk Assessment

Answer 2

Managements identification of risk

Question 3

Information and Communications Systems

Answer 3

A mean of recording transactions and communicating resposibilities

Question 4

Monitoring

Answer 4

Assessment of internal control performance over time

Question 5

Existing Control Activities

Answer 5

Control Policies and procedures

Question 6

Five Components of Internal Control

Answer 6

(C) Control Risk
(R) Risk Assessment
(I) Information and Commiunications
(M) Monitoring
(E) Existing Control Activities

“CRIME”
CPA is required to understand each element of “Crime” : as it relates to financial reporting

Question 7

Information Technology Segregation of Duties

Answer 7

(C) - Control Team
(O) - Operator
(P) - Programmer
(A) - Analyst
(L) - Librarian

“COPAL”

Question 8

Audit Process

Answer 8

1. General Principles
2. Engagement Acceptance
3. Assess Risk & Plan Response
4. Perform Procedures & Obtain Evidence
5. Form Conclusions
6. Reporting

Question 9

Audit Planning

Answer 9

(N) - Nature (preliminary evaluation materiality, audit risk, internal control)
(E) - Extent (Scope of Audit, size and complexity, IT, prior experience)
(T) - Timing (deadlines, key dates,)

(C) - Completeness (account balances, trans, disclosure)
(O) - Cutoff (correct accounting period)
(V) - Valuation, Allocation, and Accuracy act. Balances (account balances, transactions)
(E) - Existence (Balance and trans exist)
(R) - Rights; Obligations
(U) - Understandability,Classification (disclosure is clearly expressed)

“COVER U”

Must be written and can be adjusted as time goes on.

Question 10

Audit Evidence Hierarchy (Identifying Risk)

Answer 10

Remember your vowels!!!
(A) - Auditors knows 
(E) - External Evidence
(I) - Internal Evidence
(O) - Oral Evidence
(U) - Know it!

Question 11

Audit Reporting (Private)

Answer 11

(M) - Management (R) Responsibility Paragraph
(D) - Design
(I) - Implementation
(M) - Maintenance

(R) Reports
(E) Express
(P) Plan
(O) Obtain
(R) Risk 
(T)Test "Internal Controls"
(S) Statements

(C) Control
(R) Reasonableness
(A) Accounting
(M) Management
(E) Evaluating

“MR DIM REPORTS CRAME”

Question 12

Is departure from US GAAP allowed if financial statements would be otherwise misleading?

Answer 12

Yes, departure from US GAAP is allowed if financial statements would be otherwise misleading.

Still issue unmodified/unqualified opinion.

Disclosure in the notes.

Question 13

Professional Skepticism

Answer 13

is the recognition that circumstances may exist that cause the financial statements to be materially misstated.

Question 14

Emphasis Of Matter Paragraph

Answer 14

1. Going Concern
2. Material justified change in accounting principal
3. Material Misstatement in prior financial statements
4. Special Purpose Framework

Special: Change in audit opinion could potentially be state in the emphasis of matters paragraph.

You can have a emphasis of matters paragraph with a un modified, modified, adverse, disclaimer

Question 15

Other Matter Paragraph

Answer 15

1. Restrict use of Report
2. Prior financial statements audited by prior auditor has not been presented.
3. Comparative financial statements where current year is audited but PP is not audited.
4. Material inconsistency in other information
5. Report of supplementary information within auditors report
6. Refer to required Supplementary information
7. report on compliance included in auditors report.

Special: Change in audit opinion could potentially be state in the emphasis of matters paragraph.

Question 16

Explanatory Paragraph (Issuer/Public)

Answer 16

1. Restrict use of Report
2. Prior financial statements audited by prior auditor has not been presented.
3. Comparative financial statements where current year is audited but PP is not audited.
4. Material inconsistency in other information
5. Report of supplementary information within auditors report
6. Refer to required Supplementary information
7. report on compliance included in auditors report.

Special: Change in audit opinion could potentially be state in the emphasis of matters paragraph.

Question 17

Standard Audit Procedures to obtain evidence

Answer 17

(C) Confirmation

(F) Footing, Cross Footing, Recalculation “Valuation”
(“A Vowel” - Auditor Knows)
(I) Inquiry (“O Vowel” - Oral Evidence)
(V) Vouching (“I Vowel” - Internal Evidence)
(E) Examination/Inspection (“A Vowel” - Auditor Knows)

(C) Cutoff Review “No Back Dating” (“I Vowel” - Internal Evidence)
(A) Analytical Procedures (“A&I Vowel”)
(R) Reperformance (A Vowel)
(R) Reconciliation (I Vowel)
(O) Observation (A Vowel)
(T) Tracing “Expenses & Liabilities are not understated” (I Vowel)

(W) Walk-through (A&O Vowel)
(A) Audit Related Accounts simultaneously (I Vowel)
(R) Representation Letter (I Vowel)
(S) Subsequent Events Review (All Vowels)
1. Contingencies
2. Unrecorded Liabilities
3. Disclosures

“C FIVE CARROT WARS”
Remember the Facebook game Farmville.

Question 18

Substantive Procedures

Answer 18

$$$$$ lets test the money

1. Transactions Total
2. Account Balances
3. Disclosures

Question 19

Vouching

Answer 19

Risk of overstatement
-Revenue 
-Assets
Testing for existence/occurrence
"Moving Down" 

Example: start vouching with the sales journal (financial statements) to invoice

Question 20

Tracing

Answer 20

Risk of understatement
-Expenses
-Liabilities
Testing for completeness/coverage
"Moving Up"

Example: start tracing with the shipping doc to invoice to sales journal(financial statements) to audit sales

Question 21

Sampling

Answer 21

Rule 1: Always assume that the population being sampled is normally distributed, that is, it can be described by a “normal” or “bell shaped curve” (Central limit theorem)

Rule 2: For the estimates that the CPA makes about the population to have mathematical validity, the samples have to be unrestricted and randomly selected, which means that:

• every item in a population must have an absolutely equal chance of being selected .
• The CPA cannot use “Bias” in deciding which items will be selected. No substitute items may be used. (Only area where CPA does not use judgement)

Rule 3: If the sample is large enough and is randomly selected, the sample will likely have the same statistical characteristics (mean and standard deviation) as the underlying population; that is, it will be representative of the population.

Rule 4: Standard deviation is a measure of “variability” which refers to the range of values within the population. (Sample Risk)

“Variability=Uncertainty=Larger sample size”

Question 22

Does statistical sampling eliminate the need for auditing judgment?

Answer 22

No, Judgment is required to set many of the parameters and to evaluate the overall results.

Question 23

Attribute Sampling

Answer 23

Most common in TESTING CONTROLS (Yes or NO MCQ)

Testing for specific characteristics (seeking errors) IC.

Question 24

Variables Sampling

Answer 24

Estimating the dollar value of the population, substantive testing

Risk of incorrect acceptance (Beta Risk, sample results fail to identify an existing material misstatement)

Risk of incorrect rejection (Alpha Risk, lack of efficiency, sample results mistakenly indicate a material misstatement)

Question 25

Sampling Risk

Answer 25

probability that sample is wrong

Question 26

Non Sampling Risk

Answer 26

- use wrong audit procedures | - improperly evaluate evidence/results

Question 27

Tolerable Deviation Rate

Answer 27

tolerable mistakes = risk of misstatement

Question 28

Deviation Rate VS Tolerable Rate

Answer 28

The deviation rate in the sample is the auditors best estimate of the deviation rate in the population from which it was selected.

Question 29

Select the Sample (Rule 2)

Answer 29

most common random election systematic selection - same day every month block (cluster) sampling - ok if has random start

Question 30

Evaluate the Sample Results (Rule 3)

Answer 30

Sample deviation rate (+) Allowance for sampling risk = upper deviation rate.

Question 31

Sampling Exam Trick

Answer 31

examiners sometimes try to trick candidates into using the sample deviation rate (instead of the upper deviation rate) in drawing conclusions about a population. Always consider worst case scenario.

Question 32

Elements of CPA Firms Quality Controls - identified by Statement on Quality Control Standards (SQCS)

Answer 32

1. leadership responsibilities for quality within the firm 2. relevant ethical requirements 3. acceptance and continuance of client relationships and specific engagements 4. human resources 5. engagement performance 6. monitoring

Question 33

Can a CPA firm disclose the names of its audit clients?

Answer 33

A CPA firm may disclose name of clients but the disclosure may not suggest that the client may be experiencing financial difficulties.

Question 34

Control Environment

Answer 34

the foundation of a business is its people and the environment

Question 35

Risk Assessment

Answer 35

organizations must set objectives to identify, analyze, and mange risk

Question 36

Control Activities

Answer 36

Policies and procedures are needed to make sure control objectives are effectively carried out.

Question 37

Information and communication

Answer 37

organizations should create and use information and communication systems to plan, conduct, manage, evaluate, and control their operations.

Question 38

Monitoring Activities

Answer 38

information systems and internal control policies and procedures are monitored and modified as needed.

Question 39

Fraud Risk

Answer 39

1. Pressures to perpetrate fraud 2. opportunities to carry out fraud 3. rationalizations to justify a fraudulent action

Question 40

Duty to Disclose

Answer 40

a. to comply with certain legal and regulatory requirements. b. to a successor accountant management has given permission for communication between the predecessor accountant and the successor accountant c. in response to a subpoena

Question 41

Fraudulent Reporting

Answer 41

usually acts of management - manipulation, falsification, or alteration of accounting records or supporting documents - misrepresentation in, or intentional omission - intentional misapplication of accounting principles

Question 42

Misappropriation of Assets

Answer 42

usually acts of one or more individuals among management, employees, or third parties and may involve stealing assets or causing an entity to pay for something that has not been received. -theft causes the financial statements not to be presented in conformity with GAAP

Question 43

Fraud Risk - Incentive/Pressure

Answer 43

under pressure from sources or inside the entity

Question 44

Fraud Risk - Opportunity

Answer 44

- allows a misrepresentation to occur - deficiencies in internal control - easy to steal assets

Question 45

Fraud Risk - Attitudes/Rationalization

Answer 45

employee creates a mindset that justifies the misrepresentation

Question 46

Addressing Letters & Reports

Answer 46

Engagement Letter - Can be a person | Auditors Report - Board of Directors

Question 47

Raises concerns regarding managements philosophy

Answer 47

1. Management consumed with meeting the budget 2. Management dominated by one person 3. Management compensation contingent upon the entities financial statements

Question 48

Risk Assessment - Existing Control Activities

Answer 48

``` to have a strong system... (P) Prenumbering of Documents (A) Authorization of Transactions (I) Independent checks to maintain asset accountability (D) Documentation ``` (T) Timely and Appropriate Financial Performance Reviews (I) Information Processing Controls (P) Physical Controls for Safeguarding Assets (S) Segregation of Duties

Question 49

Risk Assessment - Segregation of duties

Answer 49

should not be combined.... (A) Authorization (R) Record keeping (C) Custody of related assets

Question 50

The Auditor would favor interim testing if

Answer 50

1. the assessed risk of material misstatement is low 2. the controls are strong 3. the auditor can reduce the risk that misstatements that exist at the period-end are not detected by performing appropriate procedures, and 4. GAAS does not require testing at the balance sheet

Question 51

Internal Controls (Sales)

Answer 51

1. Preparation of the Sales Order "Serially Numbered" 2. Credit Approval "approved" 3. Shipment "serially numbered bill of laden" 4. Billing "serially numbered sales invoice" 5. Accounting Billing and Accounting can be consolidated! Match order 1. Shipping 2. Order 3. Invoice

Question 52

Internal Controls (AR)

Answer 52

1. Sales 2. Collection of Cash Receipts 3. Uncollectible Receivables 4. Sales Returns "serially numbered" 5. Sales Discounts

Question 53

Internal Controls (Cash Receipts)

Answer 53

1. Cashier - actually receive receipts and makes deposits 2. Accounts Receivable Department- enters receipts into the accounts receivable subsidiary records. 3. Account Department- accounts receivable control account. 3 copies of receipts should be listed in detail. lock boxes should be used as safeguards.

Question 54

Pass Key (Revenue Cycle)

Answer 54

existence is generally a more relevant assertion than completeness when auditing the revenue cycle. The risk that accounts receivable and sales will be overstated is high, while the risk that accounts receivable and sales will be understated is low.

Question 55

Internal Controls (Purchases)

Answer 55

1. Purchase Requisition 2. Purchase Orders 3. Receipt of Goods or Service "Blind Copy" "Properly Approved"

Question 56

Internal Controls (Accounts Payable)

Answer 56

1. Recording Payables 2. Approving Invoice for Payment and Recording Payment Match order 1. Receiving report 2. PO 3. Invoice

Question 57

Internal Controls (Cash Disbursements)

Answer 57

approving payment and signing a check should be separated duties.

Question 58

Pass Key (Expenditure Cycle)

Answer 58

for AP, the completeness and accuracy assertions are generally more relevant than the existence and right and obligations assertions, because the risk of understatement is greater than the risk of overstatement.

Question 59

Lapping

Answer 59

Today's cash receipts cover yesterday's theft How to prevent? Independent comparison of recorded cash receipts with funds actually deposited.

Question 60

Kitting

Answer 60

Cash recorded in two places at once. How to prevent? look at a bank transfer situation

Question 61

Internal Controls (Inventory)

Answer 61

1. Purchasing 2. Receiving 3. Warehouse 4. Shipping Perpetual Inventory - if inventory counting is done at a date other than the date of the financial statements, the auditor should obtain evidence about whether changes in inventory + evidence for "gap" period. auditor should observe inventory count if inventory is significant. Significant? Yes- Observe No-Confirmation

Question 62

Pass Key (Inventory Cycle)

Answer 62

inventory observation implies the auditor watches the client count the inventory.

Question 63

Audit Documentation

Answer 63

1. the amount below which misstatements would be regarded as clearly trivial 2. all misstatements accumulated in audit and if they have been corrected. 3. auditors conclusion about whether uncorrected misstatements are material, individually or in aggregate.

Question 64

Reasonableness of an Estimate

Answer 64

- significant to the accounting estimate - sensitive to variations - deviations from historical patterns - subject and susceptible to misstatement and bias

Question 65

Auditor Permanent file should include......

Answer 65

items that remain relatively unchanged from year to year. | Example: capital stock and other owner's equity accounts

Question 66

Disagreements with Management and auditor

Answer 66

auditor need to communicate any disagreements that could be significant to the FS or auditor report. Disagreements based on preliminary or incomplete information that were later resolved do not need to be disclosed.

Question 67

Internal Controls (Investment Cycle)

Answer 67

1. Authorization of Purchase of Sale of Investments 2. Custody of investments 3. Record Keeping

Question 68

Internal Controls (Investment Transactions)

Answer 68

1. Completeness 2. Cutoff 3. Valuation, Allocation, and accuracy 4. Existence and Occurrence 5. Understandability and Classification

Question 69

Derivatives

Answer 69

Hedging Activities - The derivative was designated as a hedge at its inception by management - Management has documents the hedging relationship, risk management objective, and strategy and is periodically assessing its effectiveness.

Question 70

Internal Controls (PP&E)

Answer 70

1. Acquisition 2. Subsidiary Ledgers 3. Physical Security 4. Written Polices 5. Disposition "Sequentially Numbered"

Question 71

Internal Controls (Payroll)

Answer 71

1. Authorization to Employ and Pay 2. Supervision 3. Timekeeping and Cost Accounting 4. Payroll Check Preparation 5. Check Distribution Segregation of duties Observe payroll distribution IT Test to ensure that only employees existing in the computer data.

Question 72

Pass Key (Payroll Cycle)

Answer 72

1. payroll department is a record-keeping department

Question 73

Internal Controls (Financing)

Answer 73

1. adequate documentation of all financing agreements 2. Authorization of new debt financing by the board of directors or management. 3. Detail Records

Question 74

Internal Controls (Equity)

Answer 74

1. officer will be responsible. | 2. Periodic independent reconciliation

Question 75

GAO Standards

Answer 75

1. Self Interest - financial or other interest 2. Self Review - not properly evaluate 3. Bias - promote a position 4. Familiarity - close relationship 5. Undue Influence 6. Management Participation 7. Structural threats

Question 76

Client decides not to make an auditors proposed adjustments that COLLECTIVELY are NOT MATERIAL

Answer 76

the auditor can issue a standard report with a unmodified opinion

Question 77

Agreed- Upon Procedures

Answer 77

no auditors report or opinion | list procedures performed in the attestation report

Question 78

Predecessor Auditor had a qualified opinion and client will not present

Answer 78

managements responsibility paragraph of the successor report is changed to include a statement that the prior years statements were audited by another auditor, the date of the auditors report, the opinion issued, and an explanation if the opinion was other that unmodified.

Question 79

Incorrect Acceptance of a Sample

Answer 79

sample shows not material misstated but in fact is material misstated GOOD THING! WHAT WE WANT!

Question 80

Incorrect Rejection of a Sample

Answer 80

sample shows materially misstated but in fact is non material misstated. BAD THING! WHAT WE DONT WANT!

Question 81

Risk of Assessing Control Risk Too Low

Answer 81

sample results indicate a lower deviation rate than actually exists in the population

Question 82

Risk of Assessing Control Risk Too High

Answer 82

sample results indicate a higher deviation rate than actually exists in the population

Question 83

Upper Deviation Rate

Answer 83

Sample Deviation Rate(auditor best estimate) + Allowance for sampling risk.

Question 84

Matters That Require Special Consideration

Answer 84

Auditors Responsibility 1. Material Misstatements 2. Consistently applied or changed correctly

Question 85

Agreed Upon Procedures - IAMSURE

Answer 85

(I) Independence (A) Agreement of the Parties (M) Measurability and Consistency (S) Sufficiency of the Procedures - specified parties take responsibility (U) Use of the Report Is Restricted to the Specified Parties (R) Responsibility for the Subject Matter (E) Engagements to Perform Agreed-Upon Procedures on Prospective Financial Statements.

Question 86

Prospective Financial statements

Answer 86

Partially expired Completely & Pro forma & Partial Presentation expired ARE NOT considered prospective

Question 87

Prospective Financial statements

Answer 87

General Use - Forecast | Limited Use - Forecast & Financial Projection

Question 88

Preparation of Prospective Financial Statements

Answer 88

practioner should not prepare | excludes the summary of significant assumptions

Question 89

Compilation

Answer 89

- proper assembling of the financial data based on the responsible party assumptions - no assurance - read the prospective FS with the summaries of significant assumptions and accounting policies and consider whether they appear to be presented in conformity with AICPA - beware of obvious inappropriate assumptions used to construct the statements.

Question 90

Content of Compilation Report

Answer 90

- Identification entity - prospective financial information - date or period covered - management is responsible - performed the compilation engagement in accordance with SSARS - does not express an opinion, a conclusion, nor provide any assurance - prospective results may not be achieved - signature, date, city and state - FOLLOWS SSARS

Question 91

Examination

Answer 91

- statements are presented in conformity with AICPA and underlying assumptions provide a reasonable basis for the prospective statements - Independence required - Evidence required Report: independent, signature, city and state, and date Identification of the prospective financial statements criteria against FOLLOWS AICPA

Question 92

Pro Forma Financial Statements

Answer 92

demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical financial statements if it had occurred during the period covered by those financial statements. - based on managements assumptions - directly attributable to the transactions - labeled accordingly - may be examined or reviewed - understanding of the event and evaluate the pro forma adjustments, including any assumptions on which the adjustments are based. - make reference to the FS from which the historical info is derived and state whether such financial statements were audited or reviewed. CHECK THE MATH

Question 93

successor auditor ask the predecessor auditor....

Answer 93

management integrity disagreements with management change of auditors communication if regards to fraud

Question 94

written communication regarding significant deficiencies

Answer 94

- statement "express an opinion on the financial statements, but not effectiveness over controls" - "not designed to identify all deficiencies - define material weakness, where relevant, term of significant deficiency - identify significant deficiencies and mm weakness - intended solely for management

Question 95

reasonableness of an estimate

Answer 95

- significant accounting estimate - sensitive to variations - devotions from historical - subject and susceptible to misstatement and bias

Question 96

Perfect opportunity for a fraud in a operating style

Answer 96

- Management consumed with meeting the budget = Pressure - Management dominated by one person - opportunity - Management compensation contingent upon the entity's financial performance.