When It Gets Tough Flashcards
Scenario: A CPA has accepted an engagement to audit the effectiveness of the internal control over financial reporting a nonissuer and to issue a report on such audit.
In what form does the client present its written assessment about effectiveness?
In a separate report that accompanies the CPA’s report
NOTE: An auditor (CPA) may audit internal control only if certain conditions are met
One of these conditions is that management provide;
- its assessment about the effectiveness of the entity’s internal control in a report that accompanies the auditor’s report (AU-C 940)
What are elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures?
- Human Resources
- Monitoring
- Engagement Performance
What type of SSARs Engagement SHOULD a CPA make inquiries about involving material subsequent events?
The CPA should make the inquiries in A REVIEW Engagement
Note: These inquiries should be documented by written representations from management (i.e. date of representation letter should be the date of CPA’s report)
**This does NOT apply to Compilation or Preparation Engagements
E.g. The CPA does NOT make these inquiries or perform other procedures to verify, corroborate, or review information about subsequent events
What is a benefit of a using electronic funds transfer for international cash transactions?
Reduction of the frequency of data entry errors
NOTE: Processing transactions electronically (e.g. EFTs) helps eliminate human interaction; thus reducing errors when they do occur
What statement SHOULD be included in a compilation of a projection report?
A statement that;
- There will usually be differences between the forecasted and actual results
- The compilation of a projection is limited in scope
- The accountant has no responsibility to update the report for future events and circumstances
What statement should NOT be included in a compilation of a projection report?
A statement that;
- expresses an opinion or any other form of assurance on the accompanying statements or assumptions
Remember: A projection states that it
“does not include evaluation of the support for the assumptions underlying the projection…….accordingly, do not express an opinion or any other form of assurance……..”
What Management Assertion is the auditor testing for when they…
- select a sample of sales transactions and examine evidence of credit approval?
This test of controls most likely supports management’s financial statement assertion of:
- Valuation and Allocation
Why? Because this should provide the auditor with assurance that the accounts receivable are collectible and recorded at net realizable value
What would NOT be a useful ratio for an auditor WHEN reviewing the overall profitability of a manufacturing company?
The Net income to working capital Ratio
Why? - Because this ration is NOT typically considered in evaluating overall profitability
E.g. It does NOT give a broad measure of how effectively the firm is managed (NO consideration for noncurrent assets and liabilities)
WHEN is the ratio estimation sampling technique is most effective?
When calculated audit amounts are approximately proportional to the client’s carrying amounts
Why? - Because the more homogeneous the ratios, the smaller the precision (Precision - determined by considering the variances of the ratios of carrying amount to audited amount)
HOW should the measurement of materiality be factored WHEN;
- An auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements?
The measurement of materiality;
- Should be the same as that used in forming an opinion on the basic financial statements as a whole
Why? Because If the auditor is reporting on whether supplementary information is fairly stated related to the financial statements measurement of materiality is the same
Thus - the auditor need not apply extensive procedures as would be necessary to express an opinion on the information by itself
WHAT would be the appropriate opinion if an auditor expresses an opinion on information supplementary to the basic financial statements (e.g. Supplementary Information) has been subjected to auditing procedures?
The auditor should state that the accompanying information is fairly stated in;
- All material respects in relation to the basic financial statements as a whole
Why? - Because this “Supplementary Information” is measured against the financial statements as a whole
E.g. This SHOULD be reported in an other-matter paragraph or in a separate report
What should the Service Auditor’s opinion include if;
- The User Auditor will benefit from the information and they may find it necessary to plan their audit?
The Service Auditor will likely provide:
- A Description of the scope and nature of the entity’s procedures
E.g. This will likely be a report expressing an opinion on the description of controls implemented and their design (Type 1 report)
NOTE: If it were a Type 2 Report, the Service Auditor would likely provide an opinion on the operating effectiveness of their client’s controls
Type I Report = Opinion on the description of the controls implemented and their design
What does the AICPA “Code of Professional Conduct” say about soliciting clients?
The “Code of Professional Conduct” does NOT prohibit solicitation of clients.
Solicitation is permitted if it is NOT false, misleading, or deceptive
What is the likely cause on the Control Weakness WHEN;
- A payroll system continues to pay employees who have been terminated?
There were inadequate manual controls maintained outside the computer system
Why? - Because this is most likely an ineffective control external to the computer processing department
What procedure should an auditor ordinarily perform regarding subsequent events?
Reading the latest subsequent interim financial statements
NOTE: This procedure goes along with also inquiring of management and management’s legal counsel regarding ANY subsequent events
