AUDIT #1

Question 1

1.02 - What are the three categories that the overall responsibilities and objectives of an audit can be broken down into?

Answer 1

1. Responsibilities
2. Performance
3. Reporting

Question 2

1.02 What Responsibilities are applicable through out the audit?

Answer 2

1. Training & Professional judgement
   - AU-C 200
2. Independence & Other Ethical Requirements, including Due Care
   - AU-C 200
3. Professional Skepticism
   - AU-C 200

Question 3

1.02 What Performance objectives are required during an audit?

Answer 3

1. Internal Controls
   - AU-C 315
2. Corroborative Evidence (Substantive Testing)
   - AU-C 200

Question 4

1.02 What Reporting objectives are required during an audit?

Answer 4

1. Accounting principles are in conformity with Applicable Financial Reporting Framework (AFRF)
   - AU-C 700
2. No new accounting principles applied. (Comparability/ Consistency) implied
   - AU-C 708
3. Omitted financial disclosures - NONE
4. Expression of an opinion
   - AU-C 700

Question 5

1.02 The overall objectives & responsibilities in an audit can be summarized using the acronym TIPICANOE. What does it stand for?

Answer 5

1. Training and Professional Judgement
2. Independence & Other Ethical Requirements
3. Professional Skepticism
4. Internal Controls
5. Corroborative Audit Evidence (substantive)
6. Accounting Principles (conformity AFRF)
7. No new Accounting Principles (Consistency / Comparability)
8. Omissions & Disclosures None
9. Express an Opinion

Question 6

1.03 What are the two KEY considerations to accepting an Audit?

Answer 6

1. Determining the acceptability of the AFRF
2. Obtaining managements agreement that it understand and accepts certain responsibilities:
   - Financial Statements
   - Internal Controls
   - No client-imposed scope limitation

Question 7

1.03 In a first year audit inquiries with the predecessor auditor should include (RID-C-U)

Answer 7

1. Reason for the Change
2. Integrity of management
3. Disagreements during audit
4. Communication with management or those charged with governance
5. Understanding of related party relationships/transactions and significant unusual transactions

Question 8

1.03 In recurring audits what reasons might cause revision to the terms of the preceding engagement?

Answer 8

1. Indications that management does not understand the objectives and scope of the engagement
2. Revision or special terms
3. Significant changes to the entity size or nature of business
4. Changes to senior management or significant changes in ownership
5. Regulatory requirements changes
6. Change in AFRF

Question 9

1.04 Under AU-C 260 the auditor is required to communicate with those charged with governance, who does that include?

Answer 9

Management includes those with executive responsibility for the conduct of the entity’s organization?

1. Board of Directors (YES)
   1a. Audit Committee (NO)
2. Management (YES)
3. Stockholders (NO)

Question 10

1.04 What is the Audit Committee and what is it for?

Answer 10

The Audit Committee is a sub-committee made up of board members who are not officers or employees of the company (ie. they must be independent). The committee members will have no special interest in supporting the financial representation of management, which provides objectivity. They do the following:

• serve as members of the BOD and are disinterested in the day-to-day operations
• hire/fire external auditor
• receive external auditor reports and communications
• oversee the internal audit function

Question 11

***1.04 What matters need to be communicated to management or those charged with governance?

Answer 11

• Planned scope and timing of the engagement (significant risk - that many require special consideration)
• Deficiencies and material weaknesses in internal control

Question 12

1.05 When is the client representation letter required?

Answer 12

The client representation letter cannot be obtained until the end of the audit field work. It must however, be obtained prior to issuing the report.

Question 13

1.05 Once the auditor has made the decision to accept the audit engagement it is required to send out an Engagement Letter. What is included in the Engagement Letter?

Answer 13

• Objective and scope
• Auditor Responsibilities
• Client (Management) Responsibilities
• A statement of inherent limitation of an audit and I/C
• Identification of AFRF
• Reference to the expected form and content of the report with an indication that the actual report may differ
• Other…

Question 14

1.05 What are the elements of the Engagement Letter (FACSIMILE)

Answer 14

1. Fees
2. Auditors responsibility
3. Confirmation of Engagement
4. Scope & Objective of Engagement
5. Internal Control
6. Management Responsibility
   
   1. Irregularities - Fraud
   2. Illegal Acts
   3. Errors

Question 15

1.06 What are some items that may impact the Nature, Timing and Extent of an audit?

Answer 15

• The size and complexity of an entity
• The auditors experience with the entity
• knowledge of the entity’s business and industry
• knowledge of the entity and its environment (including I/C)

Question 16

1.06 What are the three preliminary engagement activities?

Answer 16

1. Performing quality control procedures regarding Acceptance & Continuance
2. Evaluating Ethical Requirements
3. Engagement Letter

Question 17

1.06 What is the formula for Risk of Material Misstatement (RMM)

Answer 17

RMM = Inherent Risk (IR) x Control Risk (CR)

IR - the risk of a material misstatement due to the nature of an element of the F/S

CR - the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to lack of effective I/C.

Question 18

1.06 What is Detection Risk in terms of RMM?

Answer 18

Detection Risk (DR) is the risk that a material misstatement will not be detected by the auditor. The higher the RMM, the lower the auditor will wish to reduce DR. DR equates to the level of substantive test that are to be performed.

Question 19

1.06 What are the steps to the Audit Plan?

Answer 19

1. Client Acceptance and continuance
2. Plan the audit
3. Obtain an understanding of the client, its environment, and internal control
4. Assess Risk of Material Misstatement and Design Further Procedures
5. Perform Test of Controls
6. Perform Substantive Procedures
7. Form an Opinion
8. Issue a Report

Question 20

1.06 The steps in planning an audit include: mnemonic BRAINSTOPS

Answer 20

1. Basic discussions with the client (NTE)
2. Review of audit documentation (prior work papers)
3. Ask about recent developments (ex. mergers)
4. Interim F/S (Flux Analysis)
5. Non-audit personnel (tax preparers for client)
6. Staffing
7. Timing (I/C, interim testing)
8. Outside assistance (specialist IT)
9. Pronouncements (updates required)
10. Scheduling with the client (PBC dates)

Question 21

1.06 What is Audit Risk (AR)?

Answer 21

AR = RMM x DR

AR = IR x CR x DR

Question 22

1.06 AU-C 240 States that the auditor has what responsibility in relation to detection risk?

Answer 22

The auditors responsibility is to plan and perform and audit to obtain reasonable assurance that no errors or acts of fraud have caused the F/S to be materially misstated.

Question 23

1.08 What is considered a misstatement?

Answer 23

1. A difference in the amount, classification or presentation of an element/account/item
2. Omission of an element
3. Disclosure not in accordance with GAAP
4. Omission of a disclosure

Question 24

1.08 What are the two types of fraud?

Answer 24

1. Fraudulent financial reporting (management fraud, or cooking the books)
2. Misappropriation of assets (embezzlement, theft, misuse of assets)

Question 25

1.08 True or False The auditor must communicate all known and likely misstatements (even immaterial), identified during the audit, other than those the auditor believes are trivial, to the appropriate level of management on a timely basis?

Answer 25

True

Question 26

1.08 True or False The auditor is required to communicate all knowledge or suspicion of fraud to management and/or governance.

Answer 26

True If the fraud involves senior management those charged with governance need to be told. The auditor may want to consult with legal counsel.

Question 27

1.08 What are the three conditions of the **Fraud Triangle**?

Answer 27

1. Reason or motivation (incentive/pressure) 2. Opportunity 3. Rationalization

Question 28

1.08 AU-C 250 states that the auditor must do what?

Answer 28

AU-C 250 states that the auditor must communicate knowledge or suspicion of noncompliance with applicable laws and regulations.

Question 29

1.08 Should misstatements be evaluated quantitatively?

Answer 29

No, they should be evaluated both quantitatively and qualitatively. -qualitatively changing trends of profitability changes a loss to income

Question 30

1.09 What is the difference between the following opinions that could be issued by an auditor: Qualified, Adverse, Disclaimer, Unmodified.

Answer 30

If a client has not appropriately accounted for a material illegal act (non-compliance) the auditor's report must reflect this departure from GAAP by issuing a QUALIFIED OR ADVERSE opinion. A Disclaimer of Opinion Reflects the inability to obtain sufficient appropriate audit evidence.

Question 31

1.08 True or False The auditor must communicate all known and likely misstatements (even immaterial) identified during the audit?

Answer 31

True - except for those the auditor believes are trivial

Question 32

1.09 True or False Any evidence of the existence of fraud should be communicated to management?

Answer 32

TRUE Fraud involving senior management must be communicated to those charged with governance. Discussion should be with the appropriate level of management, one level above.

Question 33

1.09 What items should be documented by an auditor when it comes tor consideration of FRAUD.

Answer 33

1. The brainstorm session 2. Procedures performed to obtain info used to identify RMM due to Fraud 3. Identified RMM 4. Reasons for Revenue not being considered a fraud risk 5. Procedures performed to ensure appropriate response to risk of management override 6. The nature of communication about fraud

Question 34

1.09 What type of opinion should an auditor give in their report is a material misstatement identified is not corrected by management?

Answer 34

The auditor should provide a Qualified Opinion or an Adverse Opinion.

Question 35

1.09 What kind of opinion should an auditor give if he/she was unable to obtain sufficient audit evidence to provide an opition?

Answer 35

The auditor should provide a Qualified Opinion or Disclaimer Due

Question 36

1.10 What does AU-C 220 Require of CPA Firms?

Answer 36

To implement a system of quality control procedures that provide the CPA firm with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements.

Question 37

1.10 Quality Control Standards depend on what factors?

Answer 37

* the **size** of the firm * the **nature** of the practice * the **organizational** structure * **cost** benefit considerations

Question 38

1.10 What are the 6 elements of quality control? (HEAL - ME)

Answer 38

1. Human Resources (Personnel management) 2. Ethical requirements (independence) 3. Acceptance and continuance of client relationships and specific engagements 4. LEadership responsibilities for quality within the firm (tone at the top) 5. Monitoring 6. Engagement Performance

Question 39

1.10 What does quality control 10 require?

Answer 39

QC1- Requires CPA firms to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partner issue reports that are appropriate in the circumstances. Note these are explicit to their accounting and audit practice.

Question 40

1.10 If a firm does not develop quality control procedures for the "acceptance and continuance of client relationships and specific engagement what could happen as a result?

Answer 40

QC - Procedures regarding acceptance and continuance when it comes to an audit client should be outlined in detail and should help avoid association with clients whose management lacks integrity.

Question 41

QC - Engagement Performance means?

Answer 41

The CPA firm should establish policies and procedures to ensure that it meets applicable professional standards in the performance of its engagements.