AUD - Super Fast CPA

Question 1

Audit Threats

Answer 1

Self Review (auditing one’s own work).
Self Interest (financial or other interests).
Familiarity (close relationships with auditees).
Intimidation or Undue Influences (external pressures on the auditor).
Advocacy (promoting a client’s interests).
Incentive Systems (bonuses or other incentives)
Judgment-Making Shortcuts or Heuristics (rely on rules of thumb)

Question 2

Ethical requirements and
independence rules set by SEC

Answer 2

Financial Relationships:
Employment Relationships:
Non-Audit Services:
Business Relationships:
Family and Personal Relationships:
Provision of Tax Services:
Audit Partner Rotation:
Confidentiality:

Question 3

Unconscious Auditor Biases

Answer 3

Confirmation Bias: focus on information that confirms their existing beliefs
Anchoring Bias: give disproportionate
weight to the first information they receive
Overconfidence Bias: overestimate their own abilities or the accuracy of their judgments
Availability Bias: judge the probability of events based on how easily instances come to mind.
Familiarity Bias: longstanding relationships with clients,

Question 4

Issuers

Answer 4

entities that have securities traded on a public market

Question 5

Issuers Integrated Audit:

Answer 5

Includes a financial statement audit
along with an audit of internal control over financial reporting (ICFR), as required by the Sarbanes-Oxley Act (SOX).

Question 6

Issuers Compliance Audit:

Answer 6

Ensures compliance with the
regulations set forth by the SEC and other regulatory
bodies.

Question 7

Issuers Financial Statement Audit:

Answer 7

Involves testing the financial
statements for material misstatements and providing an
opinion on their fairness.

Question 8

Issuers ICFR Audit:

Answer 8

Assesses the effectiveness of the entity’s
internal controls over financial reporting.

Question 9

Nonissuers

Answer 9

are entities that do not have securities traded on a public market. Audits of nonissuers are generally conducted under Generally Accepted Auditing Standards
(GAAS) issued by the AICPA.

Question 10

Nonissuers Financial Statement Audit:

Answer 10

Examination of financial statements to provide an opinion on their accuracy and
compliance with the applicable framework.

Question 11

Nonissuers Review Engagement:

Answer 11

Provides limited assurance on financial statements and involves less extensive
procedures than an audit.

Question 12

Nonissuers Compilation Engagement:

Answer 12

Assists management in presenting financial information without providing any assurance.

Question 13

Nature of Engagements - Financial Audits

Answer 13

Provide an opinion on whether financial
statements are presented fairly in all material respects in accordance with the applicable financial reporting framework.

Question 14

Nature of Engagements - Performance Audits

Answer 14

Evaluate the performance of a
government organization, program, activity, or function in order to provide information to improve public accountability and facilitate decision-making by parties with responsibility to oversee or initiate corrective action.

Question 15

Nature of Engagements - Attestation Engagements:

Answer 15

Examine, review, or perform agreed-upon procedures on a subject matter, or an assertion about a subject matter, and report on the results.
Attestation engagements involve the CPA being engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another
party. These engagements are broader than financial statement audits and can encompass a variety of financial and non-financial information.

Question 16

Single Audits

Answer 16

A single audit is a rigorous, organization-wide audit or examination of an entity that expends $750,000 or more of federal assistance (federal funds, grants, and awards) received for its operations. Usually, single audits are required for states, local governments, and non-profit organizations.

Question 17

Scope of Engagements - Financial Audits:

Answer 17

Include assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

Question 18

Scope of Engagements - Performance Audits:

Answer 18

Cover a variety of objectives, including
assessments of program effectiveness, compliance with laws and regulations, and financial or economic impacts.

Question 19

Scope of Engagements - Attestation Engagements and Single Audits:

Answer 19

Involve obtaining evidence about the use of governmental or other funds to assess compliance with related laws and regulations.
The scope of an attestation engagement may vary greatly and could include:
● Examination of financial forecasts
● Review of compliance with contractual agreements
● Reporting on internal control over financial reporting
● Providing assurance on sustainability reports

Question 20

Objectives - Financial Audits:

Answer 20

To express opinions on the fairness of
financial statements, and, where applicable, the effectiveness of internal controls over financial reporting.

Question 21

Objectives - Performance Audits:

Answer 21

To provide objective analysis to improve program performance and operations, reduce costs, facilitate decision-making by parties with responsibility to oversee or initiate corrective action, and contribute to public accountability.

Question 22

Objectives - Attestation Engagements

Answer 22

To provide a conclusion about the reliability of the subject matter or assertion in question. To enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of the subject matter against criteria.

Question 23

Accounting and Review Service Engagements

Answer 23

Nature: These engagements involve PREPARATION, COMPILATION, and REVIEW services for financial statements. They do not provide the same level of assurance as audits but are important for entities that do not require an audit.

Question 24

Drafting the Engagement Letter:

Answer 24

● Outline the Scope: Clearly define what the engagement will cover, including the objectives, responsibilities, and limitations.
● Detail the Responsibilities: Specify the responsibilities of both the auditor and the client, including the preparation of financial statements.
● Specify the Reports: Describe the expected types and formats of reports or communications to be issued by the auditor.

Question 25

Key Steps for Confirming Engagement Terms

Answer 25

1. Initial Evaluation: 2. Drafting the Engagement Letter: 3. Discussions with Management and Governance: 4. Documentation: 5. Continuous Communication: 6. Review by Engagement Team: 7. Final Confirmation:

Question 26

Engagement letter - body

Answer 26

Scope of Services: Responsibilities of Management: Auditor's Responsibilities: Access to Information: Fees and Billing: Other Services:

Question 27

GAAS

Answer 27

Generally Accepted Auditing Standards

Question 28

Elements of Sufficient Appropriate Audit Documentation (pg 67)

Answer 28

1. Nature, Timing, and Extent of Audit Procedures Performed: 2. Identification of Engagement Team: 3. Audit Evidence and Conclusions: 4. Accounting Records and Financial Statements: 5. Significant Matters: 6. Independence Documentation: 7. Engagement Completion: 8. Retention Period:

Question 29

Engagement Documentation (pg 72)

Answer 29

Workpaper Reference: Nature of Procedure: Timing: Extent of Procedure: Procedure Performed: Results of Procedure: Significant Findings and Conclusions: Significant Professional Judgments Made: Documentation Includes: Reviewer's Comments:

Question 30

Materiality

Answer 30

Materiality refers to the significance of an item or error in the financial statements that would affect the decision-making of a reasonable user of those statements. It's a threshold or cut-off point used by auditors to guide the nature, timing, and extent of audit procedures and to evaluate the effect of misstatements.

Question 31

Outline for Written Communication:

Answer 31

1. Introduction 2. Description of Identified Deficiencies 3. Severity Assessment 4. Recommendations 5. Conclusion

Question 32

AICPA

Answer 32

Association of International Certified Professional Accountants

Question 33

Procedures for Managing Engagement Quality

Answer 33

1. Quality Management System Design 2. Assignment of Responsibilities 3. Engagement Team Composition 4. Engagement Performance 5. Monitoring 6. Engagement Quality Reviews (EQR) 7. Documentation 8. Continuous Improvement

Question 34

Creating a detailed engagement plan (pg 98)

Answer 34

Step 1: Review Prior-Year Engagement Plan or Template Step 2: Client Assistance Request Listings Step 3: Time Budgets Step 4: Draft Detailed Engagement Plan Step 5: Review and Finalize Step 6: Monitor and Update

Question 35

Marginal Revenue (MR)/Marginal Cost (MC)

Answer 35

additional revenue that will be generated by increasing product sales by one unit. additional cost of producing one more unit of a product.

Question 36

Cross-Price Elasticity of Demand:

Answer 36

Measures the responsiveness of the quantity demanded for a good to a change in the price of another good. This can indicate whether goods are substitutes or complements.

Question 37

Business Cycles (pg 104)

Answer 37

● Trough: ● Expansion: ● Peak: ● Recession:

Question 38

Types of Economic Indicators (pg 105)

Answer 38

leading, coincident, and lagging indicators.

Question 39

Economic Indicators - Consumer Price Index (CPI):

Answer 39

Measures the average change in prices over time that consumers pay for a basket of goods and services. It is a key measure of inflation.

Question 40

Economic Indicators - Producer Price Index (PPI):

Answer 40

Measures the average change over time in the selling prices received by domestic producers for their output. It's a measure of inflation from the perspective of product sellers.

Question 41

Economic Indicators - Federal Funds Rate:

Answer 41

The interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. It's often used by the Federal Reserve to control inflation and is a leading indicator of monetary policy

Question 42

Economic Indicators - Bond Yields:

Answer 42

The return an investor realizes on a bond. The yield curve (plotting yields across different maturities) is a leading indicator, with an inverted yield curve often predicting a recession.

Question 43

Economic Indicators - Unemployment Rate:

Answer 43

A measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. It can be a lagging indicator because unemployment tends to increase for some time even after an economy starts to recover.

Question 44

IFRS

Answer 44

International Financial Reporting Standards

Question 45

Relevant factors that could impact an entity, its operations, and/or the inherent risk of material misstatement. (pg 107)

Answer 45

Economic Factors Environmental Factors Financial Reporting Framework Government Policy Industry Factors Regulatory Factors Supply Chain Technology

Question 46

Sarbanes-Oxley Act of 2002 (SOX) Section 404

Answer 46

Establishing Strong Internal Controls

Question 47

Sarbanes-Oxley Act of 2002 (SOX) Section 302

Answer 47

Corporate Responsibility for Financial Reports

Question 48

Sarbanes-Oxley Act of 2002 (SOX) Section 301

Answer 48

Audit Committee Requirements

Question 49

Sarbanes-Oxley Act of 2002 (SOX) Section 206

Answer 49

Prohibition of Certain Conflicts of Interest

Question 50

Sarbanes-Oxley Act of 2002 (SOX) Title II

Answer 50

Auditor Independence

Question 51

Sarbanes-Oxley Act of 2002 (SOX) Title VIII

Answer 51

Increased Criminal Punishment

Question 52

Sarbanes-Oxley Act of 2002 (SOX) Section 806

Answer 52

Whistleblower Protection

Question 53

Sarbanes-Oxley Act of 2002 (SOX) Section 406

Answer 53

Code of Ethics for Senior Financial Officers

Question 54

Sarbanes-Oxley Act of 2002 (SOX) Section 306

Answer 54

Insider Trades During Pension Fund Blackout Periods

Question 55

relevant factors that define the nature of an entity, including the impact on the risk of material misstatement (pg 114)

Answer 55

1. Nature of the Entity's Operations 2. Ownership and Governance Structure 3. Investment and Financing Plans 4. Selection of Accounting Policies 5. Objectives and Strategies 6. Adoption and Use of Technologies, Including Artificial Intelligence

Question 56

COSO

Answer 56

Committee of Sponsoring Organizations of the Treadway Commission

Question 57

COSO integrated framework encompasses: (pg 118)

Answer 57

● Control Environment: ● Risk Assessment: ● Control Activities: ● Information and Communication: ● Monitoring Activities:

Question 58

Walkthrough Example: Revenue Cycle (pg 133)

Answer 58

1. Selecting the Process for Walkthrough: 2. Planning the Walkthrough: 3. Performing the Walkthrough: Step 1: Initiation of Sales Transaction: Step 2: Delivery of Goods or Services: Step 3: Invoicing and Accounts Receivable: Step 4: Receipt of Payment: Step 5: Reporting and Disclosure: 4. Documenting the Walkthrough: Flowcharts or Process Diagrams: Narratives: Screenshots or System Reports: 5. Analyzing the Walkthrough Findings: 6. Reviewing and Updating Documentation:

Question 59

Overview of Entity’s IT Infrastructure (pg 136)

Answer 59

1. Enterprise Resource Planning (ERP) Systems: 2. Cloud Computing or Hosting Arrangements: 3. Custom vs. Packaged Applications:

Question 60

Procedures to Obtain Understanding (pg 137)

Answer 60

1. Document Review and Inquiry: 2. Observation and Inspection: 3. Technical Procedures: 4. Interviews with IT Personnel: 5. Review of IT Governance Policies: 6. Assessment of IT-related Risks:

Question 61

SOC 1® Engagements (pg 148)

Answer 61

Purpose: SOC 1 (Service Organization Control 1) reports are primarily aimed at the internal control over financial reporting (ICFR). They are designed for entities (like service organizations) that provide services that could impact their clients' financial statements.

Question 62

SOC 1® Engagements (pg 148) Types of Reports:

Answer 62

● Type I: Evaluates the suitability of the design of controls at a specific point in time. ● Type II: Assesses the effectiveness of those controls over a period, usually 6 to 12 months. Audience: Primarily used by the service organization’s management, user entities, and user auditors. Framework: Based on the SSAE 18 (Statement on Standards for Attestation Engagements) standard. Example Use-Cases: Payroll processing, loan servicing, data center hosting, and other services that directly affect the financial statements of user entities.

Question 63

SOC 2® Engagements (pg 149)

Answer 63

Purpose: SOC 2 reports focus on controls related to security, availability, processing integrity, confidentiality, and privacy of a system. These are based on the Trust Services Criteria.

Question 64

SOC 2® Engagements (pg 149) Types of Reports:

Answer 64

● Type I: Reports on the fairness of the presentation of management’s description of the system and the suitability of the design of controls. ● Type II: Provides the same as Type I and evaluates the operating effectiveness of these controls over a certain period. Audience: Broader than SOC 1, including stakeholders such as regulators, business partners, suppliers, and customers who need assurance about the security and processing integrity of the service organization’s systems. Framework: Based on the Trust Services Criteria set by the AICPA (American Institute of Certified Public Accountants). Example Use-Cases: Cloud computing providers, data hosting services, and entities handling sensitive customer data where the focus is on non-financial controls.

Question 65

Key Differences of SOC 1 and SOC 2 (pg 150)

Answer 65

● Scope and Purpose: SOC 1 is focused on financial reporting, whereas SOC 2 is centered around the principles of security, availability, processing integrity, confidentiality, and privacy. ● Relevance and Use: SOC 1 is for user entities and their auditors concerned with financial reporting, while SOC 2 targets a wider audience concerned with information security and processing. ● Report Types: Both have Type I and Type II reports, but the focus of the assessment differs.

Question 66

Determining Materiality (pg 164) Quantitative Measures:

Answer 66

● Often determined as a percentage of a financial statement benchmark, such as total assets, total revenue, or net income. ● Different benchmarks may be appropriate depending on the entity’s industry and financial situation.

Question 67

Determining Materiality (pg 164) Qualitative Considerations:

Answer 67

● Not all material issues are captured by quantitative measures alone. ● Qualitative factors include the nature of the item or issue (e.g., whether it involves fraud), the context of the misstatement, and circumstances such as compliance with loan covenants or regulatory requirements.

Question 68

Tolerable Misstatement (pg 171)

Answer 68

Tolerable misstatement, sometimes referred to as specific materiality or allocation of materiality, is the maximum error or misstatement in a specific account or class of transactions that an auditor would be willing to accept without concluding that the financial statements as a whole are materially misstated.

Question 69

Performance Materiality (pg 172)

Answer 69

Performance materiality, often used interchangeably with tolerable misstatement, is the amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

Question 70

The Fraud Triangle (pg 177)

Answer 70

The Fraud Triangle consists of three elements that, when present together, significantly increase the risk of fraud: ● Pressure (Motivation) ● Opportunity ● Rationalization

Question 71

Risk of Material Misstatement (RMM) Inherent Risk (IR): (pg 180)

Answer 71

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Question 72

Risk of Material Misstatement (RMM) Control Risk (CR): (pg 180)

Answer 72

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Question 73

Determine risk of material misstatement (pg 180)

Answer 73

1. Understanding Risk of Material Misstatement (RMM) 2. Financial Statement Level Assessment 3. Assertion Level Assessment for Each Significant Class of Transactions, Account, and Disclosure 4. Specific Considerations for Fraud Risk 5. Documenting and Responding to Risks

Question 74

Assertions

Answer 74

claims made by management about the accuracy and completeness of financial information

Question 75

response to risks of material misstatement at the financial statement level (pg 184)

Answer 75

1. Maintaining Professional Skepticism 2. Engagement Team Supervision 3. Incorporating Elements of Unpredictability 4. Considering the Control Environment

Question 76

Appropriate procedures to assess the operating effectiveness of relevant controls. (pg 187)

Answer 76

1. Understanding Relevant Controls 2. Risk Assessment 3. Selecting Testing Procedures 4. Types of Tests 5. Documenting and Evaluating Results 6. Considerations for IT-Related Controls 7. Adjusting Audit Procedures Based on Results

Question 77

Appropriate substantive procedures to test relevant assertions for each significant class of transactions, significant account and disclosure. (pg 189)

Answer 77

Understanding Assertions Assertions About Transactions and Events: Assertions About Account Balances: Assertions About Presentation and Disclosure: Designing Substantive Procedures For Each Significant Class of Transactions: For Each Significant Account and Disclosure:

Question 78

Procedures in Attestation Engagements (pg 193)

Answer 78

1. Engagement Acceptance and Planning: 2. Assessing and Responding to Risks: 3. Performing Attestation Procedures: 4. Evaluating Evidence and Formulating a Conclusion: 5. Reporting:

Question 79

Accounting and Review Services Engagements (pg 196) Compilation:

Answer 79

The objective is to assist management in presenting financial information in the form of financial statements without providing any assurance on them.

Question 80

Accounting and Review Services Engagements (pg 196) Review:

Answer 80

A review engagement provides limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.

Question 81

Assertions that relate to classes of transactions, account balances, and disclosures: (pg 201)

Answer 81

● Completeness: ● Accuracy: ● Cut-off: ● Classification: ● Existence: ● Rights and Obligations: ● Valuation and Allocation: ● Presentation and Disclosure:

Question 82

Benford’s Law Analysis:

Answer 82

method for identifying patterns in data sets and detecting anomalies or fraud. It's based on the observation that the leading digit in many real-world data sets is more likely to be small.

Question 83

Internal Audit Function (pg 214)

Answer 83

Internal auditors typically focus on evaluating and improving the effectiveness of risk management, control, and governance processes within an organization.

Question 84

IT Auditor (pg 214)

Answer 84

IT auditors assess the controls within an entity’s information technology infrastructure.

Question 85

Auditor’s Specialist (pg 215)

Answer 85

An auditor’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used to assist the auditor in obtaining sufficient appropriate audit evidence.

Question 86

Management’s Specialist (pg 215)

Answer 86

Similar to the auditor's specialist, management’s specialist is engaged by the entity’s management to provide expertise in a particular field.

Question 87

Component Auditor (pg 216)

Answer 87

A component auditor audits one or more components of a group financial statement. A component could be a division, subsidiary, or joint venture.

Question 88

Referred-to Auditor (pg 216)

Answer 88

A referred-to auditor is an auditor from an external firm that the principal auditor references in the audit report, typically for work performed on a separate part of the financial statements, such as a subsidiary or division.