AUD Custom Deck

Question 1

What is a type 1 report?

Answer 1

Report on management’s description of a service organization’s system and the suitability of the design of controls.

Question 2

What is a type 2 report?

Answer 2

Everything from a type 1 report and also an opinion on the operating effectiveness of controls.

Question 3

Who should the credit manager report to?

Answer 3

The CFO

Question 4

Does providing extensive advisory services impair independence?

Answer 4

Providing extensive advisory services, in of itself, does not impair independence for attest services.

Question 5

Can internal auditors assess inherent or control risks?

Answer 5

No, the auditor should never ask internal auditors to assess inherent or control risks.

Question 6

Preparation of prospective financial statements is what kind of service?

Answer 6

Preparation of PFS is an attest engagement.

Question 7

What is segregation of duties?

Answer 7

The custody, authorization and record keeping functions should all be separated from each other.

Question 8

What is a debit memo?

Answer 8

A reduction in amount owed to vendor because goods have been returned. Think: refund

Question 9

What is the relationship between materiality considerations for a F/S audit vs. a I/C audit?

Answer 9

The materiality consideration is the same.

Question 10

When should auditor communicate significant deficiencies and material weaknesses to management and those charged with governance?

Answer 10

Best made by audit report release date, but no later than 60 days after.

Question 11

What is a deficiency?

Answer 11

When the design or operation of a control does not allow management or employees, in the normal course of duty, to prevent, or detect and correct, misstatements on a timely basis.

Question 12

What is a significant deficiency?

Answer 12

A deficiency or combination of deficiencies in I/C that is less severe than a material weakness but important enough to merit attention by those charged with governance.

Question 13

What is a material weakness?

Answer 13

Deficiency or deficiencies in I/C such that a reasonable possibility exists that a material misstatement of F/S will not be prevented, or detected and corrected, on a timely basis.

Question 14

What is meant by reasonable possibility?

Answer 14

likelihood is more than remote.

Question 15

What documents the procedures and conclusion reached in the audit?

Answer 15

The working papers.

Question 16

What is a positive confirmation request?

Answer 16

Asks for a reply in all cases. May ask party if they agree with the information or to provide information.

Question 17

What is a blank confirmation request?

Answer 17

Ask party to fill in information, such is amounts.

Disadvantage is lower response rate due to additional effort.

Question 18

What is negative confirmation request?

Answer 18

Asks party to only reply if they disagree with stated information.

Question 19

PCAOB’s AS No. 3 states that audit documentation must be retained for how many years?

Answer 19

At least 7 years from the report release date.

Question 20

Is generalized audit software useful for test of controls and substantive procedures?

Answer 20

Yes, it is useful for both test of controls and substantive procedures.

Question 21

What is an integrated test facility?

Answer 21

An integrated test facility (ITF) technique places a small set of fictitious records in the master files.

The auditor compares processing with expected results to verify that the system and its controls are operating correctly.

Sending fictitious/dummy data into the system for process to verify processing accuracy.

Question 22

What is attribute sampling?

Answer 22

Examining a sample of a population and seeing what attribute are present. Extrapolate to figure out what characteristics are present in the population.

Question 23

What is an emphasis of matter paragraph?

Answer 23

Indicates significant uncertainty or other matters, which are disclosed in the notes to the F/S, but auditor feels are important enough to warrant mention in the audit report.

Question 24

What is kiting?

Answer 24

Floating a check. Receiving bank will show receipt of funds before disbursing bank has cleared the funds. Funds received show up in a prior period from the funds disbursed.

Question 25

What is lapping?

Answer 25

Stealing cash payments from one customer, then using payment from another customer to cover the original theft. A sort of ponzi scheme.

Question 26

How do you calculate inventory turnover?

Answer 26

COGS divided by average inventory (or ending inventory)

Question 27

What form of confirmation should be used for accounts payable?

Answer 27

Positive confirmation. The blank form of positive confirmation is ideal.

Question 28

What primary assertion is the auditor's focus with respect to accounts payable?

Answer 28

Completeness: the auditor is primarily concerned with the understatement of AP.

Question 29

What are trading securities? How are gains and losses accounted for?

Answer 29

Held to be bought and sold for short term profit. The G/L show in the income statement. They are classified as unrealized holding gains or losses on the income statement.

Question 30

What are available for sale securities? How are gains and losses accounted for?

Answer 30

This is the default option for non-derivative security assets. Should be on the books at fair market value. Changes in value are recorded in "unrealized gains and losses in other comprehensive income", in shareholder's equity.

Question 31

What are held to maturity investments?

Answer 31

They have a fixed maturity date, and are intended to be held to maturity. Most commonly bond or other debt instruments. They are recorded at cost (purchase price+commissions+fees) and G/L are recognized after they are sold.

Question 32

What is the preferred procedure on PP&E?

Answer 32

Testing the details of the transaction is the preferred procedure.

Question 33

What is a disclaimer of opinion?

Answer 33

When auditor is not independent. When there is a scope limitation imposed by client. When there is substantial doubt about client as a going concern or significant doubts about its business.

Question 34

What should an auditor do if management refuses to make needed disclosures?

Answer 34

Notify those charged with governance. Notify the client that report cannot be associated with the F/S. Notify applicable regulatory agencies that report should not be relied upon. Notify users that the report cannot be relied upon.

Question 35

What is vouching?

Answer 35

It tests the "existence" assertion. Look at F/S figures and then the source/supporting documents. If auditor is concerned with overstatement of revenue & assets you vouch "down" from F/S to source docs to make sure these assets/revenue actually "exist" (existence assertion).

Question 36

What is tracing

Answer 36

It tests the "completeness" assertion. Trace "up" from source docs to the F/S. Did all liabilities and expenses make it "up" from the sources docs COMPLETELY? Did they try to hide/understate some of those liability/expenses?

Question 37

How is sample size and acceptable sampling risk related?

Answer 37

Inversely related. If you want reduce your acceptable sampling risk, you need to increase your sample size.

Question 38

In monetary unit sampling (MUS) how do you determine sample interval and sample size?

Answer 38

Sample interval = tolerable misstatement/confidence factor (TM/CF) Sample size = population amount/sample interval

Question 39

In which statement should R&D cost show up in?

Answer 39

In the income statement.

Question 40

If management prevents the auditor from talking with outside legal counsel, what opinion should be expressed?

Answer 40

Disclaimer of opinion

Question 41

What are the typical US GAAP based statements that auditors report on?

Answer 41

The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports.

Question 42

What happens when notes in F/S are labeled as "unaudited" & "not covered by audtior's report"?

Answer 42

Auditor is not excused by having responsibility. They may refer to the notes in the auditor's report and also consider if the notes contain misstatements.

Question 43

Which bodies develop GAAP?

Answer 43

GAAP are principles (not interpretations). They are principles issued by bodies designated by the Council of the AICPA.

Question 44

When there is inadequate disclosure by management, what audit opinion may the auditor express.

Answer 44

Inadequate disclosure is a material misstatement and grounds for a qualified or adverse opinion.

Question 45

What is a review?

Answer 45

Provides limited assurance that there are no material modification needed to make F/S in conformity with applicable financial reporting standards. Auditor normally performs only analytical procedures and inquiries.

Question 46

What is a registration statement?

Answer 46

Documents that are filed with the SEC for any company that plans to go public.

Question 47

What is negative assurance?

Answer 47

In limited assurance engagement the assurance is expressed in negative form. Negative assurance tells the data user that nothing has come to the CPA's attention of an adverse nature or character regarding the financial data reviewed. It is like saying this car is NOT BAD (negative assurance) vs this IS A GOOD car (positive assurance).

Question 48

What are appropriate names for cash basis F/S?

Answer 48

"assets and liabilities arising from cash transactions" and "revenue collected and expenses paid".

Question 49

What is the basic difference between a compilation and preparation engagement?

Answer 49

A compilation requires a report while a preparation does not. If the accountant is NOT independent in a compilation engagement, it should be stated in the last paragraph of the report. The accountant's name is also associated with the report.

Question 50

For which type of engagements is independence required?

Answer 50

Review and audit. Not required for preparation and compilation.

Question 51

Under the Single Audit Act, a nonfederal entity receiving how much in a fiscal year would be required to have a single audt?

Answer 51

Receiving $750,000 in federal awards.

Question 52

What happens if entity doesn't adequately disclose going concern issues?

Answer 52

This is a misstatement. Auditor may give qualified or adverse opinion.

Question 53

How should inventory be recorded?

Answer 53

At the lower of cost or market. Auditor should compare recorded cost to current cost to replace.

Question 54

What must an auditor do regarding matters of independence?

Answer 54

Any matter regarding independence must be communicated in written communication to those charged with governance.

Question 55

When a report form calls for an unjustified assertion, an auditor should do what?

Answer 55

Auditor should reword the form.

Question 56

Is projecting a sample error rate an analytical procedure?

Answer 56

No it is a sampling procedure.

Question 57

What is the "percentage of coverage rule" of the Single Audit Act Amendment of 2013?

Answer 57

The auditor must select and test major programs that account for at least 40% of federal funding spent by that entity. The exception to the rule for "low risk entities", the percentage can be reduced down to 20%.

Question 58

What does Title 3, Section 303 of SOX deal with?

Answer 58

They are rules against any actions taken to fraudulently coerce, manipulate, or mislead the auditor. The PCAOB has authority to enforce the rule in a civil proceeding.

Question 59

The GAO requires auditors who spend 20% or more of their time performing government audits to have how many hours of CPE every two years directly related to government auditing?

Answer 59

80 hours of CPE every two years directly related to government auditing.

Question 60

What is the difference between audit strategy and audit plan?

Answer 60

The audit strategy is more broadly defined than audit plan. The audit plan is the specific plan to execute the strategy. The audit strategy describes the overall characteristics and scope of the audit. The audit plan is more detailed and include the nature, timing and extent of audit procedures to be performed by audit personnel.

Question 61

When F/S does not comply with GAAP because the statements would be misleading without the departure, the CPA should disclose what?

Answer 61

1. describe the departure 2. the approximate effects of the departure (if practicable) 3. the reasons why it would be misleading without the departure This requirement applies only if the effects on the statements or data is material.

Question 62

The audit program usually cannot be finalized until...?

Answer 62

The audit program usually cannot be finalized until the consideration of the entity's internal control has been completed. An audit program should reflect the results of planning considerations and procedures.

Question 63

Prior to beginning fieldwork, should an continuing auditor conduct any of these procedures? 1. obtaining an understanding of the entity and its environment. 2. update the prior year's written audit program.

Answer 63

Both procedures, obtaining an understanding of the entity and its environment and updating the prior year's written audit program, should be performed prior to the beginning of fieldwork on a continuing audit client.

Question 64

Which bookkeeping services is allowed by the AICPA but prohibited by the SEC?

Answer 64

Preparing financial statements. The AICPA does not prohibit auditors from assisting in the preparation of financial statements, whereas the SEC does. Both the AICPA and SEC prohibit auditors from preparing source documents and recording transactions.