What is the central limit theorem?
The population being sampled is normally distributed/can be described by a 'normal' or 'bell-shaped' curve
What is the alpha risk for substantive testing and test of controls?
Risk of incorrect rejection and risk of assessing risk too high
What are the sampling risks associated with efficiency?
Risk of assessing risk too high and risk of incorrect rejection
What are the sampling risks associated with effectiveness/
Risk of assessing risk too low and risk of incorrect acceptance
T/F: The most common technique in selecting the sample of test of controls is systematic selection.
False, random selection!
T/F The auditor may rely on the control if the upper deviation rate is exceeds the auditor's tolerable deviation rate.
What parameters for substantive testing have a direction relationship with sample size?
Estimated misstatement, assessed level of risk, standard deviation
What parameters for substantive testing have an indirect relationship with sample size?
Tolerable misstatement and acceptable level of risk
What is an advantage of statistical sampling over nonstatistical sampling?
Measure the sufficiency of the audit evidence obtained
T/F: Inclusion of zero and negative balances require special design considerations with classical variables sampling.
False, with PPS sampling
Would an auditor use attribute or variable sampling to identify entries posted to incorrect amounts?
If an auditor assesses control risk too low and decreased substantive testing, is the true deviation rate in the population more or less than the deviation rate in the auditor's sample?
When does a control deficiency exist for nonissuers?
When a control doesn't allow management or employees, in the normal course of performing their assigned functions, to PREVENT, DETECT AND CORRECT a misstatement
When does a control deficiency exist for issuers?
When a control doesn't allow management or employees, in the normal course of performing their assigned functions, to PREVENT or DETECT a misstatement
T/F: A deficiency in design occurs when a properly designed control does not operate as designed.
T/F: A deficiency in design exists when a necessary control is missing or when a control doesn't achieve the desired objective
What are the keywords associated with deficiencies in the design of controls?
Preparation, consciousness, segregation of duties, safeguarding of assets, qualifications, IT controls, monitoring
What are indicators of material weakness?
-Identification of any level of FRAUD perpetrated by senior management
-Identification by the auditor of a material misstatement that wouldn't have been detected by their IC
-Ineffective oversight by those charged with governance
T/F: An auditor is permitted to report on the absence of significant deficiencies.
False, not allowed
What is management's requirements in a private company?
Management makes assertion/claim and how they can prove it
T/F: Management's failure to furnish a written assertion and make a written representation should result in withdrawal of the auditor.
T/F: For nonissuers, the auditor should express an opinion directly on the effectiveness of I/C and not on management's assertion.
T/F: An engagement to report on whether a previously reported internal control weakness continues to exist is a required professional standard.
False, voluntary engagement
What opinion is issued when an auditor obtains evidence that the material weakness has been eliminated?
What does the term ''those charged with governance' encompass?
Board of directors and audit committee
T/F: The auditor may not communicate how significant risks of material misstatement will be addressed, the planned approach toward internal control, factors affecting materiality, and any potential use of internal audit staff.
False, they may!
With regards to significant findings, should the auditor communicate the auditor's views about qualitative aspects of the entity's accounting practices?
T/F: The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance should be communicated to those charged with governance.
T/F: The degree of reliance the auditor placed on the management representation letter is required to be communicated to those charged with governance.
False, not required
What is the purpose of the management representation letter?
To confirm management's oral evidence supplied during the engagement
T/F: GAAS includes designing the audit to provide reasonable assurance of detecting material misstatements resulting from noncompliance.
False, GAGAS does
What requirements apply for audits of federal financial assistance?
-Expanded internal control documentation and testing requirements
-Expanded reporting to include formal written reports on the consideration of internal control and the assessment of control risk
-Expanded reporting regarding compliance
-Application of single audit standards to federal financial assistance
What are the objectives under performance audits?
Effectiveness, economy, efficiency, Internal control, & compliance
What are increased responsibilities of management identified by GAGA
-Identification of applicable laws and regulations w/ compliance requirements
-Establishment of I/C to provide reasonable assurance that the entity complies w/ those laws and regulations
-Preparation of supplementary financial reports
-Obtaining an audit that satisfies contractual, regulatory, or legal requirements
What is the audit risk of noncompliance?
Audit risk of noncompliance = risk of material noncompliance * Detection risk
T/F: The auditor can change the risk of material noncompliance, but can't change their assessment of the risk.
False, can't change risk, but can' change assessment
T/F: As the level of detection risk increases, the assurance provided by tests of details increases.
When would tests of the operating effectiveness of controls be required?
-Substantive tests do not provide evidence to support a conclusion
-The risk assessment includes an expectation of the operating effectiveness of controls over compliance
-tests of controls are required
What are the compliance requirements for documentation?
-assessed risk of material noncompliance
-Responses to risk assessment
-Compliance with supplemental requirements
-Basis or rationale for materiality levels
T/F: Internal control documentation should be based on GAGAS, which does not contain additional audit documentation requirements beyond GAAS.
False, it does include additional audit documentation
What are the additional reporting standards under GAGAS?
-Include an affirmative statement of compliance with GAGAS
-Describe the scope of testing of regulatory compliance and IC
-Describe omitted information
-Describe the distribution of the report
T/F: Audit reports should be provided to the appropriate officials of the entity requiring or arranging for the audit.
T/F: A written report on the auditor's understanding of internal control and the assessment of control risk is required under GAAS.
False, under GAGAS
What is the Single Audit Act?
Requires entities that expend federal assistance of $500,000 or more in a fiscal year to have an audit performed to act in accordance with the act
What are the objectives of a single audit?
-Audit of the entity's f/s and reporting on a separate schedule of expenditures of federal awards in relation to those f/s
-Compliance audit of federal awards expended during the year as a basis for issuing additional reports on compliance related to major programs and on internal control over compliance
T/F: The Single Audit Act requires a separate evaluation of materiality for each major program selected.
What is an audit of entire organization that includes additional audit procedures on specific programs called?
What communication requirement do auditors have the responsibility of in government settings?
Reporting significant deficiencies to specific regulatory bodies or grantor agencies
What opinion would an auditor issue for reportable instances of noncompliance?:
Qualified or adverse
T/F: The scope of the auditor's testing of internal control is not required to be included in the auditor's report on I/C and compliance w/ laws and regulations in accordance w/ GAGAS.
False, it IS required
Who do Government Auditing Standards published by the Government Accountability Office apply to?
Primarily to audits of federal financial assistance and government organizations
T/F: A single audit does not represent a combined audit of both an entity's financial statements and federal financial assistance programs.
False, it does
T/F: OMB Circular A-133 allows auditors to use a risk-based approach to determine major grants.
Which standards require audit documentation that contains sufficient information so that supplementary oral explanations are not required?
What is the focus of auditors conducting an audit in accordance with the Single Audit Act using risk-based approach?
How is a subrecipient defined as?
A nonfederal entity that expends federal awards received from another entity to carry out a federal program
To determine the sample size for a test of controls, what should the auditor consider?
-Tolerable deviation rate, expected deviation rate, risk of assessing risk too low
What is the statistical concept when an auditor evaluates the sampling results by calculating the possible error in either direction/
T/F: All significant deficiencies are material weaknesses.
False, all material weaknesses are significant deficiencies.
Would an engagement to express an opinion on the I/C of a nonissuer be more extensive or limited in the assessment of control risk made during a f/s audit?
What are the standard auditing procedures?
Examining, Confirmation, Analytical Procedures, Reperformance, Reconciliation, Observation, Tracing, Cut-off review, Auditing related accounts simultaneously, Representation letter, Subsequent events review
What are the relevant assertions to the audit of account balances?
Completeness, Valuation, allocation and accuracy, Existence, Rights and obligations
What are the relevant assertions to the audit of transactions and events?
Completeness, Cut-off, Valuation allocation and accuracy, Existence, Understandability and classification
What are the relevant assertions to the audit of disclosures?
Completeness, valuation allocation and accuracy, Rights and obligations, Understandability
T/F: Audit evidence obtained from an independent party provides greater assurance of reliability.
T/F: Relationships among balance sheet accounts tend to be more predictable that income statement accounts.
Where should the direction of the audit test come from to determine whether transactions have been recorded?
Original source documents
When an analytical procedure is used as the principal substantive test of a significant f/s assertion, what is the auditor required to document?
The auditor's expectation and the factors considered in developing that expectation
What assertion would recalculation of the amortization and review of the amortization period test?
Valuation and allocation assertion
T/F: Information obtained indirectly from outside sources is the most reliable evidential matter.
When would positive confirmations be acceptable to send?
-Weak internal control
-Expected errors and disputes
What cash fraud scheme involves the theft of cash often concealed by failing to account for cash receipts
T/F: Frequent kiting may result in a high level of deposits coupled with a low average balance.
What is kiting?
When one check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the 1st bank
What internal control would most likely reduce the risk of diversion of customer receipts by an entity's employees?
Bank lockbox system
What would a responsible employee do immediately upon receiving checks from customers by mail?
Prepare a duplicate listing of checks received
How would an auditor provide assurance that each voucher is submitted and paid only once?
Stamp 'paid' by the check signer
T/F: Reconciling the control totals for sales invoices w/ the A/R subsidiary ledger would be an effective internal control to reduce the risk of errors in the billing process.
False! Not effective
Accounting for unused prenumbered purchase orders and receiving reports is usually performed in the vouchers payable department.
What assertion would an auditor's review of credit ratings of customers with delinquent accounts receivable concern?
Valuation and allocation
T/F: Examination of evidence of credit approval supports the assertion of rights and obligations.
T/F: There is an opportunity for a person to embezzle cash and cover it up if he/she who disburses cash (via blank checks and signature plates) also reconciles the bank statement.
What procedure would best detect a liability omission by management?
Review purchase contracts and other legal documents
T/F: By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed.
What account would an auditor focus increased attention on during a recession?
Allowance for doubtful accounts
Why would an auditor review the reconciliation of payroll tax forms that a client is responsible for filing?
To identify potential liabilities for unpaid payroll taxes
How is dividend income from investments tested by?
Referring to dividend record books produced by investment advisory services
How would an auditor generally test the segregation of duties related to inventory by?
Personal inquiry and observation
What assertion does inquiries of production and sales personnel concerning possible excess or obsolete inventory items support?
Valuation and allocation
T/F: In auditing payroll, an auditor would most likely compare payroll costs with entity standards of budgets.
In auditing long-term bonds payable, what would an auditor most likely do?
Compare interest expense w/ the b/p amount for reasonableness
What would an auditor do in performing tests concerning the granting of stock options?
Trace the authorization for the transaction to a vote of the board of directors
Should periodic inventory counts be used to adjust perpetual records to maintain perpetual inventory records?
T/F: Examining an analysis of inventory turnover helps identify slow-moving and obsolete items included in inventories.
T/F: When the A/P manager issues purchase orders, this indicates a strength in A/P procedures.
What is a key control for ensuring sales are properly authorized when assessing control risks for sales?
Sales orders are sent to the credit department for approval
What evidence does tracing shipping documents to prenumbered sales invoices provide?
Shipments to customers were properly invoiced
What substantive testing of payroll balances would be limited if the control risk is assessed as low
Applying analytical procedures and recalculating payroll accruals
What assertion does looking at related party transactions support?
Valuation, allocation, and accuracy
What procedures would be applied to determine the existence of related parties?
-Evaluating the company's procedures for identifying and accounting for related party transactions, and obtaining a conflict of interest statement from the client
-Asking management for the names of all related parties
-Reviewing the entity's filings with the SEC
-Reviewing material transactions for related party evidence
-Reviewing prior years' audit documentation or inquiring of the predecessor auditor
T/F: To identify a contingency, an auditor would NOT send an inquiry letter to the client's attorneys.
False, they would!
What factors would an auditor concentrate on in evaluating the reasonableness of an estimate?
-Significant to the accounting estimate
-Sensitive to variations
-Deviations from historical patterns
-Subjective and susceptible to misstatements and bias
T/F: It is unlikely that a CPA would not accept a new audit engagement when the prospective client is unwilling to permit inquiry of its legal counsel.
T/F: Transactions based on terms that are significantly different from those that would be expected in an arm's length transaction may be indicative of related party involvement.
Why are auditors hesitant to use embedded audit modules?
Auditors are required to be involved in the system design of the application to be monitored
T/F: Embedded audit modules allow the auditor to capture specific data as transactions are being processed.
T/F: Continuous performance of audit tests is not required when financial data is processed electronically.
False, it is required
T/F: When an auditor tests a computerized accounting system, test data are processed by the client's computer programs under the auditor's control.
T/F: Whether or not a misstatement is considered material, it is not ultimately a matter of professional judgment.
False, it is
When do significant deficiencies exist?
When an engagement team
-fails to obtain sufficient appropriate evidence
-reached an inappropriate overall conclusion
-report is not appropriate
-Firm is not independent
If analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships, what would this indicate?
Additional tests of details are required.
T/F: Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.
How may inventory turnover ratio increase?
Cost of sales must increase or average inventory must decrease
T/F: The lower the inventory turnover, the better the entity's performance.
False, the HIGHER, the better
T/F: An auditor ordinarily uses a working trial balance resembling the f/s without footnotes and contains columns for reconciliations and tickmarks.
False, columns for reclassifications and adjustments
A copy of what would be included in the audit documentation that makes up the current file?
T/F: In testing the existence assertion for an asset, an auditor ordinarily works from the supporting evidence to the accounting records.
False, from the accounting records to the supporting evidence
What assertion would reviewing the renewal of a note payable shortly after the b/s date support?
Understandability and classification
Would inspection of bank statements obtained directly from the client's financial institution provide reliable audit evidence?
T/F: The measure of sufficiency of audit evidence does not lie in the auditor's judgement.
False, it does!
What assertion would selecting items for test counts and tracing the test counts to the client's inventory listing support?
What provides a greater assurance of reliability: Bank statement of bank reconciliation?
Between a sales invoice and vendor invoice, which provides the least assurance of reliability?
What confirmation would an auditor be most likely to identify a contingent liability?
Standard bank confirmation
What is the sampling unit in a test of controls pertaining to the existence of payroll transactions?
Payroll register entry
What procedures are good controls over the payroll system?
-A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary
-Payroll checks are prepared by the payroll dept. and signed by the treasurer
-The personnel dept sends employees' hire and termination notices to the payroll department
What is the purpose of segregating the duties of personnel and distributing payroll checks?
To separate the authorization of transactions from the custody of related assets
T/F: Confirmation of A/R provides evidence that the customer and the receivable are complete.
Why might auditor confirmation of A/P balances at the balance sheet date be unnecessary?
There is likely to be other reliable external evidence available to support the balances
What are the 2 assertions for which confirmation of A/R balances provides primary evidence for?
Rights and obligations and existence
What is the most likely method of auditing interest earned on bond investments?
Recomputing the interest earned
What internal controls most likely would give the greatest assurance that securities held as investments are safeguarded?
Access to securities requires the signatures and presence of 2 designated officials
What control is most likely to prevent the improper disposition of equipment?
A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders
T/F: Customer confirmations relate to contingent liabilities disclosed.
False, relate to receivables
What step is required in an auditor's program to examine long-term debt/
Examine bond trust indentures
What is the primary purpose of sending a standard confirmation request to financial institutions with which the client has done business?
To corroborate information regarding deposit and loan balances
What population of documents is appropriate to determine whether A/P are complete and an auditor performs a test to verify that all merchandise received is recorded?
What is a cashier's job description that would contain compatible duties?
Receive remittances and prepare the daily deposit slip
If the objective of a test of details is to detect overstatement of sales, the auditor should trace transactions from the:
Accounting records to the source documents
T/F: Tracing bills of lading to sales invoices provides evidence that shipments to customers were recorded as sales.
False, that shipments to customers were invoiced
T/F: Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance provide evidence regarding possible unrecorded transacionts.
False, they do!
T/F: Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the existence of cash receipts.
What department stamps, perforates, or otherwise cancels supporting document after payment is mailed: vouchers payable or treasury/cash disbursement dept?
What should be used to determine whether A/P are complete when the auditor performs a test to verify that all merchandise received is recorded?
When the shipping department returns nonconforming goods to a vendor, should the purchasing dept. send to the accounting dept the credit or debit memo?
What assertion does an auditor's purpose in reviewing credit ratings of customers with delinquent A/R support?
Valuation and allocation
What are the2 documents most likely to be generated by the revenue cycle application
Credit memos and sales invoices
What would be the source for when the company considers the decline in value of equity securities classified as available-for-sale to be temporary?
Management representation letter
Who has the ultimate responsibility for the performance of the audit and preparation of the report?
The engagement partner
What does tracing items in the inventory listing to inventory tags and the auditor's recorded count sheets verify?
Assurance that all inventory items in a client's inventory listing are VALID
What is an alternate procedure to support the existence of receivables when an auditor doesn't receive replies to 2nd requests?
Inspect the shipping records documenting the merchandise sold to the debtors
T/F: The requirement for 2 authorized signatures is part of the notes payable system.
False, part of the disbursements internal control system
Who is responsible for the selection and appointment of the independent external auditor, and for reviewing the nature and scope of the engagement?
What should the auditor consider and document as part of the pre- acceptance phase of the engagement?
Firm's ability to meet the reporting deadlines
Firm's ability to staff the engagement
Integrity of client's management
How may the audit be facilitated by AFTER acceptance?
-Making specific inquirires
-Review the predecessor's audit documentation
Which auditing standard is the auditor responsible for conducting the audit in accordance with?
What are two limitations of an engagement?
Audit is NOT designed to
-detect error or fraud that's immaterial to the financial statements
-provide assurance on internal control or to identify significant deficiencies
What should the engagement letter indicate about the auditor's responsibility?
Obtains an understanding of Internal control, entity and environment AND obtains reasonable assurance (EVIDENCE)
What should a successor auditor ordinarily request to review the predecessor's audit and documentation relating to?
Contingencies and internal control
What should the successor auditor do if they become aware of info indicating that the financial statements reported on by predecessor auditor may require revision during the audit?
Request the client to arrange a meeting among the 3 parties to discuss the information and attempt to resolve the matter
Which may preclude the auditor from obtaining sufficient audit evidence:
-The adequacy of the accounting records or the operating effectiveness of controls
The adequacy of the accounting records
Under ISA 210, what should the auditor do if they are unable to agree to a change if the engagement from an audit to a lower level of service?
T/F: The auditor should be prepared to revise the audit strategy and audit plan based on the results of audit procedures.
T/F: Before the engagement is accepted, the auditor must obtain an understanding of the client's business and industry.
False, Once the engagement has been accepted
What are 2 factors that determine the focus of the audit team's efforts?
-Preliminary evaluations of materiality, audit risk, and internal control
-Areas where there is a higher risk of material misstatement
Should the auditor use the smallest or largest level of misstatement that could be material to any one of the f/s?
What are some of the audit procedures?
-Risk assessment procedures
-Further audit procedures
-Other audit procedures
-Timing of audit procedures
What are substantive procedures use for and what do they include?
-To detect material misstatements
and include tests of details and substantive analytical procedures
What are the assertions about transactions?
Completeness, CutOFF, Valuation, allocation, and accuracy, Existence and occurence
What are the assertions about account balances?
Completeness, Valuation, allocation, and accuracy, Existence and occurrence, Rights and obligations
What are the assertions about Disclosures?
Completeness, Valuation and accuracy, Rights and obligations, Understandability and classification
If the auditor decides to make use of the internal auditor's work, what must be assessed?
Objectivity and competence
What source a CPA use to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standard?
AICPA Accounting Trends and Techniques
What may the work of internal auditors affect the independent auditor's..
-Procedures performed in obtaining an understanding of internal control
-Procedures performed in assessing the risk of material misstatement
-Substantive procedures performed in gathering direct evidence
What is the auditor's preliminary judgement about materiality based on?
Annualized interim financial statements or annual financial statements from a prior period
An internal auditor's work would most likely affect the NET of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the..
Existence of fixed asset additions
T/F: The extent of involvement of the client's internal auditors is not a factor in planning the nature, timing, and extent of auditing procedures.
False, it is
What is the purpose of pre-audit planning meetings?
Give guidance to the staff regarding both technical and personnel aspects of the audit
What would an auditor do to obtain an understanding of a continuing client's business in planning an audit?
Review prior-year audit documentation and the permanent file for the client
Why would an auditor most likely consider the methods used to process accounting information in planning an audit of a new client?
Such methods influence the design of internal control
T/F: The results of analytical procedures would be used to assess the competence and objectivity of an entity's internal auditor.
Why should the audit work performed by each assistant be reviewed?
To evaluate whether the results are consistent with the conclusions to be presented in the auditor's report
What is not part of the planning phase?
Selecting a sample of vendors' invoices for comparison to receiving reports
What would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
The entity's f/s of the prior year
What would a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate cause the auditor to do?
Perform the planned auditing procedures closer to the balance sheet date
T/F: Quality of the internal auditor's working paper documentation should be used to assess the competence of the internal auditor's.
Would a discussion of the timing of the audit with the client's management be necessary during the initial planning phase of an audit?
What kind of relationship exists between RMM and the assurance required from substantive procedures?
T/F: As materiality decreases, audit risk decreases as well.
False, inverse relationship between audit risk and materiality
What statement in the auditor's standard report recognizes the existence of audit risk?
Auditor obtains reasonable assurance about whether the f/s are free of material misstatement
When an auditor increases the assessed level of control risk, what would most likely increased as well?
The extent of tests of details
T/F: As the acceptable level of detection risk decreases, the assurance provided from substantive tests should decrease
What are the types of fraud?
Fraudulent financial reporting, misapporpriation of assets, and corruption
What does ISA 240 state?
The auditor should obtain a written representation from management that it has disclosed to the auditor the results of its assessment of the risk that the f/s may be materially misstated as a result of fraud
What is the auditor's responsibility with regards to fraud?
To plan and perform the audit to obtain reasonable assurance about whether the f/s are free of material misstatement, whether caused by error or fraud
What would be needed when inconsistent responses are a result of inquiries are made of personnel regarding their views of fraud risk?
The greatest risk is present when:
Management judgment is involved and very complex accounting principles
What are type of responses to assessed fraud risk?
-Overall general response
-Response to specific auditing procedures
-Response addressing risks related to management override
What is a material misstatement concern regarding inventory quantities?
Failure to reconcile book to physical inventory
How would an auditor assess management estimates?
Engage a specialist
Develop an independent estimate
Perform a retrospective review of prior period estimates
What are conditions identified during fieldwork?
Discrepancies in the accounting records
Conflicting or missing evidential matter
Problematic relationships between the auditor and management
Who should the auditor communicate with for fraud that causes a material misstatement/fraud involving senior management?
Those charged with governance
What kind of item should the auditor communicate to senior management AND those charged with governance?
Significant deficiencies or material weaknesses
T/F: Misstatement caused by fraud (even immaterial misstatements) may be indicative of an underlying problem with management integrity.
T/F: The auditor should determine whether and to what extent fraud risk factors are present as part of the final overall review stage of the audit.
T/F: When management is dominated by one individual who is also a shareholder, there may be an opportunity for management to override control procedures.
What does missing or unavailable documents or electronic evidence indicate?
Intentional material misstatement in the entity's f/s
T/F: A lack of independent checks is a fraud risk factor that provides an opportunity for misappropriation of assets.
What are the steps to assess the risk of material misstatement?
Internal control, entity, environment
Assess level of risk response
Perform substantive testing
T/F: The third standard of fieldwork requires the auditor to obtain an understanding of the entity and its environment, including its internal control.
False, the 2nd standard
What is the objective of analytical procedures during planning?
To enhance the auditor's understanding and identify unusual transactions and events, and amounts
What is the auditor's knowledge about the design of relevant internal controls used for?
To identify types of misstatements that could occur
Would reviewing unaudited information from internal quarterly reports be considered an analytical procedure?
T/F: The compliance with applicable laws and regulations is most relevant to the audit.
False, the reliability of financial reporting is
What are the components of internal control?
Information and communication systems
Existing control activities
What are the activities in a strong system of internal control?
Authorization of transactions
Independent checks to maintain asset accountability
Timely and appropriate performance reviews
Information processing controls
Physical controls for safeguarding assets
Segregation of duties
When should errors be detected in a well designed I/C environment?
In the ordinary course of business by employees
T/F: The internal control environment should be detected by management override and collusion.
False, ONE PERSON
What are preventive controls designed to do?
Provide reasonable assurance that only valid transactions are recognized, approved, and submitted for processing
T/F: Detective controls are designed to provide reasonable assurance that errors or irregularities are discovered and corrected on a timely basis
How can an auditor's understanding of internal control be documented?
Internal control questionnaire or checklists
Documentation from the client
Who are manual controls performed by and when are they more suitable?
People and when judgment and discretion are required
What are the functions of segregation of duties?
T/F: When electronic evidence may not be retrievable after a specific period, what may be difficult to determine?
Timing of control and substantive tests
Why might an auditor concentrate on the substance of the controls rather than their form?
Because management may not enforce compliance
T/F: The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
T/F: Significant risk exists when control risk is exceptionally high.
False, when inherent risk is high!
Why would only substantive tests be performed?
-There are no effective controls relative to the specific assertion
-The implemented controls are assessed as ineffective
-It would be inefficient to test the operating effectiveness
T/F: If relying on the operating effectiveness of internal controls, tests of controls do not have to be performed.
False, MUST be performed
T/F: As the planned level of assurance about operating effectiveness increases, the auditor should obtain more reliable/more extensive audit evidence.
What should the auditor use to test the control if it is applied on a transaction basis throughout the period?
What procedures do tests of controls include?
Documentation, inquiry, observation, and reperformance
What is the objective of tests of details?
To evaluate whether an internal control operated effectively
T/F: Preparation of system flowcharts indicate whether controls were actually operating as designed.
T/F: Accounting records pertain to the control environment.
False - information and communication system
What does the AICPA Code of Professional Conduct require firms providing audit, attestation, and accounting and review services to adopt?
System of quality control
What are the elements of quality control?
Engagement/client acceptance and continuance
Performance of the engagement
Which element of quality control (HELPME) established policies/procedures to ensure that the engagement is appropriately supervised and that work is appropriately reviewed?
Performance of the engagement
Who bears responsibility for the monitoring process?
A partner of someone with appropriate experience and authority
What do monitoring procedures include
Performance of engagement quality control reviews
Inspections of a selection of completed engagements
Post-issuance reviews of engagement documentations
What is a peer review?
When a CPA firm reviews another CPA firm's compliance with its quality control system
What should all firm personnel do at least ANNUALLY in regards to ethical requirements?
Confirm their independence in writing
What is not prohibited by SOX?
Routing tax return preparation
Employee personal tax services
What does ISA 800 state that the auditor's report on special purpose audit engagement should include?
What are the common types of OCBOA/
-income tax returns
T/F: GAAP titles such as Balance Sheet/Income Statement will be used in OCBOA f/s
False, Non-GAAP titles
What should the explanatory paragraph state under OCBOA f/s?
-Basis of presentation and reference to the footnote
-Basis of presentation is a non-GAAP basis
T/F: When an OCBOA report is prepared on a basis to comply with a regulatory agency, it should not be restricted.
False, it SHOULD be restricted!
T/F: Generally if the element account or item is far-reaching or pervasive, (Net income, stockholders' equity) the auditor must audit the complete set of f/s.
What should not be expressed when the auditor has expressed an adverse or disclaimed an opinion?
In a special report, specified elements, accounts, or items of a f/s, should an explanatory paragraph be included?
With regards to special reports in compliance with audited f/s, what assurance is given when an opinion is given other than adverse/disclaimer?
What are the ares of special reports?
-Compliance - Audited F/S
-Compliance - Financial presentation
What kind of financial presentation might an auditor make a special report on?
-Incomplete financial presentation that's GAAP
-Special purpose financial presentation that's NOT GAAP
T/F: If the auditor has disclaimed an opinion on the f/s taken as a whole, the auditor may express an opinion on an entity's AR balance ONLY if the report is presented separately from the disclaimer of opinion on the f/s
What should an auditor do if financial information is presented in a printed form not acceptable because it calls for statements that are inconsistent with the auditor's responsibility?
Reword the form or attach a separate report
What report should be issued when an accountant performs more than one service (compilation and an audit)
Issue report appropriate for the highest level of service rendered
What are the types of frameworks allowed in compilation and review engagements?
GAAP by FASB
What are the 5 elements of a compilation/review engagement?
-3 Party relationship
-Financial reporting framework
-Sufficient Appropriate Evidence (Review only)
-Written Communication or report
When establishing an understanding with a client in a compilation engagement, is an engagement letter presumptively mandatory or recommended?
What is required of an accountant performing a compilation in understanding a client's business?
Transactions types and frequency
Accounting basis used to prepare the f/s
Form of the accounting records
F/s form and content
When reporting on a compilation, is independence required and why/why not?
NO, independence is NOT required because NO ASSURANCE
What is the pnemonic device for reporting a compilation?
CAR - MR- ARSOM
Complied and neither AUDITED/REVIEWED
Auditors responsibility/SSARS/objective of management
When reporting on f/s that omit substantially ALL disclosures, an accountant may compile these statements provided..
-Disclosure of such omissions
-Omission is not intended to mislead any person who is expected to use them
When an accountant submits unaudited f/s to the client that are not expected to be used by a 3rd party, what may be used rather than a compilation report?
Engagement letter --> RESTRICTING their USE
What are the REVIEW requirements?
Understanding/Learn/Inquiry/Analytical Procedures/Review/CLIENT REPRESENTATION letter/Professional judgment/Accountant communicate results
What is an accountant NOT required to do in a review?
Perform audit tests
Assess fraud risk
Communicate with predecessor auditor
Test internal controls
What should analytical procedures in a review be designed to do>
Detect relationships and individual items that appear to be unusual and may indicate material misstatement
What two things are not included in the form and content of documentation for a review?
-Test of internal controls
-Audit test work
What is included in the intro paragraph of a review?
Management's financial data
Substantially less in scope
Does not express (an opinion)
When an accountant becomes aware that fraud or an illegal act may have occurred, what should take place?
Communicate to an appropriate level of management
If an auditor has compiled the f/s of a nonissuer, and they are not expected to be issued by a third part, what may the accountant do?
Decline to issue a compilation report
T/F: If a written representation letter is obtained from the client's management, an auditor compiling reports may decline to issue it
False, if it's a written ENGAGEMENT letter to document the understanding with the client
Does SSARS require that the compilation report be printed on the accountant's letterhead and be manually signed?
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when REVIEWING the f/s?
What is ordinarily performed by an accountant in a compilation engagement of a nonissuer?
READING the f/s to consider whether the are free of obvious mistakes in the application of accounting principles
T/F: An accountant is likely to observe the safeguards over access to and use of assets and records during an engagement when reviewing the f/s of a nonissuer.
False, it is not conducted in a review!
T/F: Reference to the original engagement should be included in the auditor's report if they conclude there is reasonable justification to change the engagement.
T/F: Scope limitation that resulted in the changed engagement is NOT included in the auditor's review report.
What is the objective of a compilation?
To assist management in presenting financial information in the form of financial statements
What does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer's financial statements?
The accountant is independent with respect to the entity
What accounting service may an accountant perform w/o having to issue a compilation or review report under the SSARS?
Prepare a working trial balance and a standard monthly journal entry
What 3 audit procedures are generally not performed in a REVIEW engagement?
-Tests of the accounting records
-Test of management's assertions regarding CONTINUED EXISTENCE
-Inquires of the entity's attorney concerning contingent liabilities
Would obtaining a representation letter from the chief executive officer be more likely performed in a review engagement or compilation engagement?
T/F: When an accountant performs more than one level of service, such as a compilation and a review, the accountant generally should issue the report that's appropriate for the lowest level of service rendered.
False, HIGHEST level of service rendered
When a service downgrade from a review to a compilation occurs, what may the accountant do:
-Issue compilation report and add a paragraph
-Reissue prior period review combined or presented separately
What should prior accountants do when asked to reissue their prior report/
Read the new financial statements and obtain a representation letter from the new accountatn
When a predecessor's report is not reissued, what may the current accountant do?
Make a reference to the report
Perform the level of service themselves
To update an accountant's knowledge during planning, what should an accountant perform?
-Read the documentation of prior audits and reviews, to identify matters that may affect the current period's interim financial information
-Read the most recent annual financial info and financial info from recent comparable prior interim periods
-Inquire of management regarding changes in business activities or internal control
What two things are not required regarding inquiries for a public issue?
-Inquiry of client's lawyer
What are the general attestation standards?
Training and proficiency
Performance/due professional care
Professional, adequate knowledge of subject matter
-Your belief that subject matter is capable of evaluation against criteria
What are the attestation fieldwork standards?
-Planning and supervision
-Appropriate, sufficient evidence
What should an accountant do if there is a scope restriction on an examination or review?
What is the mnemonic device for agreed-upon procedures?
Agreement of the parties
Measurability and consistency
Sufficiency of the procedures
Use of the report is RESTRICTED
Responsibility for the subject matter
In a compilation, is there a statement that prospective f/s are in conformity with AICPA guidelines?
What should an accountant's report on a review of pro forma financial information include?
Reference to the financial statements from which the historical information is derived
What statement should an accountant's standard report on a compilation of a projection NOT include?
The hypothetical assumptions used in the projection are reasonable in the circumstances
T/F: A practitioner's report on AGREE-UPON procedures that's in the form of procedures and findings should NOT contain a statement of restrictions on the use of the report.
FALSE, It should be included
What kind of an opinion should a CPA issue if several significant assumptions do not provide a reasonable basis for the entity's financial forecast?
What is a similarity between GAAS and the attestation standards?
Requirement that the CPA be independent in mental attitude
T/F: An accountant should make inquiries about the accounting principles used in the preparation of the prospective financial statements during an engagement to compile prospective financial statements.
What does the phrase 'generally accepted accounting principles' mean?
Encompasses the conventions, rules, and procedures necessary to define accepted accounting practices at a PARTICULAR TIME
Who is the International Auditing and Assurance Standards Board (IAASB)
Standard setting board of the International Federation of Accountants (IFAC)
Who is the International Ethics Standards Board for Accountants (IESBA)
Standard setting board of IFAC and establishes the IFAC Code of Ethics for Accountants
What is professional skepticism?
Maintenance of an objective attitude throughout the audit, including a questioning mind and a critical assessment of audit evidence
T/F: Strong controls imply the audi.tor will require more evidence from substantive procedures
False, LESS evidence
What is a "limited" reporting engagement?
When the auditor may report on one basic f/s and not the others, as long as access is not limited to information underlying the basic f/s
What are the 2 major choices an auditor has when associated with f/s?
To render an opinion on the f/s taken as a whole or to disclaim an opinion
What are the standards of field work?
Planning and supervision
Internal controls, entity, and environment
What is the objective of express Opinion?
To prevent misinterpretation of the degree of responsibility the auditor is assuming when his/her name is associated with financial statements
What provides the most authoritative guidance for the auditor of a nonissuer?
General guidance provided by a Statement on Auditing Standards
What is the third general standard ordinarily interpreted to require?
Critical review of the judgment exercised at every level of supervision
When would the concept of materiality be least important to an auditor?
When considering the effects of a direct financial interest in the client on the CPA's independence
Would assessment of management's honesty and integrity performed during the previous year be necessarily relevant to the current year's audit?
What kind of audit evidence must an auditor obtain to afford a reasonable basis for the opinion?
T/F: The report is generally addressed to management in the auditor's report.
False, it's to the company, its stockholders and/or board of directors
What is the pnemonic device for the auditor's standard report?
Responsibility (ours) and theirs
Audit Accordance with GAAS
Planned and Performed
Assessing the Accounting principles
Made by Management
What are the 2 explicit standards in the opinion paragraph of an auditor's report?
Opinion as to the fair presentation of the f/s and statement regarding conformity with U.S. G.A.A.P
What is the report date that must be included in the report?
Should be dated on or after the date on which appropriate audit evidence, sufficient to support the opinion, has been obtained
What do audits of issuers require in the auditor's report?
A reference to the standards of the PCAOB
What do audits of nonissuers require in the auditor's report?
Conduct an audit in accordance with both GAAS and PCAOB
Which paragraph of an auditor's standard report on f/s should refer to GAAP and GAAS?
GAAS = Scope paragraph
GAAP = Opinion paragraph
What are the 3 major differences between the audit report under US and ISA?
-ISA report includes expanded descriptions of management's and auditor's responsibilities
-ISA should be addressed as required by the circumstances of the engagement and should name the location in the country or jurisdiction where the auditor practices
-reference to both the national auditing standards of the jurisdiction and the IAS if there's no conflict
T/F: A qualified opinion states that the f/s present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP.
False, an UNQUALIFIED opinion does
What may be added to the auditor's standard (unqualified) report?
Explanatory language (modified unqualified opinion
What is the criteria for a disclaimer (GAAS)
Lack of independence
What is the criteria for a qualified and adverse opinion under GAAP?
Unjustified Departure from GAAP
Unreasonable Acctg Estimate
What kind of uncertainties exist for unqualified opinion?
When there is a division of responsibility, how many paragraphs will the auditor mention this division?
All THREE paragraphs
Where would the explanatory paragraph go in a qualified, adverse, or disclaimer of opinion?
Before the opinion paragraph
What will the report express when the principal auditor decides to mention the work done by other auditors?
Division of responsibility
When the principal auditor decides not to make reference, what must they assure themselves of?
When a CPA agrees with a necessary and justified departure from GAAP, what should the explanatory paragraph include?
-Description of the departure
-Its approximate effects
-Reasons why adherence to the generally accepted principle would make the f/s misleading
Who requires that the auditor should consider the going concern assumption throughout the engagement?
What does U.S. auditing standards require in regards to going concern>
Consider whether the results of the audit procedures performed identify conditions and events that indicate that there could be substantial doubt about an entity's ability ton continue as a going concern
What procedures should evidence be examined from with regards to the going concern?
Inquiry of client's legal counsel
Subsequent events review
What conditions/events may be indicative of substantial doubt
Who standardizes that management has a responsibility to assess the entity's ability to continue as a going concern and requires the auditor to evaluate management's assessment?
Under U.S. auditing standards, what terms must be included involving uncertainties?
SUBSTANTIAL DOUBT & GOING CONCERN
T/F: The explanatory paragraph under U.S. auditing standards goes before the opinion paragraph.
FALSE, it goes AFTER
When there is substantial doubt about the about the ability of an entity to continue as a going concern, should you limit to "For 1 year"?
NO!, don't say it!
What does ISA 570 require regarding plans for future action?
Obtain written representations from management
T/F: Under US auditing standards, a sample going concern representation is included in the authoritative literature related to Management Representations.
What kind of items should be emphasized?
A related party transaction
Significant SUBSEQUENT event
COMPONENT of a larger business enterprise
Under ISA 706, what is an "emphasis of a matte" paragraph used for?
To draw attention to a matter presented or disclosed in the f/s
What should the auditor consider when evaluating the acceptability of an accounting change?
The change is to an acceptable principle
-the method of accounting for the change is acceptable
-management is justified in the change
Should the auditor add an explanatory paragraph to the unqualified report if a change in GAAP has occurred between accounting periods and the effect is material?
Would the correction of an error in principle (from cash method to accrual method) affect consistency and require a consistency modification?
What 2 changes/corrections require an explanatory paragraph?
Correction of an error in principle
Changes in depreciation method
What event would an auditor issue a report that omits any reference to consistency?
A change in the useful life used to calculate the provision for depreciation expense
What kind of opinion would be expressed if 1 of the following is NOT met:
-The method of accounting for the change is acceptable
-The change is to an acceptable principle
-management is justified in the change
A qualified or adverse opinion
What kind of opinion should be expressed if it is GAAP and the change is acceptable/justified/
Modified Unqualified Opinion
What kind of opinion is expressed if it is NOT GAAP and it is unacceptable/unjustified?
Adverse or Qualified
Should the explanatory paragraph to describe the non-GAAP accounting change appear BEFORE or AFTER the opinion paragraph?
What should the CPA do if something is deceptive, misleading, or fraudulent and it's not fixed?
When there is no statement of cash flows, should the statement of cash flows be mentioned in the intro and scope paragraphs?
As an auditor, are you require to create the statement of cash flows should the company decide not to present one?
What should you do regarding the omission of the statement of cash flows?
Make sure it doesn't make the f/s
What kind of opinion is issued when an uncertainty is properly reported according to GAAP and the auditor has evidence to support such disclosure?
What are examples of conditions that restrict scope?
Time constraints and inability to obtain sufficient audit evidence
T/F: An auditor may issue an unqualified opinion if the auditor was able to become satisfied by applying alternative procedures.
Where should the nature of the SCOPE LIMITATION be described in an explanatory paragraph?
Preceding the opinion paragraph
Where should the nature of the scope limitation should be referred to?
Both the scope and opinion paragraphs of the auditor's report
What modification is included in the intro paragraph for a disclaimer of opinion?
Use of the words - 'were engaged to audit' instead of audited
-and deletion of the reference to the auditor's responsibility
What are examples of mitigating factors?
-increase ownership equity
-to borrow money
-to restructure debt
-to sell assets
-to reduce/delay expenditures
When the auditor lacks independence with respect to the client, would a disclaimer or qualified opinion be issued?
When the current year f/s are being audited and prior year's were not audited, a scope limitation is faced, what may be required?
Should an update be made in the current year's report if evidence affects the prior statements and opinion that was expressed?
When NOW in conformity with GAAP, what must be disclosed to update/changed opinion?
Changes that have occurred
Statement that the 'opinion..is different'
When the report of a predecessor auditor is presented, who should make the following:
-Read the statements for the current period
-Compare the statements with the current period statements
-Obtain a letter of representation from the successor auditor
-Obtain a letter of representation from management
What should a prior cpa do when report of a predecessor auditor is presented?
-Read the statements for the current period
-Compare the statements with the current period statements
-Obtain a letter of representation from the successor auditor
-Obtain a letter of representation from management
Who should make indications in the introductory paragraph when the report of a predecessor auditor is NOT presented?
Where should the current cpa make indications when the report of a predecessor auditor is not presented?
What should the current cpa indicate when the report of a predecessor auditor is not presented?
-Statements were examined by other auditors in prior periods
-Date of predecessor auditor's report
-Type of opinion expressed
-Substantive Reasons for other than an unqualified report
When the report of a predecessor auditor is presented and unrevised, what is the date of report?
Original report date
When the report of a predecessor auditor is presented and revised, what is the date of report?
During what period does an auditor have active responsibility to investigate certain subsequent events?
What kind of responsibility does an auditor have to make any inquiries or to perform further audit procedures to discover subsequent events AFTER the original date of the auditor's report?
NO ACTIVE responsibility
Why might an auditor dual date the report?
To extend the responsibility only for the particular subsequent event
What actions should the auditor make when information is discovered that affects the report after it is issued"
-Advice client to issue revised f/s
-Advise client to make necessary disclosures and revisions to any imminent f/s
-If the effect of f/s can't be determined on a timely basis, notify that f/s shouldn't be relied upon
What should the auditor do if the client refuses to follow procedures after info is discovered after the report has been issued/
Notify each member of the board of such refusal and that steps will be taken
What steps should an auditor make to prevent further reliance/
Would changes in long-term debt occurring after year end be investigated by an auditor in regards to subsequent events?
T/F: If the results of the other procedures that were applied to tend to compensate for the procedure omitted, the auditor would need to apply the omitted procedure.
FALSE, No need to apply
What should the auditor do when subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report?
Determine whether there are persons relying or likely to reply on the f/s who would attach importance to the information
In the event of omitted audit procedures, what should the auditor first do?
Attempt to perform alternative procedures in order to ascertain whether the original opinion can be relied upon
If f/s are adjusted w/o disclosure of the event in the footnotes, the report ordinarily should be dated...S
when sufficient audit evidence was obtained
Should auditors examine the latest available interim f/s and compare them with the f/s under audit in obtaining evidence about subsequent events?
When management refuses to revise bother information in documents containing audited f/s, what should the auditor do?
-Communicate matter with those charged w/ governance and
-Revise audit report to include a description of the material inconsistency
-Withhold the use of the report
-Withdraw from the engagement
Should the auditor notify those charged with governance when the auditor concludes that mgmt there is a material misstatement of fact that refuses to correct?
In reporting on supplementary information in relation to the f/s as a whole, what are the 2 objectives of an auditor?
-Evaluate the presentation of the supplementary info in relation to the f/s as a whole
-Report on whether the supplementary info is fairly stated, in all material respects
T/F: The auditor must obtain an agreement of management that it acknowledges and understands its responsibilities in regards to supplementary info.
What statement should the CPA include in the report when asked to prepare a report on the application of accounting principles to a specific transaction
Responsibility for the proper accounting treatment rests with the preparers of the f/s
T/F: A statement that any difference in the facts, circumstances, or assumptions presented may change the report should not be included in the CPA's report when asked to prepare a written report on the application of accounting principles to a specific transaction.
False, it IS included
What should the reporting CPA do when rendering an opinion on the application of accounting principles to a specific transaction?
Consult with the continuing CPA to obtain information relevant to the transaction
When f/s are prepared in conformity with the acct principles generally accepted in the parent's company and are for use only in the country, how should the auditor report the statements?
-US style report modified to report on the accounting principles of the parent's company
-The report form of the parent's company
What is the requirement for the auditor's report on supplementary information?
There is NO requirement
What responsibility does an auditor have when submitting a document containing audited f/s to a client or others?
To report on all the information included in the document
Should an auditor's report on the selected information included in a client-prepared document containing audited f/s be limited to data derived from audited f/s?
T/F: The measure of materiality would be the same as that used in forming an opinion on the f/s taken as a whole.
What is the auditor's responsibility for supplementary information which is outside the basic f/s but required by the FASB?
APPLY CERTAIN LIMITED PROCEDURES to the RSI and add an explanatory paragraph to the f/s audit report
T/F: The auditor has a responsibility to report on all the info included in the document when they submit a document containing audited f/s to the client or others
What opinion should the auditor issue if management declines to present information required by the GASB?
Unqualified opinion with an additional explanatory paragraph!
What is the auditor's objective of auditing procedures to segment information to provide the auditor with a reasonable basis?
The info is presented in conformity with the GAAP rules on segment information
When information accompanies audited f/s in a client-prepared document and is materially inconsistent w/ the f/s, what should the auditor request?
Revision of the letter of transmittal
What responsibilities should members carry out as professionals?
Sensitive professional and moral judgments in all their activities
What is required by members regarding scope and nature of services?
-have adequate INTERNAL QUALITY CONTROL measures
-determine whether CONFLICTS OF INTEREST arise
-assess whether the firm's activities are consistent w/ professionalism
T/F: Independence is required for nonattest and compilation services (tax/consulting services)
FALSE, it is NOT required
T/F: Independence is impaired by being a member of or an honorary trustee.
False, it is NOT IMPAIRED
Under Rule 201 -General Standards, what does professional competence mean?
Knowledge of technical matter OR ability to obtain that knowledge
Should all relevant data be obtained to afford a reasonable basis for conclusions?Wh
NO, only sufficient!
Who measures the quality of performance under Rule 202 - Compliance w/ standards?
Government accounting standards board
Management consulting services executive committee
Accounting and Review services committee
Auditing Standards Board and PCAOB
Tax executive committee
What are the exceptions to Rule 301 Confidential client information?
-Subpoena or summons
-Quality review aka peer review
-Inquiry either made by the ethics division or the trial board of the Institute
-your defense team (when client is suing you)
What is a recurring discreditable act to the profession?
Failure to return records to a client after the client makes demand
Advertising and other forms of solicitation are permitted unless they are..
false, misleading, or deceptive
When is commission not allowed?
-examination of prospective financial info
Who permits an auditor to provide internal audit services in which independence is not necessarily impaired?
IFAC Code of Ethics for Professional Accountants
What should an auditor do to exercise due professional care?
Critically review the judgment exercised by those assisting in the audit
T/F: The accountant must be independent to issue a standard report on an examination of a financial forecast.