AUD Important Topics

Question 1

What is the order of an unmodified opinion (non-issuer) ? Where is the framework or GAAS referrenced?

Answer 1

OBRA

Opinion
Nature of engagement
FRAMEWORK referenced

Basis for opinion
GAAS referenced

Responsibility of management
a. GAAP, design of IC
b. Going concern
c. FRAMEWORK referenced

Responsibility of auditor
GAAS referenced

Question 2

What is the order of an unqualified opinion (Issuer) ? Where is the framework or GAAS referrenced?

Answer 2

Opinion of FSs

Framework (PCAOB + GAAP)
Opinion

Basis of opinion

Reasonable assurance
Mgmt’s responsibility
Auditor’s responsibility

Question 3

When and what are CAMs used for? What is included in CAM report?

Answer 3

CAMs (Only for unqualified or qualified) AKA Issuer ONLY

1. Usually significant judgements, events, transactions
2. Section after “Basis for opinion”

MUST BE: Matter that was communicated to audit committee

Report (IPAD)
1. Identification of CAM
2. Principal consideration of matter
3. Addressed - How it was addressed in the audit
4. Disclosures made in FSs

Question 4

What are the modifications for a qualified opinion? (Non-issuer)

Answer 4

Opinion section

1. “except for”

Basis for qualified opinion

1. Add paragraph describing departure from framework and quantify effects
2. States the type of opinion at the end

Question 5

What are the modifications for a qualified opinion? (Issuer)

Answer 5

Opinion section
1. “except for”
2. Add paragraph describing departure from framework and quantify effects

Additional paragraphs
1. Reasons for departure from GAAP.

Question 6

What are the modifications for an adverse opinion? (Non-issuer)

Answer 6

Opinion section

1. “because of the significance of the matter… the FSs do not present fairly”
2. Reference to a separate section disclosing the basis of opinion

Basis for adverse opinion

1. Add paragraph describing departure from framework and quantify effects
2. Description of the matter giving rise to the modification
3. Basis for adverse opinion - States the type of opinion at the end

Note: No Key Audit Matter for Adverse opinions

Question 7

What are the modifications for an adverse opinion? (Issuer)

Answer 7

Opinion section

1. “because of the significance of the matter… the FSs do not present fairly”
2. Reference to a separate section disclosing the basis of opinion

Additional paragraphs

1. Add paragraph describing departure from framework and quantify effects
2. Description of the matter giving rise to the modification

Note: No Critical Audit Matters for Adverse opinions

Question 8

What are the modifications for a disclaimer of opinion? (non-Issuer)

Answer 8

Opinion section

1. “do not present fairly”
2. Add paragraph describing departure from framework and quantify effects

Basis for disclaimer

1. Reference to auditor’s report where auditor’s responsibilities are described.
2. Statement on whether evidence obtained is sufficient.
3. The reasons for the inability to obtain sufficient appropriate audit evidence

Auditor’s responsibilities

1. To conduct in accordance with auditing standards generally excepted.
2. Statement Because of Basis for disclaimer of opinion…. Auditor was not able to obtain sufficient appropriate information.
3. Auditor is required to be independent.

Question 9

What are the modifications for a disclaimer of opinion? (Issuer)

Answer 9

Opinion section

1. change heading
2. “We were engaged to audit”
3. “Not able to obtain sufficient appropriate audit evidence”

Additional paragraphs

1. All substantiative reasons for the disclaimer and reservations regarding the conformity to GAAP.

Basis for disclaimer

1. Eliminate “Our responsibility” and “We conduct our audits in accordance with”

Question 10

What opinion would you modify the auditor’s responsibility paragraph?

Answer 10

Disclaimer of opinion only

Question 11

EOM paragraph is used when?

Answer 11

1. Justified change in accounting principal, change in consistancy, change in reporting entity
2. Change in audit opinion from subsequent events
3. Special purpose framework refers to note in FS
4. Going concern

Question 12

Other-Matter Paragraphs is used when?

Answer 12

1. Prior year FSs not presented (audited by prior auditor)
2. Comparative FSs where CY is audited and PY is not.
3. Restricting the use of the auditor’s report
4. Report on compliance is included in auditor’s report.

Question 13

Predecessor auditor should (5)?

Answer 13

1. Read & Compare CY comparative FSs with PY
2. Obtain letter of representation from successor auditor & management
3. Date of report (unrevised or dual date)

Question 14

Successor auditor should (4)?

Answer 14

1. Check type of opinion expressed
2. Check nature of “Extra” paragraphs added
3. Check Date of Prior audit report (USE ORIGINAL DATE IF NOT REVISED)

Question 15

In other matter paragraph, concerning differing opinions, what is the format that you should state? (DORCS)

Answer 15

1. Date
2. Opinion (previously used)
3. Reason (for prior opinion)
4. Changes
5. Statement (for change)

Question 16

Group engagement partner vs Principal auditor?

Answer 16

Group engagement partner (AICPA Private) or Principal auditor (PCAOB Public)

Question 17

Auditor Responsibility (PRIME) of Subsequent Events **

Answer 17

1. Post-balance sheet transactions
2. Representation letter of management
3. Inquiry client’s legal counsel and management
4. Minutes
5. Examination latest interim FSs

Question 18

What is included in Other information?

Answer 18

1. Report to those charged with governance financial summaries, ratios, officers

Question 19

Auditor’s responsibility for other information?

Answer 19

1. Read other information to determine credibility
2. If management refuses other information revision, then:
   a. Communicate to those charged with governance.

b. Include an “other matters section” when management refuses to cover

c. Consider withdrawing from the engagement

Question 20

Auditor’s responsibility for Supplementary information?

Answer 20

(APPLY LIMITED PROCEDURES)

Report whether supplementary information is fairly stated

Question 21

When is a supplemental paragraph required?

Answer 21

Non-issuer

Add separate paragraph “Required Supplementary info”
states management is responsible for Supplementary
information

Issuer

Not required to add paragraph unless:
1. Information is omitted
2. Material departure
3. Auditor unable to complete procedure
4. Are unresolved doubts about conformance of required supplements

Question 22

What basis should you use EOM paragraph for SPF?

Answer 22

(CT) Cash and Tax basis use EOM paragraph exclusively.

Question 23

What basis should you use EOM, other-matter, and discription of purpose of SPF FSs are prepaired?

Answer 23

(RCO) Regulatory, contractual, other basis.

Question 24

What is included in SPF EOM paragraph?

Answer 24

1. States that the SPF is a framework other than GAAP
2. Refers to the notes in the FSs that describe the framework and HOW IT DIFFERS
3. States that FSs may not be suitable for any purpose other than the stated purpose

Question 25

What is included in SPF other-matter paragraph?

Answer 25

1. Restricts the use of the stated parties 2. Should not be used by anyone else

Question 26

Engagement Letter Requirements contents

Answer 26

Objectives and scope of the audit Responsibilities of the auditor Responsibilities of management Other relevant information

Question 27

Quality control procedures/standards “HELP ME” ***

Answer 27

1. Human Resources (hiring competent employees) a. Hiring b. Assign personnel to engagement c. Professional development d. Performance 2. Engagement/Client acceptance and continuance a. Minimize association with client management that lacks integrity b. Reasonably expect to complete with professional competence 3. Leadership responsibilities (firm’s tone at top) 4. Performance of the engagement 5. Monitoring Peer review (Every 3 years) “Wrap-up” (Second partner review) 6. Ethical requirements a. Evaluating independence

Question 28

Document retention********

Answer 28

1. SAS rules (Non-issuer) = holder for 5 years after release, assembled 60 days after report release 2. PCAOB rules (Issuer) = holder for 7 years after release, assembled 14 days after report release

Question 29

******5 Components of Internal Control (CRIME)***** APPLIES TO ORC – PRESENT + FUNCTIONING

Answer 29

1. Control environment (Tone at the top) (EBOCA) * Ethics, Independent BOD, Organization structure, Competence, Accountability 2. Risk assessment (FS misstated, not efficient) (SAFR) * Specify objectives, Analyze risks, Consider potential fraud, ID and assess changes 3. Information and communication systems (Fair, accurate, complete, timely) “FACT” (OIE) * Obtain and use information, internally report, externally report 4. Monitoring (Effectiveness of controls + reporting) (SOD) * Ongoing and separate evaluations, Communicate deficiencies 5. Existing Control activities (policies to mitigate risks) (CAT P) Select control activities, Technology controls, deploy policy and procedures “PAID TIPS” Pre-number documents Authorize and approval of transactions Independent checks Example: Bank recs Documentation Timely and appropriate financial performance reviews Information processing Physical and logical controls Segregation of duties

Question 30

When should you use more interim dates over year end dates?

Answer 30

1. Strong IC = More Interim dates 2. Weak IC = More year-end (RISK OF DETECTION)

Question 31

Formula for performance materiality?

Answer 31

$140,000 (overall materiality) × 0.5 (lower range provided in audit firm guidance) = $70,000

Question 32

relationship with RMM, “acceptable level of DR” **************

Answer 32

1. RMM(increasing) = DR(decreasing) a. More assurance required from $ubstantive testing b. More tests at year end 2. RMM(decreasing) = DR(increasing) a. Less assurance required from $ubstantive testing b. More tests at interim date

Question 33

Control risk to sample size relationship?

Answer 33

Lower control risk = Lower sample (Positive relationship)

Question 34

What are the risk assessment procedures by PCAOB?

Answer 34

1. Obtain understanding of entity and environment Auditor assessment of control and inherent risk 2. Obtain an understanding of internal control over financial reporting 3. Inquire the audit committee, management, BOD, internal auditors and others within the company about risks of material misstatement 4. Perform analytical procedures to assist in planning by Identifying inconsistencies: 5. Conduct a discussion among engagement teams members regarding RMM 6. Observation and inspection Support, corroborate or contradict inquiries of management

Question 35

What are responses to areas of greater RMM for FSs risks?

Answer 35

1. Communicate skepticism to team 2. Assign staff with more specialization 3. More supervision 4. Greater level of unpredictability 5. Make pervasive changes to audit strategy

Question 36

What are responses to areas of greater RMM for Assertion level risks?

Answer 36

Design procedures that address NET of items: Nature Inquiries (Not enough), Observation, Inspection, reperformance (Tests operating effectiveness) Extent Sample size used Frequency of performance is a large factor Timing When the tests are performed

Question 37

What is Incorrect acceptance?

Answer 37

Sample supports conclusion of the balance being not materially misstated, but it actually is. Questions that use the word "misstatements"

Question 38

What is Incorrect rejection?

Answer 38

Sample supports conclusion that the balance is materially misstated, but it actually is not. Questions that use the word "misstatements"

Question 39

Sampling risks in tests of controls = Too high = ?

Answer 39

Indicates a greater deviation rate in sample than tolerable rate Does more work than necessary, inefficient Questions that use the word "deviations"

Question 40

Sampling risks in tests of controls = Too low = ?

Answer 40

Assessed level of controls risk based on sample is too low than true risk Indicates a lower deviation rate in sample than tolerable rate Questions that use the word "deviations"

Question 41

What is the upper deviation rate? When can an auditor rely on controls?

Answer 41

Upper deviation rate = Sample deviation rate + Allowance for sampling risk If upper deviation rate < or = Tolerable rate = Auditor may rely on If upper deviation rate > Tolerable rate = Auditor would not rely on

Question 42

RMM and expected misstatement have what effect on sample size?

Answer 42

Positive relationship

Question 43

Tolerable misstatement and acceptable level of risk have what effect on sample size?

Answer 43

Negative relationship

Question 44

How do you calculation misstatement using tainting factor?

Answer 44

Sample Error = # recorded - audited # Tainting factor = Sample error / # recorded Misstatement = Tainting factor * sampling interval

Question 45

What are diagnastic data analytic techniques?

Answer 45

Explains "Why". Uncovers correlation, patterns, and relationships to explain outcome. Examples: Variance analysis Period-over-period analysis Data profiling Clustering

Question 46

What are descriptive data analytic techniques?

Answer 46

Describes what happened within the data set. May be similar to dectective controls. Examples: Range, mean, median, dependence (correlation)

Question 47

What are predictive data analytic techniques?

Answer 47

Predictive analytics provide expected or predicted outcomes based on historical data. Examples: Predictive Regression Semtiment analysis

Question 48

What are prescriptive data analytic techniques?

Answer 48

Prescribes courses of action to help optimize decisions. Examples: What-if analysis Decision support

Question 49

What are the formulas for Sampling interval and sample size using PPS?

Answer 49

Sampling interval = TM / Reliability factor Sample size = Recorded amount is population / Sampling interval

Question 50

What is the formula for (MPU) Mean-per-unit Estimation = Average sample value * Number of items in population

Answer 50

Mean-per-unit Estimation = Average sample value * Number of items in population

Question 51

What is the formula for Ratio estimation?

Answer 51

Ratio estimation = (Audited value of sample / Book value) * Total Book Value

Question 52

What is the formula for Difference estimation?

Answer 52

Difference estimation Calculate Projected error = ((Book value of sample - Audited value of sample) / # of items audited) * Population Calculate Point estimate = Total book value of population - Projected error

Question 53

What is AP responsible for?

Answer 53

1. Match of PO, Receiver, and invoice

Question 54

What are procedures that the treasurer should do?

Answer 54

1. Mail the checks he signs 2. Voucher needs to be stamped paid or cancels the voucher packet, so it cannot be used again

Question 55

What procedure will find unrecorded liabilities?

Answer 55

Vouch cash disbursements after the BS date, compare to receiving reports

Question 56

What are procedures that purchasing should do?

Answer 56

1. Issue prenumbered POs 2. Contact with Vendors 3. Receive requisition 4. Send accounting debit memos for returns

Question 57

What are procedures that requisitioner should do?

Answer 57

1. Receive goods 2. Get approval 3. Send copy to purchasing

Question 58

What is kiting?

Answer 58

Depositing check in 2 banks - Detected by bank transfer schedule Auditor should look at bank tfr schedule dates

Question 59

What is lapping?

Answer 59

Employee withholds funds for personal use by applying subsequent receipts to cover the prior funds Auditor should compare depost slips to AR credits

Question 60

What should be included in a management representation letter? (10 items)

Answer 60

1. Financial statements Responsible for FSs design, implementation fair presentation, controls relevant to preparing 2. Completeness of information 3. Responsible for design and implementation to prevent fraud + disclosure of any fraud 4. Uncorrected misstatements are immaterial 5. Litigation 6. Estimates 7. Laws and regulations 8. Related parties 9. Subsequent events 10. Additional representations - New principals, impairments, obsolete, etc.

Question 61

How and to who should the auditor communicate significant deficiencies and material weaknesses to?

Answer 61

Management and TCWG within 60 days of the report release

Question 62

What should be included in a communication to management and TCWG letter?

Answer 62

1. Definition of term material weakness 2, Description of significant deficiencies (Potential effects) 3. Sufficient information for TCWG to understand 4. A restriction regarding the communication with management

Question 63

What is the mailroom's procedures?

Answer 63

1. Sperate checks and remittance advices. 2. Stamp endorsement on checks. 3. Prepare prenumbered list of checks received. 4. Forward remittance to A/R (Matches to check deposit and remittance) 5. Forward prelisting to accounting/AR, and cashier ( prepares deposit with check received and adds to prenumbered cash summary list).

Question 64

What reports can be included in SSARS?

Answer 64

SSARS -preparation, compilation, review

Question 65

Independence is impaired if:

Answer 65

1. Spouse, family or close relative is client management Exception is automobile, insurance loans and borrowing cash or credit cards 2. Member has a material indirect financial interest in an attest client 3. Member is previously employed for the attest client 4. Member leaves firm to work for the client 1 year cool off 5. CPAs make mgmt decisions for the client 6. Client is more than 1 year overdue for professional fees 7. Actual or threatened litigation

Question 66

What 2 ethical standards must a CPA keep at all times?

Answer 66

Objectivity and integrity. Note: independence is only required for review and audit

Question 67

What is included in engagement letter of a compilation? and procedures performed in a compilation?

Answer 67

Objective Auditor responsibility No accuracy or completeness Management’s responsibility Limitations of the engagement Our report Gaining an understanding (Procedures) 1. Read the FSs 2. Staff appropriately

Question 68

What is included in the auditor's report of a compilation?

Answer 68

Management responsible for FSs FSs subjected to compilation Date or period covered Accountant complied with SSARS Statement that Accountant did not audit or review the FSs No procedures to verify accuracy or completeness Additional paragraphs for: 1. Lack of independence 2. Disclosing omissions and statement on disclosures 3. Supplemental information information that is the representation of management without audit or review. Each page marked Usefulness of projected FSs

Question 69

What should be included in the additional paragraph when prior period has been audited for a review or compilation?

Answer 69

1. The prior period statements were audited 2. The date of the previous reports 3. The opinions expressed and reasons for it 4. That no auditing procedures have been performed since that date

Question 70

Steps for a review (U LIAR CPA)

Answer 70

1. Understanding the client (EL) Objectives, responsibilities, limitations, framework, form of report Similar to compilation 2. Learn and obtain sufficient knowledge of entity’s business Principles, framework, industry and business Design analytical procedures and inquiries based on this 3. Inquiries Management and personnel Accounting principles and practices Procedures in FSs Significant events or transactions 4. Analytical procedures Develop expectation and comparing recorded amounts (Ratios/budgets) 5. Review other procedures Read FSs Perform additional procedures on incorrect work 6. Client rep letter Required, Accountant report date, Signed by management 7. Professional judgment Document clear understanding of work that you did 8. Accountant standard report results Title “independent” Addressee Introductory paragraph Management responsibility Accountant’s responsibility Limited assurance Independent reference Conclusion Sign and date

Question 71

What level of assurance do the following give: Preparation, compilation, review?

Answer 71

Preparation - None Compilation - None Review - Limited

Question 72

What documentation should be included in a preparation?

Answer 72

1. EL 2. Copy of FSs 3. Any significant findings or issues 4. Communication with management regarding non-compliance

Question 73

What is the difference between a compilation and preparation?

Answer 73

1. Compilations require a report, while preparations do not. 2. Compilations require to disclose nonindependence, while preparations do not.

Question 74

What is included in a review report?

Answer 74

1. Title (Independent accountant review report) 2. Addressee 3. Intro paragraph a. State FSs have been reviewed b. State period covered c. Statement that review includes analytical procedures and inquiries d. Statement that review is less than an audit 4. Management's responsibility - implementation 5. Accountant's responsibility a. Conducted with SSARS b. Limited assurance for an opinion c. Requirement to be independent 6. Accountant conclusion

Question 75

What are the differences between a SOC 1 and SOC 2? Type 1 and type 2?

Answer 75

SOC 1 – Controls affecting the company’s financial information are operating correctly (e.g., payroll expense). SOC 2 – Controls affecting the company’s customer data protection are operating correctly (e.g., protecting credit card information). Type 1 – Management's description of internal controls as of a specific date. Not testing for operating effectiveness. Type 2 – Management's description of internal controls over a period of time. Tests operating effectiveness of controls.