AUD 3

Question 1

What’s the difference between an audit and an examination?

Answer 1

In simple terms, an audit focuses on numbers, while an examination looks at processes and practices.

Question 2

What is a recall of the TBS on communicating significant deficiencies?

Answer 2

It depends on if the audit is for a non-issuer/issuer, also if it is an integrated audit.
Some key things are the following about significant defciencies:
Always in writing
Always report to management and those charged with governanace
Always define sig def and material weakenesses in auditor’s report
Audit is never required to search for sig def in this case
Must communicate by 60 days of report release date
The report is restricted in use

Question 3

What does footing and crossing mean in auditing very simply?

Answer 3

Footing: This involves adding up the columns of numbers at the bottom to ensure the totals are accurate. For example, if you have a list of expenses, footing would mean summing all the individual expenses to confirm the total matches what is recorded.
Cross-footing: This checks the accuracy of a report by adding the rows horizontally and comparing them to the totals. For instance, if you have totals for different categories, cross-footing would involve adding those row totals and comparing it to the overall total to ensure consistency.
This test the accuracy assertion

Question 4

Which of the following best describes the nature of an audit performed in accordance with the Government Accountability Office (GAO) Government Auditing Standards?

Answer 4

Audit provides assurance for the following three things:
Entity’s compliance with laws and regulations
Effectiveness and efficiency of operations
Reliability of financial reporting

Question 5

When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to who?

Answer 5

Specific legislative and regulatory bodies

Question 6

The Accounting Principles Rule of the Code of Professional Conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as what?

Answer 6

New legislation
Evolution of a new form of business transaction

Question 7

When assessing management’s plans for dealing with the adverse effects of future conditions and events, mitigating factors would include four things:

Answer 7

The postponement of expenditures (including R&D);
Plans to dispose of assets;
Plans to borrow money or restructure debt;
Plans to increase ownership equity (sell stock).

Question 8

Accounting estimates are not used to measure ________ _________. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.)

Answer 8

future events

Question 9

What is a bill of lading?

Answer 9

In short, a bill of lading is a critical document that shows proof of goods shipped, a binding contract for transportation, and proof of title and ownership. Understanding bills of lading is crucial for accurate accounting of inventory, expenses, and revenue, especially in businesses involved in international trade.

Question 10

What management assertion would be tested by the following audit procedure: request positive confirmation directly from the customer of its balanced owed to the company?

Answer 10

Existence

Question 11

What management assertion would be tested by the following audit procedure: test that the income statement agrees to the change of assets minus liabilities and owners’ equity?

Answer 11

Accuracy

Question 12

What management assertion would be tested by the following audit procedure: test the aging in the A/R ledger?

Answer 12

valuation

Question 13

What management assertion would be tested by the following audit procedure: trace shipping documents to the related sales invoices and orders, and to entries in the sales journal and A/R subsidiary ledger?

Answer 13

Cutoff/Completeness

Question 14

How to calculate the sampling interval?

Answer 14

Tolerable Misstatement/Reliability Factor

Question 15

How to calculate sample size?

Answer 15

Book Value of population/Sampling Interval

Question 16

How to calculate tainting percentage?

Answer 16

(Book Value - Audited Value)/Book Value

Question 17

Who could be related parties to a corporation?

Answer 17

Shareholders
Directors
Officers
Family members of directors and officers
Entities controlled by shareholders or officers
Business partners and joint ventures
Affiliated organizations

Question 18

PCAOB rules state that auditors cannot what when it comes to financial relationships with their clients?

Answer 18

direct financial interest
indirect material financial interest

Question 19

These services do not impair independence for an auditor under PCAOB but must be communicated to the audit committee in writing, but they are not prohibited. The potential effects of the services should be discussed with the audit committee.

Answer 19

non-audit services related to internal control

Question 20

For two balance sheet accounts: cash and fixed assets, how would an auditor go about auditing them if cash had many transaction while fixed assets had few transactions?

Answer 20

Cash: more efficient to focus on the ending balance
Fixed asset: audit the transactions that occurred

Question 21

What are some things that a registered firm must communicate to an audit committee?

Answer 21

Critical accounting policies and practices used
A schedule of unadjusted audit differences
alternative accounting treatments discussed with management

Question 22

A change in accounting principle that is inseparable from a change in estimate should be accounted for how?

Answer 22

as change in estimate, not a change in principle. The client’s accounting constitutes a departure from GAAP.

Question 23

allows users to perform diagnostic analytics to drill down into underlying data to answer questions or better understand the data.

Answer 23

data mining

Question 24

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:

Answer 24

$10,000
Because the statements are interrelated, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Question 25

An engagement to provide an opinion or conclusion about a specific subject matter?

Answer 25

attestation engagement

Question 26

The A/P department should receive what three things to assure that the goods received agree with what was ordered, and that the company is being billed only for what was received?

Answer 26

Purchase Order Receiving Report Vendor Invoice

Question 27

Disclosure of fraud to parties other than a client's senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist?

Answer 27

SEC when the client reports a change in auditor A successor auditor when the successor makes appropriate inquiries. A government funding agency from which the client receives financial assistance. subpoena

Question 28

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a (an):

Answer 28

written representation obtained by the auditor from management

Question 29

Internal auditors may assist the external auditor in what?

Answer 29

Understanding of internal control performing test of controls performing substantive tests

Question 30

What is the formula to calculate whether attribute sample application is effective for a particular control?

Answer 30

Tolerable deviation rate = Sample deviation rate + allowance for sample risk Could also be T-A = S If Tolerable deviation rate is less than the S+A then the control cannot be relied upon

Question 31

The principle of due care in the AICPA Code of Professional Conduct relates to which of the following professional requirements?

Answer 31

Providing services with competence and diligence

Question 32

Providing services with an unbiased, open mind and without conflicts of interest pertains to what AICPA Code of professional conduct?

Answer 32

Objectivity Independence

Question 33

Auditing standards require that the auditor must be independent, except when?

Answer 33

When the auditor is required by law or regulation to accept the engagement

Question 34

Auditing standards for nonissuers require that audit documentation be retained for at least ________ year from the ___________.

Answer 34

five years report release date

Question 35

How many financial experts must be on the audit committee?

Answer 35

At least one

Question 36

___________ are unintentional and would not cause an auditor to withdraw from the engagement

Answer 36

errors

Question 37

If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter (explanatory) paragraph of the audit report what four things?

Answer 37

1) the financial statements of the prior period were auditbed by a predecessor auditor 2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification 3) the nature of any emphasis of matter or other matter (explanatory) paragraph included in the predecessor auditor's report 4) the date of the predecessor auditor's report

Question 38

a control that limits the severity of a control deficiency, and may prevent it from being identified as a significant deficiency or weakness

Answer 38

compensating control

Question 39

Which of the following best describes the auditor’s responsibility with respect to Statements on Auditing Standards (SASs)?

Answer 39

Have sufficient knowledge of the SASs to identify relevant provisions Should be prepared to justify any departures from such provisions

Question 40

The audit report ______________ states whether the financial statements are presented in accordance with accounting principles generally accepted in the United States of America. On the other hand, consistency is __________(i.e., it is assumed that there is consistency when there is no mention of it in the report).

Answer 40

explicitly implicit

Question 41

What type of sampling is use for testing controls?

Answer 41

Attribute sampling example would be is the invoice properly approved(yes or no questions)

Question 42

What type of sampling is used in substantive testing?

Answer 42

Variable or PPS sampling It is when an auditor wants to find the exact $ amount that they are off

Question 43

When does an auditor lower control risk?

Answer 43

When Upper Deviation Rate

Question 44

What is deviation rate?

Answer 44

The auditor's best estimate of the deviation rate in the population from which it was selected

Question 45

What are three things that affect the sample size for attribute sampling?

Answer 45

Risk of assessing control risk too low(sampling risk) Tolerable deviation rate Expected deviation rate

Question 46

If an auditor of a non-issuer is unable to apply a designed audit procedure to an item selected as part of a sample for a test of controls and no alternative procedures are possible, then the auditor should:

Answer 46

treat the item as a deviation from the prescribed control

Question 47

helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level.

Answer 47

statistical sampling

Question 48

If providing an opinion on supplementary information, the auditor should perform audit procedures using what materiality level?

Answer 48

The same materiality level used in the financial statement audit

Question 49

When are substantive analytical procedures used?

Answer 49

To test a large volume of predictable transactions

Question 50

What are two conditions that must happen for an auditor to issue an opinion on supplementary information?

Answer 50

Neither an adverse nor a disclaimer of opinion was issued on the financial statements

Question 51

Reasonable assurance is a _______, but not ___________, level of assurance to allow an auditor to detect a material misstatement.

Answer 51

high absolute

Question 52

Obtaining evidence that is sufficient and appropriate is _________ in the basis for opinion section of the auditor's report.

Answer 52

explicit

Question 53

Order the following from least to most broad: Assurance, Attestation, Auditing? Come up with examples of each to know the difference between the three?

Answer 53

Auditing: F/S Attestionation: Pro-forma f/s, financial projections, MD&A section of 10-K Assurance: Most broad, any information even non-financial

Question 54

Involves separating items into relatively homogeneous groups and treating each group as a separate population

Answer 54

Stratification

Question 55

What are the three types of variable sampling plans?

Answer 55

Mean per unit estimation ratio estimation difference estimation

Question 56

Formula for mean per unit estimation.

Answer 56

(Audited Sample Value/# of items in sample) * number of items in population

Question 57

Formula for ratio estimation

Answer 57

(Audited book value of sample/book value of sample) * Total book value

Question 58

Formula for difference estimation

Answer 58

1) ((Book Value of Sample - Audited Value of sample)/# of items audited) * Population items 2) Total book value of population - projected error

Question 59

Formula for Probability proportional to size for substantive testing?

Answer 59

1) SAMPLING INTERVAL = (Tolerable Misstatement/Reliability Factor) 2) SAMPLE SIZE = Recorded Book Value/Sampling Interval Reliability factor table will be given for the questions

Question 60

used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population.

Answer 60

variables sampling

Question 61

sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try to estimate a numerical measurement of the population.

Answer 61

attribute sampling

Question 62

What are three factors that affect the sample size for variable sampling for substantive tests and how do each affect the sample size?

Answer 62

Variability of poulation: higher variable, greater sample size Specified tolerable misstatement: higher tolerable misstatement, lower sample size specified risk of incorrect acceptance: lower risk of incorrect acceptance results in an increase in sample size

Question 63

What are the main things in an engagement letter?

Answer 63

Engagement Objectives Management's responsibilities Auditor's responsibilities Limitations (no absolute assurance) Other services to be provided

Question 64

In which sections of the auditor's report should an auditor refer refer to U.S. generally accepted accounting principles (GAAP)?

Answer 64

Opinion section and Management's responsibility section

Question 65

When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):

Answer 65

Disclaimer of opinion

Question 66

For an auditor of an issuer, critical audit matters should be communicated in the Critical Audit Matters section, which:

Answer 66

Immediately follows the Basis for Opinion Section

Question 67

What is an emphasis of matter paragraph?

Answer 67

Emphasizes a matter that is already disclosed in the f/s Used for a non-issuer

Question 68

When is an emphasis of matter paragraph required?

Answer 68

CAP Acronym CONSITENTCY Justified change in accounting principle that has a material effect on the entity's f/s AUDIT OPINION CHANGE Subsequently discovered facts that lead to a change in audit opinion PURPOSE-SPECIAL PURPOSE FRAMEWORK

Question 69

Usually the only time that a emphasis of matter paragraph is added because of a lawsuit is when what words are used?

Answer 69

"Unusually important"

Question 70

When is an other matter paragraph used?

Answer 70

When an auditor refers to matters other than those that are presented or disclosed in the financial statements

Question 71

When are other matter paragraphs required?

Answer 71

Restrict Use of report Subsequent discovered facts lead ot a change in audit opinion Comparative financial statements:

Question 72

Unless the auditor adds in an emphasis of matter or explanatory paragraph, the use can assume what about the financial statements?

Answer 72

They are materially consistent from one period to the next

Question 73

Subsequently discovered facts that lead to a change in an audit opinion may be presented in what paragraph?

Answer 73

Either Emphasis of matter Other matter

Question 74

What is the difference between management's responsibility for evaluating subsequent events for issuers/non-issuers?

Answer 74

Issuers: reposnsible for evaulating subsequent events until the date the finanaicla statements are issues Non-issuers: responsible for evaluating subsequent events until the date that the financial statements are available to be issued

Question 75

W/hat are two common examples of recognized subsequent events?

Answer 75

Litigation: when there is a lawsuit that happens before year end but is not settled until between the balance sheet date and when the financial statements are issued Bankruptcy of customer: the customer owes money to a business but will not pay because of bankruptcy

Question 76

What does the auditor do to check for subsequent events?

Answer 76

PRIME acronym Post balance sheet transaction: increases in stock or long term debt Management REPRESENTATION letter Inquiries with management Meeting minutes from BOD or audit committee Examination of interim financial statements and compare with f/s under audit

Question 77

Auditor is responsible for subsequent events until when?

Answer 77

Until the auditor report date which is usually before when the financial statements are actually released

Question 78

Section 404 of the Sarbanes-Oxley Act of 2002 requires the company's external auditors to attest to, and report on what?

Answer 78

The internal control assessment made by management of the issuer

Question 79

What does a combined approach refer to?

Answer 79

An auditor performing both a test of controls and a substantive procedure

Question 80

In an integrated audit of a non-issuer, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations?

Answer 80

a material weakness exists

Question 81

What are the three objectives of the COSO cube?

Answer 81

Operations Reporting Compliance

Question 82

PCAOB has established risk assessment standards for issuer audits. Which of the following is not a financial statement assertion as recognized by PCAOB standards?

Answer 82

Cutoff Cutoff is not a financial statement assertion recognized by PCAOB standards. PCAOB standards include the assertions of Existence or Occurrence, Completeness, Valuation or Allocation, Rights and Obligations, and Presentation and Disclosure. Cuttoff testing would be covered by the Existence or Occurrence and the Completeness assertions.

Question 83

When an auditor of a non-issuer qualifies his or her opinion because of a scope limitation, such as the inability to confirm accounts receivable, the wording in the opinion paragraph should indicate that the qualification pertains to what?

Answer 83

The possible effects on the financial statements and not to the scope limitation itself

Question 84

What is the auditor's objective of an audit?

Answer 84

To obtain reasonable assurance whether the financial statements are free from material misstatement whether due to error or fraud

Question 85

Key things from Bank reconciliation TBS

Answer 85

Bank Balance Deposits in transit: make sure these are recent Outstanding checks: make sure there are not any check >6 months outstanding Book Balance: BINS Add bank collections and interest Subtract non-sufficient funds and service charges Agreed to bank balance and General Ledger balance of the period for the bank reconciliation

Question 86

Document between the seller and the shipper

Answer 86

Bill of Lading

Question 87

What management assertions does confirming a client's customer A/R provide?

Answer 87

Existence of A/R Rights to the A/R

Question 88

This is prepared by the customer and is mailed along with the check

Answer 88

remittance advice

Question 89

When does an auditor use negative A/R confirmations?

Answer 89

When the assessed level of risk of material misstatement is low or when there are a large number of small accounts receivable accounts.

Question 90

What does a voucher package do?

Answer 90

The Accounts payable or accounting department matches the following records Purchase requisition Purchase Order Receiving Report Vendor Invoice A/P then sends this to the treasury department to pay the bill

Question 91

How does the treasurer cancel supporting documents after payment?

Answer 91

By stamping PAID on the voucher package

Question 92

How does an auditor search for unrecorded liabilities?

Answer 92

The auditor should select cash disbursements subsequent to year-end and examine the supporting documentation If this relates to a payable before year end then it should be recorded as a liability

Question 93

What are things that happen on the report release date?

Answer 93

the begging of the retention period the auditor grants the client permission to use the report the date on which the report is delivered to the client

Question 94

defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.

Answer 94

documentation completion date

Question 95

The _________ support the audit opinion, not the client's financial statements

Answer 95

auditor's workpapers

Question 96

The _________ support the client's financial statements

Answer 96

client's records

Question 97

What is important about what can be done after the documentation completion date?

Answer 97

Existing documentation must not be deleted and additions to the audit documentations must be documented as such

Question 98

includes audit documentation that has a continuing interest from year to year

Answer 98

permanent (continuous) file

Question 99

When the auditor has obtained evidence that fraud exists, what should the auditor do?

Answer 99

It is important that the matter be brought to the attention of the appropriate level of management as soon as practicable. This is true even if the matter is considered inconsequential.

Question 100

Fraud involving an officer should be reported to who?

Answer 100

Those charged with governance

Question 101

This type of misstatement involves an unreasonable estimate by the client

Answer 101

judgmental misstatement

Question 102

When are inherent risk, control risk, and detection risk assessed?

Answer 102

Although an auditor does assess inherent risk and control risk, they do not assess detection risk. Instead, they control it through the level of testing they perform.