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Flashcards in Deck 18 Deck (20):

Integrated audit

In addition to an opinion on the financial statements, auditors must also express an opinion on the effectiveness of a company's internal control over financial reporting


Top-down approach

- Used in selecting controls to test
- Auditor evaluates overall risks at the financial statement level, considered controls at the entity level, and then focuses accounts, disclosures, and assertions for which there is a reasonable possibility of material misstatement


The purpose of an examination of the effectiveness of an entity's internal control is to:

Express an opinion about whether the entity maintained, in all material respects, effective internal control as of point in time


Who selects the independent auditor and sets the audit fee?

The audit committee


Purpose of the management representation letter

Confirm management's oral evidence supplied during the engagement


The representation letter typically includes information in four categories:

Financial statements; completeness; recognition, measurement, and disclosure; and subsequent events


Materiality limits do not apply to:

- Client representations involving management fraud
- "We have no knowledge of fraud or suspected fraud involving management"


Point estimate calculation

= account balance/(1+overstatement error)


Control deficiencies can result from both:

Deficiencies in the DESIGN and OPERATION of an entity's controls


Matters that are required to be communicated to those charged with governance include:

1. Planned scope and timing of audit
2. Auditor's responsibility under GAAS
3. Client's consultations with other accountants
4. Auditor's use of a specialist
5. Uncorrected, nontrivial misstatements


Examples of positions that are audit sensitive (affect independence) include:

Cashier, internal auditor, accounting supervisor, purchasing agent, or inventory warehouse supervisor


SEC partner's rotation rules:

- Lead and concurring partner must rotate off the engagement after five years
- Other partners: after 7 years


Independence requirements extend to what family members?

- Spouse, dependent children, dependent relatives


Due professional care

Requires a member to plan and supervise adequately any professional activity for which he or she is responsible


Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?

A distinguishing mark of a profession is its acceptance of responsibility to the public.


Independence is impaired with an audit client if the auditor has:

- A direct financial interest regardless of materiality
- Material indirect financial interest


Independence is impaired if the CPA:

Is an employee of an attestation client or is able to make management decisions on behalf of the client


When are contingent fees permitted?

When they involve a legal proceeding or ruling


Municipal utility bond

Represents a direct financial interest


What tax service may be provided jointly with the audit of an issuer's financial statements without impairing independence?

Reviewing a proposed transaction and informing the client of the tax consequences