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CPA Exam AUD Series-T
First chunk of information applicable to part 1 of AUD
Terms in this set (223)
What are the six major principles in the AICPA code of professional conduct? (briefly describe each)
1. Responsibility principle- act in a responsible manner
2. Public interest - work in a way that protects the public interest
3. Integrity - perform all professional duties with high integrity
4. Objectivity/independence - maintain objectivity and be free of conflicts of interest
5. Due care principle - practice due care (adequate plannings and supervision)
6. Scope and nature of services - observe the code in determining the scope and nature of services to be provided
What are managements 4 responsibilities/preconditions for an audit of ICFR? (integrated audit)
1. Management must accept responsibility for the effectiveness of ICFR
2. Mgmt must provide the auditor with an assessment of ICFR using suitable and available criteria
3. Mgmt must support this assessment of ICFR with sufficient documentation
4. Mgmt must provide this written assessment in a report that accompanies the auditor's report
^if management refuses to furnish a written report, auditor should withdraw
What are the auditor's 2 responsibilities for auditing ICFR? (integrated audit)
Design the tests of controls to:
1. obtain suff/appro evidence to support the auditor's opinion on ICFR at the "as of" date in mgmt report
2. obtain suff/appro evidence to support the auditor's control risk assessments for purposes of the audit of the financial statements
(true/false) The auditor shouldn't use the same risk assessment process in an audit of ICFR and in the audit of the entity's financial statements (integrated audits)
(true/false) The auditor should use the same materiality for the audit of ICFR as well as the audit of the financials
What is the main technique used to evaluate ICFR design effectiveness? (integrated audit)
Walkthrough is usually sufficient
What is the main technique used to test the operating effectiveness of an entities ICFR? (integrated audit)
Inquiry alone is sufficient
Does the auditor need to get a rep letter specific to the audit of ICFR when that's what the engagement is? If so, what happens when you don't?
yes, must get rep letter. not getting one is a scope limitation
When should the auditor communicate material weaknesses or significant deficiencies? Who does he communicate with? (integrated audit)
Should be communicated IN WRITING to those charged with governance and mgmt by the report release date
When should the auditor communicate lesser deficiencies? Who does he communicate with? (integrated audit)
Should be communicated IN WRITING to management within 60 days of the reprot release date. should also inform those charged with governance of that communication
When should the auditor communicate the absence of internal control deficiencies? Who does he communicate with? (integrated audit)
the auditor should NOT issue any report saying that there aren't any deficiencies
The title of the auditor's written report on the ICFR should include the word ________
What 4 things are specified in the introductory paragraph of the auditor's ICFR report?
1. Identifies the entity involved
2. States that ICFR has been audited
3. Identifies the "as of" date
4. Identifies the criteria used to evaluate
What 3 things are specified in the "management's responsibility" paragraph of the auditor's ICFR report?
1. Management is responsible for ICFR
2. Management is responsible for its assessment about the effectiveness of ICFR
3. Refers to management's report on ICFR
What 5 things are specified in the "auditor's responsibility" paragraph of the auditor's ICFR report?
1. Auditor's responsibility is to express an opinion on ICFR
2. Audit was conducted in accordance with GAAS
3. These standards require auditor plan and perform to obtain reasonable assurance about effective ICFR was maintained in all material respects
4. Describes the audit
5. State the auditor's belief that the evidence obtained in sufficient and appropriate as a basis for the opinion
What should be the final paragraph of the auditor's report on ICFR?
the opinion paragraph that expresses the auditor's opinion on whether the entity maintained, in all material respects, effective ICFR as of the specified date, based on the criteria used
What 2 things should be specified in the "definition and inherent limitations of ICFR" paragraph of the auditor's ICFR report? lol
1. define ICFR (use same description as in management's report)
2. include paragraph discussing inherent limitations of internal control
What should the auditor do if management's ICFR report has incomplete or improperly presented parts?
if management doesn't revise it, the auditor should add an other-matter paragraph to describe the reasons for this
What should the auditor do if managements ICFR report contains additional information?
the auditor should add an other-matter paragraph to disclaim an opinion on the other information in the mgmt report. If this information does exist, the auditor should read over it to make sure it doesn't have inconsistencies with management's report (persuade them to change it if it does)
What is the role of risk assessment? (integrated audit)
1. determine significant accounts/disclosures/relevant assertions
2. the selection of controls to test
3. determination of the evidence necessary for a given control
What is the criteria for all of an auditor's team/portfolio of accounting services, which make the standards for quality performance? Promulgated by whom?
Statements on Quality Control Standards (SQCS), by the Auditing Standards Board of the AICPA
What is the criteria for compilations? promulgated by whom?
Statements on Standards for Accounting and Review Services (SSARs), by the Accounting/Review Services Committee of the AICPA
What is the criteria for reviews? promulgated by whom?
Statements on Standards for Accounting and Review Services (SSARs), by the Accounting/Review Services Committee of the AICPA
What is the criteria for audits of non-issuers? promulgated by whom?
Statements on Auditing Standards - Auditing Standards Board of the AICPA
What is the criteria for audits of issuers? promulgated by whom?
the PCAOB, SEC
What is the criteria for AUPs, examinations, projections, and forecasts? promulgated by whom?
Statements on Standards for Attestation Engagements - Auditing Standards Board of the AICPA
What two tax consulting scenarios causes public accounting firms to lose audit independence?
Firms are not independent if during their audit they provide services related to marketing, planning or opining in favor of confidential or aggressive tax positions
Firms may also forfeit independence if they provide any tax services to those in FRORs at the audit client. However, there are ___ exceptions. What are they?
1. If the person in the FROR is only in that position because he or she is a member of the client's board of directors
2. Is in an FROR only because of his or her relationship to an affiliate of the entity being audited where the affiliate's financial statements are not material to the consolidated financial statements
3. Was not in an FROR position before a hiring, promotion, or similar change in employment
What are the two objectives for an audit of ICOFR?
1. obtain reasonable assurance whether material weaknesses exist at the "as of" date in management's assessment of ICOFR
2. express an opinion on the effectiveness of ICFR and communicate appropriately with management and TCWG
In an audit of ICFR, is the auditor required to search for significant deficiencies? also, if there are material weaknesses, can ICFR be deemed effective? (AICPA)
No. Auditor only required to search for material weaknesses, doesn't have to search for anything less severe.
If any material weaknesses exist, the controls are NOT effective
Which stage in the audit process is materiality determined?
Materiality is set during the planning stage of an audit, but is subject to change throughout the audit
What is the auditor required to communicate to those charged with governance during the planning stage of an audit? what about management?
Auditor required to communicated to TCWG an overview of planned scope and timing of the engagement.
They may communicate some of the planning issues with management, but should avoid divulging too many details that could make the audit too predictable
At what stage in the audit process does the auditor determine whether specialists will be needed?
As a result of the planning, the auditor is required to develop a written ______ ________. This encompasses what 3 things?
audit program (or plan)
1. nature and extent of planned risk assessment procedures
2. nature/timing/extent of of planned further audit procedures
3. other planned audit procedures necessary to comply with GAAS
Materiality is a matter of professional ____________
What is performance materiality?
The reduction in materiality to reduce the probability of aggregate misstatements exceeding the materiality of the FS as a whole.
What should the auditor document regarding materiality during the audit process?
1. materiality for the FS as a whole
2. materiality for particular classes of transactions/account balances
3. Performance materiality
4. any revision of the above considerations during the engagement
What is tolerable misstatement?
The amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.
What are analytical procedures? When are they used in the planning stage?
evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data
Used in planning for risk assessment procedures - this is required
How/why are analytical procedures used for assessing risk during planning? (3 things, kinda wordy)
1. Analytical procedures performance as RA procedures may identify aspects of the entity in which the auditor was originally unaware. This can help to have a better understanding of risk assessment. This includes financial and nonfinancial data (square footage example)
2. They can help the auditor understand the client's business and the significant transactions that have occurred since the prior audit and help identify unusual transactions/events that have audit implications. This relates to the overall risk assessment
3. Remember: when analytical procedures use high level data, only a broad initial indication exists about whether a misstatement exists
If fraud that is not material and doesn't involve senior management is discovered, who should the auditor report this to?
the appropriate level of management (usually one level above where the fraud occurred), and may be written or oral
If fraud that is material or does involve senior management, who should the auditor report this to?
Those charged with governance
When considering using the work of a "specialist", the auditor should examine what 3 traits of the specialist?
The auditor should evaluate the:
2. capabilities, and
of the auditor's specialist for the auditor's purposes
Other than evaluating the characteristics of the specialist himself, what else does the auditor need to obtain an understanding of in regards to working with a specialist?
the auditor must obtain an understanding of the specialist's field of expertise
If the specialist's work is not adequate, what happens?
The auditor should attempt to resolve the matter by performing additional circumstances that are appropriate to the circumstances. If that doesn't resolve the matter, there might be a scope limitation that would constitute a modified opinion
If the auditor's report contains an "unmodified opinion" , should the auditor refer to the work of an auditor's specialist?
If the auditor's report contains a "modified opinion" should the auditor refer to the work of the auditor's specialist?
Yes, if the auditor believes that mentioning the specialist would help readers understand the reason for the modified opinion. The specialist must agree to be mentioned. Also, the auditor needs to make it clear that the reference doesn't reduce the auditor's responsibility to express an opinion
What are the 4 main things that the auditor should communicate to those charged with governance after the audit?
1. The auditor's views about the qualitative aspects of the entity's significant account policies (significant accounting practices, estimates, disclosures)
2. significant difficulties encountered during the audit (time delays, unreasonable time pressure, etc.)
3. Disagreements with management
4. Any other matters the auditor thinks is worth mentioning
What should the auditor do when there are misstatements that need to be corrected?
Ask management to correct them. If they don't do it, report the uncorrected misstatements to those charged with governance.
Also, corrected misstatements should be reported to TCWG
When should going concern issues be reported to TCWG?
If the auditor still has doubts after considering management's strategy, the auditor needs to communicate the nature of the conditions, the possible effect on the F/S, and the effects on the auditor's report to TCWG
What are the 3 necessary criteria that the internal audit function must meet for the external auditor to consider using them to obtain audit evidence?
3. Systematic and disciplined approach (internal audit must work in a structured, formal manner. Not all willy nilly lax whatever bruh)
What is a key way to assess the objectivity of internal audit staff when determining whether or not to use them to obtain audit evidence?
examine the internal audit function's organizational status, and relevant policies and procedures
The determination of materiality is a matter of professional ________. This involves both ______ and ________ considerations
judgment, quantitative, qualitative
What are "qualitative" considerations concerning materiality?
they involve the surrounding circumstances
What are "quantitative" considerations concerning materiality?
they involve the relative magnitude of the items in question
For planning purposes, an auditor should consider materiality in terms of the ________ aggregate level of misstatements that could be material to any one of the financial statements
Woah, black Betty
The AICPA now classifies assertions in three separate categories for the auditor's consideration. These three are:
1. Account balances at period end
2. Presentation and Disclosure
3. Classes of transactions and events
What are the 4 assertions specific to "account balances at year end"? Define each
1. Existence - assets/liabilities/equity exists
2. Completeness - All assets/liabilities/equity that should've been recorded has been. No omissions.
3. Rights and obligations - entity holds rights to assets and liabilities are obligations. any restrictions are disclosed.
4. Valuation and allocation - assets/liab/equity is recorded at appropriate amounts in the F/S and adjustments are documented
What are the 4 assertions about "presentation and disclosure"? Define each.
1. Occurrence and rights and obligations: the disclosed events and transactions have occurred and pertain to the entity
2. Completeness - all disclosures that should have been recorded have been. No omissions.
3. Classification and understandability - financial info is appropriately presented, described, and clearly expressed
4. Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts
What are the 5 assertions about classes of transactions and events for the period? Define each
1. Accuracy - the amounts and other data have been recorded appropriately
2. Occurrence - transactions and events that have been recorded have occurred. (properly recorded and valid)
3. Completeness - all transactions and events that should've been recorded have been. no omissions
4. Cutoff- transactions and events have been recorded in the correct accounting period
5. Classification - the transactions and events have been recorded in the proper accounts
Analytical procedures can be used for what 3 parts of the audit process? Which 2 of the 3 are required?
1. Planning stage: for risk assessment
2. Evidence gathering stage: for substantive evidence
3. Final review stage: assist the auditor in forming an overall conclusion about the financial statements
1 and 3 are required
What are substantive analytical procedures particularly helpful for testing?
omissions of transactions that would have been hard to detect with procedures that focus on recorded amounts
Analytical procedures involves examining the _______ and ________ of relationships
Relationships in a stable environment are usually _______ predictable than those in a dynamic environment
Relationships involving _________ ___________ accounts tend to be more predictable than those involving ___________ ___________ accounts. Why?
income statement, balance sheet
income statement deals with a period of time rather than a single moment in time
The likelihood of detecting a misstatement ____________ as the level of aggregation of the data increases.
Relationships involving transactions subject to management discretion tend to be ______ predictable
What is the current ratio?
What is current cash to debt ratio?
net cash from operations / average current liabilities
What is asset turnover ratio?
net sales / average total assets
what is profit margin on sales ratio?
net income / net sales
How do you calculate gross profit percentage
(sales - cogs) / sales
how do you calculate rate of return on assets
operating income / average total assets
What is the price earnings ratio?
market price of stock / EPS
What is the times interest earned ratio?
EBIT/ interest expense
what is the cash to debt coverage ratio?
net cash from operations / average total liabilities
what do coverage ratios measure?
the ability for an entity to meet its obligations over time
what do activity ratios measure?
measures an entity's effectiveness at putting its assets to use
What do liquidity ratios measure?
measures an entity's short-term ability to meet its obligations
What are the 2 types of substantive procedures?
1. Test of Details
2. Substantive analytical procedures
Performing substantive procedures at an interim date increases _________. Why?
If you perform the tests now, there's a chance that a misstatement can occur between the end of the tests and the end of the year
What's the acronym you made up to remember account balances at year end assertion?
What's the acronym you made up to remember presentation disclosure?
What's the phrase you made up for remembering the classes of transactions and events assertion?
Instead of "AOC plus 3" it's "AOC plus 2.... C's"
When there is an incentive to overstate net income, tests of receivables are primarily for finding _________, and testing payables are primarily for finding __________
The auditor should make _________ of management in regard to pending litigation involving the client
Explain the process that occurs involving the letter of inquiry. (who it is given to, what's in it, what's its purpose)
The letter of inquiry is drafted by the auditor, for management to give to their lawyers. It's basically a letter that says "hey, this is everything we have found that you are doing for this client. Is this right?" It includes a list of all the legal matters the client is involved with that the auditor knows about.
The letter of inquiry is supposed to get the lawyers to corroborate management's response to the inquiries about legal contingencies
In response to the letter of inquiry, the client's lawyer drafts the ________ _________ which is to corroborate the auditor's inquiries about management's legal contingencies
What are the rules surrounding "asserted claims" and how/when the client's lawyer is supposed to inform the auditor?
"asserted claims" are lawsuits that have been filed against the client or are officially intended to be filed. If the letter of inquiry omits any "asserted claims", the lawyer is required to directly tell the auditor about the claims
What are the rules surrounding "unasserted claims" and how/when the client's lawyer is supposed to inform the auditor?
"unasserted" claims means that the client has exposure to litigation, but no lawsuit has been filed and no one has stated intent to file against the client. If the letter of inquiry omits unasserted claims, the lawyer is NOT permitted to directly inform the auditor.
Instead, the lawyer should inform management that they should tell the auditor about the unasserted claims
An unasserted claim must be disclosed according to GAAP if these two conditions exist:
1. it is probable that a claim will be asserted
2. it is at last reasonably possible that a material unfavorable outcome will occur
A limitation in the lawyer's response to the letter of inquiry would most like preclude a __________ opinion from the auditor. What would happen if the lawyer doesn't respond?
This would probably constitute a disclaimer of opinion due to a scope limitation
For audits of both issuers and non-issuers inquiry to the client's lawyers does not need to involve matters that are __________
(true/false) A letter of inquiry to external legal counsel is presumed in an audit of both issuers and non-issuers.
The primary source of information to be disclosed regarding litigation, claims, and assessments comes from:
Woah black betty
What 4 tests is the auditor required to perform as substantive tests?
1. Confirmation of customer balances if A/R is material
2. Observation of inventories if inventories is material
3. Obtaining a representation from the company's legal counsel addressing material uncertainties
4. Obtaining a representation from management addressing all material assertions and other matters
What are some examples of test of details?
confirmations, recalculation, vouching from accounting records, tracing from source documents, and observation
What is the difference between attributes sampling and variables sampling?
Attributes sampling is for test of controls and variables sampling is looks at dollar amounts
What are "issues" or "problems" referred to in attributes sampling? what about variables sampling
Deviations for attributes sampling, misstatements for variables sampling
what is sampling risk?
the risk that the sample will not reflect the true population
What is non-sampling risk?
the risk that the auditor will misinterpret the sample
What is Alpha Risk (Type 1), and how does is it defined in terms of attributes sampling and variables sampling?
For attribute sampling, alpha risk is called "risk of assessing control risk too high" or "risk of under-reliance" (too much work performed, inefficient use of time)
For variables sampling it's the "risk of incorrect rejection"
What is Beta Risk (Type 2), and how does is it defined in terms of attributes sampling and variables sampling?
For attributes sampling, it's the "risk of assessing control risk too low" or "risk of over-reliance" or "risk of litigation"
for variables sampling, it's the "risk of incorrect acceptance"
Name type of relationship between Beta Risk and Sample Size (inverse or direct)
Name type of relationship between Materiality and Sample Size (inverse or direct)
for attributes sampling this is "tolerable deviation rate" and for variable sampling this is "tolerable misstatement"
Name type of relationship between Expected population deviation rate/ misstatement and Sample Size (inverse or direct)
Name type of relationship between population size and Sample Size (inverse or direct)
Name type of relationship between variation in population and Sample Size (inverse or direct)
What are some advantages of PPS? (probability proportional to size)
1. small sample sizes than classical variables sampling methods
2. size of sample not based on variation of items in population
3. automatically stratifies population
4. automatically selects key items
5. generally easier to use than classical var. sampling
What are some disadvantages to PPS? (probability proportional to size)
1. select of zero and negative account balances merit special attention
2. general assumes audited amount of sample item is not in error by more than 100%
3. can overstate the allowance for sampling error, resulting in a more conservative approach
What type of sampling method is Mean-Per- Unit, and how does it work?
classical variable sampling method
Calculate the average audit value per sampling unit and project that onto every account
What type of sampling method is Difference Estimation, and how does it work?
classical variable sampling method
look at the average difference between the sampled BV and sampled AV and project it to the population
What type of sampling method is Ratio Estimation, and how does it work?
classical variable sampling method
Look at the ratio of sampled AV to BV and project that ratio to the population
what are IT general controls?
policies and procedures that relate to many applications and support the effective function of application controls
what are IT application controls?
are manual or automated procedures that typically operate at a business process level and apply to the process of transactions by individual applications.
Can be preventative or detective and are designed to ensure the integrity of accounting records
What are the 3 types of IT application controls? what's the objective of each?
1. Input controls - ensures the input data is accurate and properly authorized
2. Processing controls - ensure that the processing of data is accurate and authorized
3. Output controls - ensure that the output, specifically the distribution of any related reports, is accurate and authorized.
What are logic checks?
common controls used for data validation purposes. basically to identify errors
what is a field test?
a test that establishes that a field properly consists of all alphabetical or all numeric characters
What are batch totals?
totals that are subject to meaningful interpretation (i.e the day's cash withdrawals at a specific ATM location)
What are hash totals?
totals that have no meaningful interpretation, even though a total can be mathematically determined (i.e. adding up employees social security numbers to verify that no employees were omitted from a payroll application)
What are 4 audit procedures specific to testing IT application controls? Define each
1. Test data - I think it basically means putting in dummy transactions to see if the system detects the error
2. Integrated test facility - a fictitious division or department created by the auditor within the client entity where dummy data is processed along actual "live" client data
3. Parallel Simulation - processing the client's actual data using the auditor's system and software, then comparing the auditor's output with the client's output for agreement
4. Embedded Audit Modules/ Hooks - modules are routines that are built into application programs to perform ongoing audit functions, hooks are exit points that are built into application programs where an audit module can be added at a later time
What is the cash ratio?
cash + cash equivalents / current liabilities
What is dividend yield? the formula
Most recent full-year dividend / current share price
Woah black betty
When a client is using a special purpose framework for their F/S, what 3 things should the auditor gain an understanding of in determining the acceptability of the framework?
1. The purpose for with the FS are prepared
2. The intended users
3. The steps taken by management to determine that the framework is acceptable
What are the 4 main types of special reporting frameworks?
1. Cash Basis
2. Tax Basis
3. Regulatory Basis
4. Contractual Basis
they list a 5th one as "other basis"
For which two SPF's is the auditor required to describe "the purpose for which the financial statements are prepared"
contractual basis or regulatory basis
Which special purpose frameworks require an emphasis of matter paragraph that alerts readers to the special purpose framework? Which one is the exception
All four ( cash, tax, contractual, and regulatory (if restricted))
Regulatory (for general use) does not require this EoM paragraph
Which special purpose frameworks require an other-matter paragraph to restrict the distribution of the auditor's report to specified users?
Only the regulatory basis (if restricted) and the contractual basis do
What items must the auditor express if the financial statements use the regulatory basis and are intended for general use?
In this case, the auditor should NOT include an emphasis of matter or other-matter paragraph.
Instead, the auditor should express:
1. an opinion as to whether the statements are performed in accordance with GAAP (they aren't)
2. An opinion in a separate paragraph as to whether the financial statements are prepared in accordance with the special purpose framework
Government Auditing Standards (GAS) or (GAGAS) is the government version of _______
What are the three primary reporting differences between GAGAS and GAAS?
1. The auditor is required to issue a written report on I/C in every financial audit (documents understanding, risk assessment, etc.) When the auditor communicates significant deficiencies, the auditor must also obtain a response from the entity's management
2. Auditor must prepare a written report on compliance with applicable laws and regulations (must distinguish between general requirements and specific requirements) (this report must include any known instances of fraud, illegal acts, or violations of grants that are more than inconsequential)
3. Auditor must report any known instances of illegal acts that could result in criminal prosecution
What is the "Single Audit Act" and who/what does it apply to?
It's a set of heavier standards and guidelines that are applicable to state and local governmental entities that have expenditures of federal assistance (grants) aggregating at least $750,000 in a given year
What two documents is management responsible for under the Single Audit Act?
1. A schedule of expenditures of federal assistance (to go along with the F/S)
2. A corrective action plan to respond to current-year audit findings
Under the Single Audit Act, the auditor is required to perform risk assessment procedures, develop and understanding of I/C, and evaluate compliance with laws/regulations at what level?
The auditor should first identify all of the MAJOR programs in the entity, and then make separate evaluations involving risk, I/C, and compliance for each major program
Under the Single Audit Act, the auditor is required to issue __ reports on:
1. The fairness of the F/S (including the schedule of expenditures of federal assistance)
2. ICOFR (emphasis on major programs)
3. Compliance with applicable laws/regulations/other requirements
If audit findings were identified, the auditor should prepare a Schedule of Findings and Questioned Costs
What must the auditor do when the prior period FS were audited by a predecessor auditor and that report is NOT reissued?
The auditor should add on other-matter paragraph stating that:
1. the prior period FS were prepared by a predec. auditor
2. the type of opinion given
3. the nature of any EoM or other matter paragraph
4. Date of predecessor's report
What must the auditor do when the prior period FS were audited by a predecessor auditor and that report is reissued?
the predecessor should obtain a rep letter from the successor auditor regarding matters that may affect the pred's prior period audit report. pred. should NOT refer to the successor auditor in the predecessor's reissued audit report
What should the auditor do if the pri-period FS were compiled or reviewed, but not audited?
Include other-matter paragraph that states:
1. nature of service performed in prior period
2. description of any modifications noted
3. statement that service does not provide a basis for an opinion
4. date of the report
What should the auditor do if the pri-period FS weren't compiled, reviewed, or audited?
include an other-matter paragraph pointing out that fact
What are the two main procedures that the accountant performs in a review engagement? Which one is more than the other?
Inquiries of management, ARPs. I think it's much heavier on the inquiries.
What 5 main things should the accountant inquire of management during a review engagement?
1. Whether the subject matter has been prepared in accordance with criteria
2. Practices used by management to record and measure the subject matter
3. Questions arising in connection with other review procedures
4. Communications from regulatory agencies, if any
5. Ask if management is aware of fraud or cases of non-compliance with laws
What should the accountant ask management about subsequent events during a review engagement?
Ask if there management is aware of subsequent events that could have a material impact on the financials. If so, act accordingly. The reviewer has NO responsibility to perform additional procedures after the report date
What is the difference between the "emphasis of matter" paragraph and the "other matter" paragraph?
the EoM paragraph is about matters already disclosed in the F/S.
the other matter paragraph is about matters that are not disclosed in the F/S
What is different between assessing the risks of material misstatement between examinations and reviews?
Since a review is less in nature and extent than an examination, the accountant should only focus procedures on high-risk areas where the risk of misstatement could exist.
What are the 3 types of engagements that fall under Attestation engagements?
Reviews, Examinations, AUPs
What is the primary guidance for attestation engagements?
Statements on Standards for Attestation Engagements (SSAEs)
What is required to be made upon finishing an attestation engagement?
A written assertion
Ya know, like a review, examination, or AUP report
For an examination or review engagement, what should the practitioner do if the engaging party is the responsible party and refuses to provide a written assertion?
withdraw if permitted
For an examination or review engagement, what should the practitioner do if the engaging party is not the responsible party and the responsible party refuses to provide a written assertion?
The refusal should be disclosed in the practitioner's report, and the report's use should be restricted to the engaging party
For an AUP engagement, when the responsible party refuses to provide a written assertion, what should the practitioner do?
Disclose the refusal in the practitioner's report
What are the two categories of professional requirements from the SSAEs? briefly describe each
focus on the key words for each one
1. Unconditional requirements - must be complied with in all relevant circumstances. indicated by the word "must"
2. Presumptively mandatory requirements - allows for rare exceptions, indicated by the word "should"
Are interpretive publications requirements for attestation requirements?
no, they're recommendations
What are the 3 fundamental preconditions applicable to any attestation engagement?
1. Practitioner must be independent
2. Responsible party must take responsibility for the subject matter
3. Engagement must follow the four required characteristics
What are the 4 engagement characteristics required in the 3 fundamental preconditions for attest engagements?
1. subject matter is appropriate
2. criteria to be used is suitable and available
3. practitioner expects to obtain necessary evidence related to the opinion, conclusion, or findings
4. the opinion/conclusion/findings are expressed in a written report
What is required to be able to change the terms of an engagement to a lower level of engagement/service?
What happens when there IS reasonable justification for changing to a lower level of engagement?
the prac. report should NOT reference the original engagement, procedures already performed, or scope limitations that caused the engagement to change
What doesn't count as "reasonable justification" for changing to a lower engagement level?
it's not reasonably justified if the reason for changing is due to failure to obtain sufficient appropriate evidence
How should the practitioner modify his conclusion when there is a misstatement of subject matter?
The pract. should determine if an "except for" statement in the conclusion paragraph would adequately disclose the misstatement. If not, he should withdraw.
When can the practitioner use an "except for" statement in the conclusion paragraph of the review report? (identify severity of misstatement)
If the misstatement is material, but not pervasive
What should the practitioner (review engagement) do if there is a misstatement that is both material and pervasive?
What about if if a scope limitation exists?
What are the 2 main types of prospective financial statements? Describe the difference
1. Financial Forecasts- a forecast of what could happen in the future based on factors that currently exist and likely will exist in the future a
2. Financial Projections- a projection of what could occur in the future given hypothetical circumstances
What are the two types of engagements associated with prospective financial statements?
Examinations and AUPs
In an examination of prospective financial statements, what would cause a practitioner to express a qualified or adverse opinion?
If the prospective statements depart in a material way from AICPA presentation guidelines
In an examination of prospective financial statements, what would cause a practitioner to express an adverse opinion?
If the statements fail to disclose "significant assumptions" or if one of those assumptions isn't suitably supported or do not provide a reasonable basis for the forecast or projection
In an examination of prospective financial statements, what would cause a practitioner to express a disclaimer of opinion?
If unable to obtain sufficient appropriate evidence as a basis for the opinion
What is "pro forma" financial information? What are the two types of engagements frequently associated with pro forma financial statements?
A presentation that shows what the significant effects on historical financial information have been had a consummated or proposed transaction had taken place at an earlier date
For an examination of PF financial statements, the historical F/S must have been ______
For a review of PF financial statements, the historical F/S must have been _______ or _______
What are the two types of engagements associated with compliance attestation?
Examinations, agreed upon procedures
Which type of prospective financial statement is allowed for general use? Which one is restricted for firm use only?
Forecasts are general, projections are restricted because they involve hypotheticals
What is the main difference between supplemental information rules for the AICPA and the PCAOB?
The process of analyzing supplementary information is more stringent and involved under PCAOB standards.
For the AICPA standards, you basically just inquire from management about whether they've done everything right and you double check it with your stuff. For PCAOB standards, you have to do all the testing and stuff to verify the supplemental info. must be coordinated with the regular audit
under PCAOB supplemental info rules, if the auditor issued a qualified opinion on the financial statements, how should the accompanying supplemental information be handled?
if the basis for the qualification also applies to the supplemental information, then the auditor should express a qualified opinion on the supp information
under PCAOB supplemental info rules, if the auditor issued an adverse report or disclaimer of opinion on the financial statements, how should the accompanying supplemental information be handled?
the auditor should also issue an adverse report or disclaimer of opinion on the supplemental information
under AICPA supplemental info rules, if the auditor issued a disclaimer of opinion or adverse report on the financial statements, what should the auditor do with the supplemental information?
in that case, the auditor would be prohibited from reporting on the supplemental information
What are the three general procedures used to test for existence?
3. Vouching to underlying documents
What are the 2 general procedures used to test for completeness?
1. Cutoff tests
2. Analytical procedures
What are the 2 general procedures used to test for rights and obligations?
1. Inquiry of the applicable client personnel
2. Examine authorization of transactions
What are the 4 general procedures used to test for valuation and allocation?
1. Recalculate account balances
2. Trace to subsequent cash receipts/disbursements
3. Analytical procedures
4. Examine published price quotations for FV measurements, when applicable
How do you test for the existence of cash?
Bank reconciliation - proves cash exists
you would wanna use a cutoff bank statement approximately 10 days after year end
How do you test for the completeness of cash?
bank reconciliation- shows liabilities to the bank
you would wanna use a cutoff bank statement approximately 10 days after year end
How do you test for the completeness/occurrence assertion of Accounts Receivable?
1. Verify that the subsidiary A/R ledger agrees or reconciles with the A/R general ledger balance
2. Send confirmations (positive or negative) to all accounts that are deemed individually material
What are two alternate procedures that should be performed to test for the existence of A/R when the auditor has sent 2 positive confirmations and still heard nothing back?
1. Trace collections on the account subsequent to the date of the confirmation to the cash receipts journal and to the bank statement
^ preferred method
2. Vouch to (inspect) the underlying documents supporting the validity of the transactions comprising the account balance
^ last resort
How do you test for the valuation assertion of accounts receivable?
1. Evaluate the reasonableness of management's estimates of allowance for uncollectibles and allowance for sales returns
2. Review client's aged trial balance of A/R - inquire about large, deliquent items, and estimate the percentage of uncollectible accounts within each category of age
3. Review receiving reports after year end for sales returns
4. Review AJE's (i.e. write-offs) for proper authorization
How do you test for completeness of A/R?
1. Perform a cut-off test of sales- compare shipping documents around the end of the period with related sales invoices
How do you test for rights and obligations of A/R?
inquire of management:
1. about receivables pledged as collateral for debt
2. about shipments on consignment that aren't actual sales
3. about any receivables due from employees or mgmt that should be classified separately from ordinary trade receivables
focus on #1 I think
How do you test for the existence of inventory?
1. Observation of physical count - the client counts the entire inventory and the auditor observes the client's taking of the inventory, while taking independent test counts
this is the main one
What happens if the auditor is unable to attend physical inventory counting due to unforeseen circumstances?
the auditor should make some physical counts on an alternative date and perform audit procedures on intervening transactions
If attendance at physical inventory counting is impracticable, the auditor should do what? What happens if he can't even do that? (the answer)
Perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.
If not possible, appropriately modify the auditor's opinion
What is an option for the auditor when inventory is stored at a public warehouse?
the auditor can confirm such inventory with the custodian.
or just do physical observation
How do you test for the valuation assertion for inventory?
1. Perform price tests (unit costs, not selling price)
2. Recalculate quantity times cost/unit
3. Inquiry of management to make sure that any obsolete or damaged items are written down from historical cost to NRV
How do you test for the completeness assertion for inventory?
1. Test inventory cutoff ( i.e. FOB SP vs destination) to make sure everything is recorded in the right period based on the FOB terms
2. analytical procedures - gross profit rates, inventory turnover comparisons, total inventory, yada yada
How do you test for the rights and obligations assertion for inventory?
1. inquire of management about inventory held on consignment or pledged as collateral
make sure to document those inquiries
How do you test for the existence assertion of investments?
1. physical inspection
How do you test for the completeness assertion for investments?
Primarily ARPs. use them to:
1. evaluate investment income or loss accounts
2. compare dividends, interest, or other investment income (loss) to PY workpapers for reasonableness
3. review BoD minutes for proper authorization
How do you test for the valuation assertion for investments?
It varies by the type of security.
For bonds HTM - verify the interest, look at the amortization of premium/discount, inquire of mgmt's intent and ability to hold
for stocks or bonds marked to market - agree to underlying documents, verify year-end fair value (trace to an outside independent source like the failing new york times)
How do you test for the rights and obligations assertion of investments?
1. inquire of management about any restrictions applicable to investments
2. review cash receipts/ disbursements subsequent to year-end in relation to investments
How do you test for the existence assertion for fixed assets? (additions vs disposals)
For additions: vouch (inspect) the underlying documents to make sure it all checks out, look for approval in BoD minutes if the addition is a big'un
for disposal: trace any proceeds received to the cash receipts journal and bank statement. review for appropriate approval
How do you test for the valuation assertion for fixed assets?
1. examine calculations for depreciation expense, recalculate
2. consider if there are any impairments that require an assets to be written-down
How do you test for the completeness assertion for fixed assets?
1. review client's repairs & maintenance expense account to make sure nothing should have been capitalized
2. review lease agreements to see if anything should have been capitalized
How do you test for the rights and obligations assertion for fixed assets?
ask management if any of the fixed assets are being pledged as collateral for debt.
document the inquiries
For current liabilities, the primary assertion to focus on is ________, not _________
How do you test for completeness of A/P?
perform search for unrecorded liabilities
How do you test for existence of A/P?
verify mathematical accuracy of payables, vouch selected items to underlying vendor invoices
How do you test for rights and obligations for A/P?
inspect the specific terms of the payables, inquire about related party transactions
What audit procedure should the auditor use to test other current liabilities such as wages payable, dividends payable, and interest payable?
How do you test for the completeness assertion of long-term liabilities?
use substantive tests of transactions (to address decreases in debt):
1. verify due dates
2. trace cash disbursements from acct recordings to bank statements
3. examine canceled notes if paid in full
How do you test for the existence/occurrence assertion for long-term liabilties?
use substantive tests of transactions (to address increases in debt):
1. review loan documentation
2. verify authorization in BoD minutes
3. trace receipts from account records to bank statements
How do you test for the valuation assertion for long-term debt?
Most should be based on present values.
1. trace cash receipts/disbursements from acct records to bank statements
2. examine underlying contracts
3. recalculate amortization of premiums/discounts
How do you test for the rights and obligations assertion for long term debt?
ask management about debt covenants and any assets pledged as collateral
How do you test for the existence of S/E?
confirm the outstanding shares of stock if there is an external registrar
How do you test for the completeness of S/E?
1. review BoD minutes for proper authorizations
2. account for all certificate numbers so that no unauthorized shares were issued
How do you test for rights and obligations of S/E?
1. Review BoD minutes for authorization
2. inquire of management about any restricts on the availability of retained earnings
How do you test the valuation assertion for S/E?
1. Review cash receipts and disbursements (and BoD minutes)
2. Compare sub ledger to general ledger stock accounts
How do you test for the accuracy/occurrence assertion for payroll?
1. examine personnel records on a test basis to determine that the levels of compensation and support for all deductions exist for all employees
2. trace selected transactions from the payroll register to the GL and to the payroll bank account
3. recalculate selected entries on the payroll register
How do you test for completeness of payroll?
1. Review time reports and time cards to verify support for production records
2. apply ARPs
What is the difference between an audit plan and the audit strategy?
Audit Strategy: determines characteristics of the engagement that defines its scope. This includes determining key dates and reporting objectives, and preliminary identification of areas where RMM is higher. This is where the auditor assigns resources.
Audit Plan: More detailed than the audit strategy - includes nature, timing, and extent of audit procedures to be performed by the audit team members to obtain suff/appro evidence
what is the return on equity ratio?
Net income / SE
How often must a registered public accounting firm make representations to the audit committee?
at least annually and prior to accepting the engagement
what is the maximum number of years an audit partner can perform audit services for a client before rotation is required?
If an entity makes a material change in accounting principle, how is the audit report impacted?
An emphasis of matter paragraph is required to be added to reference the footnotes discussing the change
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