Chapter 1: Auditing and Attestation - Engagement Acceptance and Understanding the Assignment

Question 1

CPA firms should establish policies and procedures for determining this in order to minimize the risk of being associated with a client whose management lacks integrity.

Answer 1

Acceptance of Client

Question 2

An attempt to quantify the effects of future events that cannot be known with certainty, based on assumptions and projections.

Answer 2

Accounting Estminates

Question 3

The principal laws and regulations used by management and those charged with governance in the preparation of the financial statements of an entity.

Answer 3

Applicable Financial Reporting Framework (AFRF)

Question 4

Was adopted to provide guidance and rules to all members in the operation of their professional responsibilities. Members include those in public practice, government, industry, and education jobs.

Answer 4

AICPA Code of Professional Conduct

Question 5

A set of audit procedures that examine the relationships between financial and nonfinancial data.

Answer 5

Analytical Procedures

Question 6

The measure of the quality of audit evidence, that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

Answer 6

Appropriate

Question 7

Declarations or a set of declarations about whether subject matter is based on or conforms to selected criteria (AT 101.08).

Answer 7

Assertions

Question 8

The practitioner’s satisfaction about the reliability of an assertion being made by one party for use by other parties.

Answer 8

Assurance

Question 9

To issue a written communication expressing a conclusion (opinion) on subject matter, or an assertion about the subject matter that is the responsibility of another party (AT 101.01).

Answer 9

Attest Engagement

Question 10

A set of standards that provides guidance and a broad framework for a variety of attest services performed by a certified public accountant.

Answer 10

Attestation Standards

Question 11

A periodic verification of assets, records, transactions, events, or conditions performed by a person independent of the custody or recordkeeping for the items verified.

Answer 11

Audit

Question 12

A body formed by a company’s board of directors to oversee audit operations and circumstances.

Answer 12

Audit Committee

Question 13

A statement about the correspondence between assertions by others (usually quantifiable information) and established criteria.

Answer 13

Audit Opinion

Question 14

A series of specific and specialized steps or actions auditors take to meet audit objectives.

Answer 14

Audit Procedure

Question 15

A written outline of work to be done during an audit.

Answer 15

Audit Program

Question 16

An individual who performs auditing procedures to determine the validity and fair presentation of financial information or to provide assurance to management on the effectiveness of the organization’s governance, risk management, and/or control processes.

Answer 16

Auditor

Question 17

A person (or firm) possessing knowledge in a particular field other than accounting or auditing.

Answer 17

Auditor’s Specialist

Question 18

Those bodies recognized as authoritative sources of accounting standards.

Answer 18

Authoritative Bodies

Question 19

A summary of assets, liabilities, and owner’s equity for a company as of a specific date.

Answer 19

Balance Sheet

Question 20

The amount of net cash that was generated by an entity during an accounting period. It is the difference between total cash inflows and total cash outflows.

Answer 20

Cash Flow

Question 21

A condition (or set of conditions) that develops from an event or a series of events, which may occur almost imperceptibly and may converge in random or unexpected ways to create situations that might otherwise not have occurred and might not have been anticipated.

Answer 21

Circumstance

Question 22

Designed to ensure that all transactions are recorded in the correct account, charged or credited to the correct customer (or vendor), applied to the correct product line, or classified as an intercompany sale (i.e., a review of a fixed asset listing to confirm that no maintenance and repair expenditures have been capitalized).

Answer 22

Classification

Question 23

The process of conveying ideas or messages from one person to another. In the case of electronic data processing (EDP), communication is the transfer of data from one device to another.

Answer 23

Communication

Question 24

Represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen.

Answer 24

Competence

Question 25

A service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.

Answer 25

Compilation

Question 26

Part of the group audit engagement partner’s firm in a different location, a network firm, or another firm.

Answer 26

Component Auditor

Question 27

Direct communication with external independent parties to prove that balances (e.g., cash balances, accounts receivable, accounts payable, notes payable) are correct.

Answer 27

Confirmation

Question 28

The use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.

Answer 28

Consistency

Question 29

An organization or individual that provides consulting services generally provides advice.

Answer 29

Consulting Services

Question 30

An event or condition that may occur in the future but that cannot currently be predicted.

Answer 30

Contingency

Question 31

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

Answer 31

Control Risk

Question 32

Evidence, other than the books of original entry (i.e., the accounting records), which allows the auditor to reach conclusions.

Answer 32

Corroborating Evidence

Question 33

An individual elected or appointed to the board of directors of a corporation.

Answer 33

Director

Question 34

An expression of no opinion. (AU-C 700.03)

Answer 34

Disclaimer of Opinion

Question 35

Indicating clearly in the audit report, in the introductory and opinion paragraphs, the portion of the audit covered by the other independent auditor(s).

Answer 35

Division of Responsibility

Question 36

In computing, the instructions for operators, descriptions of procedures, and other descriptive material about a program or a system. In systems analysis, the preparation and production of documents for system analysis, programming, and system operation. In auditing, the use of documentary evidence to support or substantiate a claim or opinion

Answer 36

Documentation

Question 37

A situation wherein the practitioner renders professional services.

Answer 37

Engagement

Question 38

A letter written by the CPA to the client that represents the contractual understanding between the CPA and the client of the work to be performed, signed by both the CPA and the client.

Answer 38

Engagement Letter

Question 39

The requirement of the auditor to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion on financial statements.

Answer 39

Evidence

Question 40

A method of providing information to external users, which is useful in making business and economic decisions.

Answer 40

Financial Reporting

Question 41

The principal means of communicating financial information to those users external to the entity.

Answer 41

Financial Statements

Question 42

A graphic depiction, using uniform symbols to show the control flow, primary actions, and interrelationships of a task or a set of tasks.

Answer 42

Flowchart

Question 43

It gives the entity's expected future position and results of operations based on expected conditions and expected courses of action.

Answer 43

Forecast

Question 44

The intentional misrepresentation or failure to disclose a material fact or facts that results in injury or loss to someone relying on it.

Answer 44

Fraud

Question 45

Basic accounting principles and standards and specific conventions, rules, and regulations that define accepted accounting practice at a particular time by incorporation of consensus and substantial authoritative support.

Answer 45

Generally Accepted Accounting Principles (GAAP)

Question 46

The Statements on Auditing Standards issued by the Auditing Standards Board (ASB), the senior committee of the AICPA designated to issue pronouncements on auditing matter for nonissuers.

Answer 46

Generally Accepted Auditing Standards (GAAS)

Question 47

The body authorized to promulgate standards of financial accounting and reporting for governmental units.

Answer 47

Government Accounting Standards Board (GASB)

Question 48

A business entity that is expected to continue in operation indefinitely.

Answer 48

Going Concern

Question 49

These are audit standards that must be followed for audits of federal organizations, programs, activities, functions, and funds received by contractors, nonprofit organizations, and other external organizations.

Answer 49

Government Auditing Standards

Question 50

To be free from conflicts of interest and bias, self-governing, impartial, not subject to control by others, not requiring or relying on something else, not contingent, and acting with integrity and objectivity (i.e., with judgment that is unimpaired and without bias or prejudice).

Answer 50

Independence

Question 51

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.

Answer 51

Inherent Risk

Question 52

The seeking of appropriate information from knowledgeable persons inside (both management and staff) or outside the entity (e.g., bankers, attorneys, vendors, customers, predecessor auditor) with the approval of management.

Answer 52

Inquiry

Question 53

An audit of internal control over financial reporting being integrated with the audit of financial statements.

Answer 53

Integrated Audit

Question 54

An unimpaired condition or firm adherence to a code of ethics or moral values.

Answer 54

Integrity

Question 55

Must include consideration of relevant systems, records, personnel, and physical properties, including those under the control of third parties.

Answer 55

Internal Audit Scope

Question 56

A process, effected by an entity's board of directors, management and other personnel, which is designed to provide reasonable assurance regarding the achievement of objectives in one or more categories: Effectiveness and efficiency of operations Reliability of financial information Compliance with applicable laws and regulations

Answer 56

Internal Control

Question 57

The comfort letter provides “negative assurance” to the underwriters that “nothing came to our attention which would indicate that the information does not meet the specified standard.”

Answer 57

Letter for Underwriters

Question 58

A statement that “there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.”

Answer 58

Limited Assurance

Question 59

a suit that is contested in court. It is a legal action

Answer 59

Litigation

Question 60

written representation from management which affirms (AU-C 580): the fair presentation of the financial statements and management's responsibility for them, the completeness of all information provided to the auditor and in the financial statements, representations relating to recognition, measurement, and disclosure (including the absence of knowledge of fraud or suspected fraud), and information concerning subsequent events.

Answer 60

Management Representation Letter

Question 61

an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity's financial report

Answer 61

Materiality

Question 62

an untrue statement that misrepresents the facts and which, by its magnitude or nature, influences the decision making of the user

Answer 62

Materially Misstated

Question 63

a reported amount that is over (overstated) or under (understated) the actual amount

Answer 63

Misstatement

Question 64

a written description of the internal control structure of the auditee

Answer 64

Narrative

Question 65

the type of audit procedure to be used, whether a class of transactions is tested by analytical procedures, tests of controls or substantive testing through confirmation, recalculation, examination of documents (tracing and vouching), reperformance, etc

Answer 65

Nature

Question 66

describes violations of laws or governmental regulations perpetrated by the entity or by the management or employees acting on behalf of the entity

Answer 66

Noncompliance with Laws and Regulations by Client

Question 67

all entities except for those defined as issuers

Answer 67

Nonissuer

Question 68

an accounting method used for nonprofit organizations that utilizes the fund structure

Answer 68

Nonprofit Accounting

Question 69

distinguished from a business entity by three characteristics: contribution of significant resources from providers who do not expect proportionate return, operating purposes other than to provide goods or services for profit, and absence of ownership interests like business enterprises.

Answer 69

Not-for-Profit

Question 70

remaining impartial in judgments in order to get more quality information

Answer 70

Objectivity

Question 71

It prescribes the specific policies, procedures, and guidelines to implement the Single Audit Act of 1984 and the Single Audit Act Amendments of 1996, 2003, 2007, and 2013.

Answer 71

OMB Circular A-133

Question 72

the computation of the net difference between the income earned and expenses incurred in operating a trade or business

Answer 72

Operating Income/Loss

Question 73

he physical count of inventory taken by the client at year-end (i.e., on the last day of the fiscal year) to obtain evidence regarding existence and completeness

Answer 73

Physical Inventory

Question 74

an auditor who was previously the auditor of an entity and who has resigned or been replaced by another auditor

Answer 74

Predecessor Auditor

Question 75

the auditor responsible for the greater portion of financial statements

Answer 75

Principal Auditor

Question 76

the professional conduct or skill expected of one rendering professional services

Answer 76

Professional Competence

Question 77

"the application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement."

Answer 77

Professional Judgment

Question 78

performed to determine if the projected objectives established by a legislative body for a particular program have been achieved

Answer 78

Program Audits

Question 79

consists of financial estimates of future events that may be a forecast (the entity's expected future position and results of operations based on expected conditions and expected courses of action) or a projection (based on hypothetical assumptions).

Answer 79

rospective Financial Information

Question 80

states that except for the effects of the matter to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow in accordance with accounting standards generally accepted in the United States or an applicable financial reporting framework

Answer 80

Qualified Opinion

Question 81

a CPA firm's system of specified standards that are required to be developed to assure that firm is in compliance with professional standards for the services it provides

Answer 81

Quality Control Standards

Question 82

the degree of assurance to convince a “reasonable man” within the cost-benefit constraint

Answer 82

Reasonable Assurance

Question 83

management, owners, family members of owners or management, affiliates, or any party which “can significantly influence the management or operating policies” such that the entity might be “prevented from fully pursuing its separate interests.”

Answer 83

Related Parties (Financial Statements)

Question 84

an engagement undertaken to achieve, through the performance of inquiry and analytical procedures, limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP or, if applicable, with a comprehensive basis of accounting other than generally accepted accounting principles

Answer 84

Review

Question 85

a systematic process of evaluating the potential risks that are involved in an audit or attestation engagement

Answer 85

Risk Assessment

Question 86

the combination of inherent risk (IR) and control risk (CR) for an entity

Answer 86

Risk of Material Misstatement (RMM)

Question 87

provide the detail and guidance needed to meet the 10 GAAS standards

Answer 87

Statements on Auditing Standards (SAS)

Question 88

a restriction on an audit that is caused by the client, issues beyond the control of the client, or other events that do not allow the auditor to complete all aspects of his or her audit procedures

Answer 88

Scope Limitation

Question 89

To achieve adequate internal control in a business enterprise, the primary functions of the business should be identified. The duties of these functions should be outlined and control procedures designed to achieve adequate internal control. In designing control procedures, the duties involved in accomplishing these functions should be separated as much as possible to attain control

Answer 89

Segregation (or Separation) of Duties

Question 90

deficiencies which are considered significant to the design and operation of the internal control structure should be reported to those charged with governance

Answer 90

Significant Deficiency

Question 91

requires state and local governments and not-for-profit organizations that expend total federal financial assistance equal to or in excess of $750,000 in a fiscal year to have an audit performed in accordance with the Act (as implemented by OMB Circular A-133)

Answer 91

Single Audit Act Amendment of 2013

Question 92

a person (or firm) possessing knowledge in a particular field other than accounting or auditing

Answer 92

Specialist

Question 93

standards concerning the accounting (compilation) and review services rendered in connection with unaudited financial statements or other unaudited financial information of an entity that is not required to file financial statements with a regulatory agency

Answer 93

Statements on Standards for Accounting and Review Services (SSARS)

Question 94

states that the financial statements present fairly, in all material respects, the entity's financial position, results of operations, and cash flows in accordance with accounting principles generally accepted in the United States of America

Answer 94

Standard Auditor's Report

Question 95

the owner of a share of the corporation's common or preferred stock

Answer 95

Stockholder

Question 96

an event occurring after the balance sheet date but prior to the issuance of the auditor's report, which has a material effect on the financial statements and therefore requires adjustment or disclosure in the statements. (AU-C 560)

Answer 96

Subsequent Event

Question 97

corporation controlled, directly or indirectly, by another (parent) corporation where the control is usually by ownership of a majority (greater than 50%) of the outstanding voting stock

Answer 97

Subsidiary

Question 98

tests of transaction details and account balances and analytical procedures performed to detect material misstatements in the account balances, transaction class, and disclosure components of the financial statements

Answer 98

Substantive Procedures

Question 99

an auditor who replaces the previous auditor

Answer 99

Successor Auditor

Question 100

the formal education and subsequent experience an auditor must have to perform an adequate audit

Answer 100

Technical Training and Proficiency

Question 101

provides evidence on a sample basis about the presence or absence of a control condition

Answer 101

Test of Controls

Question 102

the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity

Answer 102

Those Charged with Governance

Question 103

states that the financial statements are presented fairly in accordance with accounting principles generally accepted in the United States of America or an applicable financial reporting framework—the basic premise being that the auditor has tested the financials and they give an accurate representation of the company's condition

Answer 103

Unmodified Opinion

Question 104

document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached (AU-C 230)

Answer 104

Workpapers