A: Determine Nature and Scope of Engagement Flashcards
(43 cards)
The phrase “generally accepted accounting principles” is an accounting term that:
encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
In an audit of a nonprofit organization under OMB Circular No. A-133, an auditor must comply with all of the following, except:
There is no requirement for an auditor performing an audit under the provisions of OMB Circular No. A-133 to correspond with individuals or entities that have received or made use of the federal award funds and determine the appropriateness of such distributions.
Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with the Statements on Standards for Attestation Engagements (SSAEs)
Issue a report on findings based on specified procedures performed…AT 201.03 states, “An agreed-upon procedures engagement is one in which a practitioner is engaged by a client to issue a report of findings based on specific procedures performed on subject matter…. Because the needs of the specified parties may vary widely, the nature, timing, and extent of the agreed upon procedures may vary as well; consequently, the specified parties assume responsibility for the sufficiency of the procedures since they best understand their own needs. In an engagement performed under this section, the practitioner does not perform an examination or a review, as discussed in section 101, and does not provide an opinion or negative assurance.”
An exception to the “percentage of coverage” rule in the Single Audit Act Amendments of 1996 allows an auditor to reduce the scope of the audit when the entity is determined to be low risk. For an entity that meets the criteria for a low risk entity, the percentage of federal expenditures covered by the audit can be reduced as low as
When an entity qualifies as low risk, the scope of audits under the “percentage of coverage” rule in the Single Audit Act Amendments of 1996 can be reduced to as low as 25% of the federal funding spent by the entity.
Which of the following is the authoritative body designated to promulgate attestation standards?
Auditing Standards Board
The Single Audit Act Amendments of 1996 contain a “percentage of coverage” rule that requires the auditor of entities receiving federal financial support to select and test major programs that include:
Under the “percentage of coverage rule” that is included in the Single Audit Act Amendments of 1996, the auditor must select and test major programs that account for at least 50% of the federal funding spent by that entity.
A practitioner is engaged to express an opinion on management’s assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?
Statements on Standards for Attestation Engagements
Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?
The auditor determines whether the federal financial assistance has been administered in accordance with applicable laws and regulations. Audits of entities receiving federal financial assistance usually have the following common elements: Auditors must follow generally accepted auditing standards and government auditing standards. The auditor’s consideration of internal control is to include obtaining and documenting an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance. The auditor issues a report on the consideration of internal control. The auditor is to determine and report on whether funds are administered in accordance with applicable laws and regulations.
In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:
financial statement assertions In designing a written audit plan, specific audit objectives should be established. Audit objectives are related primarily to financial statement assertions, which can be classified according to the following broad categories: Occurrence Completeness Accuracy Cutoff Classification Existence Rights and obligations Completeness Valuation and allocation AU-C 315.A114 Audit procedures that will achieve the audit objectives are detailed in the audit plan. The timing of audit procedures and the cost-benefit of gathering evidence are considered in audit planning. Audit techniques are selected in performing the audit work.
Which of the following activities would most likely be considered an attestation engagement?
Issuing a report about a firm’s compliance with laws and regulations There are three forms of attestation (attest) engagements: an examination (an audit), a review (lesser in scope than an audit and lends only limited assurance), and agreed-upon procedures. In an attestation engagement, the CPA issues a report on subject matter or on an assertion about subject matter that is the responsibility of another party. A CPA can attest to the reliability of information such as financial forecasts, internal control, compliance with laws and regulations, advertising claims, or lottery results. The Auditing Standards Board has issued SSAEs (Statements on Standards for Attestation Engagements) to describe the professional requirements of practitioners in this area
Which of the following would be an appropriate title for a statement of revenue and expenses prepared using a special-purpose framework?
Statement of income—regulatory basis The title of the financial statement should be self-explanatory and, if applicable, illustrate its compliance with a regulatory agency. The title should not be easily confused with GAAP prepared financial statements. Using the title “Statement of Operations or Income Statement” may cause the reader to assume the financial statements were prepared in accordance with GAAP. Using the title “Statement of activities” is broad and implies the entire organization instead of only the revenue and expenses.
Kell engaged March, CPA, to submit to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement’s sole purpose is to assist Kell in developing a personal financial plan. For March to be exempt from complying with the requirements of SSARS 1, Compilation and Review of Financial Statements, Kell is required to agree that the:
financial statements will not be used to obtain credit. Statements on Standards for Accounting and Review Services will probably apply when an accountant assembles or assists with the assembly of reports that are, or reasonably might be, expected to be used by a third party. When an accountant may reasonably foresee specific uses by identifiable classes of third parties (such as banks using the reports as a basis for extending credit), ordinary care is usually considered necessary. In this case, ordinary care would be the CPA complying with the Statements on Standards for Accounting and Review Services. If the accountant can be assured no such use will occur, the accountant may be exempt from complying with the requirements of SSARS 1.
According to AU-C 330.03, which of the following terms identifies a requirement for audit evidence?
Appropriate AU-C 330.03 states, “The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement through designing and implementing appropriate responses to those risks.” Appropriateness refers to the quality of audit evidence—whether or not it is reliable and relevant.
Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonpublic entity. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the: I. additional audit effort necessary to complete the audit. II. reason given for Tech’s request.
Both I and II When requested to change from an audit to a compilation engagement, an auditor should consider the additional audit effort necessary to complete the audit and the reason management has requested the change. He should also consider what it will cost to complete the audit. If the reason to change the engagement is reasonably justified by Tech Resources, for example, because: due to a change in circumstances, Tech no longer has a need for an audit, or Tech misunderstood the nature of an audit. Davis could issue a compilation report. However, the auditor should evaluate the propriety of the request if: there is no reasonable justification for the change, a scope restriction has been placed on the audit (and the related financial statement information), or the audit procedures are substantially complete.
An accountant has been engaged to review a nonissuer’s financial statements that contain several departures from GAAP. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is inadequate to communicate the deficiencies. Under these circumstances, the accountant should:
withdraw from the engagement and provide no further services concerning these financial statements The objective of a review is to express limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in accordance with GAAP. When an accountant determines the financial statements contain one or more departures from GAAP, the first action is to ask management to revise the financial statements. If management refuses, the next action is to consider modifying one or more paragraphs to illustrate the departure and disclose the dollar effects. If a modified report is not sufficient to express the deficiencies, the accountant should withdraw from the engagement.
Under the Single Audit Act Amendments of 1996, when an entity uses funds from more than one federal program and the disbursements from the federal programs during the year exceed $500,000, then the entity:
must have a single audit. An entity must have a single audit in any year when: the entity spends more than $500,000 in federal awards, grants, or funds, the entity spends funds from one or more than one federal program, and if the entity only expends funds from one program, it “may” be eligible for a program audit versus a single audit.
A CPA is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when engaged to:
review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC. The Statements on Standards for Attestation Engagements (SSAE) state that the practitioner shall express a conclusion about the subject matter and the criteria to which it is being evaluated. Reviewing the MD&A is the subject matter, and the criteria are the rules and regulations adopted by the SEC.
Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved An audit plan setting forth in detail the procedures necessary to accomplish the engagement objectives is required documentation in an audit performed in accordance with generally accepted auditing standards. A program is essential to observing the first standard of fieldwork to plan and supervise audit assistants. Documentation of the accounting system and internal control should be performed; however, the form of documentation is not specified (flowchart, narrative, questionnaire, memo, etc.). The use of a documented audit planning memorandum establishing the timing of the audit procedures and coordination of the assistance of entity personnel is up to the auditor’s judgment.
A CPA is engaged to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:
Statements on Standards for Attestation Engagements (SSAE).
Nonprofit organizations are required to have a single or program-specific audit under OMB Circular No. A-133 if the organization expends:
$500,000 or more in a year in federal awards.
Accepting an engagement to examine an entity’s prospective financial statements most likely would be appropriate if the prospective financial statements were to be distributed to:
a bank with which the entity is negotiating for a loan. An accountant should only consent to the association of his name with prospective financial statements that are distributed to “the responsible party and third parties with whom the responsible party is negotiating directly” (AT 301.10). Limited use of prospective financial statements is necessary so that third-party recipients (such as a bank with whom the entity is negotiating for a loan) can ask questions of the responsible party. Employees, potential stockholders, and existing stockholders represent general users of prospective financial statements. Only a financial forecast is appropriate for general use.
How does OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, define a subrecipient?
As a nonfederal entity that expends federal awards received from another entity to carry out a federal program A subrecipient is a nonfederal entity that expends federal awards received from a pass-through entity to carry out a federal program, but does not include an individual that is a beneficiary of such a program. A subrecipient may also be a recipient of other federal awards directly from a federal awarding agency.
An examination of prospective financial statements is a professional service that involves:
evaluating the preparation of prospective financial statements and the support underlying the assumptions.
Which of the following should be the first step in reviewing the financial statements of a nonpublic entity?
Obtaining a general understanding of the entity’s organization, its operating characteristics, and its products or services A review, while still an attest engagement, offers only limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with GAAP. As a review does not offer the same level of assurance that an audit does, the requirements and procedures are different. The CPA should first acquire a general understanding of the nature of the client’s business, its operating characteristics, and its products or services. This knowledge will help the CPA to interpret the results of the analytical procedures and inquiries. Comparing the financial statements with statements for comparable prior periods and with anticipated results, as well as applying analytical procedures designed to identify relationships and individual items that appear to be unusual, would be analytical procedures. While these steps are very important in a review, they would occur after first obtaining an understanding of the entity. Completing inquiries concerning the entity’s procedures for recording, classifying, and summarizing transactions would be a step in an audit in order to obtain an understanding of internal controls.
