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Flashcards in AUD Review Deck (57):

Cool down period - Auditor accepting employment as CEO, CFO, CAO, or controller

One year cool down from audit engagement


Auditor owing money to an audit client

1. Normal lending procedures must be applied
2. The loan occurred before the lender became an audit client (or the loan was sold to the client)
3. The loan is kept current and terms are not altered
4. The estimated fair value of the collateral equals or exceeds the outstanding balance


Contingent Fees on Tax Returns

It is never proper to charge a contingent fee to prepare an original or amended tax return, no matter the nature of the client.


Independence and spouse employment

A covered member's spouse may be employed by an attest client providing that s/he is not employed in a key position that would affect the audit. This includes the internal audit department.


Independence and providing benefit plan administration services for an audit client

Independence is impaired when management responsibilities are taken on. Administrative responsibilities are allowed.


Independence and broker-dealer relationships with an audit client

An exception to independence is made for a cash balance in a brokerage account that is fully insured.


The preparation and fair presentation of financial statements requires:

1. Identification of the applicable financial reporting framework
2. Preparation and fair presentation of the FS in accordance with the framework
3. Inclusion of an adequate description of the framework in the FS


Date of the audit report

Use the final date of the auditor responsibility. For comparative FS, the audit report date for the most recent audit should be used.


Paragraph to reference GAAS and GAAP

GAAS: Auditors reSponsibility paragraph
GAAP: Management's responsibility paragraph and oPinion paragraph


IAS vs GAAP - Auditor's Report

1. ISAs description can refer to preparation of FS that give a true and fair view
2. ISAs require the intro to refer to the summary of significant accounting policies
3. ISAs require the AR paragraph refer to ethical requirements


Types of Audit Opinions

1. Unmodified - Clean Opinion
2. Qualified "Except For" Opinion - GAAP or GAAS (insufficient evidence) issues
3. Adverse Opinion - GAAP Issues
4. Disclaimer of Opinion - GAAS issues
5. Withdraw - False, fraudulent, deceptive, or misleading


Verbiage in an EOM paragraph for going concern

"Substantial Doubt" and "Going Concern"


If comparative FS include PY statements audited by a predecessor auditor whose report is not presented, the following should be noted in the CY:

OM Paragraph
1. The PY FS were audted by a predecessor auditor (not named)
2. The opinion and, if modified, the reason
3. The nature of any EOM or OM paragraphs in the PY report
4. The date of the PY report


What is an auditor's responsibility for required supplementary information outside of the basic FS?

Apply certain limited procedures to the information and add an OM paragraph to the auditor's report disclaiming an opinion on the information.


Limited procedures to be performed for required supplementary information

1. Inquire of management about methods used to prepare the information.
2. Determine if the information is consistent with management's responses, audited FS, and other knowledge
3. Obtain written management representations regarding the information


Audits of single financial statements

A audit of a single FS is permitted under US GAAS and can be performed as a separate audit or in conjunction with an audit or the complete set of FS.


When to restrict the use of the auditor's report - Special Purpose FS

When the special purpose FS are prepared in accordance with:
1. Contractual basis
2. Regulatory basis
3. Other basis
Restrict in an OM paragraph


When auditing a complete set of FS and a single FS or a specific element:

1. Issue a separate auditor's report and express a separate opinion for each engagement.
2. Indicate in the report on a specific element the date of the auditor's report on the complete set of FS and the opinion expressed


Issuing a report on a client's compliance with contractual agreements or regulatory requirements.

The auditor must have audited the FS
Only negative assurance is given


Detection Risk

The risk that the auditor will not detect a material misstatement that exists in a relevant assertion. DR is set by the auditor by varying the NET ofaudit procedures.


Risk of Material Misstatement

RMM = Inherent Risk x Control Risk


Relationship between RMM and DR

There is an inverse relationship between RMM and DR. If RMM is high, the auditor should set detection risk to low. Conversely, if the RMM is low, the auditor should set detection risk to high.


Relationship between DR and Substantive Procedures

If DR is set to low, the assurance provided by substantive procedures must increase. If DR is set high, the assurance provided by substantive procedures can decrease.


What is an auditor's responsibility for detecting errors and fraud?

An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the FS.


What type of accounts yield the highest level of evidence for analytical procedures?

Income statement accounts that don't have much management discretion (e.g., travel and entertainment expense) because they represent an amount over a period of time rather than at a point in time, and are predictable.


Does litigation with an audit client impair indeoendence?

Not if the litigation is for and immaterial amount.


Audit partner rotation period - Issuers vs Nonissuers

Issuers - rotate off the audit engagement after 5 years
Nonissuers - no audit partner rotation required


Audit documentation should:

Show that the accounting records agree or reconcile with the financial statements


Integrated Test Facility

A computer-assisted auditing technique that allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing.


Parallel simulation

A computer-assisted auditing technique that processes client input data on a controlled program under the auditor's control to test controls in the computer system.
A computer program is written that duplicates the logic of a client's program using identical data as input and comparing output.


Generalized Audit Software

Software designed to read, process, and write data with the help of functions performing specific audit routines and with self-made macros. It is a toll in applying Computer Assisted Auditing Techniques.


What is the primary advantage of using GAS packages to audit FS of clients that use EDP systems?

The auditor may access information stored on computer files while having a limited understanding of the client's hardware and software features.


What does an auditor report on in a FS audit in accordance with GAS?

1. The scope of their testing of compliance with laws and regulations
2. The scope of their testing of internal controls.


Under the Single Audit Act, materiality is:

determined separately for each major federal financial assistance program.


Included in the AICPA's Statements on Quality Control Standards

Assigning personnel to engagements


Included in the Code of Professional Conduct

Compliance with laws and regulations


When to add an EOM paragraph altering readers about the preparation in accordance with a special purpose framework

Every time unless the framework is the regulatory basis for general use (i.e., cash, tax, regulatory, contractual)


When to include a description of purpose for which a special purpose FS are prepared

Regulatory (limited and general use) and contractual basis. NOT for cash or tax.


Accepting an engagement to report on summary FS

The auditor must also be engaged to audit the FS from which the summary FS are derived. The auditor should:
1. Determine whether the criteria applied by management in the summary FS presentation are acceptable
2. Obtain a written agreement from management that it acknowledges and understands its responsibilities
3. Obtain a written agreement from management about the expected form and content on the report


Summary FS opinion

Unmodified or adverse opinion is appropriate. Qualified is not due to the summarized nature of the FS.


Review Engagement

The accountant should perform procedures to accumulate evidence to provide a reasonable basis for obtaining LIMITED assurance that there are no material modifications that should be made to the FS in order for the statements to be in conformity with the applicable financial reporting framework.


Preparation disclaimer

If an accountant prepares the FS, then the accountant must issue a disclaimer or indicate that no assurance is provided on the FS on each page of the FS.


SAARS Engagements - Level of Assurance Provided

1. Preparation: none
2. Compilation: none
3. Review: Limited


SAARS Inquiry and Analytical Procedures Required

1. Preparation: None unless information is questionable
2. Compilation: None unless information is questionable
3. Review: Inquiries of internal personnel and analytical procedures required


What engagements require independence?

1. Preparation: No
2. Compilation: No
3. Review: Yes
4. Audit: Yes


When is an engagement letter required?

All SAARS engagements and audit engagements


When is an understanding of internal control required?

1. Preparation: No
2. Compilation: No
3. Review: No for SAARS engagement, but yes for SAS or PCAOB engagement
4. Audit: Yes


When is communication with the predecessor auditor required?

1. Preparation: No
2. Compilation: No
3. Review: No for SAARS and SAS engagements, but yes for PCAOB engagements
4. Audit: Yes


When are subsequent event inquiries required?

1. Preparation: No
2. Compilation: No
3. Review: Yes
4. Audit: Yes


Substantive tests vs Tests of Controls

$ubstative tests deal with dollar amounts. Tests of controls include attribute testing related to controls.


What should be included in the engagement letter?

An understanding with the client regarding management's responsibilities, which include the preparation and fair presentation of the FS in accordance with the applicable financial reporting framework.


When are analytical procedures required?

During planning and the final review. They are not required during the substantive procedures phase of the audit.


Vouch - Type of assertion being tested



Trace - Type of assertion being tested



Auditing asset or revenue balances - Type of assertion being tested

Existence - This is because assets and revenues are more likely to be overstated than understated (completeness).



Lapping involves withholding and not recording current receipts of cash or checks. The unrecorded receipt is covered by applying a subsequent receipt to the previously unrecorded account.



Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. Kiting may be used to cover a cash shortage or to pad a company's cash position.