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AUDIT- big picture

Terms in this set (85)

covered or not covered

individual on the attest engagement team
covered
covered or not covered

a staff member in the same office as the engagement team
not covered
covered or not covered

any partner of the accounting firm
not covered
covered or not covered

an individual who can influence the engagement
covered
covered or not covered

a partner or manager who provides more than 10 hours of nonattest services to the attest client in any fiscal year
covered
covered or not covered

a partner in the same office where the lead engagement partner primarily practices
covered
covered or not covered

the accounting firm itself
covered
covered or not covered

a staff member who provides nonattest services to the client
not covered
who are the covered members
an individual on an attest engagement team,

an individual in a position to influence an engagement team,

a partner or manager who provides 10 or more hours of nonattest services to an attest client per year,

a partner in the office in which the lead attest engagement partner practices in connection with an attest engagement,

and the audit firm.
what is required by the audit firms for the PCAOB
registration with PCAOB
disclosure of audit fees
rotation of lead audit partner
disclosure of fees for tax services
communication of accounting policies to audit committees
what are functions provided by the PCAOB
inspection of public accounting firms
establishment or adoption of ethics standards
Performances prohibited by the PCAOB
provision of internal auditing services
what is auditors responsibility regarding financial statements
the responsibility is confined to the expression of the auditor's opinion
who establishes the generally accepted auditing standards
Auditing Standards Board and PCAOB
presumptively mandatory requirements means what
should
why do independent auditors report on financial statements
the company preparing the statements and the person using the statements may have different interests
A financial statement audit is designed to
Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.
Independent auditing can best be described as
A discipline that enhances the degree of confidence that users can place in financial statements.
The primary reason for an audit by an independent, external audit firm is to
Provide increased assurance to users as to the fairness of the financial statements.
Users of an issuer's financial statements demand independent audits because
Management may not be objective in reporting.
Unconditional/Presumptively Mandatory/Requirement to consider

The auditor should document the evidence obtained in the audit.
Presumptively mandatory requirement
Unconditional/Presumptively Mandatory/Requirement to consider

The auditor must be independent.
Unconditional requirement
Unconditional/Presumptively Mandatory/Requirement to consider

The auditor should test management's assertions relating to the financial statements.
Presumptively mandatory requirement
Unconditional/Presumptively Mandatory/Requirement to consider

The auditor may make suggestions about the form or content of the financial statements.
Requirement to consider
Unconditional/Presumptively Mandatory/Requirement to consider

In some cases, the auditor could apply one audit procedure to test more than one assertion.
Requirement to consider
Unconditional/Presumptively Mandatory/Requirement to consider

The auditor must follow GAAS in an audit of a nonissuer.
Unconditional requirement
Unconditional/Presumptively Mandatory/Requirement to consider

The auditor should obtain sufficient appropriate evidence to support the opinion.
Presumptively mandatory requirement
attestation/assurance and advisory/consulting

Typically involves only two parties.
Consulting services
attestation/assurance and advisory/consulting

Results in a written conclusion about subject matter or a written assertion of another party.
attestation services
attestation/assurance and advisory/consulting

The CPA is independent and the level of assurance can be explicit or implicit.
assurance and advisory
attestation/assurance and advisory/consulting

Obtained by the client for the purposes of making better decisions.
Assurance and advisory services
attestation/assurance and advisory/consulting

The CPA makes recommendations based on management's objectives.
Consulting services
The subject of the AICPA's clarity project for audits
GAAS - Generally Accepted Auditing Standards
Issued by the AICPA to set guidelines to offer limited assurance on historical financial statements
SSARS - Statements on Standards for Accounting and review services
The accountant makes recommendations based on the objectives of the engagement
SSCS- Statement on Standards for Consulting Services
Defines audit requirements for issuers
SOX
Describes six elements the CPA firms must consider
SQCSs - Statements on Quality Control Standards
Requires the accountant to have reason to believe that the assertion is measurable in terms that are suitable to the users of the assertion
SSAEs - Statements on Standards for Attestation Engagements
Defines the process of undertaking an audit engagement for nonissuers
GAAS- Generally Accepted Auditing Standards
Mandates that a second partner review and approve audit reports
SOX - Sarbanes-Oxley Act of 2002
Issued by the AICPA to set guidelines for performing a compilation
SSARS - Statements on Standards for Accounting and review services
Requires accounting firms to appropriately consider the risk of providing services
SQCSs - Statements on Quality Control Standards
According to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards, "presumptively mandatory requirements" in the auditing standards use which word?
A. Must.
B. Can.
C. Should.
D. May.
C. Should.
unconditionally required
must
An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to
A. Express an opinion as to the fairness of Camden's financial statements.
B. Express an opinion as to the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.
C. Certify the correctness of Camden's financial statements.
D. Make a 100% examination of Camden's records.
A. Express an opinion as to the fairness of Camden's financial statements.
An issuer client who disagrees with the independent auditor on a significant matter affecting its financial statements has several courses of action. Which of the following courses of action would be inappropriate?
A. Appeal to the FASB to review the significant matter.
B. Modify the financial statements by expressing in the notes its viewpoint with regard to the significant matter.
C. Ask the auditor to refer in the auditor's report to a client note in the financial statements that discusses the client point of view with regard to the significant matter.
D. Engage another independent auditor.
A. Appeal to the FASB to review the significant matter.
Audit committees have been identified as a major factor in promoting independence in both internal and external auditors. Which of the following is the most important limitation on the effectiveness of audit committees?

A. Audit committees are composed of independent directors. However, those directors may have close personal and professional friendships with management.

B. Audit committee members are compensated by the organization and thus favor a shareholder's view.

C. Audit committees devote most of their efforts to external audit concerns and do not pay much attention to internal auditing and the overall control environment.

D. Audit committee members do not normally have degrees in the accounting or auditing fields.
A. Audit committees are composed of independent directors. However, those directors may have close personal and professional friendships with management.
Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements?

A. Maintaining a suspicious attitude, presuming that the client is dishonest until evidence proves otherwise.

B. Performing professional responsibilities with the highest sense of integrity.

C. Performing audit procedures efficiently and within expected time budgets.

D. Maintaining confidentiality of client information by not including it in the audit documentation.
B. Performing professional responsibilities with the highest sense of integrity.
Audit standards require that the engagement partner
A. Examine all available corroborating evidence.
B. Be responsible for the assignment of tasks to, and supervision of, assistants.
C. Review evidence and audit documentation once the report has been issued.
D. Design the audit to detect all instances of noncompliance with laws and regulations having direct effects on the determination of material financial statement amounts and disclosures.
B. Be responsible for the assignment of tasks to, and supervision of, assistants.
A violation of the profession's ethical standards most likely occurs when a CPA who
A. Has been admitted to the Bar represents on letterhead to be an attorney and a CPA.

B. Has not prepared a newsletter permits the publisher to attribute it to the CPA.

C. Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications.

D. Maintains a separate, distinct practice but forms an association with other CPAs for joint advertising. The group practices public accounting under the association's name.
D. Maintains a separate, distinct practice but forms an association with other CPAs for joint advertising. The group practices public accounting under the association's name.
CPAs within each state have formed state societies or associations of CPAs. Which of the following statements about these associations is false?
A. Most associations have their own codes of professional ethics that closely parallel the AICPA Code of Professional Conduct.
B. The state societies are independent of the AICPA.
C. All CPAs in the state must be members of the state association or society.
D. Members of state associations may also be members of the AICPA.
C. All CPAs in the state must be members of the state association or society.
In which of the following situations would a covered member's independence be considered to be impaired?
I. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.
II. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust.
III. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a capital lease, and the rental income is material to the CPA.
A. I and II.
B. II and III.
C. I and III.
D. I, II, and III.
B. II and III.
The AICPA Code of Professional Conduct
A. Prohibits encroachment on the practice of another CPA.
B. Prohibits offers of employment to employees of another CPA without notice.
C. Expects the CPA to honor the public trust.
D. Encourages but does not require CPAs to refrain from advertising or engaging in other forms of solicitation.
C. Expects the CPA to honor the public trust.
Thorp, CPA, was engaged to audit Ivor Co.'s financial statements. During the audit, Thorp discovered that Ivor's inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial in state court. Ivor claimed accountant-client privilege to prevent Thorp from testifying. Which of the following statements is most likely true regarding Ivor's claim?
A. Ivor can claim an accountant-client privilege only in jurisdictions that have enacted a statute creating such a privilege.
B. Ivor could claim an accountant-client privilege if a criminal tax case were brought in federal court.
C. The accountant-client privilege can be claimed only in civil suits.
D. The accountant-client privilege can be claimed only to limit testimony to audit subject matter.
D. The accountant-client privilege can be claimed only to limit testimony to audit subject matter.
Which of the following acts by a CPA who is not in public practice is most likely to be a violation of the ethical standards of the profession?
A. Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA's employer.
B. Distributing business cards indicating the CPA designation and the CPA's title and employer.
C. Corresponding on the CPA's employer's letterhead, which contains the CPA designation and the CPA's employment status.
D. Compiling the CPA's employer's financial statements and referring to the CPA's lack of independence.
A. Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA's employer.
Which of the following violates the AICPA's Code of Professional Conduct?
A. A member not in public practice is a bank controller who is designated as a CPA on bank stationery and in bank advertisements listing officers of the bank.
B. A member contracts with a service entity to maintain a client's computer hardware and charges the client a higher servicing fee than that charged to the member by the service provider.
C. A partner in a CPA firm is elected to public office. After her withdrawal from the firm, the remaining partners continue to use a firm name that includes her name.
D. A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually.
D. A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually.
complilation
consists of writing the financial statements from a client's books and records.
attestation standards
standards are a general set of standards to guide engagements in areas other than audits of financial statements.
Audits of historical financial statements are guided by a broad set of principles referred to as
GAAS
persuassion
refers to the nature of information provided by evidence and the management assertions related to that evidence.
audit plan
is a list of auditing procedures that will be performed during the engagement to gather sufficient appropriate evidence.
independence in fact
a state of mind that is characterized by appropriate questioning and a critical assessment of audit evidence.
Independence in appearance
relates to financial statement users' perceptions of auditors' independence.
due care
reflects a level of performance that would be exercised by reasonable auditors in similar circumstances.
corroborating evidence
Written corroboration of information received verbally from management is referred to as
T or F

In the United States, the auditors' report must state whether the financial statements are presented in accordance with GAAP
True
audit opinion
An overall opinion that the financial statements present the financial condition, results of operations, and cash flows according to generally accepted accounting principles i
when should auditors be engaged
before the clients fiscal YE or date of financial statements
risk of material misstatements
is a combination of the probability that a material misstatement will occur and not be detected by the entity's internal controls.
what created the PCAOB
SOX
what is the need for internal controls?
To ensure that their personnel comply with professional standards and issue reports that are appropriate in the circumstances
what are the 4 basic requirements of becoming a CPA
Education, the CPA Examination, experience, and a state certificate.
operational auditing
the study of business operations for the purpose of making recommendations to managers on how to improve profitability.
GAO
the accounting, auditing, and investigating agency of the U.S. Congress.
cutoff
refers to recognizing assets and liabilities as of proper date and accounting for revenue, expense, and other transactions in the proper period.
information risk
The risk that the information disseminated by a company will be materially false or misleading
general standards
1.Undertake only those services that the member can REASONABLY expect to complete with professional CARE.
2. Exercise due professional CARE when performing professional services.
3.AdequatelyPERFOMRANCEand supervise performance of professional services. 4.Obtain sufficient relevant data to provide a reasonable basis for conclusions or recommendations in relation to any professional service.
how long do working papers need to be retained
public 7
private 5
what are the functions of working papers
Provide a means of assigning and coordinating SUBORDINATE/AUDIT work
•Aid in PERFORMING and reviewing the audit work
•Provide support for the auditors' CONCLUSIONS
•Document the auditors' COMPLIANCE with auditing standards
•Aid in planning and conducting future audits
Audit documentation should be SUFFICIENT TO enable members of the audit team AND future AUDIT TEAMS of the workpapers to:
o understand who performed and reviewed the work
•To understand what work was performed
•To show that the accounting agree or reconcile to the ACCOUNTING RECORDS
Purpose of an Audit and Premise Upon Which an Audit is Conducted
1.The purpose of an audits to enhance the degree of confidence that users can place in the financial statement. This purpose is achieved when an auditor expresses an opinion on the financial statements.

2.An audit is based on the premise that management has responsibility to prepare the financial statements, maintain internal control over financial reporting, and provide the auditor with relevant information and access to personnel
responsibilities of an auditor
Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit.
performance audit standards
4.The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

5.Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality levels, identify risks of material misstatement, and design and implement appropriate audit responses to the assessed risks.

6.An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement.
reporting audit standard
The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed
what do private companies adhere to
AICPA-ASB
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