AUD Deck 3 Flashcards
(13 cards)
When performing a review of interim financial information, the accountant is required to become knowledgeable about the entity’s business and its internal control in order to focus the inquiries and analytical procedures. The procedures to obtain this knowledge include the following:
Reading documentation of the preceding year’s audit and of reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year to the extent necessary, based on the accountant’s judgment, to enable the accountant to identify matters that may affect the current-period interim financial information
Reading the most recent annual and comparable prior interim period financial information
Considering the results of any audit procedures performed with respect to the current year’s financial statements
Inquiring of management about changes in the entity’s business activities
Inquiring of management about the identity of, and nature of transactions with, related parties
Inquiring of management about whether significant changes in internal control have occurred subsequent to the preceding annual audit or prior review of interim financial information
The auditor’s report for a performance audit of a governmental entity in accordance with Government Auditing Standards should contain:
the objectives, scope, and methodology of the audit,
the audit results, including findings, conclusions, and recommendations, as appropriate,
a reference to compliance with generally accepted government auditing standards,
the views of responsible officials, and
if applicable, the nature of any privileged and confidential information omitted.
A concurrent opinion on the historical financial statements is not the objective of the performance audit and is not required.
T or F
Management must prepare a written response to the auditor’s communication regarding significant deficiencies or material weaknesses.
False
Management may, but is not required to, prepare a written response to the auditor’s communication regarding significant deficiencies or material weaknesses. This communication may include corrective actions taken, or the reasons that management has decided not to implement a suggested control.
Which do the AICPA or SEC allow?
Preparing source docs
Recording transactions
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.
GAGAS requirements for auditors and audit firms include:
1) 80 hours of CPE in governmental auditing every two years for those auditors who spend at least 20% of their time on these audits.
2) a system of quality control that includes independence, legal, and ethical requirements, and human resource policies and procedures
3) An external peer review is required at least once every three years
PPS Sampling - Recorded Book Amount Greater Than Sample Interval, How to determine Projected Error?
In probability-proportional-to-size sampling, the projected error is equal to the actual sample error when the book value of the item sampled is equal or greater than the sampling interval. In this instance, the book value is $10,000. The sampling interval is $5,000, so the actual error of $2,000 ($10,000 - $8,000) specifies that the projected error is also $2,000.
In litigation, ask clarifying request for
“We believe that the action can be settled for less than the damages claimed.”
For actual or potential litigation, claims, and assessments identified based on the audit procedures required in paragraph .16, the auditor should obtain audit evidence relevant to the following factors:
The period in which the underlying cause for legal action occurred
The degree of probability of an unfavorable outcome
The amount or range of potential loss
“We believe that the possible liability to the company is nominal in amount” provides a range of potential loss.
“We believe that the plaintiff’s case against the company is without merit” provides the degree of an unfavorable outcome.
“We believe that the company will be able to defend this action successfully” also provides the degree of an unfavorable outcome.
“We believe that the action can be settled for less than the damages claimed” is the only answer choice that does not provide the auditor certainty of any of the above to cause disclosure in the financial statement. The amount of the loss is unknown because the amount of the potential damages is unknown.
Auditor’s report refer to the lack of consistency when there is a change in accounting principle that is significant?
A lack of consistency caused by a material change in an applicable financial reporting framework between periods would be reported in an other-matter paragraph after the opinion paragraph. Under these circumstances, the auditor issues a modified unmodified opinion. The other answer choices are incorrect because the proper treatment of a lack of consistency is to add an other-matter paragraph after the opinion paragraph.
Prior to PCAOB rules being effective, who must approve it?
The SEC must approve all rules of the Public Company Accounting Oversight Board prior to such rules becoming effective.
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor’s report for:
(An unjustified accounting change and material weakness in internal control)
Neither
The auditor is required to state whether GAAP has been consistently applied. Inconsistency in the application of GAAP is a common reason for qualified opinions by auditors. Therefore, an unjustified accounting change would not result in an unmodified opinion with an emphasis-of-matter paragraph. Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance. However, this is done in a separate communication and is not included as an emphasis-of-matter paragraph to an unmodified opinion in the auditor’s report.
When auditing an entity’s financial statements in accordance with Government Auditing Standards (the “Yellow Book”), an auditor is required to report on:
I. recommendations for actions to improve operations.
II. the scope of the auditor’s tests of compliance with laws and regulations.
In accordance with the “Yellow Book,” an auditor is required to report on the scope of the auditor’s testing of internal controls and on the scope of the auditor’s tests of compliance with laws and regulations.
Does not have to provide recommendations to improve operations
CPA asked to express an opinion on Profit participation can only accept if:
When a CPA is asked to express an opinion on an employee’s profit participation in an employer’s net income, the CPA must also audit the employer’s complete financial statements.
GAGAS compliance audit if auditor detects material noncompliance then issue:
If due to scope limitation,
Qualified or Adverse Opinion
If due to scope limitation, then disclaim an opinion
When the audit includes basic compliance requirements which are not applicable to a major federal program, the auditor expresses a positive opinion on the compliance with respect to the items actually tested and negative assurance on those aspects of compliance which were not tested. The auditor never expresses no assurance or reasonable assurance. It is the objective of the audit procedures performed to provide the auditor with reasonable assurance that any material noncompliance with requirements will be detected.
