Wiley Flashcards
In the USA, who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?
AICPA’s Auditing Standards Board
In the USA, who issues auditing standards applicable to audits of public companies (also known as issuers)?
Public Company Accounting Oversight Board (PCAOB)
In the USA, who issues auditing standards applicable to audits of governmental entities?
US Government Accountability Office (GAO)
What is meant by generally accepted auditing standards (GAAS) under the clarified auditing standards?
The Statements of Auditing Standards issued by the AICPA’s Auditing Standards Board
Identify the four primary themes associated with the AICPA’s seven principles for audit standard setting
1, Purpose/premise
- Responsibilities
- Performance
- Reporting
Identify the topics associated with each of the AICPA’s seven principles for auditing standard setting
- Purpose
- Premise
- Responsibilities
- Reasonable Assurance
- Performance requirements to achieve reasonable assurance
- Inherent limitations
- Reporting
Identify the topics associated with the three general standards formerly known as generally accepted auditing standards (GAAS), which are still applicable to the PCAOB’s auditing standards
- Training
- Independence
- Due professional care
Identify the topics associated with the four reporting standards for generally accepted auditing standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
- GAAP
- Consistency
- Disclosure
- Opinion
List the six elements of a quality control system
- Leadership responsibilities for quality within the firm
- Relevant ethical requirements (especially independent)
- Acceptance and continuance of client relationships
- Human resources
- Engagement performance
- Monitoring
What matters should be covered in the (successor) auditor’s inquiry of the predecessor auditor?
- Facts related to management’s integrity
- Significant accounting or auditing disagreements
- Any communications with the audit committee (or others charged with governance) about fraud, illegal acts, and significant deficiencies in internal control matters
- Predecessors understanding of the reason(s) for the clients change in auditors
What matters are typically addressed in an engagement letter?
- The objective and scope of the audit
- the auditors responsibilities
- managements 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
- other matters, as warranted
What is the auditor’s basic audit planning responsibility?
The auditor should plan the audit (and design the required written audit program or plan) to be responsive to the auditor’s assessment of the risk of material misstatement.
What is the difference between an overall audit strategy and an audit plan?
an audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.
The clarified audit standards introduced the term “performance materiality.” What does this term mean?
the amount(s) set by the auditor at less than materiality for the financial statements as a whole to be reduced to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole
What is the audit risk model that is applicable to classes of transactions or to account balances?
Audit risk = inherent risk x control risk x detection risk
Define “audit risk”
The probability that the auditor fails to modify the opinion on financial statements that contain a material
Define “inherent risk”
the probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures
Define “control risk”
the probability that a material misstatement, that occurred in the first place, would not be detected by applicable internal controls
Define “detection risk”
The probability that a material misstatement, that was not prevented or detected by internal control, was not detected by the auditor’s substantive audit procedures
Define “risk of material misstatement”
The risk that the financial statements contain one or more material misstatements prior to the audit
Define “analytical procedures”
Evaluation of financial information through analysis of plausible relationships among both financial and nonfinancial data
What three purposes might analytical procedures serve?
- required during planning
- may be used as substantive evidence (not required)
- required during final review
what matter must be documented in connection with analytical procedures?
- the auditor’s expectation and the factors considered in developing it
- the results of the comparison of the recorded amounts (or ratios) with the expectations
- any additional auditing procedures performed to investigate significant differences identified by the comparison
What are the three categories of fraud-related risk factors that should be considered by the auditor?
- incentives/pressures (the motivation for committing fraud)
- opportunities (the ability to commit fraud)
- attitudes/rationalizations (the justification or excuse for committing fraud)
List the two types of financial statement related frauds
- fraudulent financial reporting (sometimes called cooking the books)
- Misappropriation of assets (covering up theft by false journal entries)
when might an auditor have a duty to inform others outside of the audited entity of fraud related matters?
- in response to a valid subpoena
- to comply with applicable legal and regulatory requirements
- to respond appropriately to successor auditors inquiries when the former client has given permission to the predecessor
- to report fraud to the applicable funding agency under the requirements of government auditing standards
What are the auditors responsibilities to communicate fraud identified by the auditor?
- if the fraud is not material, the auditor should inform the appropriate level of management
- if the fraud is material, the auditor should inform those charged with governance
what is the auditors responsibility to detect illegal acts?
The auditor should design the audit to provide reasonable assurance of detecting illegal acts having a direct and material effect on the financial statements
What is meant by the term “legal and regulatory framework”?
Those laws and regulations to which an entity is subject; noncompliance may result in fines, litigation, or other consequences that my have a material effect on the financial statements
what are the two ways the external auditor might use the work of an internal audit function?
- to obtain audit evidence
2. to provide direct assistance
When using the work of internal audit function to obtain audit evidence, what three matters should the external auditor evaluate?
- Objectivity - the internal audit functions organizational status and the objectivity of the internal auditors
- competence of the internal auditors
- whether the internal auditor function applies a “systematic and disciplined approach, including quality control”
When using the internal audit function to provide direct assistance, what two matters should the external auditor evaluate?
- Objectivity - the internal audit functions organizational status and the objectivity of the internal auditors
- competences of the internal auditors
define what is meant by the term “those charged with governance”
the person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity
Define what is meant by the term “management”
the person(s) with executive responsibility for the conduct of the entity’s operations
what matters are the auditor required to communicate to those charged with governance?
- the auditors responsibilities under GAAS
- the planned scope and timing of the audit
- significant findings from the audit
What are the three objectives of internal control as identified in the definition of internal control?
- reliability off financial reporting
- effectiveness and efficiency of operations
- compliance with applicable laws and regulations
identify three procedures an auditor might perform to obtain an understanding of internal controls?
- inquiry of appropriate personnel
- observation of client’ activities
- review entitys documentation of internal controls
identify three ways auditors might document their understanding of internal controls?
- flowcharts of transaction cycles
- internal control questionnaires
- narrative write-ups (memos)
identify two reasons for assessing control risk at the maximum level
- the auditor believes that the design of internal control is ineffective
- 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
Identify the five interrelated components of internal controls
- control environment
- risk assessment
- control activities
- information and communication systems
- monitoring
what is meant by the term “control environment”?
the policies and procedures that determine the overall control consciousness of the entity, sometimes called “the tone at the top”
what is meant by the term “risk assessment”?
the policies and procedures involving the identification, prioritization, and analysis of relevant risks as a basis for managing those risks
what is meant by the term “information and communication systems”?
the policies and procedures related to the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities
what is meant by the term “control activities”?
the policies and procedures that help ensure that management directives are carried out especially those related to (1) segregation of duties, (2) physical controls, (3) authorization of transactions, (4) performance reviews, and (5) information processing
list the three categories of incompatible functions associated with segregation of duties
- authorization of transactions (execution function)
- accounting (record keeping function)
- access to assets (custody function)
what is the auditors responsibility for assessing the risk of material misstatement
the auditor should identify and assess the risks of material misstatement (1) at the financial statement level and (2) at the relevant assertion level related to classes of transactions, account balances, and disclosures
define the term “significant risks”
risks that the auditor believes require special audit consideration
define “material weakness”
a deficiency (or combination of deficiencies) in internal control 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
define “significant deficiency”
a deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance
what is meant by the term “deficiency in design”?
When a control necessary to meet the control objective is missing, or when the control objective is not always met, even if the control operates as designed
what is meant by the term “deficiency in operation”?
when a properly designed control does not operate as designed, or when the person performing the control does not have the authority or competence to effectively perform the control
describe the auditor’s requirements for communicating deficiencies in an entitys internal controls
- the auditor must communicate in writing the significant deficiencies (including material weaknesses) identified in the audit
- the auditor may choose to communicate lesser matters too
describe the timing of the required communication of significant deficiencies in internal control
under AICPA professional standards, written communication is required no later than 60 days after the audit report release date (including matters communicated orally during the audit)
what is meant by the term “transaction cycle”?
a group of essentially homogeneous transactions; that is, transactions of the same type
why do auditors emphasize transaction cycles?
control risk is generally constant within a particular category of transactions as all transactions are processed the same way.
what is the difference between an accounts payable system and a vouchers payable system?
an accounts payable system aggregates payable to identify the total owned to any individual vendor.
list to two broad categories of substantive procedures
- tests of details
2. substantive analytical procedures
identify the two categories of substantive tests of details
- tests of ending balances
2. tests of transactions
identify the four considerations that determine the effectiveness and efficiency of analytical procedures used for substantive purposes
- nature of the assertion
- plausibility and predictability of the relationship
- availability and reliability of data
- precision of the expectations
what is meant by “sufficient” and “appropriate” when “sufficient appropriate audit evidence” is mentioned?
- “sufficient” refers to the quantity of evidence that is require
- “appropriate” refers to the quality of the evidence involved, in term of “relevance” and “reliability”
define “assertion”
implicit or explicit statements of fact by management that are associated with the entitys financial statements
list the three broad categories of assertions under AICPA professional standards
- account balances at the end of the period (there are four assertions related to the balance sheet)
- classes of transactions and events during the period (there are five assertion related to the income statement)
- presentation and disclosure (there are four assertions related to the footnotes applicable to any of the financial statements
list the four assertions about presentation and disclosure (footnotes)
- occurrence and rights and obligations
- completeness
- classification and understandability
- accuracy and valuation
list the five assertions about classes of transactions and events during the period (income statement)
- accuracy
- occurrence
- completeness
- cutoff
- classification
list the four assertions about account balances at the end of the period (balance sheet
- existence
- completeness
- rights and obligations
- valuation and allocation
what are the AICPA’s guidelines to rank the reliability of audit evidence?
- direct personal knowledge by the auditor is the most reliable audit evidence
- evidence obtained from an independent outside source is the next most reliable
- evidence obtained from the entity under effective internal control is next
- documentary evidence is more reliable than verbal responses to inquiries
list the three categories of audit procedures
- risk assessment procedures
- tests of controls
- substantive procedures
what are substantive procedures?
procedures performed to detect material misstatements at the relevant assertion level; these consist of tests of details and substantive analytical procedures
define “report release date”
the date the auditor grants the entity permission to use the auditor’s report
what is meant by the term “documentation completion date” under the AICPA and PCAOB standards, respectively?
under AICPA standards, the auditor should complete the assembly of the final audit file no later than 60 days after the “report release date”
under PCAOB standards, the auditor should complete the assembly of the final audit file no later than 45 days after the “report release date”
what is meant by the term “projected misstatements”?
the auditor’s best estimate of misstatements in populations suggested by audit sampling
what matters must be documented by the auditor in connection with the evaluation of misstatements?
- the threshold for determining what is viewed as clearly trivial
- all misstatements accumulated during the audit
- the auditors conclusion as to whether any uncorrected misstatements are material, and the basis for that conclusion
what changes can the auditor make to the audit documentation after the documentation completion date?
- the auditor must not deleted audit documentation before the end of the retention period
- the auditor may add to the documentation but must document any materials added, by whom, when, the reasons for the change, and the effect on the auditors conclusions
what are the audit documentation retention requirement under the AICPA and PCAOB standards, respetively
under AICPA standards, the audit documentation should be retained for at least five years from the report release date
under PCAOB standards, the audit documentation should be retained for at least seven years from the report release date
list two alternative procedures for a nonresponse to a positive confirmation (usually performed after a second request was sent, but no response was received)
- Verify subsequent cash receipts
2. examine underlying documents for apparent validity
when might negative confirmations be justified?
- the final statement item involves a large number of small (immatrial) accounts
- control risk is low
- recipient are expected to pay attention to the request
what is meant by the term “negative confirmation”?
a response is only requested in the event the confirming party disagrees with the identified balance
what is meant by the term “positive confirmation”?
a response is requested whether or not the confirming party agrees with the entitys recorded amount
what is the auditors basic responsibility when auditing accounting estimates?
evaluate the reasonableness of any significant accounting estimates relative to GAAP or other applicable financial reporting framework
what is meant by the term “estimation uncertainty”?
the susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement
what is the best evidence of fair value?
published price quotations in an active market
define “fair value”
the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale
what is meant by the term “observable inputs”?
assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity
what is meant by the term “unobservable inputs”?
an entitys own judgments about what assumptions market participants would use
list the two types of letters involved in the communication with the entitys lawyers
- letter of inquiry
2. lawyer’s letter
what is meant by the term “asserted claim”?
a claim that has already been filed or when the other party has announced an intention to sue
what is meant by the term “unasserted claims”?
audited entity has exposure to litigation but no one has yet filed a law suit or announced an intention to sue
list the four matters the lawyers letter should address regarding asserted claims
- the nature of the litigation
- the progress of the case to date
- how management is responding or intends to respond to the litigation
- an evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss
list the three matters the lawyers letter should address regarding “unasserted” claims
- the nature of the litigation
- how management intends to respond if the claim is asserted
- an evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range or potential loss
what is the effect of a limitation in the lawyers response to the letter of inquiry of the audit report?
this would be considered a scope limitation sufficient to prevent an unqualified opinion and likely resulting in a disclaimer of opinion
under what circumstances might an auditor NOT be required to obtain a letter from the entitys legal counsel?
if the entity had no litigation, claims, or assessments having financial reporting relevance and, accordingly, did not engage legal counsel
what are the two basic categories of issues usually addressed by the management representation letter under the AICPA’s clarified auditing standards?
- financial statements
2. information provided
what is the purpose of obtaining the required management representations letter?
to document in writing the essence of managements verbal responses to the auditors important verbal inquiries
list the members of management who are responsible for signing the management representations letter
the chief executive officer (CEO) and chief financial officer (CFO)
what is meant by the term “related party”?
one party that controls or can significantly influence the management or operating policies of another party
identify three responsibilities of the auditor when related party transactions have been identified
- obtain an understanding of the business purpose of the related party transaction
- determine if the related party transaction was authorized by board of directors
- evaluate the adequacy of the disclosures of the related party transactions
what is meant by the term “subsequent events”?
events or transactions that occur after the balance sheet date up to the date of the auditor’s report which have a material effect on the financial statements and, therefore, require either financial statement adjustment or disclosure
what period of time defines a subsequent event?
the period after the balance sheet date up to the date of the auditors report
when would a subsequent event require adjustment of the financial statements?
when material events or circumstances clarify circumstances already in effect as of the balance sheet date
when would a subsequent event require disclosure in the financial statements?
when material events or circumstances arise after the balance sheet date
what should the auditor do when subsequently discovered facts become known to the auditor?
discuss the matter with management and determine whether the financial statements require revision
what procedures should the predecessor auditor perform when reissuing an audit report?
- read the subsequent financial statements and compare to those previously audited
- make inquiries of management and obtain written representations from management about issues affecting the previous representations obtained from management
- obtain a representations letter from the successor auditor about known relevant matters
what is meant by the term “dual dating the auditors report”?
the auditor uses one date fro the overall audit report, but specifies a later date to address a particular subsequent event
when the auditor has substantial doubt about an entitys ability to continue as a going concern, what further evidence gathering responsibilities does the auditor have?
- inquire about managements strategy to overcome the entitys financial difficulties
- evaluate the feasibility of the “key” elements of managements plans with emphasis on “mitigating factors”
what is meant by the term “mitigating factor” when the auditor is evaluating an entity’s going concern issues?
those aspects of management’s strategy that might be expected to improve the entity’s cash flows
describe the auditors reporting responsibilities when the auditor has substantial doubt about an entitys ability to continue as a going concern
- consider the adequacy of disclosure about these issues relative to GAAP or other applicable financial reporting framework
- if the financial statements are consistent with the requirements of the applicable framework, the auditor should add and emphasis-of-matter paragraph after the unmodified opinion
what is meant by the term “reasonable period of time” when the auditor is assessing an entitys going concern issues?
a period of time not to exceed one year beyond the date of the financial statements being audited
what is the purpose of a bank confirmation?
- it verifies the existence and ownership of bank accounts
2. it also provides evidence about the completeness and terms of notes payable with bank
what is meant by the term “cutoff bank statement”?
short period bank statement obtained directly from the bank useful in verifying the deposits in transit and providing some evidence about outstanding checks on a bank reconciliation
what is the schedule of interbank transfers used for?
it is used to verify that transfers between the entitys bank accounts are recorded properly
what is meant by the term kiting?
an overstatement of the true cash balance at year end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between the entity’s cash accounts
describe how the auditor performs the cutoff test for sales
examine the last few transactions before year end and the first few years after year end
what is meant by the term lapping related to accounts receivable?
an attempt to cover up a theft of receipts, where a clerk might apply a different customers payment to a prior customers account to conceal the theft
what is meant by the term derivative?
a derivative is a financial instrument or other contract whose value is derived from its relationship to something else known as the underlying
what is meant by the term hedge?
a hedge is a defensive strategy designated to protect against the risk of adverse price or interest rate movements to achieve a state of balance
what is usually considered to be the best evidence of fair value for a financial instrument that is measured at fair value?
quoted market prices obtained from financial publications, national exchanges, or NASDAQ
describe the basic steps that comprise the auditors search for unrecorded liabilities
- review cash disbursements after year end and examine underlying documents to identify liabilities of the period under audit
- examine unpaid invoices at the time of the test
- inquire of management as to the completeness of liabilities
when is the detailed testing of payroll typically performed?
usually performed only when the auditors analytical procedures suggest that there is a risk of material misstatement relating to payroll
define sampling risk
the risk that the sample may be truly representative of the population
define type I error
the risk of under reliance of controls; or incorrect rejection of the fairness of an account balance
define type II error
the risk of over-reliance of controls; or incorrect acceptance of the fairness of an account balance
define nonsampling risk
any mistake by the auditor other than sampling risk that is not a direct consequences of using a sampling approach
list the two general approaches to audit sampling
- statistical
2. nonstatistical
define random sampling
sampling methodology where each item in the population has the same probability of being selected
list the three factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application
- expected error rate
- tolerable error rate
- risk of over reliance
what is the formula to obtain the sample size for probability proportionate to size (PPS) sampling?
n = reliability factor x book value/tolerable error
list the various types of classical variables sampling techniques
- difference estimation
- ratio estimation
- mean per unit estimation
what is the purpose of stratification?
to reduce the overall variability within a population
what is the relevant sampling unit in PPS sampling?
an individual dollar associated with the financial statement element involved
what is the primary advantage of PPS sampling?
efficiency - if there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than other sampling methods
what is the primary disadvantage of PPS sampling?
PPS sampling does not work very well in dealing with understatements of zero balances
define general controls
controls that have pervasive effects on all the specific computer processing applications
list the five categories of general controls
- organization and operation
- systems development and documentation
- hardware and systems software
- access
- data and procedures
define application controls
information processing controls that apply to the processing of specific computer applications
what two topics of responsibility are addressed in the Management’s responsibility section of the auditors report?
- managements responsibility for the fair presentation of the financial statements
- managements responsibility for the design, implementation, and maintenance of internal control related to financial reporting
what is the auditors responsibility with respect to consistency on audited financial statements presented on a comparative basis?
The auditor should evaluate the consistency between all such periods presented, as well as the consistency of the earliest period covered by the auditor’s opinion with the previous period
what is meant by the term initial audit engagement?
an engagement in which (1) the financial statements for the prior period were not audited, or (2) the financial statements for the prior period were audited by the predecessor auditor
what is meant by the term other information?
information other than the financial statements and the auditors report that is included in a document containing audited financial statements and the auditors report
what does the term readily available mean?
it means that no further action by the entity is required
what is the auditors responsibility to enforce the distribution of the auditors written communication having an alert to restrict the use of it?
the auditor is not responsible for enforcing such distribution
what is meant by the term summary financial statements?
historical financial information that is derived from financial statements but that contains less detail than the financial statements, while still providing a structured representation consistent with the provided by the financial statements
what is meant by the term service organization?
an organization or segment of an organization that provides services to user entities that are relevant to those user entities internal control over financial reportin
the auditor expresses positive assurance on what specific matter(s) in a “letter for underwriters and certain other requesting parties”?
An opinion is only expressed on whether the audited financial statements and schedules, included in the registration statement, comply as to form with SEC requirements
what does the acronym IESBA stand for?
international ethics standards board for accountants
list two types of safeguards against threats to independence
- created by profession, legislation or regulation
- present in the workplace
- firm wide
- engagement specific
list the categories of threats in independence outlined in the international federation of accountants code
- self interest threats
- self review threats
- advocacy threats
- familiarity threats
- intimidation threats
is the international federation of accountants code rules based?
no, the IFAC code is principles based
what is the role of the professional ethics executive committee?
the PEEC monitors the international federation of accountants activities and gives the US input to IESBA
what is the role of the international federation of accountants?
it is the global voice for the accounting profession
what does the acronym IFAC stand for?
international federation of accountants
what two primary independence concerns do the department of labor independence rules address?
- financial ties
2. employment ties
what audits do the government accountability office guidelines apply to?
audits of:
- government entities
- entities that receive government grants
list the PCAOB basic functions
- registering public accounting firms
- setting up standards
- inspecting public accounting firms
- investigating violations
- enforcing compliance
who must be rotated under sarbanes oxley?
- lead audit partner and reviewing partner
- other partners playing a significant role
who hires, compensates, and fires auditors of public companies?
the audit committee performs these actions
list the items about which a consultant should communicate with the client
- conflicts of interest
- significant reservations about engagement
- significant engagement findings
list the various types of consulting services
consultations, advisory services, implementation services, transaction services, staff and other support services, product services
under what three circumstances are commissions prohibited?
when member also performs:
- audit or review of a financial statement
- compilations to be used by third parties
- examination of prospective financial information
under the AICPA code of professional conduct, what actions should be taken by the member regarding commission or referral fees?
Accepting a permitted commission or referral fee must be disclosed to the client
under what circumstances are contingent fees prohibited?
contingent fees are prohibited for performing:
- any work for attest client
- preparation of tax return or refund
- correcting an omission in original return
list some examples of false, misleading, or deceptive acts
- creating false or unjustified expectations of favorable results
- implying the ability to influence a court or agency
- estimating a fee knowing that the amount charged will likely be much higher
list the actions that an auditor may take when a client requests a return of their records
- return client provided records within 45 days
- may keep client records prepared by CPA if bill not paid
- may keep supporting records if bill not paid
- CPAs working papers need not be turned over
list the features of “accountant client privilege” in states where such privileges are recognized
- protects client, not CPA
- waivable by client
- waiver as to part is waiver as to all
what steps should be taken when departing from generally accepted accounting principles?
- disclose departure
- disclose approximate effects of departure
- explain why GAAP compliance would mislead
under what two circumstances may an auditor depart from GAAP?
- new legislation
2. new form of business transaction
list the ways in which conflicts of interest can be resolved
they can be solved by:
- full disclosure
- client consent
define immediate family members
- spouse
- spousal equivalent
- dependents
define close relatives
- parent
- sibling
- nondependent child
define key positions
- primary responsibility for significant accounting functions
- primary responsibility for preparation of F/S
- ability to exercise influence over contents of F/S
list the primary actions auditors should avoid in order to preserve independence
- performing management functions
- making management decisions
- appearing to do these things
- taking custody of client assets
under what circumstances can a covered member audit a charity and remain on the board of directors of said charity?
- position is purely honorary
- position is identified as honorary
- contributes no more than use of name
- does not vote or participate in management affairs
list some independence safeguards if a client employee moves to the audit firm
regarding an audit covering the time period the person worked for the client, a client employee
- cannot be on the team or PTI
- can be OPIO or 10 hour person
does entertainment provided by a client to the auditor impair independence?
independence is not impaired if entertainment provided by the client is “reasonable under the circumstances”
do gifts from a client to the auditor impair independence?
while gifts can impair independence, independence is not impaired if the value is “clearly insignificant”
list the type of permitted loans from financial institution clients that will not impair independence
- grandfathered
- certain de minimis loans that are small and collateralized
under the principles of the code of professional conduct, what types of financial interest impairs independence?
- direct and material
- indirect and material
- direct and immaterial
- but not: indirect and immaterial
list the four major areas of concern related to independence under the principles of the code of professional conduct
- employment ties
- financial ties
- consulting
- family ties
what activities are included in the category of attest work?
- audit or review of F/S
- compilation of F/S expected to be used by third parties
- examination of prospective financial information
integrity requires the observance of what three principles?
- objectivity
- independence
- due care
list the three services that can be performed by the auditor that does not required independence
- compilation
- tax
- consulting services not banned by SOX
list the three features of objectivity
- impartiality
- intellectual honesty
- freedom from conflicts of interest
list the five principles and categories of criteria associated with trust services consisting of SysTrust and WebTrust
- security
- availability
- processing integrity
- confidentiality
- privacy
What is WebTrust?
the AICPAs assurance service intended to facilitate e-commerce activities
what is primeplus?
the AICPAs assurance service directed at the needs of aging persons
what is SysTrust?
the AICPA’s assurance service regarding systems reliability
define assurance services
independent professional services that improve the quality or context of information for decision makers
list the four assertions that are implicitly embodied in the management discussion and analysis presentation
- occurrence
- consistency with the financial statements
- completeness of the explanation
- presentation and disclosure
what is the only type of prospective financial statement for which an examination report can have general unrestricted distribution?
a forecast can have unrestricted distribution
what is meant by the term project?
a projection represents the financial statement outcome based on certain specified hypothetical assumptions which may or may not be likely to occur
what is meant by the term forecast
a forecast represents the predicted financial statement outcome
what type of report should the auditor express when a misstatement is viewed as material, but not pervasive
qualified opinion
what is meant by the term other matter paragraph in an auditors report
a paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors judgment, is relevant to users understanding of the audit, the auditors responsibilities, or the auditors report
what is meant by the term emphasis of matter paragraph in an auditors report?
a paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors judgement, is of such importance that it is fundamental to users understanding of the financial statements
when must a state or local government entity be audited according to the single audit act of 1984 as amended?
when a state or local government entity spends federal assistance aggregating at least $750,000 in a fiscal year
What AICPA standards are applicable to reviews and compilations for nonissuers
SSARS are issued by the AICPA’s accounting and review services committee
what is meant by the term significant component?
a component identified by the group engagement team that (1) is of individual financial significance to the group, or (2) due to its specific nature, is likely to include significant risks of material misstatement of the group financial statement
list the three usual types of attestation engagements
- examinations
- reviews
- agreed-upon procedures
what conditions are required to be present for a practitioner to issue an examination or review report on pro forma financial information?
- the document containing the pro forma information includes or references the complete historical financial statements
- the accountant has audited or reviewed the related historical financial statements
an examination report on pro forma financial information involves expressing an opinion on three matters. list the three matter
- whether managements assumptions provide a reasonable basis for presenting the significant effects attributable to the transaction/event
- whether the adjustments appropriately reflect those assumptions
- whether the pro forma column reflects the proper adjustments of the historical financial statemets
list the three specific elements required by the SEC in the MD&A presentation
- discussion of financial condition - regarding liquidity and capital resources
- discussion of changes in financial conditions
- discussions of results of operations
what preconditions must exist for an auditor to accept an engagement to report on an entity’s MD&A presentation?
- practitioner must have audited the annual financial statements for the latest period covered by the MD&A presentation
- any other financial statements involved must have been audited, or at least reviewed if they are interim financial statements, but the practitioner or a predecessor auditor
differentiate between the AICPA and the PCAOB requirements regarding retention of audit documentation
- AICPA requires retention of audit documentation for five years for audits of nonissuers
- PCAOB requires retention of audit documentation for seven years for audits of issuers
differentiated between the AICPA and the PCAOB requirements regarding the documentation completion date
- AICPA: a compete and final set of audit documentation should be assembled no later than 60 days after the report release date for audits of nonissuers
- PCAOB: a complete and final set of audit documentation should be assembled no later than 45 days after the report release date for audits of issuers
define entity level controls
controls related to the control environment; controls over management override; the companys risk assessment process; controls to monitor results of operations or other controls; controls over the period end financial reporting process; and policies that address significant business control and risk management practices
list the difference in the AICPA statements on quaity control standards relative to the PCAOB auditing standard no 7
SQCS do not:
- require an engagement quality review for any type of engagement
- impose a cooling off restriction or a requirement that the reviewer must be an associated person of a registered public accounting firm
- require a concurring approval of issuance before issuing a report
- specifically require that engagement quality review documentation must be retained with other documentation
list the five financial statement assertions outlines in the PCAOB auditing standard No 15
- existence
- completeness
- rights and obligations
- valuation or allocation
- presentation and disclosure
what is the role of the IFAC IAASB?
- in general, to be the global standard setting body related to auditing, review, other assurance services, and quality control, and to facilitate convergence of national and international standards
- with respect to auditing specifically, to issue ISAs applicable to the audit of historical financial information
what is the auditors basic objective when reporting on supplemental information under PCAOB auditing standard no 17?
to obtain sufficient appropriate audit evidence to express an opinion on whether the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole
list the covered members outlined in the principles of the code of professional conduct
- team members
- those in a position to influence other members
- other partners in the office
- ten hour people
- the firm
- any entity controlled by the above
who are considered to be in a position to influence as outlined in the principles of the code of professional conduct?
those who:
- evaluate the performance of recommend compensation of attest engagement partner
- directly supervise the AEP and all successively senior levels
- consult with team during engagement
- provide quality control or other oversight
list the activities forbidden by SOX for public company audit clients
bookkeeping or other services related to the accounting records of financial statements;
financial information systems design and implementations;
appraisal or valuation services, fairness opinions, or contributions in kind reports;
actuarial services;
internal audit outsourcing services;
management functions of human resources;
broker or dealer, investment adviser, or investment banking services;
legal and expert services unrelated to audit
list some examples of improper consulting activities that an auditor can partake in on behalf of an audit client
authorizing, executing, or consummating a transaction on clients behalf;
preparing source documents evidencing occurrence of transactions;
taking custody of client assets;
supervising client employees normal recurring activities;
reporting to board on managements behalf;
establishing or maintaining internal controls
list the circumstances under which a CPA may disclose client confidences
they may be disclosed when:
- client consents
- GAAP requires disclosure
- enforceable subpoena
- ethical examination
- peer review
- other members of firm need to know
what must an auditor do to avoid subordinating judgment when disagreeing with a supervisor regarding proper audit procedures?
- need do nothing further if upon reflection the member concludes that the F/S as proposed represent an acceptable alternative and dont misrepresent facts
- alert the appropriate level of management if upon reflection the member concludes that the F/S could be materially misstated
- consider resigning and communicating with regulatory authorities if problem is not addressed
list the five discreditable acts outlined in rule 501 under the AICPA code of professional conduct
- discrimination and harassment in employment practices
- failure to follow standards and/or procedures or other requirements in governmental audits
- negligence in the preparation of financial statements or records
- failure to follow requirements of governmental bodies, commissions, or other regulatory agencies in performing attest or similar functions
- solicitation or disclosure of CPA examination questions
list the three main differences in government auditing standards relative to AICPAs statements on auditing standards
- government auditing standards require a written report on internal control
- government auditing standards require a written report on compliance with applicable laws and regulations
- government auditing standards require the auditor to report any known instances of illegal acts that could result in criminal prosecution
what are the objectives of the compliance audit?
- to express an opinion on whether the entity complied with applicable compliance requirements, at the level specified in the governmental audit requirements
- to identify audit/reporting requirements in the governmental audit requirements that are supplementary to GAAS and GAGAS and to evaluate those requirements
when might the user auditors report appropriately refer to the service auditors report?
the user auditor may refer to the service auditor in the user auditors report containing modified opinion, if the reference would be helpful to understanding the user auditors modification
what two types of reports on internal controls at the service organization may the service auditor be engaged to issue?
- report on managements description of a service organizations system and the suitability of the design of controls
- report of managements description of a service organizations system and the suitability of the design and operating effectiveness of controls
which special purpose frameworks require a paragraph in the auditors report to restrict the distribution of the report to specified users?
the contractual basis and regulator basis require such a restriction
when deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what three matters should the auditor consider?
- the purpose for which the financial statements are prepared
- the intended users of the financial statements
- the steps taken by management to determine that the framework is acceptable in the circumstances
what is meant by the term special purpose framework?
a financial reporting framework other than GAAP that is one of the following bases of accounting:
- cash basis
- tax basis
- regulator basis
- contractual basis
- other basis that uses a definite set of logical, reasonable criteria
when is the AICPA pronouncement, reports on application of requirements of an applicable financial reporting framework applicable?
when providing a written report or verbal advice on:
- the application of accounting principles to specific transactions
- the type of opinion that might be issued on specific financial statements
identify the procedures an auditor should perform when engaged to report on the application of accounting principles to a specific transation
- obtain an understanding of the form and substance of the transaction involved
- consult with the continuing accountant
- review applicable accounting requirements and consult with others, as necessary
to what extent must the auditor comply with GAAS when auditing financial statements intended for use solely outside of the USA
the auditor should comply with GAAS, except for requirements related to the form and content of the auditors report
identify two general circumstances that would require an alert to restrict the use of the auditors report
- when the subject matter is based on criteria that are only suitable for a limited number of users
- the matters are presented in the by product report that is not the primary objective of the engagement
how does required supplementary information affect the auditors report on the entitys financial statements?
the auditor should include other matter paragraph in the audit report to comment on required supplementary infromation
what is meant by the term required supplementary information?
information that a designated accounting standard setter requires to accompany an entitys basic financial statements
Where should and emphasis of matter or other matter paragraph be presented in the auditors report?
- the emphasis a matter paragraph should be presented after the opinion paragraph
- The other matter paragraph should be presented after the opinion paragraph
When A material change in accounting principle has been properly accounted for by the entities financial statements what is the effect on the auditors report?
The auditors report should include an emphasis of matter paragraph to describe the change and reference the footnote that discusses the change
List the items comprising of an unmodified audit report under the AICPA’s clarified auditing standards
- Title
- Addressee
- Introductory paragraph
- Management responsibility section
- Auditors responsibility section
- Opinion paragraph
- Signature with the city and stay at the office responsible for the engagement
- Date
Identify the three issues for which an emphasis of matter paragraph is required
- When there is substantial doubt about the entities ability to continue as a going concern
- When there it is an inconsistency in accounting principles used
- When the financial statements are prepared in accordance with special purpose frameworks
What is the purpose of the review as prescribed under statements on standards for accounting and review services
The purpose of the review is to obtain limited assurance sometimes called negative insurance that there are no material modifications that should be made to the financial statements
If the prior periods financial statements have been audited by a predecessor auditor whose report is not issued the auditor should add an other matter paragraph. What specific matter should the other matter paragraph address
- That the prior period Financial statements were audited by the predecessor auditor
- The type of opinion expressed
- The nature of any emphasis of matter or other matter paragraph
- The date of the predecessors report
If the auditors report includes a section after the opinion paragraph labeled report on other legal and regulatory requirements how should the introductory paragraph be labeled
Report on the financial statements
Ordinarily the introductory paragraph does not have a label but in this case it would
Identify the three requirements that determine whether a reference to component auditors is permitted
- The components financial statements must use the same framework as the group
- The component auditor has compiled with GaAs
- The component auditor has issued an audit report on the components financial statements
What is meant by the term component auditor
An auditor who performs work on the financial information of a component that will be used as a audit evidence for group audit
When the group engagement partner decides to reference the component auditors work what is the effect on the auditors report
Introductory paragraph and management responsibility section, no effect
Auditors responsibility section, first sentence modified to identify the component audit by other auditors and the magnitude of the financial statements involved
Opinion paragraph, modified to say in our opinion based on our audit and the report other auditors
What is the accountants responsibility to establish an understanding for an engagement to compile a non-issuers financial statements
The accountant should establish an understanding about the objectives, managements responsibilities, the accountants responsibilities, and the limitation of the engagement, among other matters with management and document that in writing with an engagement letter
What is the effect on a compilation report if the accountant is not independent
A compilation does not require independent, since no assurance is provided. But the compilation report must point out the fact when independence is lacking
What is the accountants responsibility to establish an understanding for an engagement to review a nonissuers financial statements
The accountant should establish an understanding about the engagements objectives, management responsibilities, the accountants responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter
What is the effect on the successor accountants compilation or review report when the predecessor accountants compilation of you report is not presented on their prior years financial statement
The successor accountants report should include an explanatory paragraph that identifies the nature and date of their predecessors report it states that the current accountant takes no responsibility for the prior years financial statements
What is the accountants responsibility to establish an understanding for an engagement to compile specified elements of an entity’s financial statements
The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties respective responsibilities, and the nature of the report to be issued
What is the accountants responsibility to establish an understanding for an engagement to compile and entities pro forma financials information
The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties respective responsibilities, and the nature of the report to be issued
What are the accountants performance requirements regarding an engagement to compile pro forma financial information
The accountant should read the compiled pro forma financial information, including the summary of significant assumptions, and consider whether the information appears to be free of obvious material affect
List the three types of engagement that are permitted by AICPA attestation standards related to prospective financial information
- Examination
- Agreed-upon procedures
- Compilation
List the two categories of requirements applicable to attestation engagement
- Unconditional requirements
2. Presumptively mandatory requirements
Describe an agreed-upon procedures attestation engagement
And engagement whereby the practitioner and the specified parties agree upon the specific procedures to be performed and the specific parties take responsibility for the sufficiency of the procedure for their purpose
Define attest engagement
And engagement where a CPA practitioner is engaged to issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter that is the responsibility of another party
