Aud Flash Cards

Q001.
- Assurance provided on a compilation

A001.
- disclaimer of assurance
Q002.
- Assurance provided on a review
A002.
- Limited Assurance
Q003.
- Assurance provided on an examination/audit
A003.
- Positive Assurance or Opinion Expressed
Q004.
- Assurance provided on a agreed-upon procedures
engagement
A004.
- Results of procedures but no assurance
Q005.
- SSAE
A005.
- Statements on Standards for Attestation Engagements -
codified in section AT of the professional standards within
framework of the 11 attestation standards
Q006.
- SAS
- SSARS
- SSCS
A006.
- Statements on Auditing Standards - issued by ASB
- Statements on Standards for Accounting and Review
Services
- Statements on Standards for Consulting Services
Q007.
- PCAOB
A007.
- Public Company Accounting Oversight Board established
by Sarbanes-Oxley Act of 2002
- Currently issued 7 auditing standards for audits of
issuers.
Q008.
- Practitioner
A008.
- A certified public accountant in the practice of public
accounting
Q009.
- Attest Engagement
A009.
- An engagement where a practitioner is engaged to
- issue or does issue an examination, a review, or an
agreed-upon procedures
- report on subject matter, or an assertion about the
subject matter that is the responsibility of another party.
Q010.
- Professional services provided by practitioners that are
not covered by SSAEs include
A010.
- Services performed in accordance SASs
- Services performed in accordance with SSARSs
- Services performed in accordance with SSCS such as
engagements in which the practitioner's role is solely to
assist the client or engagements in which a practitioner is
engaged to testify as an expert witness in accounting,
auditing, taxation, or other matters, given certain stipulated
facts
Q011.
- Attestation Standards
A011.
- AT 50
- 5 General Standards
- 2 Standards of Field Work
- 4 Standards of Reporting
Q012.
- AT 50
- TSCIP
A012.
- 1. Training and proficiency
- 2. knowledge of the Subject matter
- 3. suitable and available Criteria
- 4. Independence in mental attitude
- 5. due Professional care
- Trish Said Chris Is Profane
Q013.
- AT 50
- PECCRR
A013.
- Field Work
- 1. Planning and supervision
- 2. sufficient Evidence
- Reporting
- 1. identify the subject matter and state the Character of
the engagement
- 2. Conclusion about the subject matter
- 3. significant Reservations
- 4. Restrictions on use
- Please Excuse Cousin Chris's Rude Remarks
Q014.
- AT 50 Suitable Criteria
A014.
- Objectivity
- measurability
- completeness
- relevance.
Q015.
- Criteria available to users
A015.
- Publicly, included in presentation of subject matter,
included in Pract. report, well understood by most users,
available only to specified parties.
Q016.
- The practitioner must state in the report that the report is
intended
- solely for the information and use of the specified parties
under the
- following circumstances
A016.
- When the criteria are determined by the practitioner to be
appropriate only for a limited number of parties who either
participated in their establishment or can be presumed to
have an adequate understanding of the criteria.
- When the criteria are available only to specified parties.
- When reporting on subject matter and a written assertion
has not been provided by the responsible party.
- When the report is on an attestation engagement to apply
agreedupon
- procedures to the subject matter.
Q017.
- Audit objective of independent, external audit in
accordance with GAAS
A017.
- Express an opinion whether the financial statements
present fairly, in all material respects, the financial
position, the results of its operations and its cash flows in
accordance GAAP
Q018.
- Assertions about classes of transactions and events
A018.
- Occurence
- Completeness
- Accuracy
- Cutoff
- Classification
Q019.
- Occurence
A019.
- Recorded transactions and events occured.
Q020.
- Completeness
A020.
- All transactions and events that should have been
recorded, were recorded.
Q021.
- Accuracy
A021.
- Amounts and other data were recorded appropriately.
Q022.
- Cutoff
A022.
- Transactions and events were recorded in the proper
period.
Q023.
- Classification
A023.
- Transactions and events were recorded in the proper
accounts.
Q024.
- Assertions about account balances at period-end
A024.
- Existence
- Rights and Obligations
- Completeness
- Valuation and Allocation
Q025.
- Existence
A025.
- Assets, liabilities, and equity interests exist.
Q026.
A026.
- The entity holds or controls the rights to assets, and
liabilities are its obligations.
Q027.
- Completeness
A027.
- All assets, liabilities, and equity interests that should
have been recorded, were recorded.
Q028.
A028.
- Assets, liabilities, and equity interests are included at
appropriate amounts and adjustments are appropriately
recorded.
Q029.
- Assertions about presentation and disclosure
A029.
- Occurence and Rights and Obligations
- Completeness
- Classification and Understandibility
- Accuracy and Valuation
Q030.
- Occurrence and Rights and Obligations
A030.
- Disclosed transactions and events have occurred and
pertain to the entity
Q031.
- Completeness
A031.
- All disclosures that should have been included were
included.
Q032.
- Classification and Understandability
A032.
- Financial information is appropriately presented and
described, and disclosures are clearly expressed.
Q033.
- Accuracy and Valuation
A033.
- Information is disclosed fairly and at appropriate
amounts.
Q034.
- CAVE CROC
- Financial Statement Assertions
A034.
- Completeness
- Accuracy
- Existence
- Cutoff
- Occurence
- Classification and Understandibility
Q035.
- ADEPT
- Categories of Assertions
A035.
- Account Balances
- Disclosures
- Events
- Presentation
- Transactions
Q036.
- Auditing Standards
- TIP
A036.
- 1. Training and proficiency to
- perform the audit.
- 3. due Professional care
- Tammy Is Pretty
Q037.
- GAAS
- PIE
A037.
- 1. adequately Plan the work and supervise assistants.
- 2. sufficient understanding of the entity and
- Internal control.
- 3. sufficient appropriate audit Evidence.
- Peter Is Evil
Q038.
- GAAS
- GCDO
A038.
- 1. conformity with GAAP
- 2. principles Consistently observed
- 3. informative Disclosures reasonably adequate
- 4. expression of an Opinion
- Great Couple Doing Okay
Q039.
- Hierarchy of Pronouncements
- Interpretive Publications
- SASs
- 10 Auditing Standards
- Other Auditing Publications
- AICPA's Code of Professional Conduct
A039.
- 10 Auditing Standards
- AICPA's Code of Professional Conduct
- SASs
- Interpretive Publications
- Other Auditing Publications
Q040.
- Compilations and Reviews
A040.
- AR 100
- Compilation is a presentation in statement form of
information that is the representation of management.
- No independence necessary.
- Review - accountant makes inquiries, applies analytical
procedures, and obtains management representations.
Express limited assurance. Must be independent.
Q041.
- Agreed-Upon Procedures
A041.
- AT 201
- Practitioner is engaged to assist specified parties to
evaluate the subject matter or an assertion.
- Report is restricted to the specified parties.
- Provides neither positive nor limited assurance.
- Must be independent.
Q042.
- AT 301
A042.
- Prospective Financial Statements
- Must be independent
Q043.
- Financial Forecast
- AT 301
A043.
- PFSs that present, to the best of the responsible parties
knowledge and belief, an entity's expected financial
position, results of operations, and cash flows.
Q044.
- Financial Projection
- AT 301
A044.
- Based on the responsible party's assumptions reflecting
conditions it expects would exist given one or more
hypothetical assumptions. " what would happen if..."
Q045.
- Pro Forma Financial Information
A045.
- AT 401
- Shows " what the significant effects on historical financial
information would have been had a consummated or
proposed transaction occurred at an earlier date."
- Examples - business combination, disposal of segment,
change in form or status of entity, change in capitalization.
Q046.
- Examination of Internal Control over Financial Reporting
A046.
- AT 501
- Examination of a nonissuer's internal control over
financial reporting and expression of an opinion in
coordination with the financial statement audit.
- Must be independent.
Q047.
- Compliance Attestation
A047.
- AT 601
- Independent practitioner may perform an examination
leading to an opinion on whether the entity is in
compliance with specified requirements (i.e. covenants of a
contract).
Q048.
- MD&A
A048.
- AT 701
- MD&A constitutes a written assertion that may be
examined or reviewed by the practitioner. The practitioner
must be independent.
Q049.
- Assurance Services
A049.
- Independent professional services that improve the
quality of information or its context for decision makers.
Information can be financial or non financial, historical or
prospective, consist of data or relate to systems, be
internal or external to the user.
- Can capture information, imporve information reliability,
and improve decision making.
Q050.
- 6 Assurance Services Identified by the AICPA
A050.
- 1. CPA risk advisory
- 2. ElderCare Services (PrimePlus)
- 3. CPA performance review
- 4. Healthcare effectiveness
- 5. SysTrust
- 6. WebTrust
Q051.
- CPA risk advisory
A051.
- Managers/investors are concerned about whether entities
have identified the full scope of various business risks and
taken precautions to mitigate them.
Q052.
- ElderCare Services (PrimePlus)
A052.
- Assess whether specified goals regarding care for the
elderly are being met by various care givers. Inc -
accumulation of information, financial management, and
assessment of nursing care.
Q053.
- CPA performance review
A053.
- Evaluates whether an entity's performance measurement
system contains relevant and reliable measures for
assessing - the degree to which the entity's objectives are
achieved or how its performance compares with that of its
competitors.
Q054.
- Healthcare effectiveness
A054.
- Provides assurance about the effectiveness of healthcare
services provided by HMOs, hospitals, doctors, and other
providers.
Q055.
- SysTrust
A055.
- Assesses whether an entitys internal information
systems provide reliable information for operating and
financial decisions.
- Use suitable criteria to determine whether managements
assertions about the following principles are fairly stated:
Online privacy, security, processing integrity, availability,
and confidentiality.
Q056.
- WebTrust
A056.
- This service provides internet users, including
businesses and internet service providers, assurance
about electronic commerce activities related to online
privacy, security, processing integrity, availability, and
confidentiality.
Q057.
- SQCS
A057.
- Statements on Quality Control Standards
- Require that a CPA firm have a system of quality control
- Applies to all audit, attestation, compilation and review,
and other services with standards established by the ARB
or the ARSC. Does not explicitly apply to consulting or tax
services.
Q058.
- The 6 elements of a system of quality control
A058.
- 1. Leadership responsibilities for quality within the firm.
- 2. Relevant ethical requirements
- 3. Acceptance and continuance of client relationships and
specific engagements.
- 4. Human resources
- 5. Engagement performance
- 6. Monitoring
Q059.
- Peer Review
A059.
- PR 100
- Does not substitute for monitoring but is a necessary part
of the practice-monitoring requirement for AICPA
membership.
- Covered portions of practice include engagements under
SASs, SSARSs, SSAEs, and Government Accounting
Standards.
Q060.
- System Review
A060.
- On-site review required for a firm that performs the
highest level of services.
Q061.
- Engagement review
A061.
- For a firm not required to have a system review, but not
qualifying for a report review.
Q062.
- Report review
A062.
- For a firm that performs only compilations omitting
substantially all disclosures.
Q063.
- Lead auditor and reviewing partner must be rotated off
audit every
A063.
- 5 years
Q064.
- Code of Professional Conduct applies to
A064.
- AICPA members
Q065.
- Code of Professional Conduct Principles
A065.
- 1. Responsibilities
- 2. The public interest
- 3. Integrity
- 4. Objectivity and independence
- 5. Due care
- 6. Scope and nature of services
Q066.
- Rule 101
A066.
- Independence
- Members in public practice
Q067.
- Rule 102
A067.
- Integrity and Objectivity
- All members
Q068.
- Rule 201
A068.
- General Standards
- All members
Q069.
- Rule 202
A069.
- Compliance with Standards
- All members
Q070.
- Rule 203
A070.
- Accounting Principles
- All members
Q071.
- Rule 301
A071.
- Confidential Client Information
Q072.
- Rule 302
A072.
- Contingent Fees
Q073.
- Rule 501
A073.
- Acts Discreditable
- all members
Q074.
- Rule 502
A074.
- Advertising and other forms of solicitation
Q075.
- Rule 503
A075.
- Commissions and Referral Fees
- Commissions -Members in public practice
- Referral fees - All members
Q076.
- Rule 505
A076.
- Form of Organization and Name
- All members
Q077.
- Two types of independence
A077.
- 1. Intellectually honest
- 2. Free of obligation to or interest in the client, owners, or
management
Q078.
- Covered member includes
A078.
- 1. individual on engagement team or who can influence
engagement
- 2. partner or manager that provides nonattest services to
the client
- 3. partner in the office where the lead engagement partner
primarily practices in relation to the engagement
- 4. The accounting firm
Q079.
- Independence is impaired if a covered member
A079.
- 1. Has a direct financial interest in a client
- 2. has a loan to or from a client except certain loans from
a financial institution
- 3. a material indirect financial interest in a client
- 4. is a trustee of a trust or executor of an estate with
direct or material indirect interest in a client
- 5. has a material joint, closely held investment with a
client
- 6. owns more than 5% of a client
- 7. formerly employed by or associated with the client as
an officer, director, manager, employee
Q080.
- Independence is impaired if a firm or partner or
professional employee
A080.
- is associated with the client as an officer, director,
manager, employee, or underwriter.
Q081.
- Covered members immediate family (spouse and
dependents)
A081.
- are subject to rule 101
Q082.
- Independence is impaired if an individual participating in
the engagement (or able to influence or a partner in the
office with the lead partner)
A082.
- has a close relative (sibling, parent, non-dependent child)
that holds a key position with the client
Q083.
- Rule 102 - Integrity and Objectivity
A083.
- a member shall maintain objectivity and integrity, shall be
- free of conflicts of interest, and shall not knowingly
misrepresent facts or subordinate
- his or her judgment to others.
Q084.
- Rule 102 - Integrity and Objectivity
- Knowing misrepresentation of facts
A084.
- 1. Makes, or permits or directs another to make, materially
false and misleading entries in an entity's financial
statements or records
- 2. Fails to correct an entity's financial statements or
records that are materially false and misleading when he or
she has the authority to
- record an entry
- 3. Signs, or permits or directs another to sign, a
document containing materially false and misleading
information.
Q085.
- Rule 201
- General Standards
- (4 standards)
A085.
- 1. Undertake only those professional services that the
member can reasonably expect to be completed with
professional competence.
- 2. Exercise due professional care in the performance of
professional services.
- 3. Adequately plan and supervise the performance of
professional services.
- 4. Obtain sufficient relevant data to afford a reasonable
basis for conclusions or recommendations in relation to
any professional services.
Q086.
- General standards helpful mnemonics
- 1. PC and Double PC
- 2. PS and obtain SuRe Data
A086.
- 1. Professional Competence and Due Professional Care
- 2. Plan and Supervise and obtain Sufficient Relevant Data
Q087.
- Proficiency. An auditor must have
A087.
- 1. Adequate technical training
- 2. Education
- 3. Experience
- 4. Proper supervision
- 5. Objectivity
- 6. Seasoned and independent judgment
Q088.
- Due Professional Care
A088.
- 1. Use due care to plan the audit
- 2. Have degree of skill commonly possessed by other
auditors
- 3. Exercise professional skepticism
- 4.Obtain reasonable assurance
Q089.
- General standards also apply to
A089.
- consulting services
Q090.
- Compliance with standards - rule 202
A090.
- A member who performs professional services shall
comply with standards issued by designated bodies
(PCAOB and AICPA)
Q091.
- Accounting principles - Rule 203
- Any material departure from an accounting principle
issued by an AICPA-designated standard setter prevents a
member from
A091.
- 1. Expressing an opinion that the financial statements are
in conformity with GAAP
- 2. Stating that he is not aware of any material
modifications that should be made
- Applies to all members
Q092.
- If financial statements would have been misleading
without the departure from GAAP, the member must
describe
A092.
- 1. The departure
- 2. Its approximate effects
- 3. The reason compliance with the principle would be
misleading
Q093.
- Confidential Client Information - Rule 301
- A member in public practice shall not
A093.
- disclose confidential client information without the
client's consent
Q094.
- Confidential Client Information - Rule 301 does not affect
a CPA's obligations to
A094.
- 1. Comply with a valid subpoena or summons or with
applicable laws and regulations
- 2. Discharge his professional obligations
- 3. Cooperate in an official review of his practice
- 4. Initiate a complaint with or respond to any inquiry made
by an appropriate investigative or disciplinary body
Q095.
- The rule against disclosure of confidential information
does not prohibit
A095.
- the review of a member's practice as part of a purchase,
sale, or merger of the practice
Q096.
- Contingent Fees - Rule 302
- A contingent fee is established as part of an agreement
under which the amount of the fee is
A096.
- dependent upon the finding or result
Q097.
- Fees are not considered to be contingent if
A097.
- 1. They are fixed by public authorities
- 2. In tax matters, they are based on the results of judicial
proceedings or the findings of governmental agencies
Q098.
- A member in public practice shall not perform for a
contingent fee any professional services for any of the
following
A098.
- 1. An audit or review of a financial statement
- 2. A compilation of a financial statement if the member
might reasonably expect that a third party will use the
statement and the report does not disclose the lack of
independence
- 3. An examination of prospective financial information
Q099.
- A member in public practice shall not prepare for a
contingent fee
A099.
- 1. An original tax return
- 2. An amended tax return
- 3. A claim for a tax refund
Q100.
- Acts Discreditable - Rule 501
- Client-provided records must be returned after a client
request even if
A100.
- 1. Fees have not been paid or
- 2. The state in which the member practices grants a lien
on certain records
Q101.
- Working papers are
A101.
- the members property and need not be made available to
the client unless required by
- 1. Statute
- 2. Regulation
- 3. Contract
Q102.
- Client records prepared by the member include
accounting and other records that the member was
engaged to prepare. They may be withheld if
A102.
- fees are due or the engagement is incomplete
Q103.
- Supporting records contain information produced by the
member that is not in the client's records, without which its
financial information is incomplete.
A103.
- 1. They are not otherwise available to the client
- 2. Supporting records for an issued work product should
be given to the client upon request unless fees are due for
that product
Q104.
- Records must also be given to a client who suffered a
loss because of
A104.
- an act of war or natural disaster
Q105.
- The member may
A105.
- 1. Charge a reasonable fee
- 2. Retain copies
- 3. Provide records in any format or usable form unless the
engagement was to prepare them in the requested format
Q106.
- Compliance with a clients request should be within
A106.
- 45 days
Q107.
- When a court or administrative agency has made a final
determination that a member has violated an anti-
discrimination law, he is
A107.
- deemed to have committed an act discreditable
Q108.
- It is an act discreditable to be responsible for negligently
A108.
- 1. Making materially false and misleading entries in the
financial statements or records
- 2. Failing to correct materially false and misleading
statements
- 3. Signing a document with materially false and
misleading information
Q109.
- It is an act discreditable to fail to comply with laws
regarding
A109.
- 1. Timely filing of personal or firm tax returns
- 2. Timely payment of taxes collected for others is an act
discreditable
Q110.
- Advertising and Other Forms of Solicitation - Rule 502
- A member in public practice shall not seek to obtain
clients by advertising or other forms of solicitation
A110.
- done in a false, misleading, or deceptive manner
Q111.
- Solicitation through
A111.
- coercion, overreaching, or harassing conduct is
prohibited
Q112.
- Members must not do through others
A112.
- what they are prohibited from doing themselves
Q113.
- Commissions and Referral Fees - Rule 503
- Prohibited commissions are those received when a
member in public practice recommends or refers
A113.
- 1. To a client any product or service
- 2. Any product or service to be supplied by a client
Q114.
- Prohibited commissions are those received when a
member in public practice also performs for the client
A114.
- 1. An audit
- 2. A review
- 3. A compilation reasonably expected to be used by a
third party if the member's lack of independence is not
disclosed
- 4. An examination of prospective financial information
Q115.
- A permitted commission must be
A115.
- disclosed to any person or entity to whom the member
recommends or refers a related product or service
Q116.
- Referral fees are not considered commissions and are
permitted if
A116.
- disclosed to the client.
- These include acceptance of a referral fee for
recommending or referring any service of a CPA to anyone
or payment of a referral fee to obtain a client
Q117.
- The first standard of field work states
A117.
- the auditor must adequately plan the work and must
properly supervise any assistants
Q118.
- The auditor should communicate with the
A118.
- predecessor auditor before accepting the engagement.
The auditor is responsible for initiating the communication
Q119.
- Under ISAs, an auditor may obtain sufficient appropriate
evidence about opening balances by reviewing
A119.
- the predecessor's working papers. The auditor should
consider the competence and independence of the
predecessor.
Q120.
- Under the ISAs, if the terms of the engagement change,
for example, from an audit to a review, the auditor and
client may not be able to agree to the change. In these
circumstances,
A120.
- the auditor should withdraw and consider whether to
report to others.
Q121.
- The factors that affect the planning of the audit include
A121.
- 1. The size and complexity of the entity
- 2. The auditor's experience with the entity
- 3. The auditor's understanding of the entity and its
environment, including internal control
Q122.
- An audit plan must be developed and documented for all
audit engagements. It includes
A122.
- the nature, timing and extent of procedures expected to
reduce the audit risk to an acceptably low level.
Q123.
- Risk assessment procedures are performed to obtain an
understanding of the entity and its environment, including
its internal control to identify and assess the RMMs at the
levels of
A123.
- 1. The financial statements as a whole
- 2. Relevant assertions
Q124.
- The RMM is the combined assessment of
A124.
- inherent risk and control risk
Q125.
- The auditor should communicate
A125.
- the planned scope and timing of the audit to those
charged with governance
Q126.
- The risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially
misstated is
A126.
- audit risk
Q127.
- Misstatements can arise in many ways for example
A127.
- 1. Inaccuracies in data processing
- 2. Omissions
- 3. Departures from GAAP
- 4. Unreasonable management judgements about
accounting estimates or principles.
Q128.
- Known misstatements are
A128.
- specifically identified during the audit
Q129.
- Likely misstatements derive from
A129.
- 1. Differences between the auditor's and management's
judgements about accounting estimates
- 2. Extrapolations from audit evidence
Q130.
- Errors are
A130.
- intentional misstatements
Q131.
- Fraud is an
A131.
- intentional act involving deception to obtain an unjust or
illegal advantage
Q132.
- Audit risk and materiality are considered at the
A132.
- overall financial statement level and the individual
balance, transaction class, or disclosure level
- Risk assessment procedures are performed at both levels
Q133.
- Audit risk and materiality have
A133.
- an inverse relationship
- Risk of large misstatement is low
- Risk of small misstatement is high
Q134.
- Decreasing the audit risk judged to be appropriate or the
amount of material misstatement for a balance requires the
auditor to do one of the following
A134.
- 1. Perform more effective procedures
- 2. Perform procedures nearer to year end
- 3. Increase the extent of certain procedures
Q135.
- Audit risk has three components that may be assessed in
quantitative terms or non quantitative terms which are
A135.
- 1. Inherent risk
- 2. Control risk
- 3. Detection risk
Q136.
- Inherent risk is
A136.
- the susceptibility of a relevant assertion to material
misstatement in the absence of related controls
Q137.
- Control risk is
A137.
- the risk that internal control will not prevent or detect on a
timely basis a material misstatement that could occur in a
relevant assertion
Q138.
- Detection risk is
A138.
- the risk that the auditor will not detect a material
misstatement that exists in a relevant assertion.
- Detection risk is inversely related to the RMM.
- Thus, as RMM increases, the acceptable detection risk
decreases
Q139.
- Inherent risk and control risk are
A139.
- independent of the audit and cannot be changed by the
auditor
Q140.
- The audit risk model uses the following terms
A140.
- Audit risk = the risk of material misstatement X detection
risk
Q141.
- Because the auditor determines an acceptable AR and
assesses the components of the RMM the equation can be
solved for DR
A141.
- Detection Risk = Audit Risk / RMM
Q142.
- RMM =
A142.
- Control risk X inherent risk
Q143.
- Detection risk can be divided into Test of details and the
risk for substantive analytical procedures making the audit
risk formula =
A143.
- RMM x AP x TD
Q144.
- Solving RMM x AP x TD for TD
A144.
- TD = AR/ RMM x AP
Q145.
- The second standard of fieldwork states
A145.
- The auditor must obtain a sufficient understanding of the
entity and its environment, including its internal control, to
assess the risk of material misstatement of the financial
statements whether due to error or fraud, and to design the
nature, timing and extent of further audit procedures
Q146.
- The categories of risk assessment procedures performed
to obtain the understanding of the entity are
A146.
- 1. Inquiries of management and others within the entity
- 2. Analytical procedures
- 3. Observation and inspection
Q147.
- Inquiries within the entity may be directed to
A147.
- 1. Those responsible for financial reporting
- 2. Those charged with governance
- 3. Internal auditors
- 4. Legal counsel
- 5. Marketing, sales, and production managers
- 6. Others with different levels of authority who may have
information about RMMs
Q148.
- Observation and inspection provide support for inquiries
and direct evidence about the entity and its environment
such as
A148.
- 1. Observing activities and operations
- 2. Inspecting documents and records
- 3. Reading reports, IA reports, interim statements,
quarterly reports, minutes of meetings
- 4. Tours of facilities
- 5. Tracing financial transactions during a walk through
Q149.
- The auditor develops expectations or predictions of
recorded balances or ratios. Five sources of information
used to develop analytical procedures are
A149.
- 1. Financial information from comparable prior periods
- 2. Anticipated results, such as budgets or forecasts
- 3. Relationships among data, such as balances on the
financial statements
- 4. Comparable information from the client's industry
- 5. Related nonfinancial information
Q150.
- Analytical procedures applied in planning the audit
emphasize
A150.
- 1. Improving the understanding of the business and the
transactions and events since the last audit
- 2. Identifying areas that may represent specific audit risks
Q151.
- Analytical procedures and tests of details may be used as
A151.
- substantive tests of management assertions. For some
assertions, analytical procedures alone may provide the
necessary assurance
Q152.
- The effectiveness and efficiency of analytical procedures
depend on the following factors
A152.
- 1. The nature of the assertion
- 2. Plausibility and predictability of the relationship
- 3. Availability and reliability of the data used to develop
the expectation
- 4. Precision of the expectation
Q153.
- Fraud is intentional. The three conditions ordinarily
present when fraud exists include
A153.
- 1. Pressures or incentives to commit fraud.
- 2. An opportunity
- 3 and the capacity to rationalize misconduct.
Q154.
- The types of fraud relevant to the auditor include
misstatements arising from
A154.
- 1. Fraudulent financial reporting
- 2. Misappropriation of assets
Q155.
- Documentation of the consideration of fraud should
include
A155.
- 1. Planning-stage discussions
- 2. Procedures for identifying and assessing fraud risks
- 3. Specific risks identified and the response
- 4. Reasons for not identifying improper revenue
recognition as a fraud risk
- 5. Results of further addressing management override
- 6. Responses to other conditions and analytical
relationships
- 7. Fraud communications
Q156.
- The auditor's responsibility for detection of
misstatements arising from illegal acts having direct and
material effects is
A156.
- the same as that for material errors and fraud.
- An audit usually does not include audit procedures
specifically designed to detect illegal acts that have
indirect effects.
Q157.
- If information comes to the auditor's attention indicating
the potential for an illegal act having material but indirect
effects, the auditor should
A157.
- apply specific audit procedures.
Q158.
- The ISAs do not differentiate between violations of laws
and regulations having
A158.
- direct and indirect effects
Q159.
- The following procedures respond to a possible illegal act
having direct effects
A159.
- 1. Obtaining an understanding of the act, the
circumstances in which it occurred, and sufficient other
information to evaluate its financial statement effects
- 2. Inquiring of management at a level above those
involved
- 3. Consulting with client's legal counsel
- 4. Applying any other appropriate audit procedures
Q160.
- If an illegal act having a direct and material effect on the
financial statements has not been accounted for properly,
the auditor should express
A160.
- a qualified or adverse opinion
Q161.
- If unable to collect sufficient information on an illegal act,
the auditor usually
A161.
- disclaims an opinion
Q162.
- When the auditor concludes that an illegal act has or is
likely to have occurred, he should discuss the matter with
the appropriate level of management and request that any
necessary remedial actions be taken. If the alleged illegal
act has a material effect on the financial statements or the
client does not take the remedial actions that the auditor
considers necessary, the auditor should express
A162.
- a qualified or adverse opinion, depending on the level or
materiality, or withdraw from the engagement
Q163.
- Disclosure of possible illegal acts to outside parties
ordinarily is not the auditor's responsibility and would
violate the duty of confidentiality. However, the auditor may
need to
A163.
- 1. Comply with legal and regulatory requirements - For
example reportable events must be disclosed to the SEC
- 2. Communicate with a successor auditor
- 3. Respond to a subpoena
- 4. Report to a funding or other specified agency in
accordance with governmental audit requirements
Q164.
- Inquiries should be made about the internal auditors'
A164.
- 1. Organizational status
- 2. Application of professional standards
- 3. Audit plan, including the nature, timing, and extent of
audit work
- 4. Access to records and limitations on the scope of their
work
Q165.
- Assessing competence. The auditor considers the
following
A165.
- 1. Educational level and professional experience
- 2. Professional certification and continuing education
- 3. Audit policies, programs, and procedures
- 4. Practices regarding assignment of internal auditors
- 5. Supervision and review
- 6. Quality of documentation, reports, and
recommendations
- 7. Performance evaluation
Q166.
- Assessing objectivity. The auditor considers the following
A166.
- 1. The organizational status of the chief audit executive
including whether the CAE reports to someone with
sufficient status to ensure broad audit coverage and
adequate consideration of, and action on, findings and
recommendations
- 2. Policies to maintain objectivity about the areas audited.
Q167.
- The auditor is responsible for and cannot share with the
internal auditor judgements about
A167.
- 1. Assessments of risk
- 2. Materiality
- 3. The sufficiency of tests
- 4. The evaluation of estimates
- 5. Other matters affecting the report
Q168.
- For assertions related to material amounts for which the
RMM or the degree of subjectivity is high, the internal
auditors' work alone
A168.
- cannot reduce audit risk to an acceptable level to
eliminate direct tests of assertions by the auditor
Q169.
- If the work of the internal auditors is expected to affect
the auditor's procedures, it may be efficient for the auditor
and the internal auditor to coordinate their work by
A169.
- 1. Holding periodic meetings
- 2. Scheduling audit work
- 3. Providing access to internal auditor's engagement
records
- 4. Reviewing audit reports
- 5. Discussing possible accounting and auditing issues
Q170.
- If the work of the internal auditors significantly affects the
auditors work, the auditor should
A170.
- evaluate the quality and effectiveness of the internal
auditor's work
Q171.
- The ISAs state that, when specific work of the internal
auditors is to be used, it should be
A171.
- evaluated and tested
Q172.
- A specialist is
A172.
- a person or firm possessing special skill or knowledge in
a particular field other than auditing or accounting, e.g.
actuaries, appraisers, attorneys, engineers, and geologists
Q173.
- Examples of types of matters for which the auditor may
use the work of a specialist include
A173.
- 1. Valuation (art, special drugs, securities)
- 2. Determination of physical characteristics relating to
quantity or condition (mineral reserves, materials stored in
piles above ground)
- 3. Determination of amounts by using special techniques
or methods (certain actuarial determinations)
- 4. Interpretation of technical requirements, regulations, or
agreements (the significance of contracts, legal title to
property)
Q174.
- The auditor should become satisfied about the
qualifications and reputation of the specialist.
Consideration should be given to the specialist's
A174.
- 1. Professional certification, license, or other recognition
of competence
- 2. Reputation and standing
- 3. Relationship with the client
Q175.
- Under the ISAs, the auditor need not evaluate the
capabilities and competence of an expert for each audit if
the expert is
A175.
- employed by the audit firm and is therefore subject to its
recruitment and training systems
Q176.
- The auditor should have an understanding of the nature
of the work to be performed by the specialist. The
understanding should be documented and cover
A176.
- 1. The objectives and scope or the work
- 2. The specialist's relationship, if any, with the client
- 3. The methods or assumptions to be used and a
comparison with those used in the preceding period
- 4. The appropriateness of using the specialists work
- 5. The form and content of the specialist's report that will
enable the auditor to evaluate whether the findings support
the assertions
Q177.
- The auditor should
A177.
- 1. Obtain an understanding of the methods or
assumptions used to determine whether the findings may
serve as corroboration
- 2. Consider whether the findings support the assertions
- 3. Test the data provided by the client
Q178.
- If the specialist is related to the client, the auditor should
A178.
- consider performing additional procedures to determine
that the findings are not unreasonable or engage an
outside specialist for that purpose
Q179.
- If the specialists findings support the assertions, the
auditor may reasonably conclude
A179.
- that sufficient appropriate evidence has been obtained
Q180.
- If the specialists findings and the assertions differ
materially, the auditor should
A180.
- apply additional procedures
Q181.
- If the auditor is unable to resolve a material difference in
the specialists findings and the assertion, the auditor
should
A181.
- seek the opinion of another specialist
Q182.
- An unresolved matter is a scope limitation that will
usually result in
A182.
- a qualified opinion or a disclaimer of an opinion
Q183.
- If the auditor concludes after additional procedures that
the assertions are not in conformity with GAAP, he should
express
A183.
- a qualified or adverse opinion
Q184.
- When expressing an unqualified opinion, the auditor
ordinarily should
A184.
- not refer to the work or findings of the specialist. This
reference may be misunderstood to be a qualification of
the opinion or a division of responsibility
Q185.
- A specialist may be referred to and identified in the report
if the auditor believes the reference will facilitate an
understanding of the reason for an explanatory paragraph,
for example, when
A185.
- 1. Describing a substantial doubt about the entity's ability
to continue as a going concern
- 2. Emphasizing a matter
Q186.
- The auditor may also refer to the work of a specialist if he
A186.
- departs from an unqualified opinion
Q187.
- RMM
A187.
- Combined assessment of inherent risk and control risk.
Q188.
- A risk is more likely to be significant when it involves the
following:
A188.
- 1. A risk of fraud
- 2. Recent significant developments
- 3. A complex transaction
- 4. A related party transaction
- 5. A high degree of subjectivity or uncertainty
- 6. A nonroutine transaction
Q189.
- RMMs related to significant non routine transactions may
be greater if they result from:
A189.
- 1. Increased manual intervention for data processing
- 2. Increased management intervention to determine
accounting practices
- 3. Difficult accounting principles
- 4. Transactions with related parties
- 5. Transactions for which implementing controls is
difficult.
Q190.
- RMMs related to significant judgment matters may be
greater if they involve accounting estimates resulting from
A190.
- 1. Accounting principles subject to different
interpretations
- 2. Subjective or complex judgments
- 3. Significant assumptions
Q191.
- Auditor's Overall responses to risks
A191.
- 1. An emphasis on professional skepticism in evidence
gathering and evaluation
- 2. Increased supervision
- 3. Assignment of staff with greater experience or
expertise
- 4. Greater unpredictability in the choice of further audit
procedures
- 5. Performance of substantive procedures at the end of
the period
Q192.
- Weaknesses in the control environment lead to a
response that may include
A192.
- 1. Seeking more evidence from substantive procedures
- 2. Obtaining more persuasive evidence
- 3. Expanding the engagement's scope to audit more
locations
Q193.
- Substantive audit approach
A193.
- Based on substantive procedures
Q194.
- Combined audit approach
A194.
- Applies tests of controls and substantive procedures.
Q195.
- The design of further audit procedures should consider
the following
A195.
- 1. Risk significance
- 2. Likelihood of a material misstatement
- 3. Characteristics of the transaction class, balance, or
disclosure
- 4. Nature of the controls
- 5. Extent of the expectation of obtaining evidence of the
effectiveness of controls
Q196.
- Nature of Further Procedures is a function of purpose and
type
- Purpose is
A196.
- Substantive procedures or tests of controls
Q197.
- Nature of Further Procedures is a function of purpose and
type
- Type is
A197.
- inspection, observation, inquiry, confirmation,
recalculation, re-performance, or analytical procedures.
Q198.
- The choice of audit procedures depends on
A198.
- 1. The relevant assertion
- 2. The RMM
- 3. Reasons for the assessment of the RMM
Q199.
- The timing of procedures is based on considerations
such as
A199.
- 1. The relevant period or date
- 2. Availability of information
- 3. Nature of the risk
- 4. The control environment
Q200.
- The extent of a procedure is its quantity (# of sampled
items). Auditors judgment about extent is based on
A200.
- 1. The desired level of assurance
- 2. The assessed RMM
- 3. The tolerable misstatement
Q201.
- The two circumstances when an auditor tests suitably
designed controls at the relevant assertion level
A201.
- 1. The risk assessment is based on the expectation that
controls are operating with some degree of effectiveness.
- 2. Substantive procedures are inadequate by themselves
to obtain sufficient appropriate evidence.
Q202.
- Testing controls takes the additional step of obtaining
evidence about their operating effectiveness. The evidence
addresses
A202.
- 1. How controls were applied at relevant times
- 2. By whom they were applied
- 3. The consistency of their application
Q203.
- Tests of controls typically include
A203.
- 1. Inquiry
- 2. Inspection
- 3. Observation
- 4. Reperformance
Q204.
- Extent of Tests of Controls considers
A204.
- 1. Frequency of use
- 2. Expected control deviations
- 3. Relevance and reliability of needed evidence
- 4. Evidence from tests of other controls
- 5. Planned reliance on the control
- 6. Time during the period for which reliance is sought
Q205.
- Extent of tests of controls increases with increases in
A205.
- 1. The reliance on their operating effectiveness in the
assessment of RMMs
- 2. The expected deviation
Q206.
- The auditor should document the following concerning
their response to risks
A206.
- 1. Overall responses
- 2. Nature, timing, and extent of further audit procedures
and their connection with assessed risks of relevant
assertions
- 3. Results of audit procedures
- 4. Conclusions about use of prior-audit evidence with
respect to the operating effectiveness of controls
Q207.
- Auditing through the computer may be accomplished by
A207.
- 1. Processing test data
- 2. Parallel simulation
- 3. Creation of an integrated test facility
- 4. Programming embedded audit modules
Q208.
- Test Data Approach
A208.
- Auditor uses a set of dummy transactions designed to
test the control activities that management claims to have
incorporated into the processing programs.
- Disadvantage - tests processing at only one moment in
time.
Q209.
- Parallel Simulation
A209.
- Uses a controlled program to reprocess sets of client
transactions and compares the auditor-achieved results
with those of the client.
- Disadvantages - costs and coordination effort.
Q210.
- Integrated Test Facility
A210.
- Auditor creates a dummy record within the client's actual
system.
- Disadvantages - coordination and must purge dummy
transactions.
Q211.
- Embedded Audit Module
A211.
- An integral part of an application system that is designed
to identify and report actual transactions and other
information that meet criteria having audit significance.
Q212.
- In each audit, the auditor should report ________
_________ and _________ __________ in internal control
over financial reporting that have been identified.
A212.
- Significant deficiencies and material weaknesses
Q213.
- The communication should be _____ ______ and directed
to ________ and ______ _______ ________ ________.
A213.
- in writing - management - those charged with governance
Q214.
- When the design or operation of a control does not allow
management or employees, in the normal course of their
assigned functions, to prevent misstatements or detect and
correct them on a timely basis - what exists
A214.
- A deficiency in internal control exists.
Q215.
- A deficiency or combination of deficiences in internal
control that is less severe than a material weakness, but
merits attention by those charged with governance
A215.
- A significant deficiency
Q216.
- Matters to be communicated during internal control
communications include
A216.
- the auditors responsibilities under GAAS, an overview of
the audit, and significant findings.
Q217.
- Auditors Responsibilities under GAAS
A217.
- 1. The auditor is responsible for forming and expressing
an opinion about whether the financial statements are fairly
presented
- 2. The audit does not relieve management or those
charged with governance of their responsibilities for fair
reporting
Q218.
- An overview of the planned scope and timing for the audit
should be provided. Issues to address include
A218.
- 1. How the auditor proposes to address the RMMs, due to
error or fraud
- 2. Issues related to internal control and the internal audit
function
- 3. The concept of materiality in planning and executing
the audit
Q219.
- The Sarbanes Oxley Act of 2002 requires the auditor to
report the following to those charged with governance
A219.
- 1. All critical accounting policies and practices to be used
- 2 All material alternative treatments of financial
information within GAAP discussed with management
- 3. Ramifications of the use of alternative disclosures and
treatments
- 4. The treatment preferred by the auditor
Q220.
- The auditor should design tests of control to obtain
sufficient appropriate evidence to support the auditor's
opinion on internal control over financial reporting
A220.
- 1. At a moment in time
- 2. Taken as a whole
Q221.
- The auditor should modify the standard report on internal
control in any of the following circumstances
A221.
- 1. A material weakness requires an adverse opinion
- 2. Elements of management's annual report on internal
control are incomplete or improperly presented.
- 3. The scope of the engagement is restricted
- 4. The auditor decides to refer to the report of other
auditors as the basis, in part, for the auditor's own report.
- 5. Other information is contained in management's annual
report on internal control.
- 6. Management's annual certification under Section 302 of
the SOX act is misstated.
Q222.
- The service organization must prepare a description of its
system. It includes
A222.
- 1. The nature of the service to users.
- 2. How the service is provided
- 3. Controls over the service
- 4. Control objectives
Q223.
- The service auditor may provide two types of reports.
They are
A223.
- 1. Type 1 report
- 2. Type 2 report
Q224.
- A type 1 report
A224.
- expresses an opinion on the fair presentation of the
description and whether the controls are suitably designed.
Q225.
- A type 2 report
A225.
- expresses not only the type 1 opinions but also an
opinion on whether the controls were operating effectively.
Q226.
- All information used by the auditor in arriving at the
conclusion on which the audit opinion is based is
A226.
- audit evidence
Q227.
- Accounting records include
A227.
- 1. Initial entries
- 2. Supporting records ex. checks, EFTs, invoices,
contracts, the general and subsidiary ledgers, journal
entries, worksheets, spreadsheets, and reconciliations.
Q228.
- Other information (audit evidence)
A228.
- 1. Minutes of meetings
- 2. Confirmations
- 3. Industry analysts' reports
- 4. Comparable data about competitors
- 5. Controls manuals
- 6. Information obtained by the auditor from inquiries,
observation, and inspection.
Q229.
- Sufficient Appropriate Audit Evidence
- Sufficiency is
- The greater the RMM
- The higher the quality of evidence
A229.
- the measure of the quantity of evidence.
- the more evidence required.
- the less evidence required.
Q230.
- Appropriateness is
A230.
- the measure of the quality of evidence. It is the relevance
and reliability of evidence.
Q231.
- Evidence is generally more reliable when
A231.
- 1. Obtained from knowledgeable independent sources
outside the entity.
- 2. Generated under effective internal controls.
- 3. Obtained directly by the auditor.
- 4. It exists in documentary form (any medium).
- 5. It consists of original documents (rather than
photocopies).
Q232.
- Tests of controls are required in the following two
circumstances
A232.
- 1. When the risk assessment is based on an expectation
of the operating effectiveness of controls.
- 2. When substantive procedures alone do not provide
sufficient appropriate evidence.
Q233.
- Substantive procedures are used to detect material
misstatements at the relevant assertion level. They include
A233.
- 1. Tests of detail of transaction classes, account
balances, and disclosures.
- 2. Substantive analytical procedures.
Q234.
- An auditor should use the following audit procedures,
singly or in combination, as risk assessment procedures,
tests of controls, or substantive procedures
A234.
- 1. Inspection of records or documents
- 2. Inspection of tangible assets
- 3. Observation
- 4. Inquiry
- 5. Confirmation
- 6. Recalculation
- 7. Reperformance
Q235.
- Auditors responses to some information in electronic
environments existing only in electronic form or only at a
certain moment or period of time are
A235.
- 1. Performing audit procedures using computer-assisted
audit techniques
- 2. Requesting the entity to retain certain information
- 3. Performing audit procedures at the moment when
information exists
Q236.
- The confirmation process includes the following
A236.
- 1. Selecting items for confirmations
- 2. Designing the request
- 3. Communicating the request to the appropriate 3rd party
- 4. Obtaining the response
- 5. Evaluating the information, or lack of it, provided by the
3rd party about the audit objectives including its reliability
Q237.
- The auditor uses the audit risk assessment to determine
A237.
- the appropriate audit procedures.
Q238.
- Audit documentation provides the principal support for
A238.
- 1. The representation that the audit is in accordance with
GAAS
- 2. The opinion expressed
Q239.
- The auditor should document
A239.
- 1. Who performed the audit work and the date such work
was complete
- 2. Who reviewed specific audit documentation and the
date of such review
Q240.
- Audit documentation serves other purposes, including
A240.
- 1. assisting the audit team to plan and perform the audit
- 2. Assisting new auditors to understand the work
performed
- 3. Assisting audit supervisors
- 4. Demonstrating the accountability of the audit team
- 5. Retaining a record of matters of continuing significance
to future audits
- 6. Assisting inspectors, peer reviewers, and quality
control reviewers
- 7. Assisting a successor auditor
Q241.
- Documentation should be assembled into an audit file. It
should enable an experienced auditor to understand
A241.
- 1. The procedures performed under GAAS or other
requirements
- 2. The results and evidence obtained
- 3. Significant conclusions
- 4. That the accounting records agree with the audited
information
Q242.
- Examples of documentation include
A242.
- 1. Audit plans
- 2. analyses
- 3. memoranda
- 4. confirmations
- 5. letters of representation
- 6. abstracts or copies of documents (contracts)
- 7. schedules
- 8. commentaries
Q243.
- Lead schedules are
A243.
- summaries of detailed schedules.
Q244.
- Permanent files are
A244.
- schedules, documents, and records with continuing audit
significance for a specific client. (Articles of incorporation)
Q245.
- Current files are
A245.
- schedules and analyses that relate to the current year
under audit.
Q246.
- Advantages of CAATs
A246.
- 1. The auditor can work independently of the auditee
- 2. The confidentiality of auditor procedures can be
maintained
- 3. Audit work does not depend on the availability of
auditee personnel
- 4. The auditor has access to records at remote sites
Q247.
- Disadvantages of CAATs
A247.
- 1. The auditor must have a working understanding of the
computer system, e.g. a complicated database system
(may be an advantage)
- 2. Supervisory review may be more difficult
Q248.
- GAS (Generalized Audit Software) may be used to perform
the following audit tasks
A248.
- 1. Sampling and selecting items
- 2. Testing extensions, footings, and calculations
- 3. Examining records
- 4. Summarizing and sorting data
- 5. Performing analytical procedures
- 6. File access and file reorganization
Q249.
- Advantages of GAS
A249.
- 1. It is independent of the client's programs and
personnel
- 2. Less computer expertise is needed compared with
writing original programs
- 3. It can run on a variety of systems
Q250.
- Disadvantages of GAS
A250.
- 1. Some software packages may process only sequential
files
- 2. Modifications may be necessary for a specific audit
- 3. Audit software cannot examine items not in machine-
readable form
- 4. It has limited application in an online, real time system
Q251.
- Testing the sales and receivables for completeness
A251.
- 1. Reconcile the subsidiary ledger to the A/R amount in
the general ledger.
- 2. Analytical procedures - A/R turnover
- 3. Account for numerical sequence of sales orders,
shipping documents, and invoices.
- 4. Compare shipping documents with invoices to see if
they were recorded at the time of sale.
Q252.
- Testing the sales and receivables for accuracy
A252.
- 1. Obtain management representation letter that includes
assertions related to sales and receivables.
- 2. Evaluate managements disclosures about reportable
operating segments and related information.
Q253.
- Testing the sales and receivables for valuation and
allocation
A253.
- 1. Age the accounts receivable and compare to prior
years
- 2. Trace subsequent cash receipts - these provide the
best evidence concerning collectibility
- 3. Review delinquent customers credit ratings
Q254.
- Testing the sales and receivables for existence
A254.
- 1. Confirm accounts receivable unless they are
immaterial, confirmation would be ineffective, or RMM
based on other procedures is deemed to be sufficiently
low.
- 2. Vouch recorded A/R to shipping documents.
Q255.
- Testing the sales and receivables for cutoff
A255.
- 1. Sales cutoff test - test to determine that a sale and
receivable were recorded when title passed to the
customer.
- 2. Cash receipts cutoff test - test the recording of receipts
of cash and the associated reduction of accounts
receivable.
Q256.
- Testing the sales and receivables for rights and
obligations
A256.
- 1. Inquiries of management - consider the motivation and
opportunity for factoring receivables (selling)
- 2. Track cash receipts to determine that the entity is
collecting and depositing cash into accounts it controls
Q257.
- Testing the sales and receivables for occurrence
A257.
- Vouch a sample of recorded sales to customer orders and
shipping documents. Large and unusual sales should be
included in the sample.
Q258.
- Testing the sales and receivables for classification and
understandability
A258.
- 1. Inspect the income statement to determine that sales
are recorded as a revenue minus returns and allowances.
- 2. Evaluate note disclosures to determine that accounting
policies are disclosed.
Q259.
- Testing cash for completeness
A259.
- 1. For cash receipts, trace the daily remittance list to the
last validated deposit ticket for the period.
- 2. For cash disbursements, determine the last check
written for the period and trace the effect to the accounting
records.
Q260.
- Testing cash for accuracy
A260.
- Compare a sample of daily remittance lists with deposits,
journal entries, and ledger postings.
Q261.
- Testing cash for valuation and allocation
A261.
- US currency has low inherent risk relative to this
assertion. Special circumstances, such as holding foreign
currency, may require additional testing.
Q262.
- Testing cash for existence
A262.
- 1. Count cash on hand - control all cash to prevent
substitution, determine that all received checks are
payable to the client, and determine that all received
checks are for deposit only
- 2. Bank confirmation - the AICPA standard form to
confirm account balance information with financial
institutions is used for specific deposits and loans.
- 3. Bank reconciliation
- 4. Cutoff bank statement - should be requested for the
period 7-10 days after the period end. Use this statement to
test reconciling items.
- 5. Schedule of interbank transfers
- 6. Proof of cash
Q263.
- Testing cash for cutoff
A263.
- 1. Inspect and trace the daily remittance lists for several
days prior to and after year end.
- 2. Identify and trace the last check written for the year in
the accounting records.
Q264.
- Testing cash for rights and obligations
A264.
- In most cases, risks related to ownership are low and few
specific procedures are applied.
- Confirmations related to the existence assertion provide
evidence for the rights and obligations assertion.
Q265.
- Testing cash for occurrence
A265.
- 1. Vouch a sample of recorded cash receipts to accounts
receivable and customer orders.
- 2. Vouch a sample of recorded cash disbursements to
approved vouchers.
Q266.
- Testing cash for classification and understandability
A266.
- 1. Inquire of management about disclosure
- 2. Determine that restricted cash is reported in the
noncurrent asset section of the balance sheet
- 3. Assess statement of cash flows
- 4. Evaluate financial statement note disclosures
Q267.
- This account is usually the most significant current
liability of a firm
A267.
- Accounts Payable
Q268.
- Testing accounts payable and purchases for
completeness
A268.
- 1. Reconcile the accounts payable ledger with the general
ledger control account.
- 3. Trace subsequent payments to recorded payables.
- 4. Search for unvouchered payables.
Q269.
- Testing accounts payable and purchases for accuracy
A269.
- 1. Obtain a management representation letter with
assertions related to purchases and payables.
- 2. Compare the G/L balances to the balances on the
Q270.
- Testing accounts payable and purchases for valuation
and allocation
A270.
- GAAP requires that debts be stated at the amount
necessary to satisfy the debt.
- Detection risk for this assertion is reduced if the other
assertions are tested in accordance with GAAS. This
assertion is interrelated with existence and completeness.
Q271.
- Testing accounts payable and purchases for existence
A271.
- 1. Confirmation is not a generally accepted auditing
procedure because it is not likely to disclose unrecorded
purchases. Normally the auditor can become satisfied as to
the existence of recorded payables using evidence
acquired directly from the client.
- a. If confirmations are made, auditor should use large,
small and zero balances. Blank confirmations should be
used.
Q272.
- Testing accounts payable and purchases for cutoff
A272.
- 1. Purchases cutoff test - determine that all goods for
which title has passed to the client at year end have been
recorded in inventory and accounts payable.
- 2. Cash disbursements cutoff test - test the recording of
cash disbursements and the associated reduction in
accounts payable. Inspecting the last check written and
tracing to the A/P subsidiary ledger will provide evidence
of proper recording.
Q273.
- Testing accounts payable and purchases for rights and
obligations
A273.
- Because the risk of reporting liabilities of others is
relatively low, the procedures for this assertion are not as
consequential as those for other assertions
- 1. Inquiries - obtain management representations about
the nature of recorded payables.
Q274.
- Testing accounts payable and purchases for occurrence
A274.
- 1. Vouch recorded payables to documentation
Q275.
classification and understandability
A275.
- 1. Inspect the financial statements - A/P is a current
liability, purchases are COGS on income statement
- 2. Evaluate note disclosures - unusual transactions or
events should be described by management
Q276.
completeness
A276.
- Analytical procedures - Inventory turnover - Vertical
analysis - Budgets - Nonfinancial information
Q277.
- Testing accounts payable and purchases for accuracy
A277.
- Compare the general ledger balance to the amount on the
Q278.
- Testing accounts payable and purchases for valuation
and allocation
A278.
- Inventory recorded at lower of cost or market?
- 1. Compare recorded costs to current costs to replace the
goods
- 2. Calculate the turnover ratio - applied to individual items
- potentially obsolete items
- 3. Test costs of manufactured items - dir mat, dir lab, OH.
Test OH rate for reasonableness
Q279.
- Testing accounts payable and purchases for existence
A279.
- 1. Observation is a generally accepted auditing procedure - AU 331 -
Auditor must observe and make test counts but not responsible for
inventory. If periodic inventory method used, test counts at or near year
end. If perpetual inventory method interim dates are okay if records are well
kept. If RMM is high, inventory counts should be done at year end.
Observations include all significant inventory locations.- 2. The clients
plan should make effective use of and exercise control over prenumbered
inventory tags and summary sheets - 3. Performing tests of the count
should include - Observe employees following the plan - assuring that all
items are tagged - Observing employees making counts and recording
amounts on tags - Determine tags and summary sheets are controlled -
Making test counts and comparing to summary sheets and records - Being
alert for empty boxes, empty squares, and inventory defects - Establishing
a cutoff by documenting the last receiving report and shipping document -
4. The performance of procedures should be documented- 5. The auditor
should confirm or investigate inventories held in public warehouses
Q280.
- Testing accounts payable and purchases for cutoff
A280.
- 1. Purchases and sales cutoff - Test recording of
transactions subject to the terms of both purchase and
sale of inventory
Q281.
- Testing accounts payable and purchases for rights and
obligations
A281.
- 1. Vouch recorded purchases to documentation
- 2. Consider the industry or client practices for consigned
goods
Q282.
- Testing accounts payable and purchases for occurrence
A282.
- 1. Vouch a sample of recorded purchases to
documentation
- 2. Vouch a sample of recorded costs of sales to
documentation
Q283.
classification and understandability
A283.
- 1. Read financial statements
- 2. Inquire of management about consigned goods, major
purchase commitments, pledging of inventory, and other
significant transactions or events.
- 3. Obtain a management assertion letter that contains
assertions related to inventory and cost of sales.
Q284.
- The balances included in testing of PPE include
A284.
- 1. Buildings, equipment, improvements, and vehicles
including associated depreciation expense, repairs and
maintenance, and accumulated depreciation
- 2. Land
- 3. Capital leases and associated amortization expense
Q285.
- Testing PPE for completeness
A285.
- 1. Perform analytical procedures - typical ratios include
rate of return on plant assets and plant assets to total
assets
- 2. Reconcile subsidiary and general ledgers - a schedule
of fixed assets is usually prepared from the subsidiary
ledgers
- 3. Analyze repairs and maintenance - vouch significant
debits from R&M to see if should have been capitalized
Q286.
- Testing PPE for accuracy
A286.
- Include amounts and classifications in the management
representation letter
Q287.
- Testing PPE for valuation and allocation
A287.
- 1. Inspect records of purchases
- 2. Vouch additions and disposals
- 3. Test depreciation
Q288.
- Testing PPE for existence
A288.
- 1. Inspect plant additions - vouch a sample from the
recorded asset additions by examining the supporting
documents and inspecting the physical assets
Q289.
- Testing PPE for cutoff
A289.
- 1. Test the cutoff - transactions near year end should be
tested to ensure recording in the proper period
Q290.
- Testing PPE for rights and obligations
A290.
- 1. Examine titles and leases
- 2. Inspect insurance policies
- 3. Inspect property tax records
Q291.
- Testing PPE for occurrence
A291.
- 1. The auditor should test the authorization, execution,
recording, and custody aspects of a sample of transactions
Q292.
- Testing PPE for classification and understandability
A292.
- 2. Make inquiries of management about disclosures and
other reporting issues
Q293.
- The following balances are included in testing of
investments
A293.
- 1. Noncurrent items
- 2. Current items
- 3. Derivatives and hedges
- 4. Revenues from investments
Q294.
- Assessment of inherent risk for derivatives and securities
depends on
A294.
- 1. Their complexity
- 2. Management's objectives
- 3. Whether the transactions involve a cash exchange
- 4. The entity's experience with derivatives and securities
- 5. If the derivative is embedded in a host contract
- 6. External matters
- 7. Entity's reliance on expertise of outsiders
- 8. Assumptions required by GAAP
Q295.
- Assessment of control risk for derivatives and securities
requires considering whether controls have been
implemented that provide for
A295.
- 1. Independent approval and monitoring of derivative
activity
- 2. Senior management's attention to situations in which
limits are exceeded and divergences occur from approval
derivative strategies
- 3. Reconciliations over the full range of derivatives
Q296.
- Testing investments for completeness
A296.
- 1. Perform analytical procedures - compare expected ROI
to actual
- 2. Reconcile the subsidiary ledger with the control
accounts
- 3. Evaluate contracts and agreements
Q297.
- Testing investments for accuracy
A297.
- Recalculate interest revenue
Q298.
- Testing investments for valuation and allocation
A298.
- 1. Vouch recorded amounts for trading securities and
available for sale securities to market quotations if available
- 2. Determine that unrealized gains and losses are properly
accounted for
- 3. Vouch recorded costs for held to maturity securities to
market quotations
- 4. Determine that transfers between categories are at fair value
- 5. Inspect relevant records and documents and make
appropriate inquiries about nontemporary declines in fair value
- 6. Obtain audited financial statements from the investees if
investments are accounted for by the equity method
- 7. Evaluate goodwill for potential impairments
Q299.
- Testing investments for existence
A299.
- 1. Physically inspect and count securities in the clients
possession
- 2. Confirm securities
Q300.
- Testing investments for cutoff
A300.
- Test the cutoff
Q301.
- Testing investments for rights and obligations
A301.
- Trace dividend and interest revenue
Q302.
- Testing investments for occurrence
A302.
- Vouch recorded costs to documentation
Q303.
- Testing investments for classification and
understandability
A303.
- 2. Make inquiries of management about intentions to
dispose of investments
Q304.
- Testing of noncurrent debt includes the following
balances
A304.
- 1. Noncurrent notes payable, mortgages payable, and
bonds payable
- 2. Related interest expense
Q305.
- Testing noncurrent debt for completeness
A305.
- 1. Perform analytical procedures - debt to equity ratio
- 2. Reconcile the subsidiary ledger with the control
account
Q306.
- Testing noncurrent debt for accuracy
A306.
- 1. Make inquiries of management
Q307.
- Testing noncurrent debt for valuation and allocation
A307.
- 1. Vouch recorded debt to debt instruments
- 2. Test amortization
Q308.
- Testing noncurrent debt for existence
A308.
- Confirm debt
Q309.
- Testing noncurrent debt for cutoff
A309.
- Test the cutoff
Q310.
- Testing noncurrent debt for rights and obligations
A310.
- 1. Evaluate existing agreements
- 2. Examine any bond trust indenture
Q311.
- Testing noncurrent debt for occurrence
A311.
- Review contracts and agreements
Q312.
- Testing noncurrent debt for classification and
understandability
A312.
- 1. Evaluate financial statements
- 2. Inspect disclosures
Q313.
- Typical balances included in the audit of equity
A313.
- 1. Common and preferred stock
- 2. Additional paid in capital
- 3. Retained earnings
- 4. Treasury stock
- 5. Accumulated other comprehensive income
Q314.
- Testing equity for completeness
A314.
- 1. Perform analytical procedures
- 2. Reconcile the subsidiary ledger to the control accounts
Q315.
- Testing equity for accuracy
A315.
- The auditor should inquire of management about the
actions, activities, and balances related to equity
Q316.
- Testing equity for valuation and allocation
A316.
- 1. Trace entries to equity accounts
- 2. Test sales of treasury stock
Q317.
- Testing equity for existence
A317.
- 1. Confirm shares issued and outstanding with the
registrar and transfer agent
- 2. Inspect stock certificates held in treasury
- 3. Inspect stock certificate book
Q318.
- Testing equity for cutoff
A318.
- Determine if transactions near year end are recorded in
the correct period
Q319.
- Testing equity for rights and obligations
A319.
- Inspect the articles of incorporation and the bylaws of the
corporation
Q320.
- Testing equity for occurrence
A320.
- Vouch entries to supporting documentation
Q321.
- Testing equity for classification and understandability
A321.
- 1. Read minutes of meetings of the board of directors
- 2. Inspect disclosures about treasury stock
- 3. Search for restrictions
Q322.
- Testing of payroll typically includes the following
balances
A322.
- 1. Payroll expense
- 2. Inventories (for manufacturing firms)
- 3. Accrued payroll and vacation
- 4. Payroll tax liability
- 5. Pension costs and other post employment benefit costs
Q323.
- Testing payroll for completeness
A323.
- 2. Reconcile payroll tax expense with payroll tax returns
Q324.
- Testing payroll for accuracy
A324.
- Make inquiries of management
Q325.
- Testing payroll for valuation and allocation
A325.
- 1. Trace costs to inventories (manufacturing firms)
- 2. Recalculate pension and OPEB costs
Q326.
- Testing payroll for existence
A326.
- Observe the distribution of paychecks
Q327.
- Testing payroll for cutoff
A327.
- Test payroll for cutoff
Q328.
- Testing payroll for rights and obligations
A328.
- Inspect cancelled checks
Q329.
- Testing payroll for occurrence
A329.
- Vouch a sample of employee transactions
Q330.
- Testing payroll for classification and understandability
A330.
- Read the financial statements and disclosures
Q331.
- The auditor should obtain evidence relevant to the
following
A331.
- 1. Circumstances indicating an uncertainty as to possible
loss from LCA
- 2. The period in which the underlying cause for legal
action occurred
- 3. The probability of an unfavorable outcome
- 4. The amount or range of potential loss
Q332.
- LCA
A332.
- Litigation, Claims, and Assessments
Q333.
- A lawyer's refusal to furnish the information requested in
an inquiry letter is a limitation on the audit scope sufficient
to
A333.
- preclude an unqualified opinion. The auditor ordinarily
disclaims an opinion.
Q334.
- A lawyer may limit the response to an inquiry to matters
to which
A334.
- substantive attention has been given.
Q335.
- Subsequent events are material events or transactions
that occur
A335.
- after the balance sheet date, but prior to the issuance of
the financial statements that require adjustment of or
disclosure in the statements.
Q336.
- One type of subsequent events consists of events
A336.
- providing additional evidence about conditions at the
balance sheet date and affecting the estimates in the
statements.
- ex. loss on an uncollectible receivable from customer
bankruptcy after the balance sheet date.
- The financial statements should be adjusted for any
changes in estimates resulting from such events.
Q337.
- The second type of subsequent events consists of events
A337.
- providing evidence about conditions that arose
subsequent to the balance sheet date. Some of these
events require disclosure but not adjustment.
Q338.
- Examples of the second type of subsequent events
A338.
- 1. Sale of a bond or stock issue
- 2. Purchase of a business
- 3. Settlement of litigation when the claim arose after the
balance sheet date
- 4. Loss of plant or inventories as a result of fire or flood
- 5. Losses on receivables resulting from conditions arising
after the balance sheet date
Q339.
- Subsequent events affecting the realization of assets
such as receivables and inventories or the settlement of
estimated liabilities
A339.
- ordinarily require adjustment.
- They usually are the culmination of conditions that
existed over a relatively long time.
Q340.
- The subsequent period is the period
A340.
- between the balance sheet date and the report date
Q341.
- After the date of the report, the auditor is
A341.
- not obligated to make further inquires or perform other
procedures with respect to the audited financial statements
unless new information that may affect the report comes to
the auditors attention.
Q342.
- In relation to new information, it must me of such a nature
and from such a source that the auditor would have
A342.
- investigated it had it come to his attention during the
audit.
- He should determine whether the information is reliable
and whether the facts existed at the report date.
Q343.
- If the auditor decides that action should be taken to
prevent future reliance on the report
A343.
- he should advise the client to make appropriate
disclosures
Q344.
- When the client refuses to make disclosures the auditor
should
A344.
- notify each member of the board of the refusal and of the
auditor's intent to prevent future reliance upon the report.
Q345.
- Written representations from management ordinarily
A345.
- 1. Confirm oral representations given to the auditor
- 2. Document the continuing appropriateness of the
representations
- 3. Reduce the possibility of misunderstandings
Q346.
- Management representation letters are drafted by
A346.
- the auditor and signed by client personnel
Q347.
- Written representations should be
A347.
- 1. Addressed to the auditor
- 2. Dated as of the date of the audit report
- 3. Signed by responsible and knowledgeable members of
management. Usually the CEO and CFO
Q348.
- The ISAs state that management's representations should
include disclosure to the auditor of its
A348.
- assessment of the risk of material misstatement due to
fraud
Q349.
- Managements refusal to provide written representations
is
A349.
- a scope limitation that precludes an unqualified opinion
Q350.
- Judgment (nonstatistical) sampling
A350.
- uses the auditor's subjective judgment to determine the
sample size and sample selection.
- This subjectivity is not always a weakness.
Q351.
- Statistical (probability or random) sampling
A351.
- provides an objective method of determining sample size
and selecting the items to be examined.
- Unlike judgment sampling, it also provides a means of
quantitatively assessing precision and reliability.
Q352.
- Random-based selection is
A352.
- the primary characteristic of statistical sampling and
includes random sampling, stratified random sampling,
monetary-unit sampling and systematic sampling.
Q353.
- Statistical sampling is applicable to
A353.
- both tests of controls and substantive testing
Q354.
- Sampling risk is
A354.
- the probability that a properly drawn sample may not be
representative of the population.
Q355.
- Sampling risk is inversely related to
A355.
- sample size
Q356.
- For tests of controls, the risk of assessing control risk too
low relates to
A356.
- audit effectiveness and could cause audit failure. Also
termed a type II error or Beta risk.
Q357.
- For tests of controls, the risk of assessing control risk too
high relates to
A357.
- audit efficiency and is likely to result in greater audit
failure. Also termed a Type I error or Alpha risk
Q358.
- For substantive tests, the risk of incorrect acceptance is
A358.
- that the auditor believes the balance in not materially
misstated when it is materially misstated.
- relates to audit effectiveness and could cause audit
failure. Type II error or Beta risk
Q359.
- For substantive tests, the risk of incorrect rejection is
A359.
- that the auditor believes the balance is materially
misstated when it is not.
- Relates to audit efficiency and results in greater audit
effort.
- Type I error or Alpha risk
Q360.
- Non sampling risk concerns
A360.
- all aspects of audit risk not caused by sampling, such as
the auditor's application of inappropriate procedures or his
inability to recognize misstatements or control deviations.
Q361.
- In random sampling, each item in the population has
A361.
- an equal and nonzero probability of selection.
Q362.
- Systematic sampling begins with selecting a
A362.
- random start and then taking every nth item in the
population.
- The value of n is computed by dividing the population by
the number of sampling units.
Q363.
- Block sampling randomly selects
A363.
- groups of items as the sampling units rather than
individual items.
Q364.
- In general, the sample size is dependent on
A364.
- 1. the population size
- 2. Acceptable risk
- 3. Variability in the population
- 4. The tolerable misstatement for variables sampling or
the tolerable deviation rate for attribute sampling
Q365.
- Attribute sampling is used to test
A365.
- the effectiveness of controls (tests of controls)
Q366.
- Ratio estimation calculates the population misstatement
by
A366.
- Multiplying the carrying amount of the population by the
ratio of the total audit amount of the sample items to their
total carrying amount
Q367.
- Determine the sample size - four factors determine the
necessary sample size -
A367.
- 1. The allowable risk of assessing control risk too low
- 2. The tolerable deviation rate
- 3. The expected population deviation rate
- 4. Population size
Q368.
- Sample deviation rate =
A368.
- the number of deviations observed divided by the sample
size
- This rate is the best estimate of the population deviation
rate.
Q369.
- Achieved upper deviation limit
A369.
- is based on sample size and number of deviations
discovered.
- If the auditor discovers x deviations in sample of y, he can
state at z% confidence level that the true occurrence rate is
not greater than w.
Q370.
- The true state of the population is
A370.
- the actual rate of deviations in the population
Q371.
- If the true deviation rate is less than the tolerable rate, the
auditor should
A371.
- have an expectation of the effectiveness of the control
tested.
Q372.
- If the true deviation rate exceeds the tolerable rate, the
auditor should
A372.
- not have an expectation of the effectiveness of the control
tested
Q373.
- The auditor's estimate based on the sample is the
auditor's
A373.
- conclusion about the deviation rate in the population
based on taking and evaluating a sample
Q374.
- The allowance for sampling risk equals
A374.
- the achieved upper deviation limit minus the sample
deviation rate
Q375.
- Sampling interval formula
A375.
- SI = Tolerable misstatement / Reliability Factor
- Then take the book value of the account and divide by the
SI to determine the sample size
Q376.
- MUS is useful only for tests of
A376.
- overstatements because a systematic selection method is
applied
Q377.
- The projected misstatement for a sample under MUS is
A377.
- The tainting percentage x the sampling interval
Q378.
- The tainting percentage is calculated by
A378.
- taking the difference between the recorded amount and
the actual amount and dividing it by the recorded amount
Q379.
- The order of the paragraphs in an unqualified opinion are
A379.
- 1. Introduction
- 2. Scope
- 3. Opinion
- 4. [Extra Paragraph]
Q380.
- The order of the paragraphs in a qualified opinion are
A380.
- 1. Introduction
- 2. Scope
- 3. Scope Limitation/GAAP Departure
- 4. Opinion
Q381.
- The order of the paragraphs in a adverse opinion are
A381.
- 1. Introduction
- 2. Scope
- 3. GAAP Departure
- 4. Opinion
Q382.
- The order of the paragraphs in a disclaimer of opinion are
A382.
- 1. Introduction/No Opinion
- 2. Reason for No Scope
- 3. Disclaimer
Q383.
- Financial statements should
A383.
- 1. Apply GAAP that are appropriate in the circumstances
- 2. Include adequate disclosure
- 3. Classify and summarize information so that it is neither
too detailed nor too condensed
- 4. Reflect underlying events and transactions within an
acceptable range
Q384.
- The first standard of reporting states that the auditor must
state in the auditor's report whether
A384.
- the financial statements are presented in accordance with
generally accepted accounting principles (GAAP)
Q385.
- The second standard of reporting states the auditor must
identify in the auditor's report
A385.
- those circumstances in which such principles have not
been consistently observed in the current period in relation
to the preceding period.
Q386.
- The third standard of reporting states that the auditor
must state in the auditor's report
A386.
- when the auditor determines that informative disclosures
are not reasonably adequate.
Q387.
- The fourth standard of reporting states the auditor must
A387.
- either express an opinion regarding the financial
statements, taken as a whole, or state that an opinion
cannot be expressed with the reasons therefore that an
opinion cannot be expressed
Q388.
- Introductory paragraph contains 3 sentences
A388.
- 1. We have audited ...
- 2. Statements .... responsibility .... management
- 3. Our responsibility .... opinion
Q389.
- The scope paragraph contains 5 sentences
A389.
- 1. Conducted .... GAAS
- 2. Standards .... reasonable assurance
- 3. Audit .... examining on a test basis
- 4. Audit .... assessing principles and significant estimates
by management
- 5. We believe ... reasonable basis
Q390.
- The opinion paragraph presents the auditor's conclusion
and contains one sentence
A390.
- 1. In our opinion, the financial statements .... present fairly
.... GAAP
Q391.
- The PCAOB's AS No. 1 requires the report of a client
subject to SOX to refer to
A391.
- " the standards of the PCAOB (US)" rather than GAAS
Q392.
- Non issuers may voluntarily follow the PCAOB standards
in this case the auditors may indicate in the scope
paragraph that the audit was conducted using
A392.
- both sets of standards
Q393.
- The report on an audit of a nonissuer may contain
language to clarify that expression of an opinion on
A393.
- internal control is not required
Q394.
- An unqualified opinion states that the
A394.
- financial statements present fairly, in all material respects
the financial position results of operations and cash flows
of the entity in conformity with GAAP.
Q395.
- Explanatory language added to the auditor's standard
report
A395.
- certain circumstances although not affecting the auditor's
unqualified opinion, may require that the auditor add an
explanatory paragraph
Q396.
- A Qualified opinion states that
A396.
- except for the effects of the matters to which the
qualification relates, the financial statements present fairly,
in all material respects ....
Q397.
- An adverse opinion states that
A397.
- the financial statements do not present fairly the ...
Q398.
- A disclaimer of opinion states that
A398.
- the auditor does not express an opinion on the financial
statements
Q399.
- ISAs expand in the audit report the
A399.
- descriptions of the responsibilities of management and
the auditor.
- Also, the report should name the country or jurisdiction
where the auditor practices.
Q400.
- The auditor's report should be addressed to
A400.
- the entity whose statements are being audited or to its
board of directors or shareholders
Q401.
- If an auditor is retained to audit the financial statements
of an entity that is not the client, the report customarily is
addressed to
A401.
- the client and not to the entity being audited
Q402.
- The date of the audit report is no earlier than
A402.
- the date on which the auditor has obtained sufficient
appropriate evidence to support the opinion
Q403.
- When a subsequent event disclosed in the financial
statements occurs after the date of the report but before
the issuance of the related financial statements, the auditor
may use
A403.
- dual dating. If the auditor is willing to accept
responsibility to the later date the auditor may choose the
later date as the date for the entire report
Q404.
- A qualified opinion may be based on
A404.
- 1. A lack of sufficient appropriate evidence
- 2. Restrictions on the audit's scope
- 3. A material departure from GAAP
Q405.
- Scope restrictions leading to a qualified opinion or a
disclaimer may be imposed by the client or circumstances
such as
A405.
- 1. Timing of the work
- 2. Inability to obtain sufficient appropriate evidence
- 3. Inadequacy of the accounting records
Q406.
- Some common scope restrictions relate to
A406.
- 1. The inability to observe inventory
- 2. Inability to confirm accounts receivable
- 3. Inability to obtain audited statements of an investee
Q407.
- When significant restrictions are imposed by the client,
the auditor usually should
A407.
- disclaim an opinion
Q408.
- When a qualified opinion results from a scope limitation
or insufficient evidence, the situation is described in
A408.
- an explanatory paragraph preceding the opinion
paragraph and referred to in the scope and opinion
paragraphs
Q409.
- A material departure from GAAP results in a
A409.
- qualified or adverse opinion
Q410.
- If the financial statements, including the notes, omit
disclosures required by GAAP, a
A410.
- qualified or adverse opinion should be expressed
Q411.
- A qualified or adverse opinion should be expressed if one
of the following applies
A411.
- 1. A newly adopted accounting principle is not generally
accepted
- 2. The method of accounting for the effect of the change
is not in conformity with GAAP
- 3. Management's justification for the change is not
reasonable
Q412.
- An adverse opinion is expressed when, in the judgment of
the auditor, the
A412.
- financial statements taken as a whole are not presented
fairly in conformity with GAAP
Q413.
- Auditors opinion is based in part on the report of another
auditor -
A413.
- Modify all 3 paragraphs, but do not add an additional
paragraph
Q414.
- A material accounting change affects consistency
A414.
- add an additional paragraph
Q415.
- Substantial doubt exists about the entity's ability to
continue as a going concern
A415.
Q416.
- The auditor changes an opinion for a prior period when
reporting on current statements in comparative form
A416.
Q417.
- Predecessor auditor's report for a prior period is not
presented when reporting on current financial statements
in comparative form
A417.
- add sentence to introductory paragraph
Q418.
- A matter needs to be emphasized
A418.
Q419.
- When considering whether or not to be the principal
auditor, the auditor should consider
A419.
- 1. The materiality of the portion of the financial
statements audited
- 2. His knowledge of the overall financial statements
- 3. The importance of the components he audited.
Q420.
- If the principle auditor assumes responsibility for the
other auditor's work
A420.
- no reference should be made
Q421.
- If responsibility is not assumed
A421.
- the report should refer to the audit of the other auditor
and should indicate clearly the division of responsibility
Q422.
- The principal auditor may decide not to refer to the other
auditor when
A422.
- 1. The other auditor is an associated or correspondent
firm whose work is acceptable
- 2. Other auditor was retained by the principal auditor who
guided and controlled the work
- 3. Principal auditor becomes satisfied as to the work of
the other auditor
- 4. The portion of the statements audited by the other
auditor are not material
Q423.
- In the audit of an issuer under the PCAOB's AS 3, the
principal auditor must before the report release date,
obtain, review, and retain an engagement completion
document and other documents from the other auditor.
These other documents should include
A423.
- 1. Sufficient information about findings that contradict
audit conclusions
- 2. List of significant fraud risk factors and the auditors
response
- 3. A schedule of audit adjustments, significant
deficiencies, and weaknesses in internal control
- 4. Reconciling information about the amounts audited by
the other auditor
Q424.
- The principal auditor may decide to refer to the audit of
the other auditor because
A424.
- 1. It may be impracticable for the auditor to review the
other auditors work
- 2. The financial statements of a component audited by
another auditor may be material in relation to the total
Q425.
- When the audit of the other auditor is referred to, the
report should disclose the
A425.
- magnitude of the audit of the other auditor in dollar
amounts or percentages of total assets, revenues, or other
appropriate criteria
Q426.
- The other auditor may be named if he
A426.
- gives express permission and provided his report is
presented
Q427.
- Reference to the other auditor is
A427.
- not a qualification of the opinion
Q428.
- Whether or not the principal auditor refers to the audit of
the other auditor, he should
A428.
- inquire about the professional reputation and
independence of the other auditor and coordinate activities
Q429.
- Inquires of professional reputation of the other auditor
should be made to
A429.
- 1. The AICPA
- 2. State societies
- 3. Other practictioners
- 4. Bankers
- unless known to the principal auditor
Q430.
- The principal auditor should communicate with the other
auditor to determine that he is aware of
A430.
- 1. Reliance upon and possible reference to his report
- 2. Applicable GAAP, GAAS, and regulatory requirements
- 3. The need for a review of uniformity of accounting
practices and the elimination of inter-entity transactions
and balances
Q431.
- When the principal auditor decides not to refer to the
audit of the other auditor he should consider
A431.
- 1. Visiting the other auditor and discussing the audit
procedures followed and the results
- 2. Reviewing the audit plans and audit documentation of
the other auditor
- 3. Making supplemental tests of accounts
Q432.
- An auditor who uses another auditor's report to report on
an investor's equity in underlying net assets and its share
of earnings or losses and other transactions of the
investee is
A432.
- effectively a principal auditor using the work and reports
of other auditors
Q433.
- If the report of the other auditor is other than a standard
report, the principal auditor should decide whether the
reason for the departure
A433.
- requires recognition in his report
Q434.
- If the reason for departure is not material, and the other
auditor's report is not presented, the principal auditor
A434.
- need not refer in the report to such departure
Q435.
- The quality of information that enables users to identify
similarities in and differences between two sets of
economic phenomena is
A435.
- comparability
Q436.
- 4 matters that affect comparability
A436.
- 1. Accounting changes
- 2. Errors (misstatements)
- 3. Changes in classification
- 4. Events or transactions substantially different from
those previously accounted for
Q437.
- Conformity from period to period with unchanging
policies and procedures is
A437.
- consistency
Q438.
- An entity should not make voluntary changes in
accounting principles unless they can be justified as
A438.
- preferable
Q439.
- A report on a change in accounting principle or the
method of its application having a material affect on
comparability is
A439.
- described in an explanatory paragraph following the
opinion paragraph
Q440.
- The auditor is deemed to concur with the changed unless
he takes exception to it by modifying the opinion because
of a departure from GAAP. Thus the auditor should
evaluate whether
A440.
- 1. the new principle is generally accepted
- 2. The method of accounting for the change conforms
with GAAP
- 3. Disclosures are adequate
- 4. The new principle is preferable
Q441.
- A lack of consistency by itself is
A441.
- not a basis for expressing a qualified or adverse opinion
or disclaiming an opinion
Q442.
- If the change is accounted for by retrospective
application, the explanatory paragraph is required
A442.
- only in the year of the change
Q443.
- Departures from GAAP result in a qualified or an adverse
opinion when
A443.
- 1. Disclosure is inadequate
- 2. Inappropriate accounting principles or unreasonable
estimates cause the statements to be materially misstated
Q444.
- If the auditor concludes that substantial doubt exists on
the entity's ability to continue as a going concern
A444.
- an additional paragraph should be added to the end of the
auditor's standard report but the auditor is not precluded
from disclaiming an opinion
Q445.
- The auditors explanatory paragraph should include the
terms
A445.
- substantial doubt and going concern
Q446.
- In the explanatory paragraph, the auditor should
A446.
- not use conditional language
Q447.
- If disclosures about going concern are inadequate, the
departure from GAAP may result in
A447.
- a qualified or an adverse opinion
Q448.
- The objective of a compilation is to present, in the form of
financial statements,
A448.
- information that is the representation of management
without undertaking to express any assurance on the
financial statements.
Q449.
- To perform a compilation, an accountant should possess
or obtain, prior to completing the compilation,
A449.
- appropriate knowledge of the accounting principles and
practices of the entity's industry
Q450.
- To perform a compilation, an accountant should possess
a general understanding of
A450.
- 1. Then nature of the entity's business
- 2. The form of its accounting records
- 3. The stated qualifications of its accounting personnel
- 4. The accounting basis on which the financial statements
are to be presented
- 5. The form and content of the financial statements
Q451.
- To perform a compilation, an accountant should
A451.
- agree with the client about the services to be provided,
preferably in an engagement letter
Q452.
- Compilation procedures - The accountant is not required
to
A452.
- 1. Make inquiries
- 2. Understand internal control
- 4. Test accounting records
- 5. Obtain management representations
- 6. Assess fraud risk
- 7. Perform other audit procedures
Q453.
- The standard compilation report contains
A453.
- two paragraphs
Q454.
- A statement of retained earnings may
A454.
- be omitted
Q455.
- Any other procedures performed by the accountant
should
A455.
- not be described in the report
Q456.
- The report need
A456.
- not have a title
Q457.
- The date of the report is the date of
A457.
- the completion of the compilation
Q458.
- Each page of the financial statements should contain
language such as
A458.
- " See Accountant's Compilation Report"
Q459.
- The accountant may accept an engagement to issue a
compilation report on
A459.
- one financial statement
Q460.
- When an accountant is not independent he
A460.
- 1. May perform a compilation because no assurance is
provided
- 2. Should disclose the lack of independence and may
disclose the reasons for lack of independence
Q461.
- The objective of a review is to express
A461.
- limited assurance that no material modifications should
be made to the statements for them to conform with GAAP
Q462.
- To provide a reasonable basis for expressing limited
assurance, the accountant should possess or obtain, prior
to completion of the review,
A462.
- appropriate knowledge of the accounting principles and
practices of the entity's industry and an understanding of
its business
Q463.
assurance, the accountant should have a general
understanding of
A463.
- 1. The entity's organization
- 2. Its operating characteristics
- 3. The nature of its assets, liabilities, revenues, and
expenses
Q464.
assurance, the accountant must
A464.
- 1. Make inquiries of management and other personnel
- 2. Apply analytical procedures
- 3. Obtain management representations
Q465.
- The accountant is not required to
A465.
- 1. Understand internal control
- 2. Test accounting records
- 3. Assess fraud risk
- 4. Perform other audit procedures
Q466.
- Other review procedures include
A466.
- 1. Obtaining reports from other accountants, if any
- 2. Reading the financial statements to consider whether
they appear to conform with GAAP
- 3. Inquiring about actions taken at shareholders' and
directors' meetings
Q467.
- Documentation should be prepared that addresses the
A467.
- engagements circumstances, including any findings or
issues judged to be significant
Q468.
- The standard review report contains
A468.
- three paragraphs
Q469.
- An accountant must be
A469.
- independent to issue a review report
Q470.
- If an accountant becomes aware of a material departure
from GAAP, the departure, including its effects,
A470.
- should be disclosed in a separate paragraph
Q471.
from GAAP, the conclusion paragraph of a review report
should
A471.
- use the phrase " with the exception of" or " except for"
Q472.
from GAAP, the accountant is
A472.
- not required to determine the effects of the departure
Q473.
- The request by the entity to change from a higher level of
service to a lower level of service may result from
A473.
- 1. A change in circumstances affecting the entity's
requirements
- 2. A misunderstanding as to the nature nature of one of
the services
- 3. A scope restriction, whether imposed by the client or
circumstances
Q474.
- Before an accountant engaged to perform a higher level
or service agrees to change to a lower level, the following
should be considered
A474.
- 1. The reason for the entity's request, particularly the
implications of a scope restriction, whether imposed by the
entity or by circumstances
- 2. The additional effort required to complete the original
engagement
- 3. The estimated additional cost to complete the original
engagement
Q475.
- A change in circumstances that affects the entity's
requirement for the service or a misunderstanding about
the nature of a service is ordinarily
A475.
- a reasonable basis for requesting a change in the
engagement
Q476.
- The report on the changed engagement should not
mention
A476.
- 1. The original engagement
- 2. Any auditing or review procedures performed
- 3. Scope limitations that led to the changed engagement
Q477.
- Special Reports may be issued on
A477.
- 1. Financial statements prepared in conformity with a
comprehensive basis of accounting other than GAAP (OCBOA)
- 2. Specified elements, accounts, or items of a financial
statement
- 3. Compliance with aspects of contractual agreements or
regulatory requirement related to audited financial statements
- 4. Financial presentations to comply with contractual
agreements or regulatory provisions
- 5. Financial information presented in prescribed forms or
schedules that require a prescribed form of auditor's report
Q478.
- GAAS are applicable when an auditor audits and reports
on
A478.
- any financial statement
Q479.
- A financial statement is
A479.
- a presentation of financial data including notes, derived
from accounting records and intended to communicate an
entity's economic resources or obligations at a moment in
time or the changes therein for a period of time in
conformity with a comprehensive basis of accounting
Q480.
- In addition to the basic financial statements, the following
financial presentations are considered to be financial
statements for reporting purposes
A480.
- 1. Statement of assets and liabilities that does not include
owners' equity
- 2. Statement of revenue and expenses
- 3. Summary of operations
- 4. Statement of operations by product lines
- 5. Statement of cash receipts and disbursements
Q481.
- An OCBOA is one of the following and would require a
special report
A481.
- 1. A basis of accounting that the reporting entity uses to
comply with the requirements of a regulatory agency
- 2. A basis of accounting used for tax purposes
- 3. The cash basis and modifications of the cash basis
having substantial support
- 4. A definite set of criteria having substantial support that
is applied to all material items
Q482.
- Appropriate OCBOA titles include
A482.
- 1. Balance sheet - cash basis
- 2. Statement of assets and liabilities arising from cash
transactions
- 3. Statement of assets, liabilities, and capital - income tax
basis
- 4. State of revenue collected and expenses paid
- 5. Statement of revenues and expenses - income tax basis
- 6. Statement of income - statutory basis
- 7. Statement of operations - income tax basis
Q483.
- Interim Financial Information (IFI) is
A483.
- financial information for less than a full year or for the 12
months ending on a date other than fiscal year end
Q484.
- The IFI may be in
A484.
- statement for or condensed that is asserted to conform
with an applicable financial reporting framework i.e. GAAP,
IFRS, OCBOA
Q485.
- Before accepting an engagement to review IFI, the
accountant should
A485.
- make inquiries of the predecessor
Q486.
- An accountant may review the IFI of an entity if
A486.
- 1. The latest annual statements are audited
- 2.The IFI is prepared using the same applicable financial
reporting framework as those statements
- 3. Certain other criteria are met
Q487.
- The objective of a review of IFI is to enable the accountant
to provide
A487.
- negative assurance i.e. to state whether he is aware of
any material modifications needed for the IFI to conform
with applicable reporting framework
Q488.
- A review of IFI primarily involves performing
A488.
- analytical and inquiry procedures. Does not involve
testing accounting records and controls, obtaining
evidence, applying other auditing procedures, or becoming
aware of significant matters for audit purposes
Q489.
- Before acceptance of engagement to review IFI, the
accountant should assess management's ability to
acknowledge responsibility for sufficiency of controls over
preparation of IFI. If management lacks this ability,
A489.
- the engagement should not be accepted
Q490.
- Managements responsibilities in review of IFI are
A490.
- 1. The IFI
- 2. The effectiveness of internal control
- 3. Compliance with laws and regulations
- 4. Making information available
- 5. Providing a representation letter at the end of the
engagement
- 6. Adjusting the IFI for material misstatements
Q491.
- The accountants responsibility in a review of IFI is
A491.
- to comply with AICPA standards
Q492.
- what is an audit?
A492.
- a methodical review and objective examination of an
enterprise's financial statements
Q493.
- who creates the financial statements of an enterprise?
A493.
- the management, not the independent auditor
Q494.
- what are the responsibilities of company's management?
A494.
- financial statements and internal control
Q495.
- what are the responsibilities of the auditor?
A495.
- expression of opinion
Q496.
- the expression of an opinion by the independent auditor
is known as the ______
A496.
- " audit function"
Q497.
- the auditor's report gives ____ to the financial statements
A497.
- credibility " attest function"
Q498.
- how many generally accepted auditing standards are
there?
A498.
- ten
Q499.
- what two things must an auditor be?
A499.
- independent and an expert
Q500.
- what three things must an auditor be an expert in?
A500.
- 1. accounting (knowledge of GAAP)
- 2. auditing (knowledge of GAAS)
- 3. industry (particular business)
Q501.
- what is professional skepticism?
A501.
- the auditor neither assumes management is dishonest
nor assumes unquestioned honesty.
Q502.
- the AICPA defines " fair presentation" as:
A502.
- the financial statements reflect the underlying
transactions of the company in a manner that represents
the financial statements within a range of acceptable limits
Q503.
- What are Statements on Auditing Standards (SASs)?
A503.
- interpretations of GAAS
Q504.
- who issues SASs?
A504.
- the Auditing Standards Board of the AICPA
Q505.
- where are the SASs outlined?
A505.
- section AU of the AICPA Professional Standards
Q506.
- who do SASs apply to?
A506.
- all audits of nonissuers and to the auditors of issuers to
the extent not superseded by PCAOB auditing standards
Q507.
- Audits of government organizations, programs, activities
and of entities that receive gov funds should be conducted
in accordance with ____
A507.
- generally accepted government auditing standards
Q508.
- what does PCAOB stand for?
A508.
- public company accounting oversight board
Q509.
- who are issuers?
A509.
- entities subject to the rules of the SEC (primarily public
companies)
Q510.
- who comprises the PCAOB?
A510.
- five full time, financially literate members
- only 2 CPAs
- chair can be CPA if haven't practiced for 5 yrs
- cant receive payments from public acc firm (unless fixed
continuing payments)
Q511.
- public accounting firms must _________ in order to audit
a public company.
A511.
- register with the PCAOB
Q512.
- public accounting firms registered with the PCAOB are
subject to:
A512.
- board inspection,
- disciplinary proceedings,
- sanctions
Q513.
- THe PCOB has issued several of its own _______, which
replace ASB standards for audits of issuers.
A513.
- Auditing Standards (AS)
Q514.
- what does IAASB stand for?
A514.
- International Auditing and Assurance Standards Board
Q515.
- IAASB is a ______ board of ______
A515.
- standard setting board of the International Federation of
Accountants (IFAC)
Q516.
- who establishes international standards on auditing?
A516.
- IIASB
Q517.
- _____ is a worldwide organization that establishes and
promotes adherence to high-quality professional standards
and works toward the international convergence of such
standards.
A517.
- IFAC
Q518.
- Can ISAs issued by the IAASB override the local laws and
regulations or national standards that govern the audits of
historical financial statements in particular countries?
A518.
- no
Q519.
- what does SSAE stand for?
A519.
- Standards for Attestation Engagements
Q520.
- who issues SSAEs?
A520.
- AICPA
Q521.
- what does SSARS stand for?
A521.
Services
Q522.
- what was the accounting and review services committee
established for?
A522.
- by the AICPA to establish standards for privately held
companies not seeking audited statements
Q523.
- who issues SSARS?
A523.
- the accounting and review services committee of the
AICPA
Q524.
- the _________ provides members with guidelines for
behavior in the conduct of their professional affairs.
A524.
- the AICPA code of professional conduct
Q525.
- who does the code of professional conduct apply to?
A525.
- all services performed in the practice of public
accounting
Q526.
- where is the code of professional conduct outlined?
A526.
- section ET of the AICPA professional standards
Q527.
- a ________ system consists of policies and procedures
designed, implemented, and maintained to ensure that the
firm complies with professional standards and appropriate
legal and regulatory reqs, and that any reports issued are
appropriate in the circumstances
A527.
- quality control
Q528.
- what does SQCS stand for?
A528.
- statements on quality control standards
Q529.
- who issues SQCSs and what are they for?
A529.
- issued by the auditing standards board to provide
guidance with respect to quality control
Q530.
- where are SQCSs outlined?
A530.
- in section QC of the AICPA professional standards
Q531.
- where does the SEC publish their regulations?
A531.
- in the Accounting Series Releases and Regulation S-K
Q532.
- Final standards adopted by the PCAOB do not become
effective until __________
A532.
- they are approved by the SEC
Q533.
- what does IESBA stand for?
A533.
- International Ethics Standards Board for Accountants
Q534.
- IESBA is a standards setting board of ______
A534.
- IFAC
Q535.
- what does the IESBA do?
A535.
- establish the IFAC Code of Ethics for accountants
Q536.
- Can an IFAC member body or firm issuing reports in
accordance with International Auditing and Assurance
apply less stringent ethics standards than those outlined in
the IFAC Code of Ethics for Accountants?
A536.
- no
Q537.
- what is the GAAS hierarchy - the three levels of auditing
guidance?
A537.
- 1. AICPA SASs and PCAOB Auditing Standards
- 2. Interpretive Publications
- 3. Other Auditing Publications
Q538.
- In the U.S., auditors are required to comply with _____ for
audits of nonissuers, and _______ for audits of issuers
A538.
- nonissuers - SASs published by the ASB
- issuers - PCAOB Auditing Standards
Q539.
- Are auditors allowed to departure from mandatory
requirements of SASs or PCAOB ASs?
A539.
- yes, if they justify them
Q540.
- when do SASs and PCAOB Auditing Standards apply?
A540.
- generally only in situations where auditing services are
being rendered.
- However, a few SASs apply to other services, such as
reviews of interim financial information and letters for
underwriters
Q541.
- what terms indicate an unconditional requirement in a
standard, which must always be followed?
A541.
- " must" or " is required"
Q542.
- which terms indicate a presumptively mandatory
requirement?
A542.
- " should"
Q543.
- when are departures from presumptively mandatory
requirements allowed?
A543.
- as long as there is appropriate justification, performance
of sufficient alternative procedures, and thorough
documentation.
Q544.
- do terms such as " may" " might" or " could" impose a
professional requirement for performance?
A544.
- no
Q545.
- what are interpretive publications?
A545.
- recommendations regarding how SASs should be applied
in specific situations.
Q546.
- are interpretive publications considered to be auditing
standards?
A546.
- no
Q547.
- what are examples of interpretive publications
A547.
- SAS interpretations
- appendices to the SASs
- AICPA Audit and Accounting Guides
- AICPA auditing statements of position
Q548.
- how should the auditor treat interpretive publications?
A548.
- 1. consider the guidance provided in performing an audit
- 2. be able to explain any departures, and how compliance
with standards was otherwise achieved
Q549.
- what kind of authoritative status do publications such as
auditing articles in the Journal of Accountancy, AICPA CPA
Letter, CPE materials, and textbooks have?
A549.
- no authoritative status, but they may be helpful to the
auditor.
Q550.
- which standards are qualitative in nature and set
minimum reqs for the auditing profession?
A550.
- GAAS
Q551.
- how do auditing standards differ from auditing
procedures?
A551.
- " procedures" - relate to acts to be performed
- " standards" - deal with measures of audit quality and
objectives to be achieved within an audit
Q552.
- what are the three kinds of GAASs?
A552.
- General standards
- standards of fieldwork
- standards of reporting
Q553.
- what are the ten GAASs?
A553.
- Training
- Independence
- Professional Care
- Planning and Supervision
- Internal Control, Entity, and Environment
- Evidence
- Accounting = GAAP
- Consistency
- Disclosure
- Express Opinion
Q554.
- What are the types of General Standards Under GAAS?
A554.
- Training, Independence, and Professional Care
Q555.
- What does the Training standard of GAAS mean?
A555.
- The auditor must have adequate technical training and
proficiency to perform the audit.
- the auditor must have the education in accounting, the
practical experience in auditing. and the knowledge of the
particular industry being audited
Q556.
- What does the Independence standard of GAAS mean?
A556.
- the auditor must maintain independence in mental
attitude in all matters relating to the audit
Q557.
- which standard is often called the cornerstone of the
auditing profession?
A557.
- the independence standard
Q558.
- what does independence in fact and in appearance mean?
A558.
- auditors must leave no doubt as to their independence in
the mind of the general public.
- activities or relationships that even suggest or imply a
possible lack of independence must be avoided by the
auditor
Q559.
- What does the professional care standard of GAAS
mean?
A559.
- the auditor must exercise due professional care in the
planning and performance of the audit and the preparation
of the report
Q560.
- _______ imposes a responsibility upon each person
within an independent auditor's org to observe the
standards of fieldwork and reporting.
A560.
- due professional care
Q561.
- the exercise of due professional care implies that the
auditor will obtain_________ to limit audit risk to a low
level.
A561.
- sufficient appropriate audit evidence
Q562.
- in due professional care, the high level of assurance
expected to be obtained is referred to as _____; absolute
assurance is not possible
A562.
- reasonable assurance
Q563.
- what is the " average auditor" concept?
A563.
- auditor should do what the average auditor would do and
never less, including review of work performed by
assistants and maintaining an attitude of professional
skepticism
Q564.
- what are the standards of fieldwork under GAAS?
A564.
- Planning and Supervision
- Internal Control, Entity, and Environment
- Evidence
Q565.
- What does the " Planning and Supervision" standard of
GAAS mean?
A565.
- the auditor must adequately plan the work and must
Q566.
- What does the " Internal Control, Entity, and Environment"
standard of GAAS mean?
A566.
- the auditor must obtain a sufficient understanding of the
entity and its environment, including its internal control, to
assess the risk of material misstatement of the financial
statement whether due to error or fraud, and to design the
nature, extent, and timing of further audit procedures
Q567.
- the auditor must obtain a sufficient understanding of the
entity and its environment to design the ________ of
further audit procedures
A567.
- nature, extent, and timing
Q568.
- strong controls imply the auditor will require ____
evidence from substantive procedures.
A568.
- less
Q569.
- weak controls imply the auditor will require ____ evidence
from substantive procedures.
A569.
- more
Q570.
- can an auditor express an unqualified opinion on one of
the financial statements while rendering a qualified opinion
or disclaimer of opinion on another statement?
A570.
- yes
Q571.
- the auditor may report on one basic financial statement
and not the others, as long as __________
A571.
- access is not limited to information underlying the basic
financial statement (limited reporting engagement)
Q572.
- what does an unqualified opinion mean?
A572.
- the financial statements are presented fairly in all material
aspects.
Q573.
- how many paragraphs does a standard report for an
unqualified opinion have?
A573.
- 3
Q574.
- the auditor's standard report for an unqualified opinion
has all of the following:
A574.
- 1. title - " independent"
- 2. addressee - company, stockholders/ BOD (not
management)
- 3. introductory paragraph
- 4. scope paragraph
- 5. opinion paragraph
- 6. firm name
- 7. report date
Q575.
- what word must be included in the auditor's standard
report title?
A575.
- independent
Q576.
- the introductory paragraph for an unqualified opinion
contains the following:
A576.
- 1. statement that the financial statements as identified in
the report were audited
- 2. statement that the financial statements are the
responsibility of management and that the auditor's
responsibility is to express an opinion
Q577.
- the scope paragraph of an auditor's standard report for an
unqualified opinion contains the following:
A577.
- 1. statement that audit was conducted in accordance with
GAAS
- 2. statement that the audit was planned and performed to
obtain reasonable assurance that the financial statements
are free from material misstatement
- 3. statements that the audit included examining evidence
on a test basis, assessing the accounting principles used
and significant estimates made by management, and
evaluating the overall presentation
- 4. a statement that the audit provides a reasonable basis
for an opinion
Q578.
- the opinion paragraph of an auditor's standard report for
an unqualified opinion contains the following:
A578.
- 1. statement referring to the financial statements
specifically identified in the intro paragraph
- 2. an opinion as to the fair presentation of the financial
statements
- 3. a statement regarding conformity with U.S. GAAP
Q579.
- in the auditor's standard report, what should the report
date be?
A579.
- dated on or after the date on which appropriate audit
evidence, sufficient to support the opinion, has been
obtained
Q580.
- sufficient appropriate audit evidence includes evidence
that:
A580.
- 1. audit documentation has been reviewed
- 2. financial statements have been prepared
- 3. management has taken responsibility for the financial
statements
Q581.
- the report date of a standard report shows the final date
of _____
A581.
- the auditor's responsibility
Q582.
- in an auditor's standard report, for comparative
statements, the date appropriate for the _________ should
be used.
A582.
- most recent audit
Q583.
- PCAOB Auditing Standard No. 1 requires the auditor's
report to include _________
A583.
- a reference to the standards of the PCAOB
Q584.
- an auditors report on the financial statements of an issuer
should also include identification of ____ from which the
report was issued. generally, this info is included with
________
A584.
- city and state (our country);
- included w/ the signature and date
Q585.
- can an auditor conduct the audit of a nonissuer in
accordance with the auditing standards of the PCAOB?
A585.
- yes
Q586.
- which paragraph mentions GAAS?
A586.
- scope
Q587.
- which paragraph mentions GAAP?
A587.
- opinion
Q588.
- what are the three major differences between the audit
report under US auditing standards and International
standards?
A588.
- 1. ISA audit report includes expanded descriptions of
managements and the auditors responsibilities
- 2. The ISA audit report 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
- 3. when an audit is conducted in accordance with BOTH the
auditing standards of a specific jurisdiction and international
standards on auditing, the auditor's report may refer to both the
national auditing standards of that jurisdiction and the
international standards ONLY IF there is no conflict between
the two sets of standards that would impact the report and the
audit report includes all elements required by the ISAs
Q589.
- what is a modified unqualified opinion?
A589.
- explanatory paragraph may be added to the unqualified
report.
Q590.
- a _____ opinion states that the financial statements
present fairly, in all material respects, the financial
position, results of operations, ad cash flows of the entity
in conformity with US GAAP
A590.
- unqualified
Q591.
- a ___ opinion states that, " except for" the effects of the
matter(s) to which the qualification relates, the financial
statements present fairly, in all material respects, the
financial position, result of operations, and cash flows of
the entity in conformity with US GAAP
A591.
- qualified
Q592.
- a ____ opinion states that the financial statements do not
present fairly the financial position, results of operations,
or cash flows of the entity in conformity with US GAAP
A592.
- adverse
Q593.
- a ____ opinion states that the auditor does not express an
opinion on the financial statements because he was not
able to perform an audit sufficient in scope to render an
opinion
A593.
- disclaimer of opinion
Q594.
- what kind of opinion for a financial statement with a very
material GAAP problem?
A594.
- adverse
Q595.
- what kind of opinion for a financial statement with a very
material GAAS problem?
A595.
- disclaimer of opinion
Q596.
- what are examples of uncertainties?
A596.
- impairments, intangibles, lawsuits, warranties
Q597.
- what is the management's responsibility in regards to
uncertainties?
A597.
- 1. estimate the effect of future events on the financial
statements and record and present this estimate, OR
- 2. determine that a reasonable estimate cannot be made
and make the required disclosures to that effect
Q598.
- what is the auditor's responsibility in regards to
uncertainties?
A598.
- an assessment of whether the audit evidence that is or
should be available is sufficient to support management's
assertion regarding the uncertainty
Q599.
- regarding an uncertainty, if managements analysis is
supported and properly reported or disclosed, the auditor
issues a _____ opinion
A599.
- unqualified
Q600.
- regarding uncertainties, if the auditor is unable to obtain
sufficient audit evidence involving an uncertainty, the
auditor should express what type of opinion?
A600.
- qualified GAAS opinion or disclaim
Q601.
- regarding uncertainties, if the auditor concludes that the
financial statements are materially misstated due to a
departure from GAAP, the auditor should express what
type of opinion?
A601.
- qualified GAAP or adverse opinion
Q602.
- how can the auditor modify the standard unqualified
report to explain or emphasize a matter?
A602.
- 1. modified wording - division of responsibility
- 2. explanatory paragraph
Q603.
- what is division of responsibility?
A603.
- the auditor's opinion is based in part on the report of
another auditor.
Q604.
- what instances require an explanatory paragraph?
A604.
- necessary and justified departure from GAAP
- Going concern
- to emphasize a matter regarding financial statements
- a justified lack of consistency
- required SEC regulation has been omitted
- supplementary info required by GAAP has been omitted
- other info in a doc containing audited f/s is materially
inconsistent w info appearing in financial statements
Q605.
- what is the general rule on position of explanatory
paragraph for an unqualified opinion?
A605.
- follow the opinion paragraph
Q606.
paragraph for a qualified opinion?
A606.
- precede the opinion paragraph
Q607.
paragraph for an adverse opinion?
A607.
Q608.
paragraph for a disclaimer of opinion?
A608.
Q609.
- when can an explanatory paragraph be placed either
before or after the opinion paragraph? (aka exception to
the general rule)
A609.
- justified GAAP departure
- emphasis of a matter
Q610.
- if there are other auditors working, after a decision is
reached as to who acts as the principal auditor, they must
further decide whether to:
A610.
- refer to their auditor in their report or to assume
responsibility for the report themselves
Q611.
- regardless of whether the principal auditor decides to
refer to the auditor in the report or not:
A611.
- 1. the other auditors remain responsible for their own
work and report
- 2. the principal auditor must always be satisfied regarding
the reputation and independence of the other auditor
Q612.
- when the principal auditor decides to mention the work
done by other auditors, the report will express a _______
A612.
- division of responsibility
Q613.
- where will a principal auditor mention a division of
responsibility?
A613.
- all three paragraphs. (intro scope and opinion)
Q614.
- in a division of responsibility, the name of the other
auditor is not mentioned unless ______
A614.
- that auditor gives express permission and the report of
the other auditor is presented
Q615.
- the work done by the other auditors is expressed in terms
of __________, and is set forth in the _____ paragraph.
A615.
- in terms of percentages, totals, or other appropriate
criteria.
- intro paragraph.
Q616.
- if the principal auditors decide not to make reference to
other auditor, they must assure themselves of the
_________ of the other auditor.
A616.
- independence, professional competency, and reputation
Q617.
the other auditor, what steps should they take?
A617.
- 1. visit with the other auditor and discuss the audit
procedures
- 2. review the audit program, audit documentation, and
evaluation of internal control performed (PCAOB rules
have specific additional reqs regarding documentation that
the principal must obtain, review, and retain)
Q618.
the other auditor, what do they do if the other auditor's
opinion is qualified?
A618.
- the principal auditors must decide whether the subject of
the qualification is material in relation to the consolidated
statements, and, if not, they need not make reference in
their report to the qualification.
Q619.
- if adherence to GAAP would make the financial
statements more misleading than they would be under
another accounting treatment, what should the auditor do?
A619.
- express an unqualified opinion and add an explanatory
paragraph either before or after the opinion paragraph
Q620.
- if there is a justified departure from GAAP, what should
the explanatory paragraph say?
A620.
- contain a description of the departure, its approximate
effects (if possible), and the reasons why adherence to
GAAP would make the FSs misleading.
Q621.
- when is the auditor responsible for evaluating aggregate
audit evidence to determine whether there is substantial
doubt about the entity's ability to continue as a going
concern for a reasonable period of time?
A621.
- in every audit engagement
Q622.
- if there is substantial doubt about going concern, the
auditors would state their concerns where?
A622.
- in an explanatory paragraph after the opinion paragraph
of their unqualified report.
Q623.
- the going concern period should not exceed _____ from
the date of the financial statements being audited
A623.
- one year
Q624.
- what does ISA 570 require for the time period to assess
the entity's ability to operate as a going concern?
A624.
- consider same period that was used by management in
making its assessment.
- must be at least, not limited to, a year from the balance
sheet date.
- auditor also required to inquire of management regarding
conditions or events beyond the period of assessment that
may cast significant doubt about the entity's ability to
continue as a going concern.
Q625.
- to evaluate a company's going concern, the auditor
should examine the evidence obtained from the following
procedures:
A625.
- A - Analytical procedures
- D - Debt compliance
- M - Minutes
- I - Inquiry of client's legal counsel
- T - Third parties - confirm details of financial support
arrangements
- S - Subsequent events review
Q626.
- what are the differences between U.S. and international
standards on what procedures to use to determine a
company's going concern?
A626.
- isa 570 - consider the going concern assumption
throughout the engagement (when planning and
performing audit procedures and in evaluating the results
of audit procedures)
- u.s. - don't require specific procedures, but instead
require auditor to consider whether the results of the audit
procedures performed identify conditions
Q627.
- what are the conditions and events that may be indicative
of substantial doubt of a going concern?
A627.
- F - financial difficulties
- I - Internal matters
- N - negative trends
- E - external matters
Q628.
- what kinds of financial difficulties would be indicative of
substantial doubt of a going concern?
A628.
- loan defaults, dividend arrearages, denial of usual trade
credit, debt restructuring, noncompliance with capital
requirements, new financing sources or methods, disposal
of substantial assets
Q629.
- what kinds of internal matters would be indicative of
A629.
- work stoppages, labor difficulties, substantial
dependence on a particular project, uneconomic long-term
commitments, significant revision of operations
Q630.
- what kinds of external matters would be indicative of
A630.
- legal proceedings, new legislation, loss of a key
franchise, license, or patent, loss of a principal customer
or supplier, natural disasters
Q631.
- when an auditor believes that there is substantial doubt
about an entity's ability to continue as a going concern, the
auditor is required to consider management's plans for
dealing with the conditions or events that led to the
auditor's belief, including:
A631.
- plans to borrow money or restructure debt,
- plans to sell assets
- plans to delay or reduce expenditures
- plans to increase ownership equity
- (must include both intent and ability to carry out the
planned procedures)
Q632.
- Purpose of independent auditor
A632.
- to determine whether or not the f/s under exam are
presented fairly in accordance with GAAP, audit is result of
GAAS.
Q633.
- What Constitutes GAAP?
A633.
- Technical principles, methods and proc's, both written
and unwritten.
Q634.
- 3 General Standards of GAAS?
A634.
- 1. Sufficient Tech Training
- 2. Independence
- 3. Due Pro Care
Q635.
- 3 Fieldwork Standards
A635.
- 1. Planning & Supervision
- 2. Understanding of I/C
- 3. Evidential Matter
Q636.
- 4 Reporting Standards
A636.
- 1. GAAP
- 2. Consistency
- 3. Disclosure
- 4. Opinion
Q637.
- Objectives of an audit?
A637.
- 1. Ensure appr presentation & disclosure.
- 2. Proper valuation of items
- 3. Confire A & L
- 4. Timely recording of trans.
- 5. GAAP
- 6. Compliance
- 7. Determine existence of Assets
- 8. Determine Adequacy of I/C
Q638.
- What should be considered when planning an attestation
engagement?
A638.
- 1. Presentation Criteria
- 2. Attestation Risk
- 3. Materiality
- 4. Items like to req adj
- 5. Modification of attest proc's
- 6. Nature of Report
Q639.
- Things that affect NTE?
A639.
- 1. Auditor's familiarity with client & business
- 2. Size & Complexity of the company.
- 3. Past experience with the industry
Q640.
- 3 types of audits?
A640.
- Financial, Compliance, Operational
Q641.
- What is a compilation engagement?
A641.
- presentation of managements financial info in the form of
f/s.
Q642.
- What proc's should an auditor follow when conducting a
comp engagement?
A642.
- 1. Understand accounting principles
- 2. Understand the clients business trans & accounting
records.
- 3. Consider whether other pro services are needed.
- 4. Read the f/s
- 5. Consider whether a client rep letter should be obtained
Q643.
- What is a review engagement?
A643.
- A process of conducting inquiry and analytical proc's for
the purpose of providing limited assurance that f/s don't
req mat'l modifications in order to comply with GAAP.
Q644.
- What inquiries and analytical proc's should an auditor
make when conducting a review engagement?
A644.
- 1. Understand accounting principles and industry
practices.
- 2. Understand clients business
- 3. Review actions taken at meetings of the stakeholders
- 4. Interview management
- 5. Read F/S to ensure consistent application of GAAP
- 6. Identify events occurring subsequent to the date of the
f/s
Q645.
- Examples of attestation engagements and not attestation
engagements.
A645.
- Attestation Engagements- audits, reviews, reports on I/C,
supplementary financial info and certain compliance
audits.
- Not attestation - compilations, tax prep, consulting
engagements providing constructive advice and disclosure
consulting.
Q646.
- What conditions must be satisfied prior to accepting an
agreed upon proc's engagement?
A646.
- 1. Independence
- 2. Accountant and specified users must agree on
procedures and basis of accounting.
- 3. Specified users must take responsibility.
- 4. Subject matter must be able to be measured.
- 5. Evidential matter must exist.
- 6. Report must be restricted to use by the specified users.
Q647.
- What is the title for AU110?
A647.
- Responsibilities and Functions of the Independent
Auditor
Q648.
- The financial statements are the representations of
management . T or F
A648.
- TRUE
Q649.
- How do the FSs represent management?
A649.
- 1. Management is responsible for ADOPTING SOUND
ACCTG POLICIES and for establishing and maintaining
INTERNAL CTRL that will initiate, record, process, and
report transactions consistent with management's
assertions embodied in the financial statements.
- 2. The transactions in the FS are the DIRECT
KNOWLEDGE & CTRL of mgmt.
Q650.
- What is the auditor's responsibility?
A650.
- To PLAN and PERFORM the audit to obtain reasonable
assurance about whether the financial statements are
FREE of MATERIAL MISSSTATEMENT, whether caused by
error or fraud."
Q651.
- What is knowledge of Transactions and FS limited to for
the auditor?
A651.
- Information obtained in the audit.
Q652.
- What is the auditor's Responsibility for FS confined to?
A652.
- 1. To the opinion on them
- 2. May make suggestions as to the form of financial
statements. Can also draft FS based on management's
records and accounts.
Q653.
- What does AU110 say about the Professional
Qualifications required for an auditor?
A653.
- Have the two Es.
- Must have the EDUCATION and EXPERIENCE to practice
as such" (judgment must be the INFORMED JUDGMENT of
a qualified professional person) [related to the due care
standard]
Q654.
- What does AU110 say about the auditor's responsibility to
the profession?
A654.
- The auditor has the responsibility to COMPLY WITH the
STANDARDS accepted by his [or her] fellow practitioners."
(The Rules of Conduct, part of the AICPA's Code of
Professional Conduct, provide a basis for the enforcement
of the profession's standards.)
Q655.
- What do financial statements represent?
A655.
- Representations of Management
Q656.
- What is the auditor's primary role?
A656.
- To provide an IMPARTIAL(independent) ASSESSMENT of
the RELIABILITY of management's financial statements.
Q657.
- Are Public Companies required to provide audited FS?
A657.
- Yes. The SEC requires public companies to provide
audited FS.
Q658.
- Are Private Companies required to provide audited FS?
A658.
- No.
Q659.
- Who can require Private Companies to provide audited
FS?
A659.
- Creditors can require or negotiate audited FS thru Debt
Covenants.
Q660.
- Give 3 reasons why Management might choose to provide
audited FS?
A660.
- 1. Gain more favorable cost of capital
- 2. Gain insight from the auditors about adequacy of
Internal Controls
- 3. Gain insight from auditors about how its company
compares with others in the industry
Q661.
- What is the definition of a Standard?
A661.
- Important criteria which measure quality.
Q662.
- What does the acronym GAAP stand for?
A662.
- Generally Accepted Accounting Principles
Q663.
- What is GAAP?
A663.
- The STANDARDS by which the QUALITY of the FS is
judged.
Q664.
- What does the acronym GAAS stand for?
A664.
- Generally Accepted Auditing Standards
Q665.
- What is GAAS?
A665.
- The STANDARDS by which the QUALITY of the
AUDITOR'S PERFORMANCE is judged.
Q666.
- How many Standards of GAAS are there?
A666.
- 10
Q667.
- What's the acronym to remember the 10 Standards of
GAAS?
A667.
- TIE-PIE-GCDO
Q668.
- What are the 10 Standards of GAAS?
A668.
- General Standards:
- Training
- Independence
- Due Professional Care
- Field Work standards:
- Planning
- Internal Control
- Evidence
- Reporting standards:
- GAAP
- Consistency
- Disclosure
- Opinion
Q669.
- What is the Nature of the 3 General standards?
A669.
- Personal in nature
Q670.
- What is the Nature of the 3 Field Work standards?
A670.
- Evidence gathering in nature
Q671.
- What is the Nature of the 3 Reporting standards?
A671.
- Relate to the Language used in the auditor's report
Q672.
- What does auditor Training mean?
A672.
- Have adequate TECHNICAL TRAINING and PROFICIENCY
to perform the audit.
Q673.
- What does auditor Independence mean?
A673.
- Maintain Independence in MENTAL ATTITUDE in all
matters relating to the audit.
Q674.
- What does auditor Due Professional Care mean?
A674.
- Exercise due professional care in the PERFORMANCE of
the audit and the PREPARATION of the report.
Q675.
- What does auditor Planning and Supervision mean?
A675.
- Adequately PLAN the work and must properly SUPERVISE
any assistants.
Q676.
- What is the auditor's responsibility regarding Internal
Control?
A676.
- Obtain a SUFFICIENT UNDERSTANDING of the entity and
its environment, including its internal control, TO ASSESS
risk of material misstatement of the financial statements,
whether due to fraud or error; and to DESIGN the nature,
timing, and extent of further audit procedures.
Q677.
- What is the auditor's responsibility regarding Evidence?
A677.
- Obtain sufficient appropriate audit evidence by
PERFORMING AUDIT PROCEDURES to AFFORD A
REASONABLE BASIS FOR AN OPINION regarding the
financial statements under audit.
Q678.
- What is the auditor's responsibility regarding GAAP?
A678.
- Must STATE in the auditor's report whether the financial
statements are presented in accordance with (GAAP).
Q679.
- What is the auditor's responsibility regarding
Consistency?
A679.
- Must IDENTIFY in the auditor's report those
CIRCUMSTANCES in which PRINCIPLES have not been
consistently observed in the current period in relation to
the preceding period."
Q680.
- What is the auditor's responsibility regarding Disclosure?
A680.
- When the auditor determines that informative
DISCLOSURES are NOT REASONABLY ADEQUATE, must
state so in the auditor's report.
Q681.
- What is the auditor's responsibility regarding Opinion?
A681.
- 1. Must either express an opinion regarding the financial
statements, taken as a whole, or state that an opinion
cannot be expressed, in the auditor's report.
- 2. When the auditor cannot express an overall opinion,
the auditor should state the reasons therefore in the
auditor's report.
- 3. In all cases where an auditor's name is associated with
financial statements, the auditor should clearly indicate the
character of the auditor's work, if any, and the degree of
responsibility the auditor is taking, in the auditor's report.
Q682.
- Guidance Applicable to GAAS
A682.
- There is relevant Guidance Applicable to GAAS.
Q683.
- What are the guidance related to Guidance Applicable to
GAAS?
A683.
- 1. Statements on Auditing Sds (SASs)
- 2. Interpretive Publications
- 3. Other Auditing Publications
- 4. AICPA Quality Control standards
Q684.
- What SAS describes and clarifies the guidance that is
applicable to GAAS?
A684.
- SAS 95
Q685.
- What are SASs?
A685.
- Interpretations of GAAS; Must be followed by auditors per
Rule 202 of the AICPA Code of Prof Conduct.
Q686.
- In regards to the SASs, what are the three expectations of
the auditor?
A686.
- 1. Have sufficient knowledge of the SASs to identify those
applicable to the audit.
- 2. Be prepared to justify any departures from the SASs.
- 3. MATERIALITY and AUDIT RISK also underlie the
application of the 10 standards (GAAS) and the SASs,
particularly those related to field work and reporting.
Q687.
- What is the auditor's responsibility in regards to
departures from the SASs?
A687.
- Must be prepared to justify them.
Q688.
- What are Interpretive Publications?
A688.
- Include:
- 1. Auditing interpretations of the SASs.
- 2. Auditing guidance included in AICPA Audit &
Accounting Guides
- 3. AICPA Auditing Statements of Position (and the
appendices to the SASs).
Q689.
- Give 3 facts relating to Interpretive Publications.
A689.
- 1. Interpretive publications are not auditing standards.
- 2. These are issued under the authority of the Auditing
Standards Board after all ASB members have had an
opportunity to comment on the interpretive publication.
- 3. Auditors should be aware of (and consider) interpretive
publications applicable to their audits. When auditors do
not apply such auditing guidance, they should be prepared
to explain how they complied with the SAS provisions
related to such interpretive publications
Q690.
- Give 4 examples of Other Auditing Publications.
A690.
- Articles in the Journal of Accountancy, AICPA's CPA
Letter, Continuing Professional Education Programs, &
Textbooks.
Q691.
- What is the Authority regarding Other Auditing
Publications?
A691.
- Auditing publications have no authoritative status.
However, they may help the auditor understand and apply
the SASs.
Q692.
- To assess Appropriateness of the Other Auditing
Publications, what must one consider?
A692.
- 1. The degree to which the PUBLICATION is RECOGNIZED
as helpful in applying the SASs and the degree to which
the AUTHOR is RECOGNIZED as an authority on auditing
matters.
- Note: Other auditing publications reviewed by the AICPA
Audit and Attest Standards staff are presumed to be
appropriate.
Q693.
- Section: Relationship of GAAS to the AICPA's " Quality
Control Standards"
A693.
- Section: Relationship of GAAS to the AICPA's " Quality
Control Standards"
Q694.
- What is an individual audit engagement governed by?
A694.
- GAAS
Q695.
- What is a CPA firm's collective portfolio of accounting
and auditing services governed by?
A695.
- The Quality Control Standards
Q696.
- Guidance on the Quality Control Standards is provided by
what?
A696.
- The AICPA's Statements on Quality Control Standards
(SQCS) issued by the Auditing Standards Board.
Q697.
- Which Quality Control Stmt guides a Firm's System of
Quality Control?
A697.
- QC10 - A Firm's System of Quality Control
Q698.
- T or F A CPA firm is required to have a " system of quality
control" for accounting and auditing services regarding the
performance of engagements.
A698.
- TRUE
Q699.
- The System of Quality Control regarding engagements
must be in accordance with what?
A699.
- Professional Standards, Regulatory and Legal
requirements, and the Issuance of Reports that are
appropriate in the circumstances.
Q700.
- What is the Nature and Scope of the System of Quality
Control for a CPA firm?
A700.
- The policies and procedures will vary with the
circumstances (e.g., firm size and number of offices,
complexity of services offered, experience of professional
staff, etc.)
Q701.
- What are the Inherent Limitations of the System of Quality
Control for a CPA firm?
A701.
- Similar to any internal control system, a quality control
system provides reasonable (a high, but not absolute)
assurance, reflecting implicit cost-benefit trade-offs.
Q702.
- What are the 6 elements of a Quality Control System?
A702.
- 1. Leadership Responsibilities
- 2. Relevant Ethical Requirements
- 3. Acceptance & Continuance of Clients Engagements
- 4. Human Resources
- 5. Engagement Performance
- 6. Monitoring
Q703.
- Define the Leadership Responsibility element in a Quality
Control System.
A703.
- Policies and procedures should promote an internal
culture that EMPHASIZES QUALITY (the " tone at the top" ).
Q704.
- Define the Relevant Ethical Requirements element in a
Quality Control System.
A704.
- Policies and procedures should address the
INDEPENDENCE OF PERSONNEL as necessary (should
obtain written confirmation of compliance with
independence requirements from all appropriate personnel
at least annually).
Q705.
- Define the Acceptance and Continuance of Clients and
Engagements element in a Quality Control System.
A705.
- Policies and procedures should carefully ASSESS THE
RISKS associated with each engagement (including issues
related to management integrity) and to undertake only
engagements that can be completed with professional
competence.
Q706.
- Define the Engagement Performance element in a Quality
Control System.
A706.
- Policies and procedures should FOCUS ON COMPLIANCE
with all applicable firm and professional standards and
regulatory requirements, and encourage personnel to
consult as necessary with professional (or other) literature
or other human resources within or outside of the firm for
appropriate guidance.
Q707.
- Define the Monitoring element in a Quality Control
System.
A707.
- Policies and procedures should provide an ON-GOING
ASSESSMENT of the ADEQUACY OF DESIGN and the
OPERATING EFFECTIVENESS of the system of quality
control .
Q708.
- What does the Quality Control Standards say about
handling Differences of Opinion?
A708.
- The firm should establish policies and procedures for
dealing with and resolving differences of opinion within the
engagement team, with those consulted, and between the
engagement partner and the engagement quality control
reviewer.
- CONCLUSIONS REACHED ARE: Documented and
implemented and that the report is not released until the
matter is resolved.
Q709.
- What are the two types of Professional Requirements that
the various AICPA standards distinguish between?
A709.
- 1. Unconditional Requirement
- 2. Presumptively Mandatory Requirement
Q710.
- What does the Unconditional Professional requirement
mean?
A710.
- Must comply with the requirement without exception
(indicated by " MUST" in applicable standards).
Q711.
- What does the Presumptively Mandatory professional
requirement mean?
A711.
- In rare circumstances, the practitioner may depart from
such a " requirement," but must document the justification
for the departure and how the alternate procedures
performed were adequate to meet the objective of the
" requirement" (indicated by " SHOULD" in applicable
standards).
Q712.
- What words are considered Descriptive Guidance within
the body of the standards that do not impose a
" Requirement?"
A712.
- Descriptive guidance is indicated by " MAY," " MIGHT," or
" COULD" in applicable standards.
Q713.
- What are the 3 types of categories of standards within
GAAS?
A713.
- General standards
- Field Work standards
- Reporting standards
Q714.
- What governs an individual audit engagement?
A714.
- GAAS
Q715.
- What governs a CPA firm's collective portfolio of
accounting and auditing services (related to financial
statements)?
A715.
- The Quality Control Standards
Q716.
- What is the name for the Quality Control Standards?
A716.
- Statements on Quality Control Standards (SQCS)
Q717.
- Who issues the Statements on Quality Control Stadards
(SQCS)?
A717.
- The AICPAs Auditing Standards Board
Q718.
- Is a CPA firm required to have a system of quality
control?
A718.
- Yes
Q719.
- What services does a CPA firm's quality control system
cover?
A719.
- Accounting & auditing (attestation, compilaton, & review)
Q720.
- What is the system of quality control's Basic
Requirement?
A720.
- To provide " reasonable assurance" of:
- 1. PERFORMING engagements in accordance with
PROFESSIONAL STDS and REGULATARY and LEGAL
requirements
- 2. ISSUING REPORTS that are appropriate in the
circumstances
Q721.
- A firm should document its quality control policies and
procedures. T or F
A721.
- TRUE
Q722.
- The firm should communicate its quality control policies
and procedures to its personnel. Is this communication
required in writing?
A722.
- No
Q723.
- What is the most important aspect of the Relevant Ethical
Requirement in a QCS?
A723.
- Independence
Q724.
- How often should a firm obtain written confirmation of
compliance with independence requirements from all
necessary personnel?
A724.
- Annually (paper or electronic)
Q725.
- Components of QC system?
A725.
- 1. Independence, Integrity & Objectivity.
- 2. Personnel Mngmt
- 3. Acceptance and continuance of clients
- 5. Monitoring
Q726.
- What are some appropriate audit planning proc's?
A726.
- 1. Understand clients business
- 2. Review I/C
- 3. Determine Audit Strategy
- 4. Preliminary analytic review
- 5. Determine materiality factor.
- 6. Review Prior yrs w/p's
- 7. Consider use of a specialist.
- 8. Admin matters
- 9. Nature of audit report
Q727.
- What are the main elements of an engagement letter?
A727.
- 1. Examination & review period
- 2. Fees and expenses
- 3. Audit Guidelines (GAAS)
- 4. Reqd client assistance
- 5. Disclosure and special reports
- 6. Clarify the following: f/s are representations of
management and the purpose of the audit is not to disclose
defiencies or fraud.
Q728.
- What are the auditor's responsibility in relation to staffing
and supervision.
A728.
- 1. Staffed by trained personnel.
- 2. Review work of assistants
Q729.
- Examples of supervising staff?
A729.
- 1. Instructing Assistants
- 2. Staying abreast of audit results.
- 3. Reviewing w/p's
Q730.
- Why does an auditor attempt to gain an understanding of
the clients business during the audit planning phase?
A730.
- It assists the auditor in determining necessary controls
and assessing control risk.
Q731.
- How does an auditor obtain a general understanding of a
potential client and its industry.
A731.
- 1. Read AICPA audit and accounting guides and technical
publications.
- 2. Tour the clients place of business and communicate
with predecessor auditor, audit committee, lawyers and
other professionals.
- 3. Upon conclusion of this process, prepare a proposal,
and if accepted draft an engagement letter.
Q732.
- How should an independent auditor evaluate the
competence of the client's internal auditor's?
A732.
- 1. Competence
- 2. Objectivity
- 3. Evaluations
Q733.
- Define Mat'l Misstatement
A733.
- Material Misstatement is an error which would be
considered important to the readers of the f/s.
Q734.
- Define audit risk?
A734.
- The risk that a MM to a financial statement assertion may
exist and the auditor will fail to modify the opinion.
- AR = IR x CR x DR
Q735.
- Why does DR always exist in an audit performed under
GAAS?
A735.
- Because you're not auditing all the accounts or 100% of
the transactions making up an acct bal.
Q736.
- Define W/P's?
A736.
- W/P's are documentation of audit proc's performed by the
auditor. they give support to the auditors opinion,
document compliance with fieldwork standards and serve
as a reference mat'l for future years.
Q737.
- What are analytical proc's?
A737.
- Evaluations of financial info. Determined based upon
relationships. Auditor performs as a planning tool, sub test
and overall review.
Q738.
- Purpose of AP during planning.
A738.
- Determine NTE that will be employed to obtain audit
evidence. They help identify and design auditing proc's.
Q739.
- Purpose of AP performed as a substantive test.
A739.
- To obtain evidential matter.
Q740.
- What sources may an auditor use to develop expectations
of account balances when performing AP?
A740.
- 1. Prior yr balances
- 2. Client prepared budgets and forecasts
- 3. Industry statistics
- 4. Relationship among acct balances within the same
period
- 5. Relevant nonfinancial info
Q741.
- What disclosures are req'd concerning related parties?
A741.
- 1. Nature of relationship and description of transactions.
- 2. Quantification of transactions and effects of any
change in method of establishing terms from preceding
period.
- 3. Balances to or from related parties at date of each
balance sheet presented and terms and manner of
settlement.
Q742.
- Define ICS? What are the auditor's general responsibility
in relation to the ICS?
A742.
- ICS - policies and proc's established to provide
reasonable assurance that specific entity objectives will be
achieved.
- The auditor is req'd by the 2nd std of FW to obtain a
sufficient understanding of I/c in order to plan the audit and
determine the NTE of substantive tests.
Q743.
- Auditor's specific responsibilities pertaining to
understanding an entity's ICS?
A743.
- An auditor is responsible for understanding each ICS
element and determining if they are in place. In addition the
auditor must document their understanding through
flowcharts, memo, questionnaires, etc.
Q744.
- Five elements that comprise ICS?
A744.
- Control Environment, Risk Assessment, Control
Activities, Info & Communication, Monitoring
Q745.
- Control Environment?
A745.
- Primarily managements attitude towards the importance
of controls. Managements philosophy and style.
Q746.
- Risk Assessment?
A746.
- Process of identifying, analyzing & controlling risks that
affect f/s.
Q747.
- What can cause risks?
A747.
- A risk can be created by new personnel, accelerated
growth, foreign operations, new tech new info systems
and/or new accounting pronouncements.
Q748.
- Control Activities?
A748.
- Control Activities are policies and proc's established by
management to reasonably assure control objectives are
accomplished.
Q749.
- What are some examples of control activities?
A749.
- 1. Segregation of duties
- 2. Proper Authorization of transactions.
- 3. Safeguards over access to assets and records.
- 4. Recording of transactions
- 5. Test on recorded amts
Q750.
- Monitoring element of an ICS?
A750.
- Process that assesses the effectiveness of the I/C on an
ongoing basis.
Q751.
- Five F/S assertions?
A751.
- 1. Existence or occurrence
- 2. Completeness
- 3. Valuation or allocation
- 4. Rights and obligations
- 5. Presentation and disclosure
Q752.
- What is Existence or occurrence assertion?
A752.
- did the assets and liab exist at the balance sheet date and
did the recorded transactions occur during the income
statement period.
Q753.
- What is the Completeness assertion?
A753.
- have all appropriate transactions and balances been
included.
Q754.
- What is the Valuation or allocation assertion?
A754.
- have all accts been included at appropriate amts.
Q755.
- Rights and Obligations?
A755.
- Are assets owned by the entity.
Q756.
- Presentation and disclosure?
A756.
- Have all accts been properly classified and disclosed.
Q757.
- Define a compensation control?
A757.
- A compensation control is a control employed when
incompatible functions exist within the EDP environment.
Q758.
- Examples of compensation controls?
A758.
- Req'd vaca's, restricted access to EDP equipment,
rotation of operator duties and independent document
counts and log books.
Q759.
- Define application controls.
A759.
- Application controls are controls that relate to specific
computerized accounting tasks.
Q760.
- What are the main types of application controls.
A760.
- 1. Input Controls
- 2. Processing Controls
- 3. Output Controls
- 4. Effect of inadequate application controls
Q761.
- Why must the auditor consider the competence of its
clients personnel.
A761.
- Sufficient competent personnel must be employed in
order to sustain adequate control environment.
Q762.
- Define Control Risk
A762.
- The risk that an established control proc will not detect or
prevent on a timely basis a MM in a f/s assertion.
Q763.
- When may an auditor assess control risk at the max
level?
A763.
- 1. Controls do not pertain to an assertion.
- 2. Controls are not likely to be effective.
- 3. Testing controls would be inefficient.
Q764.
- Relationship between the level of control risk and the
level of substantive testing.
A764.
- There is a direct relationship.
Q765.
- Relationship between the level of detection risk and the
assurance provided by substantive tests?
A765.
- Inverse
- The more assurance provided through substantive tests,
the less likely a deviation from a f/s assertion will go
undetected.
Q766.
- What would result in the assessment of CR being too
high?
A766.
- It will occur when the sample selected to test controls
does not support the true operating effectiveness of the
control structure.
Q767.
- What are the effects of assessing control risk too high?
A767.
- The error will diminish the efficiency (due to excessive
substantive testing) but not the effectiveness of the audit.
Q768.
- What are the auditor's responsibilities in relation to
documenting the assessed level of control risk?`
A768.
- Document understanding I/C elements and state the
assessment. If not at the max level give reasons why.
Q769.
- How should the auditor identify internal control
deficiencies?
A769.
- Auditor should inquire about the authorization of
transactions, recording of transactions, custody of assets,
comparisons and segregation of duties.
Q770.
- How should the auditor evaluate the operational
effectiveness of the internal control structure policies and
proc's?
A770.
- 1. Inquire to determine who performed a procedure.
- 2. Inspect documents & reports to determine how proc
was executed and who executed it.
- 3. Observe specific policies and proc's to determine who
performed a proc.
- 4. Re-perform the proc to substantiate that the proc was
correctly performed.
Q771.
- What is a compliance test?
A771.
- A test to determine whether a designed control is applied
as intended.
Q772.
- When would an auditor do a compliance test?
A772.
- When controls are designed effectively and testing such
controls will be more efficient that the incremental
substantive test of details necessary if the test are not
performed.
Q773.
- An auditor will normally find the rate of deviations from
control proc's greater than the error rate in the records.
A773.
- TRUE
Q774.
- What characteristics of evidential matter influence the
NTE of an auditor's test of controls?
A774.
- 1. Type of evidential matter
- 2. Source
- 3. Timeliness
- 4. Existence of other evidential matter that relates to the
same conclusions.
Q775.
- What types of proc's are considered substantive tests?
A775.
- Tests of balances and transactions and analytical review
procedures.
Q776.
- List the most common transaction cycles.
A776.
- 1. Cash Rec, Recvables, sales
- 2. Cash dis, payables, purchase
- 3. Fixed Assets
- 4. Inventory and production
- 5. Payroll
Q777.
- What is the best control procedure to prevent the
occurrence and concealment of errors or fraud.
A777.
- Segregation of duties between custody, authorization,
record keeping and execution.
Q778.
- What are some examples of proc's performed when
testing controls?
A778.
- 1. Inspection of records
- 2. Client inquiries
- 3. Observing the application of policies
- 4. Performing the actual procedures
Q779.
- What is a sig def?
A779.
- Matters representing sig def in the design and/or
operation of an entity's ICS that could adversely affect the
entity's ability to support its f/s assertions. Should be
communicated to audit committee.
Q780.
- What is a MW?
A780.
- ICS does not reduce to a relatively low level the risk of
undetected material errors.
Q781.
- Types of SD's that should be communicated to audit
committee.
A781.
- Inadequacies
Q782.
- What guidelines should a report on MW be consistent
with?
A782.
- 1. State the purpose of audit was not to provide
assurance concerning the ICS.
- 2. It is solely to be used by audit committee and
management or other restrictions.
- 3. State definition of MW.
- 4. Don't say no SD's were found.
Q783.
- What is evidential matter?
A783.
- Source doc's, data & corrobating info that supports the
f/s. Basically stuff that supports f/s.
Q784.
- What determines the sufficiency of evidential matter?
A784.
- Judgment call. Auditor must accumulate enough to
support reasonable basis for forming an opinion.
Q785.
- What types of proc's are considered substantive tests?
A785.
- 1. Detailed tests of trans.
- 2. Substantive analytical proc's
- 3. Detailed tests of account balances
Q786.
- What's the diff btw tests of trans & tests of balances?
A786.
- Tests of trans are concerned with activity and trans
cycles during the fiscal yr.
- Tests of balances are concerned with yr-end balance.
Tests for accuracy of individual accts at BS date.
Q787.
- What are some substantive tests that can be performed
prior to the BS date?
A787.
- 1. Additions and disposals to PPE
- 2. Increases and reductions in other assets, debt & equity
accts.
- 3. Analytic review of inc & exp accts.
Q788.
- What is the primary means of obtaining evidence
concerning litigation?
A788.
- Obtain a legal representation letter on all mat'l matters.
This should be sent directly to the auditor.
Q789.
- What are the limitations on the scope of the lawyers
response?
A789.
- 1. Matters of substantive attention
- 2. Mat'l matters
Q790.
- What's audit sampling?
A790.
- A process of choosing less than a 100% of trans within an
acct balance for testing.
Q791.
- What is statistical sampling?
A791.
- A sampling technique that measures and considers
sampling risk.
Q792.
- What is the main distinction of statistical sampling vs.
non stat sampling?
A792.
- Nonstatistical sampling uses qualitative terms to express
sampling results.
Q793.
- What is a sampling risk?
A793.
- A risk that occurs because less than a 100% of
transactions are tested.
Q794.
- What is a nonsampling risk?
A794.
- Risks that occur because of inappropriate proc's or failing
to detect misstatement while examining transaction.
Q795.
- When will an auditor utilize sampling?
A795.
- Attribute Sampling - testing controls
- Variable Sampling - performing substantive tests
Q796.
- What are two types of sampling risks that must be
considered in performing substantive (variable) test?
A796.
- Beta risk - the risk of incorrect acceptance
- Alpha risk - the risk of incorrect rejection
Q797.
- What are two types of sampling risks that must be
considered in performing compliance (attribute) test?
A797.
- Beta risk - the risk of over-reliance on I/C
- Alpha risk - the risk of under-reliance on I/C
Q798.
- When is acceptance sampling used?
A798.
- Test compliance with I/C.
Q799.
- What is discovery sampling?
A799.
- Wanting no errors, if found one then their is problem.
Q800.
- What is systematic sampling method?
A800.
- Begins at random point, the auditor selects every nth
item.
Q801.
- What proc's would you apply when gathering evidence for
investments?
A801.
- 1. Physical inspection
- 2. Confirmation with issuer/custodian
- 3. Confirmation of unsettled transactions
Q802.
- What specific inquiries are req'd concerning the
applicability of the equity method for investments?
A802.
- 1. Does the investor have the ability to exercise
significant influence over the operating and financial
policies of the investee?
- 2. What factors were considered by the client in
determining whether significant influence could be
exercised?
Q803.
- What are some audit proc's to identify a going concern
issue?
A803.
- 1. Loan covenants & compliance
- 2. Subsequent events
- 3. Litigation confirmations
- 4. Fluctuations in balances
- 5. Minutes
Q804.
- What events may indicate a potential going concern
issue?
A804.
- 1. Labor strikes, work stoppage
- 2. Litigation, loss of major customer
- 3. Negative business or industry trends
- 4. Other financial difficulties such as default on a loan or
violation of convenants
Q805.
- What is professional skepticism?
A805.
- No assumptions of managements honesty or dishonesty
are made and all observations and evidential matter are
evaluated objectively.
Q806.
- What is the diff btw auditing proc's and auditing
standards?
A806.
- Proc's - tailored steps performed to achieve an objective
- Standards-self-regulated measures of quality & objectives
for auditing proc's.
Q807.
- What should be included in a management rep letter?
A807.
- 1. Addressed to auditor
- 2. Dated with the same date that appears on the audit
report
- 3. Signed by CEO & CFO
Q808.
- What types of items should be included in a management
rep letter?
A808.
- Managements responsibility, disc of related parties,
availability of financial records, subsequent events, board
minutes, noncompliance of contracts, plans that affect f/s
accts.
Q809.
- Why does an auditor obtain a management rep letter?
A809.
- 1. It's req'd
- 2. Evidential Matter
- 3. Supports oral representations
- 4. Reduces misunderstandings
Q810.
- How does an auditor evaluate the reasonableness of an
accounting estimate?
A810.
- 1. Understand how management developed it.
- 2. Figure out what the estimate should look like if you did
it.
- 3. Perform subsequent transaction proc's
Q811.
- When may an auditor modify a standard report?
A811.
- GAAP departure
- Other Auditor
- Disclosure
- Going Concern
- Inconsistency
Q812.
- What types of opinions may an auditor issue relating to
an uncertainty.
A812.
- Unqual, Unqual w explanation or disclaim
Q813.
- What type of opinion should you give if f/s are not
presented in conformity with GAAP or when there is
inadequate disclosure?
A813.
- Unqual, Qual or Adverse
Q814.
- What's the format of a qual opinion due to a scope
limitation or insufficiency of evidential matter?
A814.
- Intro - No Effect
- Scope- refer to explanation para
- Explan para- explains the
- scope limitation
- Opinion- refers to explanation
- language & qual's opinion
Q815.
- What is the format of a qual opinion due to a departure
from GAAP?
A815.
- Intro - No Effect
- Scope- No Effect
- Explanation para- explains the
- departure
- Opinion- refers to explanation
- language & qual's opinion
Q816.
- What is the format of a qual opinion due to inadequate
disclosure?
A816.
- Intro - No effect
- Scope - No Effect
- Explanation para - explains nature of the omitted disc and
state its requirements w/GAAP
- Opinion-refers to explanation para language and qual's
opinion
Q817.
- What's the format of a disclaimer of opinion?
A817.
- Intro - omits auditor's responsibility to express an opinion
- Scope - omitted
- Explanation para-explains why the audit does not comply
with GAAS.
- Opinion-refer to explanation para and state not able to
express an opinion
Q818.
- What's the format of an adverse of opinion?
A818.
- Intro - No Effect
- Scope- No Effect
- Explanation Para- give reasons for the opinion and effect
of item causing the adverse opinion on the f/s
- Opinion-f/s referred to above do not present fairly....
Q819.
- How do you report on a lack of consistency that has a
mat'l effect on the comparability of f/s.
A819.
- 1. Explan para - refer to change causing the lack of
consistency and identify the nature of the change.
- 2. Disclose the change in a note to the f/s.
Q820.
- When do you not refer to the consistent application of
accounting principles in an audit report?
A820.
- 1. No changes
- 2. Immaterial changes
Q821.
- If client changes an accounting principle, what are the
appropriate proc's you should perform?
A821.
- 1. Determine if new one is GAAP
- 2. Is the change allowed in GAAP
- 3. Is managements explanation good?
Q822.
- What circumstances would you be req'd to add an
explanation para to your standard report?
A822.
- Other Auditor, Omission or req'd supplemental info,
Going concern, emphasize a matter, etc
Q823.
- When will you add an emphasis of a matter para w/o
qualifying the opinion?
A823.
- 1. Client is component of a larger entity
- 2. Significant RPTs
- 3. Significant subsequent event
- 4. Comparability of f/s has been affected by an event or
trans
Q824.
- When should an explanation para about req'd
supplementary info be added to the standard auditor's
report?
A824.
- 1. Omission of req'd info
- 2. Deviation of info from GASB/FASB
- 3. Inability to apply limited proc's
- 4. Substantial doubt exists as to whether the
supplementary info conforms to established guidelines.
Q825.
- What are the different transaction cycles?
A825.
- 1) Revenue
- 2) Expenditure
- 3) Payroll & Personnel
- 4) Inventory & Production
- 5) Property, Plant & Equipment
- 6) Investments
- 7) Other Liabilities
Q826.
- Would following TOC procedure would be a test over
SALES or COLLECTIONS?
- " Vouch a sample of sales invoices to shipping documents
and approved sales orders"
A826.
- SALES
Q827.
- " Observe mailing of monthly customer statements"
A827.
- SALES
Q828.
- " Inspect deposit slip and compare to cash summary"
A828.
- COLLECTIONS
Q829.
- " Observe the matching of remittance advices and check
deposit summary"
A829.
- COLLECTIONS
Q830.
PURCHASES or PAYABLES?
- " Inspect purchase orders for approved requisition"
A830.
- Purchases
Q831.
- True or False:
- Auditing Standards require the final audit documentation
to be assembled within 45 days following the report release
date.
A831.
- FALSE
- *must be assembled within 60 days.
Q832.
- True or False:
- The PCAOB require the final audit documentation to be
assembled within 45 days following the report release date.
A832.
- TRUE
Q833.
- Is audit documentation property of the independent
auditor or the client?
A833.
- Independent auditor
Q834.
- In determining the nature and extent of audit
documentation, the auditor should consider the following:
A834.
- 1) Risk of material misstatement
- 2) Extent to which judgment was required in performing
the work and evaluating the results
- 3) Nature of the specific auditing procedure
- 4) Significance of the evidence obtained
- 5) Nature & extent of any problems identified
- 6) The need to document conclusions that may not be
obvious
Q835.
- Is the following included in the permanent file or the
current year file?
- Copies of stock options
A835.
- PERMANENT FILE
Q836.
current year file?
- Confirmation Letters
A836.
- CURRENT YEAR FILE
Q837.
current year file?
- Summaries of significant audit findings
A837.
- CURRENT YEAR FILE
Q838.
current year file?
- Copies of Leases
A838.
- PERMANENT FILE
Q839.
current year file?
- Accounts Receivable Aging
A839.
- CURRENT YEAR FILE
Q840.
current year file?
- Copies of Bylaws and Articles of Incorporation
A840.
- PERMANENT FILE
Q841.
- Audit documentation can be provided wihtout the client's
permission under what three situations?
A841.
- 1) Part of a voluntary quality review program under the
auspices of the AICPA or state society of CPAs
- 2) If its subpoenaed by a court
- 3) If its needed as part of an official investigation being
conducted by the AICPA, a state CPA society, or under
state statues
Q842.
- True or False:
- Analytical Procedures are required in the planning stage
of the audit.
A842.
- TRUE
Q843.
- True or False:
- Analytical Procedures are required in the substantive
testing stage of the audit.
A843.
- FALSE
Q844.
- True or False:
- Analytical Procedures are required in the final stage of the
audit.
A844.
- TRUE
Q845.
- List the standard auditing procedures
A845.
- 1) Foot, Crossfoot, Recalc
- 2) Inquiry
- 3) Vouching
- 4) Examination/Inspection
- 5) Confirmation
- 6) Analytical Procedures
- 7) Reperformance
- 8) Reconciliation
- 9) Observation
- 10) Tracing
- 11) Subsequent Events Review
Q846.
- The following procedure tests which assertion?
- Examine the last five sales invoices of the year.
A846.
- Cut-off
Q847.
- Confirmation of accounts with third parties
A847.
- Existence
Q848.
- Perform inventory observation
A848.
- Existence
Q849.
- Trace an invoice to the accounts payable aging.
A849.
- Completeness
Q850.
- Inspection of contracts/debt agreements
A850.
- Rights & Obligations
Q851.
- Review of all disclosures for compliance with GAAP
A851.
- Understandability and Classification
Q852.
- Recalculation of allowance for doubtful accounts for
reasonableness.
A852.
- Allocation & Valuation
Q853.
- What is Audit Risk?
A853.
- The Probability that the auditor fails to modify the opinion
on financial statements that contain a material
misstatement
- (i.e., issues an unqualified opinion)
Q854.
- Does Audit Risk affect the application of GAAS?
A854.
- Yes
Q855.
- Which two categories of GAAS are affected by audit risk
and materiality?
A855.
- Field Work and Reporting
Q856.
- What is another way to say what Audit Risk is?
A856.
- The risk the auditor won't modify the FS.
- It is the risk the Auditor brings to the audit.
Q857.
- What two factors need to be considered together in
designing the nature, timing, and extent of audit
procedures and in evaluating the results of those
procedures.
A857.
- Audit Risk and Materiality
Q858.
- How is Audit Risk indicated in the auditor's report?
A858.
- By reference to Reasonable Assurance
Q859.
- What does Reasonable Assurance mean?
A859.
- That audit risk cannot be reduced to zero probability,
which would indicate absolute assurance.
Q860.
- What is Materiality?
A860.
- A misstatement in the financial statements can be
considered Material if knowledge of the misstatement
would affect a decision of a reasonable user of the
statements.
Q861.
- What is the Basic Auditor responsibility?
A861.
- To Detect Material Misstatements!
- To plan and perform the audit to obtain reasonable
assurance that material misstatements, whether caused by
errors or fraud, are detected.
Q862.
- What is the one over-riding audit planning objective?
A862.
- To limit audit risk to a Low Level
Q863.
- When reducing Audit Risk to a low level, what four areas
should be reduced to a low audit risk level?
A863.
- Determining the extent and nature of the auditor's risk
assessment procedures
- (how you go about assessing risk)
- 2. Identifying and assessing the risk of material
misstatement
- 3. Determining the nature, timing, and extent of further
audit procedures
- 4. Evaluating whether the financial statements taken as a
whole are presented fairly in conformity with GAAP.
Q864.
- What considerations concerning audit risk and materiality
are at the Financial Statement level?
A864.
- To keep audit risk at a low level
Q865.
- What is Audit Risk a function of?
A865.
- 3 Component Risks:
- Inherent Risk, Control Risk, Detection Risk
Q866.
- What considerations concerning audit risk and materiality
are at the individual account balance, class of transaction,
or disclosure level?
A866.
- It is the audit risk model, meaning that audit risk is a
function of 3 component risks: inherent risk, control risk,
and detection risk.
Q867.
- What is the Audit Risk model?
A867.
- AR = IR x CR x DR
Q868.
- What SAS states the AR model?
A868.
- SAS 107
Q869.
- What is Inherent Risk?
A869.
- The probability that a material misstatement would occur
in the particular audit area in the absence of any internal
control policies and procedures.
Q870.
- What is Control Risk
A870.
- The probability that a material misstatement that occurred
in the first place would not be detected and corrected by
internal controls that are applicable.
Q871.
- What is Detection Risk?
A871.
- The probability that a material misstatement that was not
prevented or detected and corrected by internal control
was not detected by the auditor's substantive audit
procedures (that is, an undetected material misstatement
exists in a relevant assertion).
Q872.
- What AU and SAS No correspond to Analytical
Procedures?
A872.
- AU329, SAS 56
Q873.
- What is the title for AU329, SAS 56?
A873.
- Analytical Procedures
Q874.
- What is the definition of Analytical Procedures?
A874.
- Analytical Procedures : evaluations of financial
information made by a study of plausible relationships
among both financial and non-financial data (sometimes
referred to as " tests of reasonableness" )
Q875.
- What is a short definition of Analytical Procedures?
A875.
- Evaluations!
Q876.
- What are the three purposes of Analytical Procedures?
A876.
- 1. Required during planning
- 2. Constitutes a form of substantive evidence
- 3. Required during review
Q877.
- In general, what do Analytical Procedures provide in the
Planning of an audit?
A877.
- They direct attention!
Q878.
- Specifically, what do Analytical Procedures provide in the
Planning of an audit?
A878.
- 1. Helps auditor understand the client's activities.
- 2. Helps target risky areas where misstatements may be
more likely.
- 3. Primarily based on financial data, but may use non-
financial data, too (e.g., sales per square foot is a widely
used benchmark in the retail industry).
Q879.
- The effectiveness and efficiency of analytical procedures
for substantive purposes depends on what 4 factors?
A879.
- 1. The Nature of Assertion
- 2. Plausibility and Predictability of relationship
- 3. Availability and reliability of data
- 4. Precision of expectation
Q880.
- Sometimes the nature of the assertion determines
whether an analytical procedure is effective or not. Give an
example of this.
A880.
- Can be effective in testing for OMISSIONS of transactions
that would be hard to detect with procedures that focus on
recorded amounts.
Q881.
- Give 3 examples where the Plausibility and Predictability
of relationship causes or does not cause an analytical
procedure to be effective.
A881.
- a. Relationships in a stable environment are usually more
predictable than those in a dynamic environment.
- b. Relationships involving income statement accounts
tend to be more predictable than those involving balance
sheet accounts (since the income statement deals with a
period of time rather than a single moment in time).
- c. Relationships involving transactions subject to
management discretion tend to be less predictable.
Q882.
- The Availability and Reliability of data effect the
effectiveness of analytical procedures in what 3 ways?
A882.
- The reliability increases when the data used is:
- (1) Obtained from independent external sources
- (2) When it is subject to audit testing (either currently or
in the past)
- (3) When it is developed under conditions of effective
internal control.
Q883.
- How does Precision of Expectation provide effectiveness
for analytical procedures?
A883.
- The likelihood of detecting a misstatement decreases as
the level of aggregation of the data increases.
Q884.
- What do Analytical Procedures provide during the final
review of an audit?
A884.
- A final opportunity to verify the appropriateness of
conclusions reached before the auditor's report is issued.
Q885.
- What AU and SAS No relate to detecting fraud?
A885.
- AU316 and SAS 99
Q886.
- What is the title for AU316 and SAS 99?
A886.
- Consideration of Fraud
Q887.
- What are the two types of misstatements that are relevant
to the auditor's consideration of fraud?
A887.
- Fraudulent Financial Reporting
- Misappropriation of Assets
Q888.
- What is Fraudulent financial reporting?
A888.
- Where misstatements are intended to deceive financial
statement users
Q889.
- What is misappropriation of assets?
A889.
- Theft of assets causing the financial statements to be in
conflict with GAAP
Q890.
- What is the auditor's basic responsibility as it relates to
Fraud during planning?
A890.
- A. In general, the auditor is required to design (plan) the
audit to provide " reasonable assurance" of detecting
misstatements that are material to the financial statements.
- B. Specifically, audit team members must have a
discussion about how and where the financial statements
might be susceptible to material misstatement due to fraud
and emphasize the importance of maintaining professional
skepticism.
- C. The auditor should also discuss the potential for
management override of internal controls.
Q891.
- In what ways can a failure to detect a material
misstatement Not be considered a substandard audit?
A891.
- Auditor may be unable to detect a material misstatement
due to forgery, collusion, or upper management
involvement, etc.
Q892.
- To obtain information needed to identify the risks of
material fraud -- what does the auditor emphasize?
A892.
- Inquiry and Analytical Procedures
Q893.
- Where should inquiries be documented?
A893.
- In the " Management Representation Letter" at the end of
fieldwork
Q894.
- In what ways does an auditor inquire about the risk of
fraud?
A894.
- Inquire of Mgmt about Knowledge of fraud
- 2. Inquire about Controls implemented to diminish fraud
- 3. Inquire of Communications w/those of governance
about fraud issues
- 4. Inquire of Communications w/others (audit com,
internal aud, etc)
Q895.
- How do analytical procedures provide a way to identify
the risk of fraud?
A895.
- By performing analytical procedures involving revenue
accounts. Consider any unexpected results associated
with analytical procedures
Q896.
- What is the presumption about Revenue and Fraud?
A896.
- That improper revenue recognition is a fraud risk --
Q897.
- When Revenue is misstated, what is the auditor's
responsibility?
A897.
- The auditor should ordinarily presume a risk of material
misstatement due to fraud and perform appropriate
procedures (such as analytical procedures)
Q898.
- The auditor is required to specifically assess the risk of
material misstatement due to fraud. T or F
A898.
- TRUE
Q899.
- SAS 99 requires to consider what 3 conditions in
association with fraud?
A899.
- 1. Incentive/Pressure
- 2. Opportunity
- 3. Attitude/Rationalization
Q900.
- What specific Incentive/Pressure risks should the auditor
consider in assessing fraudulent financial reporting?
A900.
- For Incentive Pressure, consider:
- a. Financial stability/profitability -- threatened by economic
conditions: e.g., operating losses threaten bankruptcy;
recurring negative cash flows from operations; vulnerability to
rapid changes due to technology or other factors; increasing
business failures in the industry; unusual profitability relative
to the industry,
- b. Excessive pressure to meet the expectations of outsiders --
e.g., overly optimistic press releases; marginal ability to meet
exchange listing requirements; difficulty meeting debt
covenants; need to obtain additional financing to stay
competitive.
- 2. Consider the Opportunity that's present
Q901.
- What specific Opportunity risks should the auditor
consider in assessing fraudulent financial reporting (part
1)?
A901.
- a. Nature of the industry or the entity's operations -- e.g.,
significant related-party transactions not in the ordinary course
of business; ability to dominate suppliers or customers in a
certain industry sector; unnecessarily complex transactions
close to year-end raise " substance over form" issues;
significant bank accounts or business operations in " tax-
haven" jurisdictions with no clear business justification; major
financial statement elements that involve significant estimates
by management that are difficult to corroborate.
- b. Ineffective monitoring of management -- e.g., domination of
management by a single person or small group without
compensating controls; ineffective oversight by those charged
with governance.
Q902.
- What specific Opportunity risks should the auditor
consider in assessing fraudulent financial reporting (part
2)?
A902.
- c. Complex or unstable organizational structure -- e.g.,
organization consists of unusual legal entities; high
turnover of senior management, counsel, or board
members.
- d. Internal controls are deficient -- e.g., inadequate
monitoring of controls; high turnover rates in accounting,
internal auditing, and information technology staff;
ineffective accounting and information systems (significant
deficiencies are material weaknesses).
Q903.
- What specific Attitude/Rationalizations justify fraudulent
financial reporting?
A903.
- a. Lack of commitment to establishing and enforcing
ethical standards.
- b. Previous violations of securities laws (or other
regulations).
- c. Excessive focus by management on the entity's stock
price.
- d. Management's failure to correct reportable conditions.
- e. Pattern of justifying inappropriate accounting as
immaterial.
- f. Management has a strained relationship with the
predecessor or current auditor.
Q904.
- Auditor's basic responsibilities to detect illegal acts are
about the same as for fraud. T or F
A904.
- TRUE
Q905.
- What is the AU and SAS No for Detecting Illegal Acts
A905.
- AU317 and SAS 54
Q906.
- What is the title for AU317 and SAS 54?
A906.
- Illegal Acts by Clients
Q907.
- In the planning stage of an audit, what are the auditor's
responsibilities to detect illegal acts?
A907.
- A. Must design the audit to provide " reasonable
assurance" of detecting illegal acts having a direct and
material effect on the financial statements (e.g., illegalities
related to compliance with applicable securities laws).
- B. The auditor is less likely to detect acts relating to the
entity's operating activities, rather than financial reporting
activities (for example, the auditor might not be the mostly
likely party to detect illegal disposals of hazardous waste
materials).
Q908.
- In the field work stage of an audit, what are the auditor's
responsibilities to detect illegal acts?
A908.
- Make inquiries of management about the entity's
compliance with applicable laws and their knowledge of
any such illegal acts having financial statement
consequences (include reference in the " management
representation letter" at the end of field work).
Q909.
- What must the auditor do if he determines that an illegal
act may have occurred?
A909.
- A. Gather additional evidence to determine the facts --
about the nature and financial statement effect of any such
illegal acts.
- B. Discuss with the appropriate level of management (at
least one level above those believed to be involved) and
those charged with governance.
- C. May have to consult with client's attorney or other
specialists, since determination of illegality is usually
outside of auditor's expertise.
- D. Consider implications to other audit areas -- for
example, does such an act reflect on management's
integrity?
Q910.
- What are the Reporting effects of detected illegal acts?
A910.
- A. Ask management to revise the financial statements
appropriately; if management will not make required
adjustments, the auditor should appropriately modify the
opinion (due to GAAP departure).
- B. If unable to determine the magnitude of the
misstatement, the auditor may have to disclaim or qualify
the opinion (due to scope limitation).
- C. Inform management and those charged with
governance, but not outside authorities due to
confidentiality (prohibits " whistle-blowing" -- same
" exceptions" as for disclosing fraud).
Q911.
- If management will not make required adjustments due to
illegal acts, what is the auditor's option?
A911.
- Modify the opinion due to GAAP departure
Q912.
- If auditor is unable to determine the magnitude of the
misstatement, due to illegal acts, what is the auditor's
option?
A912.
- Disclaim or Qualify the opinion due to scope limitation
Q913.
- Can the auditor inform outside authorities of illegal acts
found in the financial statements?
A913.
- No, due to confidentiality. A prohibition of whistle-blowing
Q914.
- When a specialized measurement or valuation is required
for an engagement, what may the CPA firm do?
A914.
- Hire a specialist
Q915.
- When is the need for the work of a specialist determined?
A915.
- At the planning stage
Q916.
- What AU and SAS No discusses the Work of a Specialist?
A916.
- AU336 and SAS 73
Q917.
- What is the title of AU336, SAS 73?
A917.
- Using the Work of a Specialist
Q918.
- Give examples of specialists.
A918.
- Actuaries, appraisers, engineers, geologists, and
attorneys
Q919.
- When is the expertise of a specialist needed?
A919.
- When there are audit issues related to valuation, quantity
or quality, or interpreting technical requirements.
Q920.
- What should be considered when selecting a specialist?
A920.
- Professional credentials, reputation, and any relationship
to the client (prefer unrelated parties!).
Q921.
- How is the specialist referenced in the auditor's report
when giving an unqualified opinion?
A921.
- a. Usually, do not refer to the specialist (might be
misunderstood), since a " division of responsibility" is not
permitted.
- b. However, the auditor may choose to add an explanatory
paragraph that references the report or findings of the
specialist, if that will facilitate the readers' understanding.
Q922.
- How is the specialist referenced in the auditor's report
when giving a modified opinion, qualified, adverse, or
disclaimer?
A922.
- May reference the report or findings of the specialist, if
that will facilitate the readers' understanding of the
reason(s) for the modified opinion.
Q923.
- What AU and SAS No. relates to communication with
those charged with governance?
A923.
- AU380 and SAS 114
Q924.
- What is the title of AU380 and SAS 114?
A924.
- Communication With Those Charged With Governance
Q925.
- Who are " those charged with governance" ?
A925.
- The person(s) with responsibility for overseeing the
strategic direction of the entity and obligations related to
the accountability of the entity (encompasses the term
" board of directors" or " audit committee" used elsewhere
in the auditing standards).
Q926.
- Who is management?
A926.
- The person(s) responsible for achieving the objectives of
the entity and who have the authority to establish policies
and make decisions by which those objectives are to be
pursued.
Q927.
- What is the auditor's basic responsibility?
A927.
- The auditor must communicate those matters that are
significant and relevant to the responsibilities of those
charged with governance in overseeing the financial
reporting process.
Q928.
- Is the auditor required to perform specific procedures to
identify such matters to communicate with those charged
with governance?
A928.
- No
Q929.
- Can the auditor may choose to discuss matters with
management before communicating them with those
charged with governance?
A929.
- Yes, unless it's inappropriate such as discussing
management competence or integrity
Q930.
- Can the auditor discuss matters with the internal
auditor(s) before communicating with those charged with
governance?
A930.
- Yes
Q931.
- What matters can be communicated with those charged
with governance?
A931.
- 1. Auditor's responsibilities under GAAS
- 2. The planned scope and timing of the audit
- 3. Significant findings from the audit
Q932.
- How many the auditor's responsibilities under GAAS be
communicated?
A932.
- By an engagement letter
Q933.
- Explain what is meant by communicating the planned
scope and timing of the audit.
A933.
- 1. How the auditor plans to address the significant risks
of material misstatement
- 2. The general approach to internal control relevant to the
audit;
- 3. The factors considered in determining materiality;
- 4. The auditor's use of the internal audit function and how
they can best work together.
Q934.
- What are 7 significant findings that can be communicated
to governance by the auditor?
A934.
- 1. Qualitative aspects of the entity's significant
accounting policies
- 2. Significant difficulties encountered during the audit
- 3. Disagreements with management over accounting and
auditing matters
- 4. Uncorrected misstatements
- 5. Management consultations with other accountants
- 6. Significant issues discussed (or subject to
correspondence) with management in connection with the
audtior's retention
- 7. Independence issues
Q935.
- What is meant by Qualitative aspects of the entity's
significant accounting policies?
A935.
- the acceptability of significant accounting practices.
Q936.
- What significant difficulties can be encountered during
the audit?
A936.
- 1. Significant delays caused by management,
- 2. Unreasonable time pressure
- 3. Unavailability of expected information, etc.
Q937.
- Disagreements with management over accounting and
auditing matters should be discussed with governance
whether or not it is satisfactorily resolved. T or F
A937.
- TRUE
Q938.
- What is meant by uncorrected misstatements that should
be communicated to governance?
A938.
- Those that have been identified by the auditor
Q939.
- What should be discussed with governance concerning
management consultations with other accountants?
A939.
- may represent possible " opinion shopping" activities by
management, so discuss the matters that were subject to
consultation.
Q940.
- What communication should be discussed with
governances in regards to Independence issues?
A940.
- Circumstances or relationships potentially affecting
independence, which the auditor consider in concluding
that independence is not impaired.
Q941.
- How should communication with governance take place?
A941.
- Orally or written, in a manner determined by the auditor's
judgment
Q942.
- When oral communication of significant findings are
inadequate, how should the findings be communicated?
A942.
- In writing
Q943.
- What should the auditor do when a significant matter is
discussed with an individual member of those charged with
governance?
A943.
- Evaluate whether the matter should be summarized in a
subsequent communication to all those charged with
governance
Q944.
- What is important about timely communications of the
auditor to those in governance?
A944.
- Communicate on a timely basis so appropriate action can
be taken.
- Timing may vary due to circumstance
Q945.
- The auditor should evaluate whether the two-way
communication has been adequate for purposes of the
audit. T or F
A945.
- TRUE
Q946.
- What may an inadequate two-way communication
suggest?
A946.
- An unsatisfactory control environment, which the auditor
should consider
Q947.
- What should the auditor do if the two-way communication
is inadequate?
A947.
- 1. Consider whether a scope limitation may exist
- 2. Consider the possible effect on the assessment of the
risks of material misstatement
- (this might warrant modification of the opinion, or even
withdrawal
Q948.
- How should communication between the auditor and
governance be documented?
A948.
- 1. When communication is oral, document in writing
- 2. When communication is in writing, keep a copy of that
communication
Q949.
- Other Statements on Auditing Standards require that
certain specific matters be communicated with those
charged with governance. What are they?
A949.
- 1. Illegal Acts
- 2. Going Concern Issues
- 3. Fraud
- 4. Communicating internal control matters identified in an
audit
Q950.
- What illegal acts should be communicated with those
charged with governance?
A950.
- Those that come to the auditor's attention
Q951.
- What should the auditor communicate to governance
concerning going concern issues, after considering
management's strategy?
A951.
- (1) the nature of the conditions identified;
- (2) the possible effect on the financial statements and
disclosures; and (
- 3) the effects on the auditor's report.
Q952.
concerning fraud?
A952.
- (1) Inquire of the audit committee about the risks of fraud
and the audit committee's knowledge of any fraud or
suspected fraud;
- (2) Communicate any fraud discovered involving senior
management and any fraud that causes a material
misstatement (whether or not management is involved);
- (3) Obtain an understanding with those charged with
governance regarding communications about
misappropriations committed by lower-level employees.
Q953.
concerning internal control?
A953.
- Any identified significant deficiencies (including material
weaknesses).
Q954.
- When evaluating a client's internal control system, what
should the auditor do initially?
A954.
- Obtain an understanding of internal controls and the flow
of documents and document that understanding
Q955.
- How does an auditor obtain an understanding of internal
control and the flow of documents?
A955.
- 1. Inquiry of appropriate personnel
- 2. Observation of client activities
- 3. Review documentation -- including the client's
accounting manuals, prior-year's audit documentation
(working papers), etc.
Q956.
- What does the auditor's internal control analysis tend to
focus on when evaluating internal control?
A956.
- On major transaction cycles
Q957.
- What is a transaction cycle?
A957.
- A group of essentially homogeneous transactions
Q958.
- What is true about specific transaction cycles?
A958.
- it is the highest level of aggregation about which
meaningful generalizations of control risk can be made.
Q959.
- Control risk is constant (or the same) within a transaction
cycle. T or F
A959.
- TRUE
Q960.
- Give 5 examples of transaction cycles for which a given
type of transaction is subject to essentially the same
configuration of internal control policies and procedures.
A960.
- 1. Revenue/receipts
- 2.Expenditures/disbursements
- 3. Payroll
- 4. Financing/investing activities
- 5. Inventory, especially if inventory is manufactured,
rather than purchased
Q961.
- When emphasis on reliance on internal control is planned,
emphasis on understanding of internal control increases. T
or F
A961.
- TRUE
Q962.
- What are flowcharts of transaction cycles?
A962.
- A graphical depiction of the client's accounting systems
for major categories of transactions.
Q963.
- What documents have the emphasis in flowcharts of
transaction cycles?
A963.
- The origination, processing, and distribution of important
underlying accounting documents. OPD
Q964.
- Give advantages of flowcharts of transaction cycles.
A964.
- 1. A fairly systematic approach that is unlikely to overlook
important considerations;
- 2. Tailored to client-specific circumstances;
- 3. Fairly easy for others to review and understand;
- 4. Fairly easy to update from year to year
Q965.
- Give disadvantages of flowcharts of transaction cycles.
A965.
- 1. Can be rather tedious and time consuming to prepare
initially;
- 2. The auditor might fail to recognize relevant internal
control deficiencies by getting too absorbed in the details
of the client's system
Q966.
- Name the 5 flowcharting symbols.
A966.
- Document
- Computer operation/process Manual operation (off-
line)Decision point
- Off-line storage
Q967.
- Describe the 5 flowcharting symbols.
A967.
- 1. Document - A rectangle with the latter part of the
bottom curved upward.
- 2. A Computer Operation/process - A rectangle
- 3. A Manual Operation, off-line - A trapezoid with the
longer side at the top
- 4. A Decision Point - A horizontal diamond shape
- 5. Off-line storage (i.e. filing) - An upside down triangle
with an underlined capital D in the center
Q968.
- What are internal control questionnaires (ICQs)?
A968.
- A listing of questions about client's control procedures
and activities; a " no" answer is usually designed to
indicate a control weakness.
Q969.
- What are the advantages of internal control
questionnaires?
A969.
- 1. Generic questionnaires can be prepared in advance for
clients in various industry categories with every
conceivable question, so that no important question
related to controls is likely to be omitted;
- 2. Deficiencies are easily identified by a client's " no"
response to any question
Q970.
- What are the disadvantages of internal control
questionnaires?
A970.
- 1. Generic questionnaires are not tailored to client-
specific circumstances and irrelevant questions are
annoying to client personnel;
- 2. The client personnel responding to the checklist of
questions may conceal deficiencies by inaccurate answers
without the auditor's knowledge
Q971.
- What are narrative write-ups?
A971.
- A written memo describing the important control-related
activities in the transaction cycles under consideration
Q972.
- What are the advantages of narrative write-ups?
A972.
- 1. Tailored to a client's unique circumstances;
- 2. Can be as detailed or general as desired;
- Relatively easy to prepare the memo (and easy for
reviewers to read it)
Q973.
- What are the disadvantages of narrative write-ups?
A973.
- 1. Relatively easy to overlook relevant internal control
issues (strengths or weaknesses) because the analysis is
fairly unstructured;
- 2. Can be tedious to make changes over time to a
detailed, hardcopy memo when the client's policies and
procedures have changed (may require starting over with a
new memo to accommodate any changes, although this is
not a problem when using modern word-processing
software)
Q974.
- Give the acronyms for remembering the advantages and
disadvantages of flowcharts of transaction cycles.
A974.
- STEE, TF
- Adv:
- Syst & un
- Tail
- Easy r&u
- Easy up
- Disadv:
- T & t initially
- Fail recog def
Q975.
disadvantages of internal control questionnaires.
A975.
- GD, GC
- Adv:
- Gq prep adv
- Def iden'f w/no
- Disadv:
- Gq not tail
- Conceal def by ans
Q976.
disadvantages of narrative write-ups.
A976.
- TDE, ET
- Adv:
- Tail
- Detail or gener
- E to prep
- Disadv:
- Eovlk IC s&w
- T to make chgs
Q977.
- Which AU and SAS No. focuses on the auditor's
responsibilities to understand the entity and its
environment, including internal control?
A977.
- AU314, SAS 109
Q978.
- What is the title for AU314 and SAS No. 109?
A978.
- Understanding the Entity & Its Environment
Q979.
- What are the 4 requirements that SAS 109 focuses on?
A979.
- (1) risk assessment procedures;
- (2) understanding the entity and its environment,
including its internal control;
- (3) assessing the risks of material misstatement; and
- (4) documentation.
Q980.
- Why should the auditor perform risk assessment
procedures?
A980.
- To obtain an understanding of the entity and its
environment, including its internal control.
Q981.
- Does the nature, timing, and extent of the risk
assessment procedures vary with the engagement
circumstances?
A981.
- Yes
Q982.
- What are the 5 risk assessment procedures to understand
an entity and its environment, including internal control?
A982.
- 1. Inquiries of management & others
- 2. Observation and inspection
- 4. Review information about the entity and its
environment obtained in prior periods
- 5. Discussion among audit team members
Q983.
- Give examples of whom an auditor may make inquiries to
understand an entity and its environment.
A983.
- Internal auditors, production and marketing personnel,
those charged with governance, and outsiders (such as
external legal counsel or valuation experts used by the
entity)
Q984.
- Give examples of how an auditor can observe and inspect
to better to understand an entity and its environment.
A984.
- Observation of entity operations, inspection of
documents (e.g., internal control manuals), reading reports
prepared by management and those charged with
governance (e.g., minutes of meetings), and visits to the
entity's facilities
Q985.
- What may analytical procedures do in the planning stage
of assessing risk when trying to understand an entity and
its environment?
A985.
- 1. May assist the auditor in understanding the entity and
its environment
- 2. May identify specific risks relevant to the audit.
Q986.
- What would an auditor discuss among audit team
members when trying to understand and entity and its
environment?
A986.
- The susceptibility of the entity's financial statements to
material misstatements
Q987.
- Who should be involved in the discussion of audit team
members when trying to understand the entity and its
environment as a risk assessment procedure?
A987.
- Requires professional judgment;
- Mult-location audits may require multiple discussions
with different key members
Q988.
- What is the Objective of the discussion of audit team
members when trying to understand the entity and its
environment as a risk assessment procedure?
A988.
- To understand the potential for material misstatements of
the financial statements (due to error or fraud) in specific
areas assigned to them and how their work may affect
other parts of the audit;
Q989.
- What type of Critical Issues should be discussed in the
discussion of audit team members when trying to
understand the entity and its environment as a risk
assessment procedure?
A989.
- 1. Areas of significant audit risk,
- 2. Potential for management override of controls;
- 3. Important controls;
- 4. Materiality at the financial statement level and the
account level; etc.
Q990.
- The auditor's understanding of the entity and its
environment consists of what 5 components?
A990.
- 1) industry, regulatory, and other external factors; (
- 2) nature of the entity;
- (3) objectives and strategies and related business risks
that may cause material misstatement of the financial
statements;
- (4) measurement and review of the entity's financial
performance; and
- (5) internal control.
Q991.
- Which component of understanding the entity and its
environment refers to understanding the nature of the
business, degree of regulation, or other economic,
technical, and competitive issues?
A991.
- Industry, regulatory, and other external factors
Q992.
- Which component of understanding the entity and its
environment refers to the entity's operations, ownership,
governance, financing, etc?
A992.
- Nature of the entity
Q993.
- What might understanding the entity's operations,
ownership, governance, and financing help to understand?
A993.
- The classes of transactions, account balances, and
disclosures that are relevant to the financial statements
Q994.
- Objectives and strategies and related business risks that
may cause material misstatement of the financial
statements can result in what?
A994.
- Circumstances that could adversely affect the entity's
ability to achieve its objectives
Q995.
- Does the auditor have a responsibility to identify all
business risks?
A995.
- No
Q996.
- What performance measures and their review indicate?
A996.
- Indicate aspects of the entity's performance that
management considers important, which may help the
auditor to understand whether such pressures increase the
risks of material misstatement.
Q997.
- What should an auditor do to obtain a sufficient
understanding of internal control?
A997.
- Performing risk assessment procedures to evaluate the
design of controls relevant to the audit to identify types of
potential misstatements. -- Design tests of controls, if
applicable, and substantive procedures.
Q998.
- Is inquiry alone sufficient to evaluate the design and
implementation of a control?
A998.
- No
Q999.
- Must the auditor perform substantive tests to some
degree for all significant audit areas?
A999.
- Yes. Cannot assess control risk so low that substantive
testing is omitted entirely!
Q1000.
- What SAS guides the Communication of Internal Control
Related Matters Identified in an Audit?
A1000.
- SAS 112
Q1001.
- What SAS defines the terms " significant deficiency" and
" material weakness" ?
A1001.
- SAS 112
Q1002.
- Is the term " reportable condition" still used?
A1002.
- No
Q1003.
- What AU and SAS guide Internal Control?
A1003.
- AU325 SAS 60
Q1004.
- What is control deficiency?
A1004.
- When the design or operation of a control does not allow
management or employees, in the normal course of
performing their assigned functions, to prevent or detect
misstatements on a timely basis.
Q1005.
- What is the short-cut definition of control deficiency?
A1005.
- Control can't prevent or detect a material misstatement
Q1006.
- What is a deficiency in design?
A1006.
- When a control necessary to meet the control objective is
missing; or when the control objective is not always met,
even if the control operates as designed
Q1007.
- What is a deficiency in operation?
A1007.
- When a properly designed control does not operate as
designed; or when the person performing the control does
not have the authority or qualifications to effectively
perform the control
Q1008.
- What is significant deficiency?
A1008.
- A control deficiency (or combination of control
deficiencies) that ADVERSELY AFFECTS the entity's ability
to initiate, authorize, record, process, or report financial
data RELIABLY in accordance with GAAP such that there is
more than a remote likelihood that a misstatement of the
financial statements that is more than inconsequential will
not be prevented or detected (where " inconsequential"
means clearly immaterial)
Q1009.
- What is material weakness?
A1009.
- A significant deficiency (or combination of significant
deficiencies) that results in more than a remote likelihood
that a material misstatement of the financial statements will
not be prevented or detected
Q1010.
- When evaluating control deficiencies, what must the
auditor determine?
A1010.
- Whether identified deficiencies are " significant
deficiencies" or " material weaknesses"
Q1011.
- When deciding if a control deficiency is a significant
deficiency or a material weakness, what should the auditor
consider?
A1011.
- Both the Likelihood and Potential Magnitude of
misstatement
Q1012.
- Multiple control deficiencies affecting the same financial
statement item increases the likelihood of misstatement. T
or F
A1012.
- T
Q1013.
- What should the auditor consider that may reduce the
severity of the effects of a deficiency?
A1013.
- The effects of compensating controls
Q1014.
- The auditor must communicate the significant
deficiencies and material weaknesses identified in the
audit. T or F
A1014.
- TRUE
Q1015.
- What is the form of communication to be taken when
significant deficiencies and material weaknesses are
identified?
A1015.
- Must be communicated to management and those
charged with governance IN WRITING.
Q1016.
- What is the " report release date" ?
A1016.
- The date that the auditor grants the entity permission to
use the auditor's report in connection with the audited
Q1017.
- What is the " timing" of the required communication
regarding significant deficiencies and material
weaknesses?
A1017.
- Is best made by the " report release date" and should be
made no later than 60 days following the report release
date
Q1018.
- What is the authority given for Early communication of
significant deficiencies and material weaknesses of
internal control?
A1018.
- The auditor MAY CHOOSE TO VERBALLY communicate
CERTAIN significant deficiencies and material weaknesses
during the audit (e.g., to permit timely correction); however,
all identified significant deficiencies and material
weaknesses must still be communicated in writing no later
than 60 days following the report release date
Q1019.
- What is the authority given for communicating Other
Matters that may or may not be significant deficiencies of
internal control?
A1019.
- The auditor may choose to communicate other matters
either in writing or verbally (if communicated verbally, the
auditor must document such communication)
Q1020.
- What should the written communication about significant
deficiencies and material weaknesses include?
A1020.
- 1. State that the purpose of the audit was to express an opinion on
the financial statements, not to express an opinion on the
effectiveness of internal control;
- 2. State that the auditor is not expressing an opinion on the
effectiveness of internal control;
- 3. Include the definition of the terms significant deficiency and, if
applicable, material weakness;
- 4. Identify the matters that are considered to be significant
deficiencies and, if applicable, material weaknesses;
- State that the communication is intended solely for the use of
management, those charged with governance, and others within the
organization (should not be used by anyone other than those
specified parties) - if such a communication is required to be given to
a governmental authority, that specific reference may be added;
Q1021.
- May the auditor include additional statements regarding
the general inherent limitations of internal control,
including the possibility of management override?
A1021.
- Yes, but it is not required
Q1022.
- Should the auditor issue a written communication stating
that no significant deficiencies were identified?
A1022.
- No. But the auditor is permitted to add a comment that no
material weaknesses were identified, perhaps as requested
to submit to a governmental authority
Q1023.
- Can management issue a written response to the
auditor's communication of significant deficiencies and
material weaknesses to indicate corrective action taken or
planned or stating management's belief that the costs of
correction exceed the benefits?
A1023.
- Yes.
Q1024.
- If management issues a response, to an auditor's
communication regarding significant deficiencies or
material weaknesses, stating the costs of correction
exceed the benefits, what should the auditor do?
A1024.
- The auditor should add a paragraph to disclaim an
opinion on management's written response
Q1025.
- What is the AU and SAS # that deals with the Internal
Audit Function?
A1025.
- AU322, SAS 65
Q1026.
- What is the title for AU322, SAS 65?
A1026.
- Internal Audit Function
Q1027.
- When determining the relevance of the internal auditors
when understanding internal control and assessing control
risk, what Audit Procedures should the auditor do?
A1027.
- Inquire and Review
Q1028.
- What things should the auditor Inquire about when
determining the relevance of the internal auditors?
A1028.
- 1. The internal auditors' organizational status
- 2. Their access to records and any limitations
- 3. Their application of professional standards and audit
plans
Q1029.
- What things should the auditor Review when determining
the relevance of the internal auditors?
A1029.
- 1. Documentation about the internal auditors' processes
for identifying and assessing the entity's risks and the
allocation of resources;
- 2. Review internal auditors' reports and their prior year's
audit documentation
Q1030.
- When the internal auditors' activities are deemed relevant,
what must the independent auditor decide?
A1030.
- Whether placing " reliance" on the internal auditors' work
is efficient (cost beneficial)
Q1031.
- If the internal auditor's is deemed efficient (cost
beneficial), what must the independent auditor do?
A1031.
- Assess the internal auditors' competence and objectivity.
Q1032.
- What does Competence mean, in regards to assessing an
internal auditor?
A1032.
- Related to education, certification, experience,
performance evaluations, etc.
Q1033.
- What does Objectivity mean, in regards to assessing an
internal auditor?
A1033.
- Policies to maintain their independence. The
organizational status of the internal auditors would show
how independent the internal auditors were. i.e.
independence is enhanced by having the internal audit
function report to those charged with governance, such as
the entity's audit committee or board of directors
Q1034.
- What must independent auditors do if they plan to rely on
the internal audit function as a type of internal control
strength to influence the substantive audit procedures?
A1034.
- Perform test of controls
Q1035.
- Can the independent auditor use the work of the internal
auditor to provide Direct assistance for substantive
purposes?
A1035.
- Yes, whether or not they are relying on the internal audit
function in connection with their assessment of control
risk
Q1036.
- When using the work of the internal auditor, what must
the independent auditor do in addition to assessing the
internal auditor's competency and objectivity?
A1036.
- Must supervise, review, evaluate, and test the internal
auditors' work to an appropriate extent.
Q1037.
- Of the independent and internal auditor, who has the
ultimate responsibility for the work completed and the
conclusions reached?
A1037.
- The independent auditor!
Q1038.
- Can the independent auditor refer to the internal auditors'
assistance in the audit report?
A1038.
- No
Q1039.
- What is a transaction cycle?
A1039.
- A group of homogeneous transactions
- Homogeneous means - the same kind
Q1040.
- A bulk of a company's economic activities can be
grouped into a few categories called what?
A1040.
- Transaction cycles
Q1041.
- Within a given category of transactions, what is true
about control risk?
A1041.
- It is constant
Q1042.
- What is meant by control risk being constant within a
group of homogeneous transactions?
A1042.
- That all transactions within that category are Processed
subject to the same configuration of internal control
policies and procedures.
Q1043.
- What are the 6 major transaction cycles?
A1043.
- A. Revenue/receipts
- B. Expenditures/disbursements
- C. Payroll
- D. Inventory, especially manufactured inventory (since
purchased inventory would be similar to
expenditures/disbursements as presented here)
- E. Fixed assets
- F. Investing/financing
Q1044.
- What is the acronym to use as a tool to analyze the audit
considerations of internal control policies and procedures
in each transaction cycle?
A1044.
- SCARE
- Internal controls in each transaction cycle should SCARE!
Q1045.
- What does the acronym SCARE mean?
A1045.
- (1) Segregation of duties,
- (2) Comparisons,
- (3) Access,
- (4) Records, and
- (5) Execution of transactions.
Q1046.
- How does the SAS concerning specific transactions
describe control activities?
A1046.
- In terms of 4 specific considerations:
- (1) authorization;
- (2) segregation of duties;
- (3) safeguarding assets; and (4) asset accountability.
Q1047.
- What does segregation of duties mean?
A1047.
- Separating " incompatible functions" to the extent
possible, subject to cost-benefit considerations.
Q1048.
- Give an example of a Segregation of Duties.
A1048.
- The same employee should not normally:
- Authorize (execute),
- Have access, and
- Perform accounting activities in the ordinary course of
duties.
Q1049.
- What certain Comparisons should be made?
A1049.
- 1. Comparing actual assets on hand to what the
accounting records indicate
- 2. Comparing related accounting documents on a timely
basis for consistency
Q1050.
- By making certain comparisons, what is established?
A1050.
- Proper asset accountability!
Q1051.
- Give an example of comparing related accounting
documents on a timely basis for consistency.
A1051.
- Before paying a vendor's invoice, someone should verify
that the goods reflected on that invoice agree with what
was received per the receiving report, which agrees with
the entity's purchase order
Q1052.
- Access to assets and important accounting documents
should be limited to whom?
A1052.
- Authorized personnel
Q1053.
- The Access concept compares to the what two SAS
control activities?
A1053.
- 1. Safeguarding assets
- 2. Asset accountability
Q1054.
- Having adequate records and documentation supports
what two control activities?
A1054.
- 1. Recordkeeping
- 2. Asset accountability
Q1055.
- In specific transaction cycles, how what is the concept of
Execution?
A1055.
- Transactions should be recorded as management
authorized
Q1056.
- Authorization is the same concept as what concept under
SCARE?
A1056.
- Execution
Q1057.
- What is the flowchart order of typical internal controls for
Sales?
A1057.
- 1. Customer's PO
- 2. Sales Order
- 3. Shipping Documents
- 4. Sales Invoice
- 5. Sales Journal
- 6. General Ledger
Q1058.
- What are the Objectives of internal controls in the
Revenue/Receipts Sales area?
A1058.
- A. Goods and services are provided in accordance with
management's authorization (and based on approved
orders).
- B. Terms of sale (including prices and any discounts) are
in accordance with management's authorization.
- C. Credit terms and limits are properly established (as
authorized).
- D. Deliveries of goods and services result in accurate and
timely billings.
- E. Any sales-related discounts and adjustments
(including returns) are in accordance with management's
authorization.
Q1059.
- In the transaction cycle of Revenue/Receipts Sales, what
audit procedures for " Segregation of Duties" should be
done to assess internal control?
A1059.
- 1. An independent employee should review the
statements to customers.
- 2. Credit to customers granted by an independent
department (separate from sales staff which may be paid
on commission and which may have an incentive to view
everyone as " credit worthy" ).
- 3. Returns are accounted for by an independent clerk in
the shipping/receiving area.
Q1060.
audit procedures for " Comparisons" should be done to
assess internal control?
A1060.
- 1. Trial Balance Reconciled to Ledger -- An aged trial balance
for accounts receivable is reconciled to the general ledger
(control) account -- to establish the mathematical accuracy of
the general ledger; the aging provides important information
about the quality of receivables and the need for follow-up.
- 2. Monthly Statements -- Are sent to all customers -- to provide
information to customers about their account balances and
payments received.
- 3. Sales Invoices and
- Orders:
- 4. Sales invoices are matched with a sales order (perhaps the
customer's purchase order, P.O.) and applicable shipping
documents.
Q1061.
audit procedures for " Access" should be done to assess
internal control?
A1061.
- Including direct (physical) & indirect (by computer)
access.
- 1. Computer passwords limit unauthorized access.
- 2. Cash receipts are handled by someone without access
to accounts receivable recordkeeping.
Q1062.
audit procedures for " Records" should be done to assess
internal control?
A1062.
- Regarding the adequacy of underlying documentation; e.g.,
key documents that constitute the " audit trail" should be pre-
numbered and the numerical sequence should be accounted
for to establish control over these documents.
- 1. Sales invoices are pre-numbered (and the numerical
sequence is accounted for).
- 2. Shipping documents for outbound shipments are pre-
numbered (and the numerical sequence is accounted for).
- 3. " Receivers" (shipping documents used exclusively for
inbound shipments) are pre-numbered (and the numerical
sequence is accounted for).
Q1063.
audit procedures for " Execution of transactions" should be
done to assess internal control?
A1063.
- should be as authorized.
- 1. Management should review the terms of sales
transactions and note that approval on the sales invoice
(billing).
- 2. Management should usually establish " general"
approvals of transactions within specified limits, and
specifically approve transactions outside of those
prescribed limits.
- 3. Management should specifically approve all adjusting
journal entries.
Q1064.
- Can audit risk be assessed in nonquantitative terms?
A1064.
- Yes
Q1065.
- Audit risk is the risk that:
A1065.
- An account and its related assertions contains material
misstatements & the risk that the auditor will not detect
such misstatements
Q1066.
- The likelihood of material misstatement of an assertion,
assuming no related internal control
A1066.
- Inherent risk
Q1067.
- The likelihood that a material misstatement will not be
detected or prevented on a timely basis by internal control
A1067.
- Control risk
Q1068.
- The likelihood that an auditor's procedures lead to an
improper conclusion that no material misstatements exists
in an assertion when in fact such a misstatement does
exist
A1068.
- Detection risk
Q1069.
- What is the relationship among Inherent risk, control risk,
and detection risk?
A1069.
- Inverse
Q1070.
- The magnitude of an omission or misstatement of
accounting information that, in light of surrounding
circumstances, makes it probable that the judgment of a
reasonable person relying on the information would have
been changed or influenced by the omission or
misstatement
A1070.
- Materiality
Q1071.
- When must an auditor consider materiality?
A1071.
- Planning the audit and designing audit procedures &
evaluating audit results
Q1072.
- What are the 5 assertions made by management that are
embodied in the accounts?
A1072.
- 1) Presentation & Disclosure
- 2) Existence or Occurrence
- 3) Rights & Obligations
- 4) Completeness
- 5) Valuation
Q1073.
- List 2 types of fraud
A1073.
- 1) Fraudulent financial reporting
- 2) Misappropriation of assets
Q1074.
- An attitude that includes a questioning mind and a critical
assessment of audit evidence
A1074.
- Professional skepticism
Q1075.
- What 3 conditions are generally present when individuals
commit fraud?
A1075.
- 1) Incentive/pressure
- 2) Opportunity
- 3) Attitude/rationalization
Q1076.
- All fraud involving management must be communicated
to:
A1076.
- Audit Committee
Q1077.
- All material fraud should be communicated to:
A1077.
- Audit Committee
Q1078.
- What is the auditor's responsibility for direct effect illegal
acts?
A1078.
- Same as for errors and fraud (provide reasonable
assurance of detection of material misstatements)
Q1079.
- What is auditor's responsibility for indirect effect illegal
acts?
A1079.
- No assurance, however if a possibility is detected, the
auditor should apply audit procedures to determine
whether an illegal act has occurred
Q1080.
- What should an auditor do if he discovers an act that
MIGHT be illegal?
A1080.
- Inquire of management a a level above those involved & if
satisfactory information is not provided the auditor should
consult with the client's legal counsel and apply additional
procedures such as confirmations, examinations, and
authorizations
Q1081.
- If the auditor believes an illegal act has or is likely to have
occurred, he should:(4)
A1081.
- 1) Consider its financial statement effect
- 2) Consider its implications to other aspects of the audit
(reliability of management)
- 3) Communicate it to audit committee
- 4) Consider the need to modify the audit report
Q1082.
- What are 3 types of modifications of an audit report
relating to illegal acts?
A1082.
- 1) Lack of disclosure is a departure from GAAP and either
an adverse or qualified opinion may be appropriate.
- 2) Client imposed scope restrictions will generally lead to
a disclaimer of opinion
- 3) Circumstance-imposed scope restrictions may lead to
either a qualified opinion or a disclaimer of opinion
Q1083.
- What should the auditor do if senior management is
involved in an illegal act?
A1083.
- Communicate it directly to the audit committee
Q1084.
- What should an auditor consider when a client refuses to
give appropriate consideration to handling an illegal act?
A1084.
- Whether the refusal affects his ability to rely on
managements representations and whether resignation is
desirable
Q1085.
- Who should the auditor attempt communication with prior
to acquiring a client? Why?
A1085.
- Predecessor auditor
- Obtain a general understanding of the nature of the
organization and industry
Q1086.
- Who is responsible for initiating communication with the
predecessor auditor
A1086.
- Successor auditor
Q1087.
- If the prospective client refuses to permit the predecessor
auditor to respond or limits his response, the successor
should:
A1087.
- inquire as to the reasons and consider the implications in
deciding whether to accept the engagement
Q1088.
- The successors inquiries to the predecessor should
include: (4)
A1088.
- 1) Information bearing on the integrity of management
- 2) Disagreements with management as to accounting
principles, auditing procedures or other similarly
significant matters
- 3) Communications to audit committee regarding fraud,
illegal acts, and internal control related matters.
- 4) Predecessor's understanding of the reasons for the
change in auditors
Q1089.
- Can an understanding with the client regarding the
services to be performed be obtained orally?
A1089.
- Yes but it is preferred that it is in writing
Q1090.
- The engagement letter must include four general topics:
A1090.
- 1) Objectives of engagement
- 2) Management's responsibilities
- 3) Auditor's responsibilities
- 4) Limitations of the audit
Q1091.
- What is the objective of an engagement?
A1091.
- Expression of an opinion on the financial statements
Q1092.
- What are management's responsibilities? (6)
A1092.
- 1) Establishing & maintaining effective internal control
over financial reporting
- 2) Identifying & ensuring compliance with laws &
regulations
- 3) Making financial records & related information
available to the auditor
- 4) Providing a representation letter
- 5) Adjusting financial statements to correct material
misstatements
- 6) Affirming in representation letter that effect of
uncorrected misstatements aggregated by auditor is
immaterial
Q1093.
- What are the auditor's responsibilities? (2)
A1093.
- 1) Conduct audit IAW US GAAP
- 2) Ensuring that audit committee is aware of any
reportable conditions which came to auditors attention
Q1094.
- What are the 3 limitations of the audit?
A1094.
- 1) Obtain reasonable, rather than absolute assurance
- 2) Material misstatements may remain undetected
- 3) If auditor is unable to form or has not formed an
opinion, auditor may decline to express an opinion or
decline to issue a report
Q1095.
- To develop an overall audit strategy, the auditor may
consider the following 5 client considerations:
A1095.
- 1) Business & Industry
- 2) Accounting policies & procedures
- 3) Methods of processing accounting information
- 4) Financial statement items likely to need adjustment
- 5) Considerations requiring extension of audit procedures
Q1096.
- To develop an overall audit strategy, the auditor may
consider the following 3 audit considerations:
A1096.
- 1) Planned assessed level of control risk
- 2) Preliminary judgments about materiality levels
- 3) Nature of reports to be issued by CPA
Q1097.
- Obtaining a level of knowledge of the client's business
helps the auditor: (5)
A1097.
- 1) Identify areas that may need special consideration
- 2) Assess conditions under which accounting data are
produced, processed, reviewed, and accumulated
- 3) Evaluate accounting estimates for reasonableness
- 4) Evaluate the reasonableness of management
representations
- 5) Make judgments about the appropriateness of the
accounting principles applied and the adequacy of
disclosures
Q1098.
- Is it required to communicate with the predecessor
auditor after the accepting a new client?
A1098.
- No
Q1099.
- A second communication with the predecessor is with
regard to working papers. Areas generally examined
include: (4)
A1099.
- 1) Documentation of planning
- 2) Internal control
- 3) Audit results
- 4) Other matters of continuing accounting and auditing
significance
Q1100.
- In reviewing the predecessor's working papers the
successor find financial statement misstatements. What
should he do?
A1100.
- Request that the client inform the predecessor and
arrange a meeting of the 3 parties
Q1101.
- AU 329 requires analytical procedures to be performed
when?
A1101.
- Planning and completion phases of audit
Q1102.
- What is the objective of analytical procedures performed
during the planning stage of the audit?
A1102.
- Determine the nature, timing, & extent of audit procedures
that will be used to obtain evidence for specific accounts
Q1103.
- In all audits, the CPA must obtain sufficient
understanding of this to plan the audit
A1103.
- Internal control
Q1104.
- Knowledge of internal control during the planning stage
should include knowledge about:
A1104.
- The design of controls and whether they have been
placed in operation by the client
Q1105.
- The understanding of Internal Control in the planning
stage must be sufficient to allow the auditor to: (3)
A1105.
- 1) Identify types of possible misstatements
- 2) Consider factors affecting the risk of misstatements
- 3) Design substantive tests
Q1106.
- What must be developed and used in every audit?
A1106.
- A written audit program
Q1107.
- The work of each assistant should be reviewed to: (2)
A1107.
- 1) Determine whether it was adequately performed
- 2) Evaluate whether the results are consistent with the
conclusions to be presented in the audit report
Q1108.
- The auditor who intends to apply audit tests at an interim
date should consider whether the accounting system will
provide information on remaining period transactions that
is sufficient to investigate: (3)
A1108.
- 1) Significant unusual transactions
- 2) Other causes of significant fluctuation
- 3) Changes in the composition of the account balances
Q1109.
- List the 5 General Attestation Standards
A1109.
- 1) Training & Proficiency
- 2) Adequate knowledge of subject matter
- 3) Practitioner shall perform an engagement only if he or
she has reason to believe that the subject matter is capable
of evaluation against criteria that are suitable and available
to users.
- 4) Independence in mental attitude
- 5) Due professional care
Q1110.
- List the 3 General Auditing Standards
A1110.
- 1) Training & Proficiency
- 2) Independence in mental attitude
- 3) Due professional care
Q1111.
- List the 2 Attestation fieldwork standards
A1111.
- 1) Work shall be adequately planned and assistants, if
any, shall be properly supervised
- 2) Sufficient evidence shall be obtained to provide a
reasonable basis for the conclusion that is expressed in
the report
Q1112.
- List the 3 Auditing fieldwork standards
A1112.
- 1) Adequately planned & supervised
- 2) A sufficient understanding of internal control is to be
obtained to plan the audit and to determine the nature,
timing, and extent of tests to be performed
- 3) Sufficient competent evidential matter is to be obtained
through inspection, observation, inquiries, and
confirmations to afford a reasonable basis for an opinion
regarding the financial statements under audit.
Q1113.
- List the 4 Attestation reporting standards
A1113.
- 1) Report shall identify subject matter or assertion being
reported on and state the character of the engagement
- 2) Report shall state practitioner's conclusion about the
subject matter or the assertion in relation to the criteria
against which the subject matter was evaluated
- 3) Report shall state all of the practitioner's significant
reservations about the engagement, subject matter, &
assertions
- 4) Report shall state the use of the report is restricted to
specified parties, in certain circumstances
Q1114.
- List the 4 Auditing reporting standards
A1114.
- 1) Report shall state whether the financical statements are
presented iaw GAAP
- 2) Report shall identify those circumstances in which
such principles have not been consistently observed in the
current period in relation to the preceding period.
- 3) Informative disclosures in the financial statements are
to be regarded as reasonably adequate unless otherwise
stated in the report
- 4)Report shall contain an expression of opinion regarding
financial statements, or an assertion to the effect that an
opinion cannot be expressed.
Q1115.
- Requires each individual to observe the fieldwork and
reporting standards, including a critical review at every
level of supervision of work done and the judgment
exercised
A1115.
- Due professional care
Q1116.
- To whom does quality control standards apply to?
A1116.
- CPA Firms
Q1117.
- What is the major function of quality control standards?
A1117.
- Provides criteria for evaluating peer reviews
Q1118.
- List 4 benefits of peer reviews
A1118.
- 1) Prevent poor accounting & auditing procedures
- 2) Detect poor audit procedures
- 3) Peer reviewers may learn from the process
- 4) Self-regulation by profession may be more cost
effective than governmental regulation
Q1119.
- List 2 limitations of peer reviews
A1119.
- 1) Cost
- 2) Evaluating an audit's adequacy is difficult
Q1120.
- Quality control policies and procedures applicable to a
firm's accounting & auditing practices should encompass:
(5)
A1120.
- 1) Independence, integrity, objectivity
- 2) Personnel management
- 3) Acceptance & continuance of clients & engagements
- 4) Engagement performance
- 5) Monitoring
Q1121.
- This assertion states that components of financial
statements are properly classified, described, and
disclosed
A1121.
- Presentation & Disclosure
Q1122.
- This assertion states that Assets and liabilities exist at a
given date and transactions have occurred during a given
period
A1122.
- Existence or Occurrence
Q1123.
- This assertion states that assets are rights of the entity
and liabilities are obligations at a given date
A1123.
- Rights & Obligations
Q1124.
- This assertion states that all transactions and accounts
are included
A1124.
- Completeness
Q1125.
- This assertion states that components of financial
statements are included at appropriate amounts
A1125.
- Valuation or allocation
Q1126.
- Explain the existence assertion
A1126.
- Relates to whether the recorded amount is bona fida.
Tests for overstatements
Q1127.
- Explain the completeness assertion
A1127.
- Addresses the issue of whether all transactions have
been recorded. Tests for understatements
Q1128.
- The Statement on Attestation Standards suggests two
basic types of evidence collection procedures
A1128.
- Search and Verification & Internal inquiries and
Comparisons
Q1129.
- What type of assurance does the following provide:
- 1) Examination
- 2) Review
- 3) Compilation
A1129.
- 1) Reasonable
- 2) Limited (negative)
- 3) No explicit assurance
Q1130.
- List 3 presumptions that relate to the validity of evidence
A1130.
- 1) Evidence from independent sources provides more
assurance than evidence secured solely from within the
entity.
- 2) Information from direct personal knowledge is more
persuasive than information obtained indirectly.
- 3) Assertions developed under effective internal control
are more reliable than those developed in the absence of
internal control.
Q1131.
- Section 326 states that to be competent, evidential matter
must be both:
A1131.
- Valid & Relevant
Q1132.
- Refers to the quantity of evidence that the accountant
must gather
A1132.
- Sufficient
Q1133.
- AU 342 suggests that the auditor's objectives relating to
estimates are to determine that all estimates:
A1133.
- Have been developed, are reasonable, and follow GAAP
Q1134.
- What are the three basic approaches for evaluating the
reasonableness of these estimates?
A1134.
- 1) Review & test management's process of deriving the
estimate
- 2) Develop one's own expectation of the accounting
estimate and compare it to management's.
- 3) Review subsequent events or transaction occurring
prior to the completion of field work which bear on the
estimate.
Q1135.
- Define corroborating evidence
A1135.
- Supporting documentation that is the basis for a
transaction being recorded in the journals and ledgers.
Q1136.
- List the 6 types of corroborating evidence
A1136.
- 1) Authoritative Documents
- 2) Interrelationships
- 3) Calculations
- 4) Physical existence
- 5) Authoritative statements
- 6) Subsequent events
Q1137.
- Supports ownership and transaction occurrence.
Examples are truck titles, vendor invoices
A1137.
- Authoritative documents
Q1138.
- Provides assurance as to the reasonableness of items
and the absence of material misstatements due to errors
A1138.
- Interrelationships
Q1139.
- Determined by observation and count
A1139.
- Physical existence
Q1140.
- List the frequently used auditing procedures
A1140.
- Inspection, Observation, Inquiry, Confirmation,
Reperformance, Analytical procedures, Physical
examination, Vouch, and Trace
Q1141.
- Tests of controls are used to test the _____ of processing
and substantive tests are used to test the ---- of processing
the financial statements
A1141.
- Means & Ends
Q1142.
- What is the objective of evaluating evidence?
A1142.
- Obtain an estimate of the total error in the financial
statements and to determine whether it exceeds a material
amount.
Q1143.
- What are the 2 types of substantive tests?
A1143.
- Analytical procedures & Tests of details of transactions
and balances
Q1144.
- How is analytical procedures used during:
- 1) Planning
- 2) Substantive Testing
- 3) Overall Review
A1144.
- 1) Determine the nature, timing, and extent of tests
- 2) Substantiate accounts for which overall comparisons
are helpful
- 3) Assess conclusions reached and evaluate overall
financial statement presentation
Q1145.
- What are the 4 steps in a typical approach to using
analytical procedures?
A1145.
- 1) Develop an expectation for the account balance
- 2) Determine the amount of difference from the
expectation that can be accepted without investigation.
- 3) Compare the company's account balance with the
expected account balance.
- 4) Investigate significant differences from the expected
account balance
Q1146.
- List the 3 principles involving predictability of
relationships
A1146.
- 1) Relationships in a dynamic or unstable environment
are less predictable than those in a stable environment
- 2) Relationships involving balance sheet accounts are
less predictable than income statement accounts.
- 3) Relationships involving management discretion are
sometimes less predictable.
Q1147.
- What are the 2 possible approaches for auditing an
account?
A1147.
- 1) Direct tests of ending balance " test of balances"
- 2) Tests of inputs and outputs during the year " tests of
details of transactions"
Q1148.
- When would an auditor most likely use tests of balances
and tests of details of transactions?
A1148.
- High turnover accounts & Lower turnover accounts
Q1149.
- List 2 typical auditing procedures for Presentation &
Disclosure
A1149.
- 1) Review disclosure
- 2) Inquire about disclosures
Q1150.
- List 3 typical auditing procedures for Existence or
Occurrence
A1150.
- 1) Confirmation
- 2) Observation
- 3) Trace/Vouch transactions
Q1151.
- List 2 typical auditing procedures used for Rights &
Obligations
A1151.
- 1) Cutoffs *Are used for other assertions also
- 2) Authorization
Q1152.
- List 2 typical auditing procedures used for Completeness
A1152.
- 1) Analytical procedures
- 2) Omissions
Q1153.
- List 5 typical auditing procedures used for Valuation
A1153.
- 1) Foot schedules
- 2) Agree schedules balances to GL balances
- 3) Agree financial statement balances to schedules
- 4) Consider valuation method of account
- 5) Consider related accounts
Q1154.
- Audit documentation serves mainly to provide support
for:
A1154.
- The auditor's report and to aid the auditor in the conduct
and supervision of the audit
Q1155.
- Audit documentation should be sufficient to show:
A1155.
- That the standards of fieldwork have been observed
(Proper planning, sufficient understanding of internal
control, & sufficient competent evidence)
Q1156.
- Audit documentation should include:
A1156.
- A written audit program for every audit
Q1157.
- Audit documentation should enable the reviewer to
understand:
A1157.
- The auditing procedures performed, evidence obtained, &
indicate the engagement team members who performed
and reviewed the work
Q1158.
- A listing of ledger accounts with current year-end
balances with columns for adjusting & reclassifying entries
as well as for final balances for the current year
A1158.
- Working Trial Balance
Q1159.
- Schedules that summarize like accounts, the total of
which is typically transferred to the working trial balance
A1159.
- Lead Schedules
Q1160.
- The combination of numbers and/or letters given to a
workpaper page for identification and organization
purposes
A1160.
- Index
Q1161.
- How does kiting overstate cash?
A1161.
- By causing it to be simultaneously included in two or
more bank accounts
Q1162.
- List 3 ways to detect kiting
A1162.
- 1) Preparing a bank transfer schedule
- 2) Preparing a 4-column bank reconciliation for the
account where the money was taken from
- 3) Obtaining a cutoff statement for the other account
Q1163.
- A bank transfer schedule detect kiting and is prepared
using these:
A1163.
- 1) Bank statements for periods before and after year end
- 2) Client's cash receipts and disbursements journals
Q1164.
- A bank cutoff statement is a bank statement for the 1st 8-
10 days after year end. Its primary purpose is to help
auditors:
A1164.
- Verify reconciling items on the year-end bank
reconciliation
Q1165.
- A standard bank confirmation form requests information
on deposits and loans. It is designed to substantiate
evidence primarily on which assertion?
A1165.
- The existence assertion
Q1166.
- What are 3 Cash auditing procedures that relates to
existence or occurrence?
A1166.
- 1) Confirmation
- 2) Cash count
- 3) Prepare bank transfer schedule
Q1167.
- An embezzlement scheme in which cash collections from
customers are stolen and the shortage is concealed by
delaying the recording of subsequent cash receipts
A1167.
- Lapping
Q1168.
- How does analytical procedures detect lapping?
A1168.
- It shows an increased age in receivables and a decreased
AR Turnover
Q1169.
- What are 3 other methods of detecting lapping?
A1169.
- 1) Confirm receivables
- 2) Review deposit slips
- 3) Review bookkeeping system
Q1170.
- Auditors are required to confirm accounts receivable
unless one of the three exist:
A1170.
- 1) AR are immaterial
- 2) Confirmations would be ineffective as an auditing
procedure
- 3) The combined assessment of inherent and control risk
is low, and that assessment with other substantive
evidence is sufficient to reduce audit risk to an acceptably
low level
Q1171.
- What is the difference between a positive and a negative
confirmation?
A1171.
- Positive asks for a reply no matter what and Negative
asks for a reply only if the information is incorrect
Q1172.
- If observation of counting a client's inventory cannot be
performed it must be:
A1172.
- Justified
Q1173.
- Is gain recognized when a plant asset is traded for a
similar plant asset?
A1173.
- No
Q1174.
- Improperly recording maintenance and repairs expense
can result in:
A1174.
- Understatements of PP&E
Q1175.
- Improperly capitalizing maintenance & repairs expense
can result in:
A1175.
- Overstatements of PP&E
Q1176.
- A representation letter should be addressed to the
auditor, in a letter dated no later than:
A1176.
- The date of the auditor's report
Q1177.
- The representation letter should be signed by:
A1177.
- CEO & CFO
Q1178.
- Representations from management do not substitute:
A1178.
- Application of other necessary auditing procedures
Q1179.
- Representations should be obtain for which periods being
reported on?
A1179.
- All, even if management was not present during those
periods
Q1180.
- What happens if management refuses to furnish a
representation letter?
A1180.
- Precludes an unqualified opinion, & ordinarily results in a
disclaimer, although a qualified opinion may be appropriate
in some cases
Q1181.
- Are internal auditors considered specialists?
A1181.
- No
Q1182.
- What should the auditor consider when assessing the
qualifications of the specialist?
A1182.
- Professional certification, reputation, & experience
Q1183.
- What must be evaluated if a specialist who is an employee
of the client is considered?
A1183.
- Their relationship to consider whether it might impair the
specialist's objectivity
Q1184.
- What are the 10 auditing procedures in completing the
audit?
A1184.
- 1) Search for unrecorded liabilities
- 2) Review minutes
- 3) Final review stage analytical procedures
- 4) Inquire client's lawyers
- 5) Review for subsequent events
- 6) Obtain representation letter
- 7) evaluate audit findings
- 8) Disclosure checklist
- 9) Review working papers
- 10) Communicate with audit committee
Q1185.
- To perform a compilation, the accountant must possess
this to enable performance of the compilation:
A1185.
- An understanding of the accounting principles and
practices in the client's industry
Q1186.
- To perform a compilation, the accountant must possess a
general understanding of the client's (5):
A1186.
- 1) Business transactions
- 2) Accounting records
- 3) Accounting personnel qualifications
- 4) Financial statement accounting basis
- 5) Financial statement form and content
Q1187.
- To perform a compilation, the accountant must also:
A1187.
- Read the compiled statements and consider whether they
appear to be appropriate and free from obvious material
errors.
Q1188.
- In a compilation the accountant is not required to make
inquiries, or perform other procedures, but when he
becomes aware of unsatisfactory information he should
obtain additional information. What if the entity refuses to
provide such information?
A1188.
- The accountant should withdrawal from the compilation
Q1189.
- Is independence required to perform a compilation?
A1189.
- No
Q1190.
- In a review, the accountant must possess a general
understanding of the client's: (3)
A1190.
- 1) Organization
- 2) Operating characteristics
- 3) Assets, liabilities, revenues, & expenses
Q1191.
- What are the 5 classes of transactions in the sales &
collection cycle?
A1191.
- 1) Sales
- 2) Cash receipts
- 3) Sales Returns & allowances
- 4) Charge-off of uncollectible accounts
- 5) Estimate of bad debt expense
Q1192.
- For each class of transaction, list the accounts that are
affected by them
- 1) Sales
- 2) Cash receipts
- 3) Sales returns & allowances
- 4) Charge-offs
- 5) Bad debt expense
A1192.
- 1) Sales & AR
- 2) Cash & AR
- 3) Sales returns & allowances & AR
- 4) AR & allowance for uncollectible accounts
- 5) Bad debt expense & allowance for uncollectible
accounts
Q1193.
- For each class of transaction, list the business functions
they provide:
- 1) Sales
- 2) Cash receipts
- 3) Sales returns & allowances
- 4) Charge-offs
- 5) Bad debt expense
A1193.
- 1) Processing customer orders, granting credit, shipping
goods, billing customers & recording sales
- 2) Processing & recording cash receipts
- 3) Processing & recording sales returns & allowances
- 4) Charging off uncollectible AR
- 5) Providing for bad debts
Q1194.
- What should be done before goods are shipped?
A1194.
- Credit approved
Q1195.
- What is used as a signal to bill the customer?
A1195.
- Shipping document
Q1196.
- A document indicating the description & quantity of
goods sold, the price, freight charges, insurance, terms, &
other relevant data
A1196.
- Sales Invoice
Q1197.
- Document indicating a reduction in the amount due from
a customer because of returned goods or an allowance
granted
A1197.
- Credit Memo
Q1198.
- List the 6 Sales transaction related audit objectives
A1198.
- 1) Recorded sales are for shipments made to actual
customers
- 2) Existing sales transactions are recorded
- 3) Recorded sales are for the amount of goods shipped &
are correctly billed & recorded
- 4) Sales transactions are properly classified
- 5) Sales are recorded on the correct dates
- 6) Sales transactions are properly included in the AR
master file.
Q1199.
- Anyone responsible for inputting sales or cash receipts
transaction information into the computer should be
denied:
A1199.
- Access to cash
Q1200.
- Credit granting should be independent of:
A1200.
- Sales function
Q1201.
- What must be authorized before a sale takes place?
A1201.
- Credit
Q1202.
- Goods must be shipped only after?
A1202.
- Proper authorization
Q1203.
- Prenumbered documents exists to prevent both:
A1203.
- Failure to bill or record sales and duplicate billings
Q1204.
- For the audit objective of " Recorded Sales Exist" what are
3 possible types of misstatements?
A1204.
- 1) Sales being included in the journals for which no
shipment was made
- 2) Sales recorded more than once
- 3) Shipments being made to nonexistent customers and
recorded as sales
Q1205.
- How can an auditor test for " recorded sale for which there
was no shipment" ?
A1205.
- Trace from sales journal to make sure related copies of
shipping & other supporting documents exist
Q1206.
- An effective procedure to test for unbilled shipments is
to:
A1206.
- Trace shipping documents to related duplicate sales
invoices and the sales journal
Q1207.
- What are the tests of controls related to existence of
sales?
A1207.
- 1) Examine customer order for evidence of customer
approval
- 2) Examine sales invoice for supporting bill of ladding and
customer order
- 3) Examine file of batch totals for initials of data control
clerk
- 4) Observe whether monthly statements are sent
Q1208.
- What are the tests of controls related to completeness of
sales?
A1208.
- 1) Account for a sequence of shipping documents
clerk
Q1209.
- What are tests of controls related to " Recorded sales are
for the amount of goods shipped and are correctly billed &
recorded" ?
A1209.
- 1) Examine sales invoice for supporting documents
clerk
- 3) Examine the approved price list for accuracy & proper
authorization
Q1210.
- What is the test of control for " Sales transactions are
properly classified"
A1210.
- Examine document package for internal verification
Q1211.
- What is the test of control for " Sales are recorded on the
correct date"
A1211.
- Account for a sequence of shipping documents
Q1212.
- What are the tests of controls related to " Sales
transactions are properly included in the AR Master file"
A1212.
- 1) Examine evidence that AR Master file is reconciled to
the GL
Q1213.
- What are the 6 transaction related audit objectives related
to cash receipts?
A1213.
- 1) Recorded cash receipts are for funds actually received
by the company
- 2) Cash received is recorded in the cash receipts journal
- 3) Cash receipts are deposited and recorded at the
amount received
- 4) Cash receipt transactions are properly classified
- 5) Cash receipts are recorded on the proper dates
- 6) Cash receipts are properly included in the AR Master
file
Q1214.
- What are the tests of controls related to the existence of
recorded cash receipts?
A1214.
- 1) Observe whether accountant reconciles bank account
clerk
Q1215.
- What are the test of controls related to the completeness
of cash received?
A1215.
- 1) Observe prelisting of cash receipts
- 2) Observe endorsement of incoming checks
clerk
Q1216.
- What are the tests of controls related to " Cash receipts
are deposited and recorded at the amounts received"
A1216.
- 1) Observe whether accountant reconciles bank account
clerk
Q1217.
- What is the test control related to " Cash receipts
transactions are properly classified"
A1217.
- Examine evidence of internal verification
Q1218.
- What is the test control related to " Cash receipts are
recorded on correct dates"
A1218.
- Observe unrecorded cash at a point in time
Q1219.
- What are the tests of controls related to " Cash receipts
are properly included in the AR Master file"
A1219.
- 2) Examine evidence that AR Master file is reconciled to
GL
Q1220.
- What are the Three General Standards of Auditing?
A1220.
- 1st General Standard: The auditor must have adequate
technical training and proficiency to perform the audit.
- 2nd General Standard: The auditor must maintain
independence in mental attitude in all matters relating to
the audit.
- 3rd General Standard: The auditor must exercise due
professional care in the performance of the audit and the
preparation of the report.
Q1221.
- What are the Three Standards of Fieldwork?
A1221.
- 1st Standard of Fieldwork: The auditor must adequately plan
the work and must properly supervise any assistants.
- 2nd Standard of Fieldwork: The auditor must obtain a
sufficient understanding of the entity and its environment,
including its internal control, to assess the risk of material
misstatement of the financial statements whether due to error
or fraud, and to design the nature, time, and extent of further
audit procedures.
- 3rd Standard of Fieldwork: The auditor must obtain a
sufficient appropriate audit evidence by performing audit
procedures to afford a reasonable basis for an opinion
regarding the financial statements under audit.
Q1222.
- What is the purpose of the Three Standards of Fieldwork?
A1222.
- Used to apply the process of obtaining and evaluating
evidence for the purpose of forming an opinion on the FS.
Q1223.
- What is the correspondence between assertions and
established criteria?
A1223.
- GAAP represents the established criteria upon which
assertions are evaluated.
Q1224.
- What are the Public benefits of Audits?
A1224.
- Credibility, Capital formation and flow, Freedom from
bias, and Freedom from material error
Q1225.
- What are the responsibilities of the entity's management?
A1225.
- 1-The entity's FS and the selection and application of
accounting principles
- 2-Establishing and maintaining effective internal control
over financial reporting.
- 3-Designing and implementing programs and controls to
prevent and detect fraud.
- 4-Identifying and ensuring that the entity complies with
the laws and regulations applicable to its activities.
- 5-Making all financial records and related information
available to the auditor.
- 6-At the conclusion of the engagement, providing the
auditor with a letter that confirms certain representations
made during the audit.
Q1226.
- What are the responsibilities of the CPA?
A1226.
- 1-Establishing and understanding with the client
regarding the services to be performed for each
engagement and documenting the communication through
a written communication with the client.
- 2-Conducting the audit in accordance with GAAS
- 3-Ensuring that those charged with governance are aware
of any significant deficiencies that come to their attention.
- 4-Either expressing an opinion regarding the FS, taken as
a whole, or stating that an opinion cannot be expressed.
Q1227.
- What is the purpose of the application of the standards of
reporting?
A1227.
- The standards of reporting apply to the preparation and
communication of the auditor's report.
Q1228.
- What are the four standards of reporting?
A1228.
- 1st Standard of Reporting: The auditor must state in the
auditor's report whether the FS are presented in accordance
with GAAP.
- 2nd Standard of Reporting: The auditor must identify in the
auditor's report those circumstances in which such principles
have not been consistently observed in the current period in
relation to the preceding period.
- 3rd Standard of Reporting: When the auditor determines that
informative disclosures are not reasonably adequate, the
auditor must so state in the auditor's report.
- 4th Standard of Reporting: The auditor must either express an
opinion regarding the FS taken as a whole or state that an
opinion cannot be expressed.
Q1229.
- What is the purpose of a SAS?
A1229.
- Statement on Auditing Standards (SAS) are authoritative
interpretations of the 10 GAAS.
Q1230.
- Can an auditor use other publications to find SAS
guidance?
A1230.
- Other auditing publications have no authoritative status;
however, they may help the auditor to understand and
apply the SASs. If an auditor applies the auditing guidance
included in another auditing publication, he or she should
be satisfied that, in his or her judgments, it is both relevant
and appropriate.
Q1231.
- What is the purpose of PCABO?
A1231.
- PCABO is empowered to establish auditing standards for
the audits of publicly traded companies. These standards
will remain effective until superseded by another standard
issued by the PCABO.
Q1232.
- What are the four opinions a CPA can conclude with
respect to the FS?
A1232.
- 1. unqualified opinion
- 2. qualified opinion
- 3. adverse opinion
- 4. disclaimer of opinion
Q1233.
- When should a compilation report be issued verses an
audit report?
A1233.
- Only a compilation report should be issued if the auditor
is not independent of the entity, not an audit report.
Q1234.
- What is audit risk?
A1234.
- Audit risk is the risk that the auditor may unknowingly fail
to appropriately modify hi/her opinion on FS that are
materially misstated.
Q1235.
- What is the definition of materiality as defined by FASB
FS concepts #2?
A1235.
- " The magnitude of an omission or misstatement of
accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a
reasonable person relying on the information would have
been changed or influenced by the omission or
misstatement."
Q1236.
- What is the auditing opinion regarding the difference
between an the term error and the term fraud?
A1236.
- Fraud refers to an intentional act by one or more
individual whereas an error is an unintentional
misstatement of amounts or disclosures in FS.
Q1237.
- What are the two types of misstatements resulting from
fraud that are relevant to an auditor?
A1237.
- a) fraudulent financial reporting
- b) misappropriation of assets
Q1238.
- Misstatements may be known or likely, what are the
definitions of each?
A1238.
- Known- misstatements that consist of an amount
specifically identified.
- Likely- misstatements represent the auditor's best
estimate of the total misstatements in the account
balances or classes of transactions that the auditor has
examined.
Q1239.
- What risks are independent from the FS?
A1239.
- Inherent risk and control risk is independent of FS audits
because it is a reflection of the client and its environment.
Q1240.
- What is inherent risk?
A1240.
- Inherent risk is the likelihood of material misstatement of
an assertion.
Q1241.
- What is the risk of material misstatement?
A1241.
- The auditor's combined assessment of inherent risk and
control risk; however, the auditor may make separate
assessments of inherent risk and control risk.
Q1242.
- What is detection risk?
A1242.
- The risk that an auditor will not detect a misstatement that
exists in a relevant assertion that could be material, either
individually or when aggregated with other misstatements.
Q1243.
- What is the relation of material misstatement to detection
risk?
A1243.
- Detection risk relates to the substantive audit procedures
and is managed by the auditor's response to risk of
material misstatement. The greater the risk of material
misstatement, the less the detection risk that can be
accepted by the auditor.
Q1244.
- What should be considered when determining
materiality?
A1244.
- Prior Periods financial results and financial positions, the
period to date financial results and financial position, and
the budgets or forecasts for the current period.
Q1245.
- What is a tolerable misstatement?
A1245.
- The maximum error in a population that the auditor is
willing to accept. The auditor should determine onr or more
levels of tolerable misstatements for classes of
transactions, account balances, and disclosures.
Q1246.
- What is the auditor's responsibility with regard to
reporting misstatements?
A1246.
- The auditor should request management to correct all
known misstatements, other than those that the auditor
believes are trivial. If management refuses to correct some
or all of the misstatements communicated to it by the
auditor, the auditor should obtain an understanding of
managements reasons for not make the corrections and
should take that into account when considering the
qualitative aspects of the entity's accounting principles.
Q1247.
- To identify the effect of identified uncorrected
misstatements, the auditor should consider: ?
A1247.
- 1. Its effect in relation the relevant individual classes of
transactions, account balances, or disclosures, including
whether materiality levels for particular items of lesser
amounts than the materiality level for the financial
statements as a whole have been exceeded.
- 2. Whether, in considering the effect of the individual
misstatement on the financial statements as a whole, it is
appropriate to offset misstatements.
- 3.The effect of misstatements related to prior periods.
Q1248.
- What are qualitative misstatements?
A1248.
- Factors that the auditor may consider relevant to his or
her consideration of whether misstatements are material.
The auditor should evaluate whether the financial
statement as a whole are free of material misstatement
considering both uncorrected misstatements and the
qualitative considerations.
Q1249.
- What should be documented by the auditor?
A1249.
- 1--The levels of materiality and tolerable misstatement,
including any changes thereto, used in the audit and the
basis on which those levels were determined
- 2--A summary of uncorrected misstatements, other than
those that are trivial, related to known and likely
misstatements; and
- 3--The auditor's conclusion as to whether uncorrected
misstatements, individually, or in the aggregate do or do
not cause the financial statements to materially misstated,
and the basis for that conclusion.
Q1250.
- What is the definition of the General Standard 1?
A1250.
- AU 210--Technical training and proficiency--all persons
must have proper education and experience in the field of
auditing and be well educated on current developments in
business
Q1251.
A1251.
- AU 220-Independence--The CPA's attitude is to be one of
judicial impartiality. The CPA must in fact be intellectually
honest and be recognized in appearance as independent
by third parties. Strengthening independence is the
formation of an audit committee.
Q1252.
- What is an audit committee and what is their role in the
audit process?
A1252.
- An audit committee is a standing committee of the BOD of
a public corporation which main responsibility is dealing
with the company's FS, external audits, and internal
controls.
Q1253.
- There are seven main functions of an audit committee.
What are they?
A1253.
- 1. Recommend the selection, retention, or termination of the
company's external auditors.
- 2. Review the overall scope of the audit with the external
auditors.
- 3.Review the FS and external audit results, including
communication of material weaknesses in internal accounting
control.
- 4. Handle unforeseen problems when the external auditor
need access to the board.
- 5. Prepare the committee's report to the board.
- 6. Approve the budget and audit plan of the company's
internal audit activities.
- 7. Approve the selection or termination of the director of
internal auditing.
Q1254.
A1254.
- AU 230- Due Care- Imposes an obligation on each person
within a CPA's organization to observe the standards of
fieldwork. (An audit conducted in accordance with GAAS
may not detect a material misstatement)
Q1255.
- What are the element of quality control policies and
procedures applicable to a firm's accounting and auditing
practice?
A1255.
- 1. Independence
- 2. Personnel management
- 3. Acceptance and continuance of clients and
engagements
- 5. Monitoring
Q1256.
- What is a system of quality control?
A1256.
- A system of quality control is broadly defined as a
process to provide the firm with reasonable assurance that
its personnel comply with applicable professional
standards and the firm's standards of quality.
Q1257.
- Quality Control Standard 3 is entitled " Monitoring a CPA
Firm's Accounting and Auditing Practice." What should be
evaluated to meet this requirement?
A1257.
- Monitoring involves an ongoing consideration and
evaluation of the following:
- 1. Relevance and adequacy of the firms policies and
procedures
- 2. Appropriateness of the firm's guidance materials and
any practice aids
- 3. Effectiveness of professional development activities
- 4. Compliance with the firm's policies and procedures.
- (A peer review does not substitute from monitoring
procedures)
Q1258.
- Define Quality Control Standard 5.
A1258.
- The Personnel Management Element of a Firm's system of
QC- Competencies Required by a Practitioner-in-Charge of
an Attest Engagement
Q1259.
- What is the practitioner in charge?
A1259.
- The person responsible for supervising accounting,
auditing, and attestation engagements and signing or
authorizing an individual to sign the accountant's report on
such engagement.
Q1260.
- What are the appropriate Step of an Audit Engagement?
A1260.
- 1st-Evaluate the client and, if possible, accept the
engagement.
- 2nd-Prepare the engagement letter
- 3rd-Perform planning procedures
- 4th-Assess Control Risk and perform Control Risk
assessment procedures only if internal controls appear reliable.
- 5th- Design audit tests for areas where audit procedures will
be performed
- 6th- Perform analytical procedures in the overall review stage
- 7th-Supervise and review the work of audit assistants
continuously
- 8th-Form conclusions on the basis of evidence obtained and
issue the audit report.
Q1261.
- What are the appropriate planning procedures?
A1261.
- --Gain an understanding of the internal control structure
- -Perform analytical procedure
- -Assess audit risk
Q1262.
- What objectives should be included in the client's
understanding of services to be performed?
A1262.
- The understanding should include the objectives of
engagement, management's responsibilities, the auditors
responsibilities, and limitations of the engagement. If the
auditor believes that this understanding has not been
established, the auditor should decline to accept or
perform the engagement.
Q1263.
- What is the procedure for establishing predecessor and
successor auditor communications?
A1263.
- Since the Code of Professional Conduct precludes an
auditor from disclosing confidential information obtained
in an audit unless the client consents, the successor
auditor must ask the prospective client to authorize the
predecessor auditor to respond fully to the successor's
inquiries.
Q1264.
- What are the elements of the engagement letter?
A1264.
- a. Objective of the engagement
- b. The scope of the audit work to be performed
- c. The fact that the purpose of the audit is not to detect fraud
but to enable the auditor to express an opinion as to the
fairness of the FS
- d. A management letter
- e. Additional work to be performed, such as tax, consulting, or
other services (if any)
- f. Any limitation of restrictions on the scope of the study
- g. Work to be performed by the client's staff (if any)
- h. The basis of the auditor's fee
- i. Audit work schedule and estimated date of completion
Q1265.
- What are the ratios that measure liquidity:
A1265.
- 1) Current ratio
- 2) Quick ratio
- 3) Inventory Turnover
- 4) Receivables turnover
- 5) Cash from operating activities to current liabilities
Q1266.
- What are the ratios that measure returns on investments:
A1266.
- 1) Total Asset turnover
- 2) Rate of return on total assets
- 3) Return on common stockholders equity
- 4) Price-earnings ratio
- 5) Dividend yield
- 6) Profit margin on sales
- 7) Payout ratio to common shareholders
Q1267.
- What are the ratios that measure solvency:
A1267.
- 1) Debt to equity ratio
- 2) Equity ratio
- 3) Times interest earned
- 4) Book value per common share
- 5) Cash flow per common share
- 6) Cash flow operating activities to net income
Q1268.
- What is the objective of an audit?
A1268.
- to express an OPINION on the financial statements in the
form of an Audit Report
Q1269.
- In an audit: what are the responsibilities the two main
parties?
A1269.
- Management = Financial Statements
- Auditors = Expression of an opinion/
Q1270.
- What does the audit function do for a company?
A1270.
- By having an auditor attest to the statements, the
company adds credibility to the company
Q1271.
- An Auditor must be:
A1271.
- Independent
- Expert
- in accounting (GAAP)
- in auditing (GAAS)
- in the industry
- Poses professional skepticism
Q1272.
- The primary assertion of a an audit is what?
A1272.
- Whether or not the financial statements are fairly
presented
Q1273.
- What is the meaning of " fairly presented?"
A1273.
- A judgment call reflecting whether or not financial
statements reflect the transactions of a company within an
acceptable range.
Q1274.
- An auditor uses which auditing standards for which
companies?
A1274.
- GAAS = mandatory on ALL audits
- GAGAS = government organizations, programs, activities,
and entities that receive government funds.
- PCAOB = companies that are " issuers" (i.e. companies
that are subject to SEC regulations)
Q1275.
- Describe requirements for auditing a public company?
A1275.
- Public accounting firms must register with the PCAOB
and are subject to board inspection. The PCAOB originally
adopted ASB standards. Since then it has released 5
additional standards to replace related ASB standards.
Q1276.
- What is SOX
A1276.
- 1. Auditors report to and are overseen by the issuer's
audit committee(PCAOB)
- 2. All services must be pre-approved by said committee
- 3. A second partner review is required for every public
company audit
- 4. Penalties for destruction of records, willful
maintenance for 7 years, commit securities fraud, fail to
report fraud
- 5. protection for whistleblowers
- 6. Anyone associated with a pubic accounting firm can be
held responsible for violation of accounting standards.
Q1277.
- Name and describe the 3 levels of GAAS hierarchy:
A1277.
- SASs - Published by the ASB. Require professional
judgment and may be departed from in certain situations.
- Interpretive Publications - recommendations regarding
how SASs should be applied in specific situations (can be
departed from).
- Other Auditing Publications - no authoritative status, but
can be helpful
Q1278.
- What is GAAS and Name the 10 standards
A1278.
- Minimum standards for auditing. These standards deal with
measures of audit quality and the objectives to be achieved in
an audit, not the procedures necessary to complete the audit.
- T - training
- I - independence
- P - professional care
- P- planning and supervision
- I - internal control
- E - evidence
- A - accounting = gaap
- C - consistency
- D - disclosure
- O - express opinion
Q1279.
- What are the GAAS general standards
A1279.
- TIP:
- Training - the auditor must have an accounting education,
practical auditing experience, and technical knowledge of
the industry for the company being audited.
- Independence - the auditor must be independent in fact
and appearance. This is the cornerstone of the profession.
SOX mandates a one year cool-off period
- Professional Care - Auditor is expected to perform due
care (attain reasonable assurance and professional
skepticism), but not expected to be infallible. the auditor
should do what the average auditor would do.
Q1280.
- What are the Standards of field work?
A1280.
- PIE:
- Planning and supervision - audit programs to enumerate
action and supervision and review of all audit work.
- Internal Control, Entity, and Environment - the auditor
should gain an understanding of internal controls, the
entity, and its industry in order to plan and design further
auditing procedures.
- Evidence - Procedures are performed so as to gather
evidence needed to render an opinion regarding the FS
Q1281.
- What are the standards of reporting?
A1281.
- ACDO
- Accounting = GAAP (E) - Must state whether or not the
financial statements are in accordance with generally accepted
accounting principles.
- Consistency (I)- does not need to be explicitly stated,
however, auditor must note circumstances where consistency
is not observed.
- Disclosure (I)- Auditor must note when any disclosures are not
adequately presented.
- Express Opinion (E)- The auditor must state and opinion on
the financial statements. If they cannot place an opinion they
must explain why. This standard is used to prevent
misinterpretation of the auditors degree of responsibility.
Opinions can be unqualified on one and qualified or disclaimer
on another.
Q1282.
- What are the three paragraphs of an unqualified report
and what do they contain?
A1282.
- RAPMEAM RAPEAM
- Introductory: - Name of the FS to be reported on RR - FS
responsibility of mgmt. - Auditor resp. for opinion
- Scope: - AA - Audit conducted in Accordance with GAAS or
PCAOB for publicly traded co. - PP - Planned and Performed to
obtain reasonable assurance - MM - FS free from Material
Misstatement. EE - Examined Evidence on a test basis. - AA -
Assessed Accounting principles.- MM -tested Management
Made estimates
- Opinion: - reference to the FS (from the intro) and opinion on
the fair presentation of the FS and conformity with GAAP.
Q1283.
- What is the report date
A1283.
- the final date of Auditor responsibility. Report should be
dated after audit documentation has been reviewed,
financial statements have been prepared, and management
has taken responsibility for the financial statements.
Q1284.
- What are PCAOB standards for audits of issuers and non-
issuers
A1284.
- Issuers: There must state in the Scope: " We conducted
our audits in accordance with the standards of the
PCAOB.."
- Non-issuers: May, but is not required to conduct the audit
in accordance with GAAS and the PCAOB.
Q1285.
- What is the general rule for GAAS and GAAP in the
standard report.
A1285.
- GAAS - Scope Paragraph
- GAAP - Opinion Paragraph
Q1286.
- What are the types of opinions:
A1286.
- Unqualified (clean) - FS is presented fairly in all material
respects and in conformity with GAAP. (standard report)
- Modified Unqualified - when an explanatory paragraph is
needed for certain circumstances, even when the opinion is
unqualified.
- Qualified Opinion (except for) - despite certain matters, the FS
is presented fairly. GAAP problems change the opinion P. while
GAAS problems change the scope and opinion P.
- Adverse Opinion: Very material GAAP problems cause the
statement to not be presented fairly.
- Disclaimer of Opinion - Significant GAAS problems have
caused the auditor to not render an opinion because they were
not able to complete the audit.
Q1287.
- What GAAP issues result in qualified and adverse
opinions?
A1287.
- Qualified:
- 1. Non-GAAP change
- 2. Inadequate Disclosure
- 3. Unjustified Departure from GAAP
- 4. Unreasonable Acctg. Estimate
- Adverse: " Very Material" versions of issues that cause
qualified opinions.
Q1288.
- What GAAS issues result in qualified and disclaimer
opinions?
A1288.
- Qualified:
- 1. Uncertainty
- 2. Scope Limitation
- Disclaimer:
- 1 - 2: same as qualified
- 3. Lack of independence
- 4. Unaudited
Q1289.
- When does an auditor withdraw?
A1289.
- When statements are false, fraudulent, deceptive, or
misleading.
Q1290.
- What is an uncertainty?
A1290.
- A matter where conclusive audit evidence is not currently
available. examples are impairments, intangibles, lawsuits,
and warranties.
Q1291.
- What is the effect of an uncertainty on an audit?
A1291.
- According to GAAP, management must either record the
event if it is probable and reasonable or decide an estimate
cannot be made and disclose the liability.
- If the auditor agrees with management then an unqualified
opinion is rendered.
- If the auditor cannot obtain enough info to agree with
management they should render a qualified (gaas) opinion
or a disclaimer due to limitation of scope
- If the auditor does not agree with managements decision
the auditor should release a qualified gaap or adverse
opinion.
Q1292.
- What situations warrant a modified opinion? how do
these situations affect the audit report?
A1292.
- *(Division of responsibility) audit opinion is based on the
report of another auditor - modified wording
- Explanatory Paragraph Needed:
- *Necessary and justified departure from GAAP
- *Going concern
- *To emphasize a matter
- *A justified lack of consistency
- *Quarterly financial data has been omitted or not reviewed
- *Supplementary info that is required by GAAP is omitted.
- *Other information in a document containing audited FS is
inconsistent with info appearing in the FS
Q1293.
- Where is the explanatory paragraph placed in the various
opinions?
A1293.
- Unqualified:
- after the opinion paragraph
- Qualified, adverse, or disclaimer:
- before the opinion paragraph
- Exceptions:
- can be placed before or after opinion for Justified GAAP
departure or Emphasis of a matter.
Q1294.
- What is the effect upon the audit statement when multiple
auditors have audited part of the FS and the primary
auditors want to show a division of responsibility?
A1294.
- The division of responsibility is should be referenced in
all three paragraphs of the report. The primary CPA can
only mention the secondary by name if they have express
permission.
Q1295.
- What is the effect upon the audit statement when multiple
auditors have audited part of the FS and the primary
auditors want to assume responsibility?
A1295.
- Before you assume responsibility (and not mention the
other CPA) you must RIPP them:
- R- check Reputation
- I - assure auditors' Independence.
- P - check Professional capacity
- P - check audit Programs
Q1296.
- What are the procedures for evaluating a going concern:
A1296.
- ADMITS:
- A - analytical procedures
- D - view terms of Debts and loans
- M- review Minutes of the board
- I - Inquiry of legal council
- T- view Third party financial support
- agreements
- S - subsequent events review
Q1297.
- What events are indicative of substantial doubt?
A1297.
- F - Financial difficulties
- I - Internal matters like work stoppages
- N - Negative trends
- E- External matters
Q1298.
- What mitigating factors can allow an alleviation of doubt?
A1298.
- Plans to borrow money or restructure
- Plans to sell assets
- Plans to delay or reduce expenditures
- Plans to increase ownership equity
Q1299.
- What should be included in audit documentation when
there is substantial doubt about a company's ability as a
going concern?
A1299.
- -The events that gave rise to the doubt
- any mitigating factors that are significant
- audit work performed to evaluate managements plans
- conclusion on whether the doubt remains
- the effect on the audits report and the financial
statements
Q1300.
- When do you emphasis a matter?
A1300.
- when the company is a " RECC"
- R - Related-party transaction
- E - subsequent Event
- C - Component of an enterprise
- C - matters that effect Comparability
Q1301.
- What must be met in order for an accounting change to be
acceptable?
A1301.
- An auditor will render a modified unqualified report only
when all three of the following are met:
- The change is to an acceptable principle
- The method of accounting for the change is acceptable
- Management is justified in the change
- If these changes are material then an explanatory
paragraph is needed.
Q1302.
- How do you deal with no statement of cash flows?
A1302.
- An explanatory paragraph is added with missing info and
its effects on the FS. Except for terminology is used in the
opinion paragraph
Q1303.
- Name some scope limitations
A1303.
- Time constraints
- Inability to obtain enough audit evidence.
- No management letter
- Refusal of clients attorney to respond
- Only report the scope limitation if you cannot identify and
use alternative audit procedures (in which case you render
an unqualified opinion with a potential modification)
Q1304.
- Describe changes to the standard report when a
disclaimer of opinion is issued:
A1304.
- Intro:
- say " were engaged to audit" instead of have audited
- delete reference of auditor's responsibility
- Delete Scope Paragraph
- Add Explanatory Paragraph and describe reason for
disclaimer and why the statement was not in accordance
with GAAP
- Opinion Paragraph:
- disclaimer is placed on FS as a whole
Q1305.
- If during a current audit an auditor realizes that he must
change a previous year's opinion, what steps must be
taken?
A1305.
- In an explanatory paragraph, " DORCS"
- D-Date of the previous report
- O-type of Opinion issued b4
- R-Reason for the prior opinion
- C-Changes that have occurred
- S-Statement that the opinion is different
Q1306.
- Before deciding to reissue an audit what steps should a
predecessor take?
A1306.
- -Read the statements for the current period.
- Compare the statements audited with the current
statements
- Obtain a letter of representation from the successor
auditor.
- Obtain a rep. letter from management.
- Unrevised reports should use the original date, Revised
reports should be dual dated
Q1307.
- What should a successor auditor do when they decide not
to present the predecessors audit report?
A1307.
- Include the following in an introductory paragraph:
- Statements were examined by other auditors in prior
periods (do not specifically mention predecessor).
- Date of predecessor's report
- Type of opinion they expressed
- the reason why it wasn't unqualified
Q1308.
- What are subsequent events?
A1308.
- Events that occur after balance sheet date but before FS
are issued.
Q1309.
- Subsequent events have what effects can they have on
the FS
A1309.
- Subsequent events can cause adjustments (type 1 event)
to the FS (if the event existed during the year)or additional
disclosures (Type 2 event) to bring statement users up to
date on potential future effects.
Q1310.
- How long is the auditor held liable for the audit?
A1310.
- Until the date on the Audit report. However, if the auditor
is made aware of events after the report date, they must
consider whether or not to adjust FS
Q1311.
- What subsequent period actions should an auditor take?
A1311.
- PRIME:
- P-Post balance sheet transactions should be reviewed
- R-Representation letter obtained from management
regarding any disclosures etc.
- I-Inquiry to mgmt. about material liabilities or
commitments, changes in equity, material unusual
adjustments, and to mgmt's legal counsel
- M-Minutes of the board should be read
- E-Examine and compare latest interim FS
Q1312.
- How should a report be dated if additional details are
found?
A1312.
- The report can be dual dated (Jan. 21, 20XX except for
note 2, as to which the date is Feb 3, 20XX)
- Or the date can be extended, but this increases
responsibility until the new date
Q1313.
- What does an auditor do if new info is found after the
audit report is completed?
A1313.
- - advise client to issue revised statements and new audit
report
- Advise the client to make necessary disclosures and
revisions
- Provide notification to the client that the statements
cannot be relied upon.
Q1314.
- What should an auditor do if a client refuses to disclose
new information that may denigrate the value of the FS?
A1314.
- DAR:
- D-Disassociate yourself with the financial statements.
- A- Alert Agencies with jurisdiction over the client that the
auditor's report cannot be relied upon
- R-Notify relying parties of the events
Q1315.
- What steps should an auditor take when omitted audit
procedures are taken after submission of an Auditor's
Report?
A1315.
- -Determine whether or not other procedures compensated
for those that were omitted.
- Undertake the (alt.) procedures.
- If opinion is changed proceed as if subsequent
information was discovered.
Q1316.
- What limited procedures must be undertaken for sup.
info?
A1316.
- -Inquire of mgmt. how the info was prepared.
- Determine if the info is consistent with mgmt's responses,
audited FS, etc.
- Consider whether the client rep. letter should refer to the
supplementary information
Q1317.
- How is supplementary information reported on?
A1317.
- Auditors are not required to audit sup. info. However,
certain situations require expansion of the report:
- required sup. info is missing
- the info is not in compliance with GAAP
- The auditor cannot complete required procedures.
- Substantial doubt is raised regarding the info.
- These concerns should be expressed in the form of an
explanatory paragraph.
Q1318.
- When can a disclaimer be placed on Sup. Info?
A1318.
- Supplementary info is not distinguished from audited
info. Or when the company tries to make it look as if the
sup. data has been audited
Q1319.
- What are condensed financial statements and how does
an auditor's report deal with them?
A1319.
- FS with much less detail. Derived from audited stmts.
- The auditor must indicate:
- 1. they audited and expressed an opinion on the full FS
- 2. date of audit report on complete FS
- 3. type of opinion expressed
- 4. whether the statements are fairly presented.
Q1320.
- What is included in a reporting accountant's report?
A1320.
- -A brief description of the nature of the engagement
- Stmt. that AICPA standards were used during the
engagement
- Identification of the entity, description of transactions,
facts, assumptions, and the source of info.
- Stmt. describing acct. principles, type of opinion
- stmt. that the preparers of the FS are responsible
- stmt. that differences in facts or assumptions will change
the report
- separate paragraph restricting use to mgmt, BOD, and
auditors.
Q1321.
- How should an auditor prepare a report when distribution
will include other countries?
A1321.
- For foreign distribution only:
- Use the report of the other country OR a U.S. report
formatted for the other country
- For more than limited distribution with the US:
- Use GAAP
Q1322.
- What should be included in the introductory paragraph of
the auditor's standard report?
A1322.
- Statements that:
- The financial statements identified in the report were
audited
- The financial statements are the responsibility of
management
- The auditor's responsibility is to express an opinion
based on the audit.
Q1323.
- What are the three standards of fieldwork?
A1323.
- The auditor must adequately PLAN the work and must
properly supervise and assistants.
- The auditor must obtain a sufficient understanding of the
entity and its environment, including its INTERNAL
CONTROL, t
Q1324.
- Explain the difference between auditing standards and
auditing procedures.
A1324.
- Auditing standards measure the quality of the
performance of the audit.
- Auditing procedures are the acts to be performed during
the audit.
Q1325.
- What types of problems would warrant a qualified opinion
due to lack of adherence to GAAS?
A1325.
- Uncertainty
- Scope limitation
Q1326.
- What types of problems would warrant a qualified opinion
due to nonconformity with GAAP?
A1326.
- Non-GAAP change in accounting principle
- Inadequate disclosure
- Unjustified departure from GAAP
- Unreasonable accounting estimate
Q1327.
- What auditing procedures should the auditor perform
regarding going concern?
A1327.
- The auditor should perform the following procedures:
- Debt Compliance (Review Compliance)
- Minutes (read a
Q1328.
- How is a justified departure from GAAP communicated in
the report?
A1328.
- The auditor issues a modified unqualified opinion.
- An explanatory paragraph should be added which
contains a description of the departure, its approximate
effect, and the reasons why adherence to the generally
accepted accounting principle would
Q1329.
- When does an auditor mention the work done by other
auditors?
A1329.
- When the principal auditor does not assume
responsibility for the work of other auditors and instead
indicates a division of responsibility.
- Note that other auditors may be named only with their
express permission and provided their report is pre
Q1330.
- What standards provide the most authoritative auditing
guidance and who issues them?
A1330.
- Statements on Auditing Standards (SASs, issued by the
AICPA Auditing Standards Board.
Q1331.
- What are the four standards of reporting?
A1331.
- 1. The report shall state whether the financial statements
are presented in accordance with generally accepted
ACCOUNTING PRINCIPLES.
- 2. The report shall identify those circumstances in which
such principles have not been
Q1332.
- What are the three general standards?
A1332.
- 1. Audit must be performed by a person(s) having
adequate technical TRAINING and proficiency as an
auditor.
- In all matters relating to the assignment, an
INDEPENDENCE in mental attitude is to be maintained
Q1333.
- What is the objective of an independent audit?
A1333.
- To express an opinion stating whether the financial
statements, taken as a whole, are fairly presented in all
material respects in conformity with accounting principles
generally accepted in the US.
Q1334.
- If an auditor chooses to mention the work done by other
auditors, how is the information reported?
A1334.
- All three paragraphs of the report should mention the
division of responsibility. The introductory paragraph
should express the work done by the other auditors in
terms of percentages, total assets, total revenues, or other
appropriate criteria.<
Q1335.
- What should be included in the scope paragraph of the
auditor's standard report?
A1335.
- Statements that:
- The audit was conducted in accordance with auditing
standards generally accepted in the US
- The audit was planned and performed to obtain
reasonable assurance that the financial statements are free
of material misstatement
Q1336.
- What is the content and format of the standard auditor's
report?
A1336.
- To: the Stockholders and Board of Directors of X
Company:
- We have audited the accompanying balance sheet of X
Company as of Dec 31, Year 1, and the related statements
of income, retained earnings, and cash flows of the year
ended
Q1337.
- How is lack of consistency handled in the auditor's
report?
A1337.
- An explanatory paragraph is added (following the opinion
paragraph) describing the change and referring the reader
to the appropriate note in the financial statements.
- If GAAP is followed, the opinion is unqualified. If GAAP is
not followed
Q1338.
- When is an explanatory paragraph added to an
unqualified opinion?
A1338.
- Necessary and justified departure from GAAP
- Going Concern
- To emphasize a matter regarding the financial statements
- A justified lack of consistency caused by a material
change in GAAP
- Required SEC regulation S-K quar
Q1339.
- What should be included in the opinion paragraph of the
auditor's standard report?
A1339.
- A statement that:
- In the auditor's opinion, the financial statements identified
in the introductory paragraph are presented fairly in all
material respects.
- The financial statements are in conformity with
accounting principles ge
Q1340.
- How do uncertainties affect the auditor's report?
A1340.
- If management's analysis is supported and properly
reported or disclosed, the auditor issues an unqualified
opinion with no reference to the uncertainty in the audit
report.
- If the auditor is unable to obtain sufficient evidential matt
Q1341.
- What conditions and events may indicate substantial
doubt about an entity's ability to continue as a going
concern?
A1341.
- The following conditions and events may be indicative of
substantial doubt:
- Financial Difficulties
- Internal matters labor difficulties, substantial dependence
on a particular project, etc)
Q1342.
- What are three things are necessary to constitute
sufficient appropriate audit evidence?
A1342.
- Evidence that:
- 1. Audit documentation has been reviewed,
- 2. Financial statements have been prepared, AND
- 3. Management has taken responsibility for the financial
statements
Q1343.
- List several features of a report on the application of
accounting principles.
A1343.
- Description of engagement, entity, and transaction
- Reference to professional standards
- Description of appropriate accounting principles OR the
type of opinion that may be rendered
- Preparers are responsible for proper account
Q1344.
- In what situations will an auditor issue an adverse
opinion?
A1344.
- Unjustified departure from GAAP.
- Inadequate disclosure
- Unreasonable accounting estimate
- Non-GAAP change in accounting principle
Q1345.
- What is the format of a report issuing a qualified opinion
due to nonconformity with GAAP?
A1345.
- [Same 1st and 2nd paragraph]
- The reasons for the qualified opinion and the related
financial impact should be set forth in an explanatory
paragraph preceding the opinion paragraph.
- The opinion paragraph should state, " In our opinion, e
Q1346.
- What is the format of the report when a disclaimer of
opinion is issued?
A1346.
- A disclaimer of opinion contains:
- No reference to auditor's responsibility in the introductory
paragraph
- Use of the phrase " we were engaged to audit" in the
introductory paragraph
- No scope paragraph
Q1347.
- What is the format of a report issuing a qualified opinion
due to scope?
A1347.
- [Same 1st paragraph]
- [Same 2nd paragraph, except insert the phrase " Except as
stated in the following paragraph" at the beginning]
- An explanatory should be inserted before the opinion
paragraph describing the scope limitation.
Q1348.
- Identify some causes of scope limitations.
A1348.
- Restrictions on the use of auditing procedures due to:
- Time constraints
- Lack of sufficient competent evidence or unavailability of
pertinent records
- Examples include:
- Inability to observe inventory
- Inab
Q1349.
- After the date of the auditor's report, what actions should
an auditor take regarding subsequent events?
A1349.
- None! While the auditor is responsible for investigating
subsequent events until the date of the auditor's report, the
auditor has no active responsibility to make inquiries or
perform auditing procedures after that date.
Q1350.
- What is the auditor's responsibility with respect to an
auditor submitted document containing audited financial
statements?
A1350.
- The auditor is responsible for reporting on all information
in the document, and he/she must indicate whether such
information is fairly stated, in all material respects, in
relation to the basic financial statements taken as a whole.
Q1351.
- When reporting on condensed financial statements or
selected financial data, what must the auditor indicate in
the report?
A1351.
- The auditor must indicate whether the information is fairly
stated, in all material respects, in relation to the financial
statements from which it has been derived.
Q1352.
- What are the reporting options when financial statements
are prepared for use in other countries will be distributed
outside the US only? What if there will be more than a
limited distribution within the US?
A1352.
- Distributed outside the US only:
- Report form of other country; OR
- US style report modified slightly to refer to the other
country
- Distributed within the US
- Standard US report modified for a departure from GAAP
Q1353.
- What is the auditor's responsibility with respect to
information accompanying the basic financial statements
in a client-prepared document?
A1353.
- The auditor should read the other information to
determine that it is consistent with the audited financial
statements and that there are no material misstatements of
fact.
- The auditor may (but is not required to) report on the
other information.
Q1354.
- How does an auditor test and report on segment
information?
A1354.
- Since segment information is a required part of the
financial statements, the auditor would apply standard
auditing procedures and would not generally refer to the
information in the auditor's report, unless there was a
problem.
Q1355.
- What actions should an auditor take upon discovering
omitted audit procedures?
A1355.
- 1. Determine whether other procedures tended to
compensate
- 2. If not, apply the omitted (or alternative) procedures
- 3. If facts emerge that support a different opinion, advise
the client to make appropriate disclosure and notification.
Q1356.
- What is an " issuer" , and what group establishes
standards for audit reports of issuers?
A1356.
- An issuer is an entity subject to the rules of the SEC (this
would include primarily public companies).
- The Public Company Accounting Oversight Board
(PCAOB) establishes standards for audit reports of issuers
Q1357.
- What types of problems would warrant a disclaimer of
opinion?
A1357.
- Uncertainty
- Scope limitation
- Lack of independence
- Unaudited financial statements
Q1358.
- Name the elements of a CPA firm's system of quality
control for its auditing, attest, and review services.
A1358.
- Independence, Integrity, Objectivity.
- Personnel management
- Acceptance and continuance of clients and engagements
- Engagement performance
- Monitoring
Q1359.
- When may an auditor issue a special report on a client's
compliance with contractual agreements or regulatory
requirements, and what type of report may be issued?
A1359.
- The auditor:
- Must have audited the client's financial statements and
expressed an unqualified or qualified opinion (no adverse
or disclaimer); AND
- May only give negative assurance on the compliance
Q1360.
- What are some of the limitations surrounding an auditor's
report on a specified element, account, or item of a
financial statement?
A1360.
- If the item is based on net income or stockholders' equity,
the auditor may only report on it if he/she has audited the
complete set of financial statements.
- If an adverse opinion or disclaimer of opinion was issued,
the auditor may not report on items that constitute a major
portion of the financial statements.
Q1361.
- Name five areas for which special reports are used.
A1361.
- 1. Financial statements prepared in conformity with a
comprehensive basis other than GAAP
- 2. Specific elements, accounts, or items of a financial
statement.
- 3. Compliance with aspects of contractual agreements or
regulatory requirements related to audited financial
statements
- 4. Financial presentations to comply with contractual
agreements or regulatory provisions
- 5. Financial information presented in prescribed forms or
schedules that require a prescribed form of auditor's
report.
Q1362.
- Give examples of comprehensive bases of accounting
other than GAAP.
A1362.
- A basis of accounting the entity uses to file its income tax
return
- A basis of accounting used to comply with the
requirements of a regulatory agency having jurisdiction
over the reporting entity.
- The cash receipts and disbursements system, and
modifications of the cash basis having substantial support.
- A definite set of criteria having substantial support that is
applied to all material items, such as price-level adjusted
Q1363.
- What are the performance requirements applicable to a
review engagement for a nonpublic entity's financial
statements?
A1363.
- The auditor should:
- Make inquiries and perform analytical procedures
designed to detect relationships and individual items that
appear to be unusual.
- Obtain knowledge of accounting principles and practices
common to the client's industry
- Obtain an understanding of the client's business
- Obtain a representation letter from management
Q1364.
- What should be included in an accountant's report on a
review of a nonpublic entity's financial statements?
A1364.
- A review has been performed in accordance with
standards (SSARS) established by AICPA
- Financial statement information is the representation of
management
- A review consists primarily of inquiries and analytical
procedures applied to financial data
- A review is substantially less in scope than an audit and
an opinion on the financial statements is NOT expressed
- The accountant is not aware of any material modifications
that should be made to the financial statements
Q1365.
- If an accountant has reviewed the prior period statements
but not compiled the current period statements, what are
his or her reporting options?
A1365.
- The accountant has provided a lower level of service: review
to compilation. Reporting options include:
- Issue a compilation report on the current period statements
with a paragraph added to describe the responsibility assumed
for the prior period statements; OR
- Reissue the review report on the prior period
- The reissued report may be combined with or presented
separately from the compilation report on the current period
- Either the added paragraph or the reissued report should
include the original date and state that no review procedures
have been performed since that date.
Q1366.
- Compilation and review standards require that an
accountant establish an understanding with the client as to
the services to be performed. What should be included in
this understanding?
A1366.
- The understanding should include:
- A description of the specific compilation or review
services to be performed
- A description of the report expected to be rendered
- An explanation of the limitations of the service, including
a statement that:
- The engagement cannot be relied upon to disclose errors,
fraud, or illegal acts; AND
- The entity will be informed of any information indicating
that fraud or an illegal act may have occurred.
- A description of other accounting services, if any, to be
performed
Q1367.
- How does the expected use of compiled financial
statements affect reporting requirements?
A1367.
- When financial statements are expected to be used by
third parties, a compilation report is required.
- When financial statements are not expected to be used by
third parties, a written communication (either a compilation
report or an engagement letter) is required
Q1368.
- What statements should be included in an accountant's
report in a compilation engagement?
A1368.
- A compilation has been performed in accordance with
SSARS issued by the AICPA
- A compilation is limited to presenting, in the form of
financial statements, information that is the representation
of management
- Financial statements have not been audited or reviewed,
and the accountant expresses no opinion or any other form
of assurance on them
Q1369.
- What are the reporting requirements with respect to
compiled financial statements when:
- Substantially all disclosures are omitted?
- Only limited disclosures are included?
- The auditor lacks independence?
A1369.
- Statements that omit substantially all disclosures:
- Report must clearly indicate omission
- Omission not intended to mislead expected users
- Compilation report should be modified by a third
paragraph disclosing such omissions
- Statements that include only limited disclosure:
- Notes should be labeled " Selected Information --
Substantially All Disclosures Required by GAAP Are Not
Included"
- Statements when the accountant lacks independence:
- The last paragraph of the report should disclose lack of
independence. Reasons should NOT be disclosed.
Q1370.
- What is the objective of the ordinary examination of
financial statements?
A1370.
- To express an opinion on reliability and fairness of
management prepared financial statements by means of
the auditor's report
Q1371.
- List the categories of Generally Accepted Auditing
Standards (GAAS)
A1371.
- 1) General Standards
- 2) Standards of Fieldwork
- 3) Standards of Reporting
Q1372.
- What are the GAAS General Standards?
A1372.
- 1) The audit must be performed by a person having
adequate training and proficiency as an auditor
- 2) The auditor must maintain independence in mental
attitude in all matters relating to the assignment
- 3) The auditor must exercise due professional care in the
performance of the examination and the preparation of the
report
Q1373.
- What are the GAAS Standards of Fieldwork?
A1373.
- 1) The auditor must adequately plan the work and must
- 2) The auditor must obtain a sufficient understanding of
the entity and its environment to assess the risk of material
misstatement of the financial statements whether due to
error or fraud, and to design the nature, timing, and extent
of further audit procedures
- 3) The auditor must obtain sufficient appropriate audit
evidence by performing audit procedures to afford a
reasonable basis for an opinion regarding the financial
statements under audit
Q1374.
- What are the GAAS Standards of Reporting?
A1374.
- 1) The auditor must state in the auditor's report whether the
financial statements are in accordance with GAAP- 2) The auditor
must identify in the auditor's report those circumstances in which
such principles have not been consistently observed in the current
period in relation to the preceding period.- 3) When the auditor
determines that informative disclosures are not reasonably adequate,
the auditor must so state in the auditor's report.- 4) The auditor
must either express an opinion regarding the financial statements,
taken as a whole, or state that such an opinion cannot be expressed
in the auditors report. When the auditor cannot express an overall
opinion, the auditor should state the reasons therefore in the
auditor's report. In all cases where the auditor's name is associated
with the financial statements, the auditor should clearly indicate the
character of the auditor's work, if any, and the degree of
responsibility the auditor is taking, in the auditor's report.
Q1375.
- What are the requirements of the Introductory Paragraph
of an Unqualified Opinion?
A1375.
- 1) We have audited
- 2) List of clients statements audited and dates covered
- 3) Financials statements are the responsibility of
management
- 4) Auditors responsibility to express and opinion
Q1376.
- What are the requirements of the Scope Paragraph of an
Unqualified Opinion?
A1376.
- 1) The audit was conducted in accordance with US GAAS
- 2) GAAS requires that we plan and perform the audit to
provide reasonable assurance that statements are free of
material misstatement
- 3) Audit involves:
- a) Examining, on test basis, evidence supporting amounts
& disclosures
- b) Assessment of accounting principles
- c) Assessment of significant estimates
- d) Evaluation of overall presentation
- 4) Audit provides a reasonable basis for opinion
Q1377.
- What are the requirements of the Opinion Paragraph of an
Unqualified Opinion?
A1377.
- 1) In our opinion
- 2) Statements (name them) are fairly presented in
accordance with GAAP
Q1378.
- Two steps in an independent audit
A1378.
- (1) Examination of a set of Financial Statements
- (2) Report of the findings to outside parties
Q1379.
- 5 Assertions
A1379.
- (1) Valuation
- (2) Existence and Occurrence
- (3) Presentation and Disclosure
- (4) Completeness
- (5) Obligations and Rights
Q1380.
- Define Material
A1380.
- Anything of a size or type that would influence the
judgment of a reasonable person relying on the information
Q1381.
- Define Misstatement
A1381.
- Error
- Fraud
- Direct Illegal Act
Q1382.
- Define Error
A1382.
- Unintentional Mistake
Q1383.
- Define Fraud
A1383.
- Intentional act that results in a material misstatement in
FS
Q1384.
- Define Direct Illegal Act
A1384.
- One that has an immediate effect on the FS figures
Q1385.
- Generally Accepted Auditing Standards (GAAS) are
established by. . .
A1385.
- Statements of Auditing Standards
Q1386.
- Statements of Auditing Standards are produced by. . .
A1386.
- Auditing Standards Board
Q1387.
- This provides rules for work done for a nonpublic
company that is less than an engagement
A1387.
Services
Q1388.
- This provides rules when a conclusion is expressed about
an assertion
A1388.
- Statements on Standards for Attestation Engagements
Q1389.
- What are the three sections to the ten basic generall
accepted auditing standards?
A1389.
- General, Fieldwork, and Reporting
Q1390.
- Of the ten basic generally accepted auditing standards
what are included in the GENERAL STANDARDS section?
A1390.
- (1) The audit is performed by a person or persons having
adequate technical training and proficiency as an auditor
- (2) In all matters relating to the assignment, independence
in mental attitude is to be maintained by the auditor
- (3) Due professional care is to be exercised in the
performance of the audit and preparation of the report
Q1391.
what are included in the STANDARDS OF FIELD WORK
section?
A1391.
- (1) The work is to be adequately planned, and assistants,
if any, are to be properly supervised
- (2) A sufficient understanding of internal control is to be
obtained to help determine the nature, extent, and timing of
the substantive testing to be performed
- (3) Sufficient, competent evidential matter is to be
obtained through inspections, observation, inquiries,
confirmations, and the like to afford a reasonable basis for
an opinion regarding the FS under audit
Q1392.
what are included in the STANDARDS OF REPORTING
section?
A1392.
- (1) The report shall state whether the financial statements are
presented in accordance with generally accepted accounting
principles
- (2) The report shall identify those circumstances in which
such principles have not been consistently observed in the
current period in relation to the preceding period.
- (3) Informative disclosures in the FSs are to be regarded as
reasonably adequate unless otherwise stated in report
- (4) The report shall either contain an expression of opinion
regarding the FS, taken as a whole, or an assertion to the effect
that an opinion cannot be expressed.
Q1393.
- As a result of SOX, this has been created to enforce
auditing, quality control, and independence standards and
rules within the accounting profession
A1393.
- PCAOB - Public Company Accounting Oversight Board
Q1394.
- T/f PCAOB is not a government agency?
A1394.
- True, but it does come under the oversight and
enforcement authority of the SEC
Q1395.
- Registered firms with PCAOB are inspected how often?
A1395.
- Every three years
Q1396.
- This opinion is given when an auditor's examination
provides sufficient evidence that statements are presented
fairly in accordance with GAAP
A1396.
- An Unqualified Opinion
Q1397.
- This opinion is given if there is a problem that is material
but some credibility can be given to the statements as a
whole
A1397.
- A Qualified Opinion
Q1398.
- This opinion is given in severe cases, when a departure
from GAAP can have such an impact that the entire
statements cannot be viewed as fairly presented in any
capacity
A1398.
- An Adverse Opinion
Q1399.
- What are the three paragraphs included in a standard
unqualified opinion?
A1399.
- Introductory, Scope, and Opinion
Q1400.
- A standard unqualified opinion is normally dated. . .
A1400.
- prior to the final day of field work
Q1401.
- What are the four purposes of the introductory paragraph
in a standard unqualified opinion?
A1401.
- (1) Indicates that an audit has been carried out of the FS
- (2) Identifies the FS by name, company name, and date
- (3) Specifies that the statements are the responsibility of
management
- (4) State that the auditor's responsibility is to express an
opinion on the FS based on audit
Q1402.
- What are the five purposes of the scope paragraph in the
standard unqualified opinion?
A1402.
- (1) Specifies that the audit was conducted according to
the auditing standards generally accepted in the US
- (2) Indicates that audit was planned and performed to
obtain reasonable assurance that the statements were free
from material misstatements
- (3) Explains that evidence supporting amts and
disclosures has been examined but only on a test basis
- (4) Indicates that an assessment was made of accounting
principles, significant estimations, and statement
presentation
- (5) States the belief that audit provides a reasonable basis
for the opinion
Q1403.
- What are the three purposes of the opinion paragraph in
the standard unqualified opinion?
A1403.
- (1)Starts with the phrase " in out opinion" to show that this
is not a guarantee but only an expert judgment
- (2)Says that statements present fairly in all material
respects the financial position, operations, and cash flows
- (3)States that FS conform to accounting principles
generally accepted in the US
Q1404.
- What are the four reasons to include a fourth paragraph in
a standard unqualified opinion?
A1404.
- (1) Emphasis of a matter (to draw attention to)
- (2) Lack of consistency (draws attention to a footnote)
- (3) Going concern problem (doubt of a company's
potential to stay in business)
- (4) Other information attached to audited financial
statements
Q1405.
- What best describes what is meant by the term GAAS?
A1405.
- Measures of the quality of the auditor's performance.
Q1406.
- Four Steps to Audit Sampling?
A1406.
- #1 - always assume a normal distribution.
- #2 - random sample
- #3 - sample is representative of the population
- #4 - standard deviation/sampling risk
Q1407.
- Factors to Determine Attribute Sample Size?
A1407.
- #1 - tolerable misstatement
- #2 - expected misstatement
- #3 - risk of assessing control risk too low
Q1408.
- What is stratification?
A1408.
- Items may be separated into relatively homogeneous
groups. Generally results in a smaller sample size.
Commonly used when population has high variance.
Q1409.
- Forms of Classical Variable Sample Plans?
A1409.
- #1 - Mean-Per-Unit
- #2 - Ratio estimate
- #3 - Difference estimate
Q1410.
- Elements of Quality Control Standards
A1410.
- Human Resources
- Engagement/Client Acceptance & Continuance
- Leadership Responsibilities
- Performance of Engagement
- Monitoring
- Ethical Requirements
Q1411.
- Management's Financial Statement Assertions -
Transactions & Events
A1411.
- Completeness
- Proper Period Cutoff
- Accuracy
- Classification
- Occurrence
Q1412.
- Management's Financial Statement Assertions - Account
Balances
A1412.
- Completeness
- Allocation and Valuation
- Existence
Q1413.
- Management's Financial Statement Assertions -
Presentation and Disclosure
A1413.
- Completeness
- Understandability and Classification
- Rights and Obligations & Occurrence
- Valuation and Accuracy
Q1414.
- Components of Internal Control
A1414.
- Control Environment
- Risk Assessment
- Information & Communication Systems
- Monitoring
- Existing Control Activities
Q1415.
- Entity Objectives
A1415.
- Reliability of Financial Reporting
- Effectiveness and Efficiency of Operations
- Compliance with Applicable Laws and Regulations
Q1416.
- Components of an IT Department
A1416.
- Control Group
- Operators
- Programmers
- Analysts
- Librarian
Q1417.
- Existing Control Activities
A1417.
- Prenumbered Documents
- Authorization of Transactions
- Independent Checks on Performance
- Documentation
- Timely & Appropriate Performance Reviews
- Information Processing Controls
- Physical Control Over Assets
- Segregation of Duties
Q1418.
- Risk Assessment Audit Steps
A1418.
- Internal Control - Understand
- Misstatement - Assess
- Assessed Risk Response
- Control Testing
- Perform substantive testing
- Audit Evidence-evaluate
- appropriateness &
- sufficiency.
Q1419.
- Documenting Internal Control
A1419.
- Flowchart
- Internal Control Questionnaire
- Narrative
- Decision Table
Q1420.
- Fraud Risk Factors
A1420.
- Fraud Triangle
- Pressure, Opportunity, Rationalization
Q1421.
- Detailed Substantive Procedures
A1421.
- Footing, Cross-footing, Recalculation
- Inquiry
- Vouching
- Examination/Inspection
- Confirmation
- Reperformance
- Reconciliation
- Observation
- Tacking
- Subsequent Event Review
Q1422.
- Generally Accepted Auditing Standards
A1422.
- Training
- Independence
- Professional Care
- Planning & Supervision
- Internal Control, Entity, & Environment
- Evidence
- Accounting = GAAP
- Consistency
- Disclosure
- Express Opinion
Q1423.
- Standard Audit Report Verbiage
A1423.
- Responsibility * 2
- Audit & Assurance
- Plan & Perform
- Material Misstatement
- Examining & Evidence
- Assessing & Accounting
- Made & Management
Q1424.
- Compilation Ingredients
A1424.
- AICPA
- Limited
- Audited - NO
- Reviewed - NO
- Disclaimer of Opinion - NO Assurance
Q1425.
- Attest Standards
A1425.
- Auditing something other than historical financial
statements...
- Differences between GAAS:
- General Standards: knowledge of subject matter & belief
that the subject can be audited.
- Fieldwork Standards: NO internal control
- Reporting Standards: Must express conclusion, disclose
significant facts, identify the subject matter, and restrict
use.
Q1426.
- Review Requirements
A1426.
- Understanding with Client
- Learn about the entity's business
- Inquires
- Review Only - No other procedures
- Client Rep Letter
- Professional Judgment
- Accountant needs to communicate results
Q1427.
- Consulting Services
A1427.
- Practitioner provides advice and/or recommendations
Q1428.
- Assurance Services
A1428.
- Independent professional services that improve the
quality of information / context for decision makers
Q1429.
- Other Services
A1429.
- Practitioners only role is to assist the client
Q1430.
- SAS
A1430.
- Statement on Auditing Standards
Q1431.
- SSARS
A1431.
- Statement on Standards for Accounting and Review
Services
Q1432.
- SSCS
A1432.
- Statement on Standards for Consulting Services
Q1433.
- Attestation - General Standards
A1433.
- 1. Training and proficiency in attestation
- 2. Knowledge of subject matter
- 3. Suitable and available criteria
- 5. Due professional care
Q1434.
- Attestation - Standards of Field Work
A1434.
- 2. Sufficient evidence
Q1435.
- Attestation - Standards of Reporting
A1435.
- 1. Character of Engagement
- 2. Conclusion about the subject matter
- 3. Significant reservations
- 4. Any restrictions on use
Q1436.
- Auditing - General Standards
A1436.
- 1. Training and proficiency in auditing
- 3. Due professional care
Q1437.
- Auditing - Standards of Field Work
A1437.
- 2. Sufficient understanding of internal control
- 3. Sufficient evidence
Q1438.
- Auditing - Standards of Reporting
A1438.
- 1. Conformity with GAAP
- 2. Principles consistently observed
- 3. Informative disclosures reasonably adequate
- 4. Expression of an opinion
Q1439.
- General Accepted Auditing Standards (GAAS)
A1439.
- C - Completeness
- A - Accuracy
- V - Valuation and allocation
- E - Existence
- C - Cutoff
- R - Rights and Obligations
- O - Occurrence
- C - Classification and understandability
Q1440.
- CPA Risk Advisory
A1440.
- Managers and investors are concerned about whether
entities have identified the full scope of various business
risks and taken precautions to mitigate them.
Q1441.
- ElderCare Services (PrimePlus)
A1441.
- ElderCare services assess whether specified goals
regarding care for the elderly are being met by various care
givers. Services provided to the elderly include
accumulation of information, financial management, and
assessment of nursing care.
Q1442.
- CPA Performance Review
A1442.
- Evaluates whether an entity's performance measurement
system contains relevant and reliable measures for
assessing the degree to which the entity's goals and
objectives are achieved or how its performance compares
to its competitors
Q1443.
- Healthcare Effectiveness
A1443.
- Provides assurance about the effectiveness of healthcare
services provided by HMOs, hospitals, doctors, and other
providers
Q1444.
- SysTrust
A1444.
- Assesses whether an entity's internal information
systems provide reliable information for operating and
financial decisions.
Q1445.
- SysTrust Criteria
A1445.
- 1. Online Privacy
- 2. Security
- 3. Processing Integrity
- 4. Availability
- 5. Confidentiality
Q1446.
- WebTrust
A1446.
- Provides Internet users, including businesses and
Internet service providers, assurance about electronic
commerce activities
Q1447.
- Elements of a Quality Control System
A1447.
- 1. Leadership responsibilities for quality within the firm
(the " tone at the top" )
- 2. Relevant ethical requirements
- 3. Acceptance and continuance of client relationships and
specific engagements
- 4. Human resources
- 6. Monitoring
Q1448.
- Quality Control Standards
A1448.
- 1. A second partner review and approval is required of audit reports
- 2. The lead auditor and the reviewing partner must be rotated off the
audit every 5 years
- 3. The accounting firm must supervise any associated person with
respect to auditing or quality control standards
- 4. Independence rules have been expanded by prohibiting the
auditor from providing a variety of nonaudit services
- 5. The client's CEO and CFO must certify the appropriateness of the
financial statements and disclosures
- 6. Penalties for destroying documents to impede an investigation
have been expanded
- 7. Management must assess the effectiveness of internal control
and issue a report on its effectiveness
- 8. The auditor must audit internal control and express an opinion on
its effectiveness
Q1449.
A1449.
- 1. Required to be used in planning all financial statement
audits
- 2. Permitted but not required to be applied as substantive
tests to achieve an audit objective related to a specific
financial statement assertion
- 3. Required to be used in the final stage of the audit as a
review
Q1450.
- Sources of information used to develop analytical
procedures
A1450.
- 1. Financial information from comparable prior period(s)
- 2. Anticipated results, such as budgets or forecasts
prepared by management (or others) prior to the end of the
period
- 3. Relationships among data, such as the interrelations
among the balances on the financial statements
- 4. Comparable information from the client's industry
- 5. Related nonfinancial information
Q1451.
- Analytical Procedures Applied in Planning the Audit
A1451.
- 1. Focus on enhancing the understanding of the business
and the transactions and events since the last audit
- 2. Identify areas that may represent specific audit risks
- 3. Ordinarily use data aggregated at a high level
Q1452.
- Components of Audit Risk
A1452.
- 1. Inherent Risk
- 2. Control Risk
- 3. Detection Risk
Q1453.
- Audit Risk
A1453.
- The risk that an auditor may unknowingly fail to modify
the opinion on materially misstated financial statements
Q1454.
- Inherent Risk
A1454.
- The susceptibility of an assertion to material
misstatement in the absence of related controls
Q1455.
- Control Risk
A1455.
- The risk that internal control will not prevent or detect on
a timely basis a material misstatement that could occur in
an assertion
Q1456.
- Detection Risk
A1456.
- The risk that the auditor will not detect a material
misstatement that exists in an assertion
Q1457.
- Fraudulent Financial Reporting
A1457.
- Intentional misstatements or omissions to deceive users,
such as altering accounting records or documents,
misrepresenting or omitting significant information, and
misapplying accounting principles
Q1458.
- Misappropriation of Assets
A1458.
- Misstatements resulting from theft, embezzlement, or an
action that causes payment for items not received
Q1459.
- Required Documentation of the Consideration of Fraud
A1459.
- 1. Planning-stage discussions
- 2. Procedures for identifying and assessing fraud risks
- 3. Specific risks identified and the response
- 4. Reasons for not identifying improper revenue
recognition as a fraud risk
- 5. Results of further addressing management override
- 6. Responses to other conditions and analytical
relationships
- 7. Fraud communications
Q1460.
A1460.
- Evaluations of financial information made by a study of
plausible relationships among both financial and
nonfinancial data using models that range from simple to
complex
Q1461.
- FVMD
A1461.
- Fair Value Measurements and Disclosures
Q1462.
- Considerations when assessing the competence of
Internal Auditors
A1462.
- 1. Education level, professional experience
- 2. Certification, continuing education
- 3. Policies, programs, procedures
- 4. Practices regarding assignment of staff
- 5. Supervision, review of activities
- 6. Quality of documentation, reports, recommendations
- 7. Performance evaluation
Q1463.
- Considerations when assessing the objectivity of Internal
Auditors
A1463.
- 1. Organizational status of director of internal auditing
- 2. Policies to maintain objectivity
Q1464.
- CRIME
A1464.
- C - Control Activities
- R - Risk Assessment
- I - Information & Communication
- M - Monitoring
- E - Control Environment
Q1465.
- Control Activities
A1465.
- Policies and procedures that help ensure that
management directives are carried out
- 1. Performance Reviews
- 2. Information Processing
- 3. Physical Controls
- 4. Segregation of Duties
Q1466.
- Risk Assessment
A1466.
- Entity's identification and analysis of relevant risks as a
basis for their management
- 1. Changes in Operating Environment
- 2. New Personnel
- 3. New/Revamped Information Systems
- 4. Rapid Growth
- 5. New Technology
- 6. New Business Models, Products or Activities
- 7. Corporate Restructuring
- 8. Foreign Operations
- 9. Accounting Pronouncements
Q1467.
- Information & Communication
A1467.
- Support the identification, capture, and exchange of
information in a form and time frame that enable people to
carry out their responsibilities
- Consists of:
- 1. Physical hardware elements (infrastructure)
- 2. People
- 3. Software
- 4. Data
- 5. Manual and Automated procedures
- Often uses IT extensively
Q1468.
- Information System
A1468.
- 1. Identifies and records valid transactions
- 2. Describes transactions for proper classification
- 3. Measures transactions
- 4. Determines the proper reporting period
- 5. Identifies proper disclosures related to transactions
Q1469.
- Monitoring
A1469.
- Process that assesses the quality of internal control
performance over time
- 1. Timely assessment of internal control.
- 2. Taking of corrective action
Q1470.
- Control Environment
A1470.
- Sets the tone of an organization, influencing the control
consciousness of its people
- 1. Integrity, ethical values
- 2. Commitment to competence
- 3. Participation of those charged with governance
- 4. Management philosophy and operating style
- 5. Organization structure
- 6. Assignment of authority, responsibility
- 7. Human resource policies and practices
Q1471.
- Limitations of Internal Control
A1471.
- 1. Human judgment is faulty
- 2. Controls can be circumvented by collusion
- 3. Management may inappropriately override internal
control
- 4. Corporate governance, effective control environment
are not absolute deterrents to fraud
- 5. Costs should not exceed benefits
Q1472.
- Results of IT
A1472.
- 1. Greater effectiveness and efficiency of internal control
- a. Permits consistent application
- b. Improves quality of information
- c. Permits additional analysis
- d. Improves monitoring of activities, policies, and
procedures
- e. Lessens risk of circumvention
- f. Implements security controls in applications,
databases, and operating systems that segregate duties
Q1473.
- IT Risks
A1473.
- 1. Reliance on faulty systems/programs
- 2. Unauthorized access leading to destruction of data
- 3. Inaccurate recording of transactions
- 4. Unauthorized changes in master files, systems, or
programs
- 5. Failure to make necessary changes in systems or
programs
- 6. Inappropriate manual intervention
- 7. Loss of data
Q1474.
- Computer System
A1474.
- Hardware - Physical aspects such as CPUs, servers, or
workstations
- Software - Operating systems, applications, and security
programs
Q1475.
- LAN
A1475.
- Local Area Network
Q1476.
- WAN
A1476.
- Wide Area Network
Q1477.
- General Controls
A1477.
- Relate to all computer activities
Q1478.
- Application Controls
A1478.
- Relate to specific tasks performed by the system
Q1479.
- Examples of General Controls
A1479.
- 1. Data center operations
- 2. Systems software acquisition and maintenance
- 3. Access security
- 4. Application system development and maintenance
Q1480.
- Examples of Application Controls
A1480.
- 1. Input
- 2. Processing
- 3. Output
Q1481.
- Organizational Structure
A1481.
- 1. Computer processing function is treated as a service
department
- 2. Department is independent of users
- 3. Department reports to senior-level management
- 4. Department does not have asset custody function
- 5. Department has no transactional authority
Q1482.
- Input Controls
A1482.
- 1. Error Listing
- 2. Field Checks
- 3. Record Count
- 4. Financial Total
- 5. Hash Totals
- 6. Reasonableness, Limit, Range checks
- 7. Preformatting
- 8. Check digits
- 9. Sequence checks
- 10. Sign checks
- 11. Validity checks
Q1483.
- Hash Total
A1483.
- Used to verify the completeness of data (without defined
meaning)
Q1484.
- Field Checks
A1484.
- Test the characters in a field to verify that they are of an
appropriate type for that field
Q1485.
- Check Digits
A1485.
- Used to detect incorrect identification numbers
Q1486.
- Narrative Memorandum
A1486.
- Written description of the process, flow of documents,
and control points
Q1487.
- Decision Table
A1487.
- Identifies, in matrix form, the contingencies considered in
the description of a problem and the appropriate actions
taken relative to the contingency
Q1488.
- Attestation or Auditing?
- Training & proficiency in attestation
A1488.
- Attestation
Q1489.
- Knowledge of subject matter
A1489.
- Attestation
Q1490.
- Suitable & available criteria
A1490.
- Attestation
Q1491.
- Independence in mental attitude
A1491.
- Both
Q1492.
- Planning & supervision
A1492.
- Both
Q1493.
- Sufficient understanding of internal control
A1493.
- Auditing
Q1494.
- Sufficient evidence
A1494.
- Both
Q1495.
- Character of engagement
A1495.
- Attestation
Q1496.
- Conclusion about the subject matter
A1496.
- Attestation
Q1497.
- Conformity with GAAP
A1497.
- Auditing
Q1498.
- Principles consistently observed
A1498.
- Auditing
Q1499.
- Informative disclosures reasonably adequate
A1499.
- Auditing
Q1500.
- Significant reservations
A1500.
- Attestation
Q1501.
- Expression of an opinion
A1501.
- Auditing
Q1502.
- Any restrictions on use
A1502.
- Attestation
Q1503.
- Training & proficiency in auditing
A1503.
- Auditing
Q1504.
- Echo Check
A1504.
- Verify that a hardware device is working properly
Q1505.
- Digital Signatures
A1505.
- Form of encryption technology used by businesses to
authenticate documents
Q1506.
- Device Authorization Table
A1506.
- Restricts access to those physical devices that should
logically need access (Compatibility Test)
Q1507.
- Management Responsibilities for Control Over Revenue
Cycle
A1507.
- 1. Proper acceptance of order
- 2. Granting credit approval with correct credit limits
- 3. Safeguarding assets
- 4. Timely shipment
- 5. Billing for shipments at authorized prices
- 6. Accounting for, collection of receivables
- 7. Cash, checks received are recorded, safeguarded,
deposited intact

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