short Flashcards
objective of a review
material modifications should be made to conform with the applicable financial reporting framework
communicate material weaknesses in internal control to both company management and those charged with governance, where ?
done in separate communication , and is not included as emphasis of matter to an unmodified opinion
the higher the risk of material misstatement, ……inherent risk and substantive test?
The higher the risk of material misstatement, the lower the detection risk must be, and the more substantive procedures the auditor must perform in order to lower the overall audit risk.
performance materiality , wut auditor do ?
materiality in planning differ materiality used in evaluating the audit
do not exceed financial statement materiality
should project the detected error to the entire population .
the auditor should reconsider the related levels of performance materiality and appropriateness of the nature, timing, and extent of further audit procedures.
test for the presence of unauthorized EDP program changes by running
source code comparison program (compare the coding of program from its last run to the original program)
obtaining an understanding of an issuer’s information and communication component of internal control
significant class of transaction manual & automated procedures accounting records financial reporting process controls for journal entries
auditor objective when engaged to report RSI is ?
evaluate the presentation of RSI relate to FS as a whole
,,report on whether RSI is fairly stated in material respect as a whole
auditor should only apply limited procedure
how to identify unrecorded trade account payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
when independence does not apply ?
compilation of personal or financial forecast
preparation of tax return
A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements,
which parties should reach on understanding ?
lawyer and auditor
what specific information must be on management representation letter ?
information concerning to fraud by CFO
wut u put on negative confirmation to encourage a timely response?
“If you do not report any differences within 15 days, it will be assumed that this statement is correct.”
cause an auditor to question the integrity of management?
audit test detect the fraud that was known to management but not disclosed to the auditor
wut risk pop up when you apply substantive test in interim date?
a risk that misstatements may exist at the balance sheet date that may not be detected by the auditor.
how to reduce the risk associated with interim testing?
cover the remaining period by performing:
(a) substantive procedures, combined with tests of controls for the intervening period,
(b) if the auditor determines that it is sufficient, further substantive procedures only, that provide a reasonable basis for extending the audit conclusions from the interim date to the period-end.”
interim testing might not be the best choice when
in a period of rapidly changing economic conditions
The primary objective of analytical procedures used in the overall review stage of an audit is to:
assist the auditor in assessing the validity of the conclusions reached.
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?
Incorrect acceptance
expression of consistency in audit report?
The auditor’s standard report does not include an expression related to the consistent application of an applicable financial reporting framework 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.
A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:
by having a system of quality control
Which of the following events occurring after the issuance of the auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
facts that have existed on balance sheet date
Which of the following events occurring after the issuance of the auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
withdraw and provide no further service
an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
the entity anualize interim financial statement
Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is:
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 it may tend to overshadow the auditor’s disclaimer of opinion. This practice is referred to as making a “piecemeal opinion” and is prohibited per AU-C 705.15. An auditor may express an opinion on only one basic financial statement, such as the balance sheet.
when auditing related party transactions, an auditor places primary emphasis on:
evaluating the disclosure of the related party transactions
“Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below.
standard financial institution confirmation request
would contain a statement addressed to the auditor concerning the results of a search for the existence of deposit or loan accounts.
when adverse opinion is issued ?
that misstatements are material and pervasive to the financial statements.
; auditor must include the reason for the adverse opinion
sarbanes oxley act prohibit what ?
prohibit from providing internal audit outsourcing service during an audit,
prohibit actuarial service related to the audit contemporaneously with the audit
prohibit advice on system design during an audit
tax services are allowed but must be preapproved by audit committee
in a comfort letter, the accountant provide negative assurance about what
the comfort letter provide “negative assurance” to the underwriter that “nothing come to our attention that would indicate the information does not meet the specified standard.
in a review of financial statement, negative assurance on what?
on whether “any material modifications should be made to the unaudited interim financial information for it to be in accordance with the applicable financial reporting framework” and whether “the unaudited interim financial information complies as to form in all material respects with the applicable accounting requirements of the [Securities Act of 1933] and the related rules and regulations adopted by the SEC.”
Under PCAOB Auditing Standard 1215, the auditor should complete the final set of audit documentation within how many days following the report release date?
45 days
when determining a sample size for test of control, the auditor should consider ?
tolerable rate
the likely rate of deviation
, allowable risk of assessing control risk too low
bill of landing come from?
bill of lading are generated by the carrier for goods being shipped to the entity
what in a management representation letter?
the entity has complied with contractual agreement
; management has made available all financial record and related data
Normally, the only time a CPA can disclose confidential information is with the client’s consent. The exceptions to client’s consent are:
a peer review by state CPA society
; a subpoena or court summon
what is allowance for sampling risk ?
an allowance for sampling risak is the difference between the upper precision limit and the sample deviation rate
what is the objective of the analytical procedure in the overall review stage of an audit ?
to assist auditor in assessing the conclusion reach and the overall financial statemetn
what treasurer department should not do ?
The treasurer’s department should not approve vendor’s invoices for payment as it would put the treasurer’s department in control of both authorization and information processing. This would not be a proper segregation of duties
what items that the client’s lawyer can respond to the auditor’s letter of inquiry ?
The client’s lawyer is only asked to respond by providing information about pending or threatened litigation, claims and assessments (or unasserted claims that are probable of assertion and that would have a reasonable possibility of a negative outcome
what is test data approach ?
The test data approach (sometimes called the test deck approach) is a way to audit “through the computer.” Test data is introduced into the client’s computer system using the same program to operate the application being tested. The output is compared to the auditor’s predetermined results. The test data approach does not involve a separate program.
An integrated test facility
An integrated test facility introduces a fictitious entity (such as a dummy subsidiary) 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.
what to consider in the planning and performance of an audit?
the audit risk, materiality, and statisticala sampling
what are the elements of a CPA firm quality control system ?
leadership responsibilities ethical continuance of client relationship human resources engagement performance and monitoring
what does the “introductory paragraph” include ?
identify the entity
; state that FS have been audited
;identify the title of FS
;date or period covered
Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:
assess the difficulty in controlling the incremental audit risk (i.e., extending the audit conclusion over the remaining period from the interim date to the balance sheet date).
when a disclaimer of opinion can be issued ?
scope limitation that prevent auditor to form an opinion
when a unmodified opinion can be issued ?
clean opinion, present fairly in all material respect
when a qualified opinion can be issued?
has an “except for” paragraph that highlight any material scope limitation or departure from GAAP. These are material but not sufficient enough material to require a disclaimer or adverse opinion
risk of accessing control risk too low
auditor over reliance on control.
; auditor fails to perform additional work ;
varies inversely with sample size (sample size go up, risk of assessing control risk too low decrease)
what management should do when it has negative trend and financial difficulty ?
dispose asset
borrow money or restructure debt
reduce or delay expenditure
; increase ownership equity
when an auditor qualifies the opinion because of scope limitation, the opinion paragraph should focus on wut?
the opinion paragraph should focus on the possible effect on the FS and NOT the scope limitation itself
what happen when the auditor change an audit or review to a review or compilation , what happen to the new engagement ?
not make any reference to the original engagement;
not why the engagement changed
what is comfort letter and who sign it ?
A comfort letter is a letter issued to underwriters concerning the financial information contained in registration statements filed with the SEC in connection with the issuance of securities.
A comfort letter is sent (and signed) by the independent auditor to the underwriter.
is confirmation the most efficient method available?
no, the confirmation is not the most efficient method available
wut is the relationship between material misstatement and detection risk?
high risk of material misstatement = lower detection risk
how to lower detection risk?
increase substantive testing
wut the main auditor do when they decide to make reference to another CPA who audited a sub of the entity?
main auditor not require to review the working paper and audit program of other CPA.
All you need to do is inquiry about professional reputation and independence of other auditor
Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for ————— as members in public practice.
objectivity
when a negative confirmation can be used ?
when inherent and control risk is low
when there are large number of small balances involved and auditor expect a small number of error
When an auditor plans to rely on controls that have changed since they were last tested, wut they gonna do ?
test the operating effectiveness of such control in the current audit
which auditing procedure would assist auditor to identify related party transaction ?
use the guarantee
Review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.
how should a practitioner present the result of applying agreed upon procedure ?
to specified subject matter
during a review, why accountant perform analytical procedure ?
to provide limited assurance on the reviewed financial statement
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
in the note of financial statement
what is dual dating?
auditor can date the report to the later date. auditor is only limited to a specific event
what does section 404 include ?
annual report filed with SEC contain an internal control report;
also contain assessment of effectiveness of internal control structure
what does section 402 include ?
unlawful for issuer to have a personal loan to the director or officer of that issuer
what does section 403 include?
disclosure from a person who is directly or indirectly a beneficial owner of more than 10%
what does section 406 include?
disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers
to understand “information and communication component of internal control”, what auditor do?
significant class of transactions manual and automated procedure accounting record financial reporting process control surrounding journal entries
An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the:
no opinion
wut omit all hypothetical assumption and presents the most likely future financial position?
a financial forecast
the engagement letter of compilation include ?
the objective
no opinion or assurance
Acknowledgment of management’s representation
agreement that the financial statements are not to be used by third parties
what does analytical procedure include ?
comparable information for prior period
relationship among element of financial information
budgets or forecast
ratios, stats, trends, projecting error rate
what the effect of ineffective general control ?
ineffective general control do not cause misstatement, but it allow misstatement to occur
when is better to use substantive analytical procedure?
substantive analytical procedure is better for large volume of transactions that are predictable over time
when is better to use test of details
test of details are used to obtain audit evidence about account balance, including existence and valuation
who enforce compliance and levies civil monetary penalties?
PCAOB enforce compliance and levies civil monetary penalties while the SEC oversee the PCAOB operation
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?
Procedures manuals and organizational flowcharts would be only two out of many possible sources of information about the entity and its environment used to assess the risk of material misstatement. The lack of one specific source to obtain the understanding would not constitute a scope limitation, nor would the auditor be limited to assessing control risk at the maximum level.
when can the auditor perform substantive test of control in the interim date ?
when the controls are strong, assessed risk of material misstatement is low
what does section 404 do ?
require that the audit report report on the internal control assessment made by the management. this internal control assessment will not be the subject of any other separate engagement
the use of ratio estimation sampling technique is most effective when ?
when the calculated audit amounts are approximately proportional to the client’s book amounts
If a registered public accounting firm is in violation of any rule or regulation of the SEC or PCAOB:
they may not prepare or issue any audit report with respect to that issuer.
Which of the following types of engagements is not permitted under the professional standards for reporting on an entity’s compliance?
practitioner should not perform a review of an entity’s compliance with requirements of specified laws, regulations, rules, contracts, or grants.
what is the differences between a deficiency, a significant deficiency and a material weakness ?
A deficiency exists when the design or operation of one or more of the internal control components does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.
A significant deficiency is a deficiency in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
A material weakness is a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. All material weaknesses are significant deficiencies; they merit attention by those charged with governance due to their severity and their potential effect on the financial statements.
An auditor is required to report material weaknesses and significant deficiencies to those charged with governance. “Although the auditor is required…to make the communications…no later than 60 days following the report release date, the communication is best made by the report release date because receipt of such communication may be an important factor in enabling those charged with governance to discharge their oversight responsibilities” (AU-C 265.A16).
The two types of deficiencies do not have to be reported separately.
what can auditor do to identify possible litigation, claims and assessments (LCA)?
discuss with management about the policies and procedures
reading the file of correspondence from taxing authorities. In this file, the auditor may discover delinquent tax notices and substantial unpaid interest and penalties.
procedure to conduct a review are usually limited to what ?
limited to performing analytical procedures
; making inquiries of company personnel and management, and other procedures that address significant accounting and disclosure matters relating to the financial statements to be reported
The objective of a review of interim financial information of an issuer is to provide an accountant with a basis for reporting whether:
basis for reporting whether material modifications should be made to the interim information to comply with the applicable financial reporting framework.
what to do when you notice there is an unjustified accounting change and a material weakness ?
Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance.
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer’s financial statements without impairing independence?
reviewing a proposed transaction and informing the client of the tax consequences
when an accountant is engaged to compile financial statement that omit all disclosure with no reference to basis but are otherwise in conformity with special purpose framework , WHAT THE 1ST PARAGRAPH SAY?
the first paragraph of the accountant’s compilation report should include a sentence that states, “The financial statements have been prepared on the [describe appropriate basis of accounting], which is a comprehensive basis of accounting other than generally accepted accounting principles.
when an auditor is requested to change from an audit to a compilation, what should auditor do ?
should consider additional audit effort
reason management for change
cost to complete the audit
what do auditors do in the planning stage of an audit ?
make a preliminary judgement about materiality
what do auditors do in the fieldwork stage of an audit?
during the fieldwork stage of an audit, the auditor would confirm a sample of the entity account payable with known creditors;
obtain written representation from management that there are no unrecorded transactions
what does auditor do in the reporting stage of the audit ?
communicate management ‘s initial selection of accounting policies to the audit committee
does accountant need to limit the distribution of the report when doing the review ?
The accountant would not need to limit the distribution of the accountant’s report.
In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning:
When using test data, the auditor is looking for controls that are built into the system, not controls that operate outside of the computer. Thus, the auditor would not be testing controls concerning control over and distribution of unclaimed paychecks.
“Real Time Issuer Disclosures,” dictates dictate what ?
issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations
when the auditor is unable to obtain an investee’s audited financial statement,
or a statement of cash flows is not presented (departure from an applicable financial reporting framewor
what opinion is this?
a qualified opinion
how an auditor test of controls over the issuance of raw material to production ?
examining material requisitions and then re-performing client controls designed to process and record issuance is the best method to test controls , because material requisition are received by the store department for the purpose of issuing such material to production
what is an audit trail ? does it related to analytical purpose ?
An audit trail in a computer system, as in a manual system, assists in discovering fraud and therefore acts as a deterrent to perpetration of such acts
Analytical purposes are not a major factor for maintaining an audit trail in a computer system. Analytical review can be performed by retrieving recorded data stored in the computer system or on hard copy.
what is check digit verification ?
single digit at the end of an identification
Under PCAOB Auditing Standard 1215, audit documentation should be retained no fewer than how many years following the report release date?
7 years
what are the seven type of circumstance that could lead to threat of independence from GAO ? Government accoutability office
Self-interest Self-review Bias Familiarity Undue influence Management participation Structural threats
the written report under Government Auditing standard should include what ?
should include weaknesses in internal control ;
significant deficiencies; any indication of fraud, abuse, or noncompliance with laws and regulations; and significant violations of contracts or grant agreements.
what consider consulting service ?
Advisory services, implementation services
subject to the Statements of Standards for Consulting Services
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs
the lower the assessed level of control risk, the fewer substantive test
Therefore, an auditor who plans to assess control risk at a low level usually performs tests of controls and only limited tests of details or substantive tests
The written communication regarding significant deficiencies and material weaknesses identified during the audit of financial statements should include what statement ?
to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity’s internal control over financial reporting.
the accountant would be required to perform analytical procedure designed to identify relationships that appear to be unusual in where ?
The accountant would be required to perform analytical procedures designed to identify relationships that appear to be unusual in a review engagement, but not in a compilation engagement.
how to classify “measurement and review of the entity financial performance ?
Measurements and review of the entity’s financial performance would be classified as control activities.
in evaluating control environment, auditor should ?
communication of integrity and ethical value
competence
participation of those charged with governance
management philosophy and style
organizaiton struction
assingment of authority and responsibiity
human resource policies and practices
what is record count ?
A record count is a total of the number of input documents to a process or the number of records processed in a run.
what auditor is not required to communicate with the audit committee ?
the degree of reliance the auditor placed on the management representation letter.
However, if an audit committee exists separate from management, the auditor should communicate the representations requested from management. The auditor may provide the audit committee a copy of the management representation letter.
what is the purpose of segregation of duties ?
performed in order to determine control risk
judging the reasonableness of accounting estimate is what ?
Judging the reasonableness of accounting estimates would be a substantive procedure used to audit the assertion of valuation and allocation.
what is CPA responsibility when undertaking a consulting service engagement ?
inform the client of significant reservations concerning the benefits of the engagement.
When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive:
negative assurance on capsule information
what is the primary focus of an auditor in the examination of liability ?
to verify that all of the entity’s liabilities have been recorded
auditor’s engagement letter include what ? and doesnt include what?
include: objective of the engagement, management responsibility, auditor responsibilities, limitation of the engagement , limit the auditor responsibility to detect fraud
does not include: significant deficiencies, audit procedure, substantial doubt about entity to continue as a going concern
what factors related to control activities impact an auditor’s consideration of the effect of IT on internal control:
information processing, segregation of duties, physical control .
In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
In this question, one-half of the sample ($5,000 out of $10,000) has been audited. The misstatement is for $1,000 ($5,000 − $4,000). Projecting the same error rate for the unaudited half of the sample, the projected misstatement is for $2,000.
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
The debit memo is usually a notification from a buyer to a seller that tells the seller that a debit was made in the seller’s account on the buyer’s book. In other words, a debit memo is a way for a buyer to inform a seller that it wants a refund on its purchase. In the instance when nonconforming goods are returned to a vendor, the purchasing department should prepare a debit memo to be sent to seller with a copy sent to accounting in order for accounting to remove the resulting payable from the accounting records.
how often PCAOB inspect the firms? (with more than 100 issuers , with less than 100 issuers?
Firms that audit more than 100 issuers are inspected annually. Firms that audit 100 or fewer issuers are inspected every three years.
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:
shipping document file
what is factual misstatement?
and judgemental misstatement?
A factual misstatement would include the misstatements the auditor is able to identify within an audit.
A difference in management’s and the auditor’s position would be a judgmental misstatemen
if an accountant who is engaged to review financial statement become aware of a departure from the applicable financial reporting framework, the accountant should… ?
should disclose the departure in a separate paragraph of the review report
The accountant is not required to determine the effects of a departure if management has not done so, provided that the accountant states in the report that such determination has not been made.
what is the purpose of when auditor do the walkthrough?
the nature of the walkthrough is meant to help the auditor to understand the full process, and determine the effectiveness of controls
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
are direct borrowings on note payable authorized by board of director?
what is the objective of internal control for production cycle?
Since the production cycle handles raw products and materials, it is important to maintain proper custody of the assets, as assets can easily be misappropriated during this cycle.
as the number of allowable deviations increase, the sample size… ?
sample size decrease
Identifying entries posted to incorrect accounts use what type of sampling?
attribute
Which of the following should an auditor do when control risk is assessed at the maximum level?
document the assessment
Other procedures which aid in understanding the client’s business in planning the audit include?
review prior year working paper
review permanent file
how to find the projected error?
the book value is $10,000. The sampling interval is $5,000, so the actual error of $2,000 ($10,000 - $8,000) specifies that the projected error is also $2,000.
A nonissuer engaged a practitioner to perform agreed-upon procedures on specified matters. The date of the practitioner’s report would ordinarily be determined by the occurrence of which of the following events?
the completion of the agreed upon procedure
so auditor engage in a review, discovered that the company is noncompliance with law and regulation, wut to do ?
The accountant is not required to search for fraud or noncompliance with laws and regulations during a compilation or a review. However, these acts may come to the attention of the accountant while performing procedures for the engagement. If noncompliance is discovered, it should be brought to the attention of the appropriate level of management.
In obtaining written representations from management, materiality limits ordinarily would apply to representations related to:
amounts concerning related party transaction
To obtain evidence that online access controls are properly functioning, an auditor most likely would:
enter invalid identification numbers or passwords to ascertain whether the system rejects them, thereby denying access.
