E-AUD Flashcards
(247 cards)
1
Q
The primary role of the auditor:
A
To provide an impartial assessment of the reliability of management’s financial statements.
2
Q
PCAOB Still uses 10 Generally Acceptable Auditing Standards (GAAS)
A
AICPA replaced 10 GAAS standards with 7 Principles. The principles are not requirement and have NO autoritative status (intended to be helpful as a framework)
3
Q
PCAOB Still uses 10 Generally Acceptable Auditing Standards (GAAS): TID-PIE-GCDO
A
General: personal - relate to qualities of an auditor 1 Training 2 Independence 3 Due Care Fieldwork Standards: evidence-gathering activities 1 Planning and Supervision 2 Internal Control 3 Evidence Reporting Standards: language required in audit report 1 GAAP 2 Consistency 3 Disclosure 4 Opinion
4
Q
PCAOB Still uses 10 Generally Acceptable Auditing Standards (GAAS): General Standards TID
A
TID General: personal - relate to qualities of an auditor
1 Training- adequate technical training and proficiency
2 Independence-in mental attitude
3 Due Care-due professional care in performance of audit and preparation of the report
5
Q
PCAOB Still uses 10 Generally Acceptable Auditing Standards (GAAS): Fieldwork Standards PIE
A
PIE Fieldwork Standards: evidence-gathering activities
1 Planning and Supervision-adequately plan, properly supervise
2 Internal Control-sufficient understanding of the entity, its environment, and internal controls
3 Evidence-sufficient appropriate evidence to afford a reasonable basis for an opinion
6
Q
PCAOB Still uses 10 Generally Acceptable Auditing Standards (GAAS): Reporting Standards GCDO
A
GCDO Reporting Standards: language required in audit report
1 GAAP - must state explicitly whether the financial statements are presented in accordance with generally acceptable accounting principles
2 Consistency - must identify circumstances where principles were not consistently observed in the current period in relation to the preceding period
3 Disclosure - if informative disclosures not adequate, must state so in the report
4 Opinion - must express an regarding FS as a whole, OR state the an opinion cannot be expressed. If an overall opinion cannot be expressed, state the reasons why.
7
Q
AICPA replaced 10 GAAS standards with 7 Principles. The principles are not requirement and have NO authoritative status (intended to be helpful as a framework) 4 Primary themes:
A
PR-PR 1 Purpose/Premise 2 Responsibility 3 Performance 4 Reporting
8
Q
AICPA 7 Principles. 1 Purpose/Premise
A
Purpose/Premise - management and those charged with governance are responsible for:
1 Preparation and fair presentation of FS
2 Providing auditor with relevant information
9
Q
AICPA 7 Principles. 2 Responsibility
A
Responsibility –> previous General Standard: characteristics of the auditor
1 Appropriate competence and capabilities; comply with relevant ethical reqs; maintain professional skepticism and exercise professional judgement
10
Q
AICPA 7 Principles. 3 Performance
A
Performance –> previous Fieldwork Standard: evidence-gathering activities:
1 Obtain reasonable assurance that FS as a whole are free from material misstatements (either fraud or error)
2 Plan and properly supervise; determine apply appropriate materiality levels; identify and asses risk of material misstatements based on understanding of firms environment and internal controls; obtain sufficient appropriate evidence
3 Unable to obtain ABSOLUTE assurance that FC are free form material misstatements because of Inherent limitations: nature of financial reporting; nature of audit procedure; balance between benefit and cost (must complete audit in reasonable period of time)
11
Q
AICPA 7 Principles. 4 Reporting
A
Reporting:
1 Express, in for of a written report, an opinion in accordance w/auditor’s findings; OR state that an opinion cannot be expressed. The opinion states whether the FS are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
12
Q
The AICPA principle dealing with responsibilities includes the characteristics formerly associated with
A
the General Standards of GAAS.
13
Q
The 7 principles adopted by the AICPA (to provide a framework for understanding an audit) are organized around 4 main themes:
A
PR-PR purpose/premise; responsibilities; performance; and reporting.
14
Q
The AICPA principle dealing with performance includes those matters formerly associated with
A
the Fieldwork Standards of GAAS.
15
Q
The AICPA principle on reporting requires the auditor’s report to explicitly refer to “accounting principles generally accepted in the United States of America.” T/F
A
F Applicable financial reporting fremework
16
Q
AICPA professional standards identify 2 categories of professional requirements:
A
(1) unconditional requirements; and (2) presumptively mandatory requirements.
17
Q
Unconditional requirements” are identified in AICPA professional standards with the word “should. T/F
A
F
18
Q
A firm’s system of quality control need not apply to “compilation” engagements, since no assurance is given on such financial statements. T/F
A
F
19
Q
Statements on Quality Control Standards are issued by
A
the AICPA’s Auditing Standards Board.
20
Q
GAAS apply to each audit engagement individually, whereas the quality control standards apply to .
A
the collective portfolio of accounting and auditing services
21
Q
The auditor’s “substantive procedures” consist of
A
(1) tests of details and
(2) analytical procedures.
22
Q
“Tests of details” consist of
A
(1) tests of ending balances and
(2) tests of transactions.
23
Q
A test of control is not a substantive auditing procedure. T/F
A
T
24
Q
The “Auditor’s Responsibility” section of the auditor’s report consists of
A
3 separate paragraphs.
25
The auditor should identify the applicable financial reporting framework in
the opinion paragraph of the standard audit report.
26
A compilation conveys no assurance about the financial statements T/F
T
27
SSARSs apply when
the CPA has been engaged to review or compile the financial statements of a nonissuer.
28
SSAEs apply when
a CPA provides assurance on written representations or subject matter other than financial statements.
29
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding
(1) disagreements with management as to auditing procedures and accounting principles
(2) facts that might bear on the integrity of management (3) the predecessor's understanding as to the reasons for the change of auditors.
30
The predecessor auditor has a professional obligation to allow an entity's new auditor to review the predecessor's audit documentation T/F
F
31
The engagement letter would typically refer to: 7
```
1 the objective of the audit;
2 management's responsibilities for the financial statements, for internal control over financial reporting, and for compliance with laws and regulations;
3 availability of financial records;
4 representation letter;
5 auditor's responsibilities;
6 components of an audit; and
7 correction of misstatements.
```
32
Engagement letter
is the contract between the auditor and the client. It sets forth the nature of the engagement, timing, anticipated completion dates, and client assistance to be rendered.
33
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
1 the objective of the audit;
2 management's responsibilities with regard to the financial statements, internal control, compliance with laws and regulations, availability of records, and the management representation letter;
3 the auditor's responsibilities for GAAS and reportable conditions;
4 a description of an audit; and
5 management's responsibilities regarding correction of material misstatements and evaluation of immaterial adjustments.
34
The terms overall audit strategy and audit plan mean the same thing and can be used interchangeably T/F
F
35
The engagement partner need not personally participate in the planning activities of an audit engagement T/F
F
36
Performance materiality
Performance materiality is largely established to help provide assurance that several immaterial misstatements do not combine to a material undetected amount of misstatement; accordingly, it ordinarily is established at a level lower than that of materiality for the financial statements.
37
Relationship between control risk and detection risk is ordinarily
Inverse
38
Audit risk is
the risk that auditor expresses an inappropriate audit opinion when the financial statements are misstated, and it is a function of the risks of material misstatement and detection risk.
39
The acceptable level of detection risk decreases, the assurance provided from substantive tests should
increase.
40
The acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. To gain this increased assurance the auditors may:
(1) change the nature of substantive tests to more effective procedures (e.g., use independent parties outside the entity rather than those within the entity),
(2) change the timing of substantive tests (e.g., perform them at year-end rather than at an interim date), and
(3) change the extent of substantive tests (e.g., take a larger sample).
41
Detection risk is:
the risk that the auditor will not detect a material misstatement that exists in an assertion. Detection risk may be viewed in terms of two components
(1) the risk that analytical procedures and other relevant substantive tests would fail to detect misstatements equal to tolerable misstatement, and
(2) the allowable risk of incorrect acceptance for the substantive tests of details.
42
While assessing the risks of material misstatement auditors:
1 identify risks,
2 relate risk to what could go wrong,
3 consider the magnitude of risks and
4 Consider the likelihood that the risks could result in material misstatements
43
An objective of analytical procedures is
identification of unusual transactions and events, and amounts, ratios and trends that might indicate misstatements.
44
For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent for:
both the risk assessment and near completion of the audit, but not as a substantive procedure.
45
"Defalcation"
is another term for misstatements arising from misappropriation of assets, a major type of fraud.
46
What are two major types of fraud with which an audit is relevant.
Fraudulent financial reporting and
| misappropriation of assets
47
AU-C 240 indicates that overall responses to the risk of material misstatements due to fraud include:
(1) assigning personnel with particular skills relating to the area and considering the necessary extent of supervision to the audit,
(2) increasing the consideration of management's selection and application of accounting principles, and
(3) making audit procedures less predictable.
48
If specific information comes to an auditor's attention that implies noncompliance with laws that could result in a material, but indirect effect on the financial statements, the auditor should next
apply audit procedures specifically designed to determine whether an illegal act has occurred
49
When the auditor detects a company's illegal acts having a material effect on its financial statements, the auditor must first inform those charged with governance and then inform the applicable law enforcement authorities. T/F
F
50
An auditor may refer to a specialist when:
The report is being modified due to the specialist's findings.
51
The auditor should establish performance materiality at less OR higher than materiality for the financial statements as a whole to allow for the possibility of uncorrected and undetected misstatements?
Less
| performance materiality
52
Tolerable misstatement should be established at an amount that exceeds performance materiality?
NO Tolerable misstatement
53
All things being equal, increasing the sample sizes applicable to the auditor's substantive procedures will decrease control risk T/F
F
54
All things being equal, increasing the auditor's emphasis on substantive tests of details will increase the auditor's detection risk. T/F
F
55
When control risk is perceived as relatively high, the auditor should compensate by lowering the level of inherent risk T/F
F
56
The "risk of material misstatement" refers to the combined risk that the auditor's tests of details and substantive analytical procedures will fail to detect a material misstatement that exists T/F
F
57
The usefulness of analytical procedures depends primarily on:
1 the predictability of the relationship,
2 the precision of the expectation, and
3 the reliability of the underlying data used.
58
Substantive Audit Procedures:
Evidence-gathering procedures whose purpose is to detect material misstatements (substantiate=verify) verify FS elements
59
Substantive Audit Procedures: 2 types
1 Analytical Procedures: Evidence-gathering procedures that suggest reasonableness based on comparison to expectations of benchmarks (comparison, ratios)
2 Test of details: Evidence-gathering procedures of 2 types:
a) Test of ending balances (where the final bal is assessed by test individual cust. bal. that make up General Ledger AR control acct bal.)
b) Test of transactions (where the final bal is assessed by examining those DRs and CRs that make end bal. change from last audited statement)
60
Standard Unqulified Audit report: 3 sections; 9 sentences
A Introductory Paragraph - 3 sentences
B Scope Paragraph - 5 sentences
C Opinion Paragraph - 1 long sentence
61
Standard Unqulified Audit report: 3 sections; 9 sentences
A Introductory Paragraph - 3 sentences:
1. Identify the entity's FS
2. Identify the Mngmt's responsibilities
3. Identify the Auditor's responsibilities
B Scope Paragraph - 5 sentences:
1. Audit conducted in accordance to GAAS
2. Audit provides reasonable assurance
3. Audit examines evidence on test basis
4. Audit includes assessing acct. principles used and significant estimates made
5. Audit provides a reasonable basis for opinion
C Opinion Paragraph - 1 long sentence
1. Express an opinion that the FS are fairly stated in conformity with GAAP (or other applicable Acct. framework)
62
Auditor's report under AICPA's Clarified Standards: 4 sections (term unqualified replaced with unmodified)
1. (No label)identifies the nature of the engagement and FS involved - 1 sentence
2. Management's Responsibility for the FS - 1 sentence
3. Auditor's Responsibility - 3 separate paragraphs
4. Opinion - 1 sentence
63
Auditor's report under AICPA's Clarified Standards: 4 sections (term unqualified replaced with unmodified)
1. (No label)identifies the nature of the engagement and FS involved - 1 sentence
2. Management's Responsibility for the FS - 1 sentence
states the Mngmt is responsible for the fair presentation of the FS and the implementation of internal control
3. Auditor's Responsibility - 3 separate paragraphs
4. Opinion - 1 sentence: expresses the auditor's opinion (same wording as that previous AICPA standard)
64
Third section Auditor's Responsibility - 3 separate paragraphs
First - 3 sentences:
1. Responsibility to express an opinion
2. Conduct the audit in accordance with GAAS
3. Plan and perform the audit to provide reasonable assurance
Second- 5 sentences:
1. Perform procedures to obtain audit evidence about the amount and disclosures
2.The procedures depend on the auditor's judgement, including assessment of risk of material misstatements, whether due to fraud or error
3. In making those risk assessments, the auditor considers internal control
4. The auditor expresses no such opinion (on internal control, when not engaged to report on internal control in an integrated audit)
5. An audit includes evaluating the appropriateness of Acct. policies used and the reasonableness of significant Acct. estimates
Third- 1 sentences:
1. expressing the auditor's belief that the audit evidence is sufficient and appropriate to provide a basis for the opinion
65
According to AICPA professional standards, when material fraud is discovered, the auditor should withdraw from the engagement. T/F
F
66
To obtain information needed to identify the risks of material fraud, the auditor must perform tests of controls to evaluate the operating effectiveness of relevant internal controls. T/F
F
67
When a specialist is engaged to assist the auditor with technical measurement or valuation issues, the auditor should modify the unmodified audit report to describe the specialist's participation T/F
F
68
AU-C 315 states that the auditor should obtain sufficient knowledge of the information (including accounting) system to:
understand the financial reporting process used to prepare the entity's financial statements, including significant accounting estimates and disclosures. It also states that this knowledge is obtained to help the auditor to understand (1) the entity's classes of transactions, (2) how transactions are initiated, (3) the accounting records and support, and (4) the accounting processing involved from initiation of a transaction to its inclusion in the financial statements
69
An auditor may document his/her understanding of the structure and his/her conclusions about the design of that structure in the form of:
```
1 answers to a questionnaire,
2 narrative memorandums,
3 flowcharts,
4 decision tables,
or any other form that the auditor considers appropriate in the circumstances.
```
70
walk-through
A procedure that involves tracing a transaction from its origination through the company's information systems until it is reflected in the company's financial report
71
Tests of controls (for nonpublic company - nonissuer) are only required when:
the auditor relies on the controls or
| substantive tests alone are not sufficient to audit particular assertions.
72
In a highly automated information processing system tests of control May be required in some circumstances. Why?
In some such circumstances substantive tests alone will not be sufficient to restrict detection risk to an acceptable level.
73
In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the
Operating effectiveness
of controls Design of
controls
No Yes
In obtaining an understanding of internal control, the auditor should perform procedures to provide sufficient knowledge of the design of the relevant controls and whether they have been implemented. Information on operating effectiveness need not be obtained unless control risk is to be assessed at a level below the maximum.
74
Tests of controls will be performed when:
they are expected to result in a cost effective reduction in planned substantive tests.
75
Control risk should be assessed in terms of
AU-C 315 requires that control risk be assessed in terms of financial statement assertions.
76
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:
Auditors test controls to provide evidence for their assessment of control risk through:
1 inquiries of appropriate personnel,
2 inspection of documents and records,
3 observation of the application of controls, and
4 reperformance of the application of the policy or procedure.
77
Which of the following is least likely to be considered a risk assessment procedure?
A. Analytical procedures.
B. Confirmation of ending accounts receivable.
C. Inspection of documents.
D. Observation of the performance of certain accounting procedures.
B Confirmation is a substantive test, rather than a risk assessment procedure.
78
An auditor may compensate for a weakness in internal control by increasing the
A. Level of detection risk.
B. Extent of tests of controls.
C. Preliminary judgment about audit risk.
D. Extent of analytical procedures.
D Increasing analytical procedures decreases detection risk in a manner which may counterbalance the condition in internal control. In effect, the weakness in internal control is compensated for by increased substantive testing. See the outline of AU-C 200 for the relationships among audit risk and its component risks—inherent risk, control risk, and detection risk.
79
A control deficiency is a condition in which:
the operation of a control does not allow management, or employees, in the normal course of performing their functions to prevent or detect misstatements on a timely basis—it does not explicitly consider likelihood of loss.
80
A compensating control is:
a control that lessens the severity of a deficiency (AU-C 265).
81
A material weakness is determined by:
whether there is more than a remote likelihood of a material loss occurring due to the control deficiency; the actual loss identified need not be material.
82
Which of the following is an accurate statement about internal control weaknesses?
A. Material weaknesses are also control deficiencies.
All material weaknesses are control deficiencies. BUT
Significant deficiencies are NOT also material weaknesses.
Control deficiencies are NOT also material weaknesses.
83
A control deficiency that is more than a significant deficiency is most likely to result in what form of audit opinion relating to internal control?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.
A) A control deficiency that is more than a significant deficiency is a material weakness, and because a material weakness leads to an adverse opinion on internal control.
84
AU-C 610 requires that judgments must always be those of the independent auditor for:
1 Assessments of inherent risk
2 Assessments of control risk
3 judgments about the materiality of misstatements,
4 the sufficiency of tests performed,
5 the valuation of significant accounting estimates, and
6 other matters affecting the auditor's report
85
Proper segregation of functional responsibilities calls for separation of the functions of
Authorization, recording, and custody.
86
An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting
A. Opening and closing inventory balances.
B. Cash receipts and accounts receivable.
C. Shipping and receiving activities.
D. Cutoffs of sales and purchases.
B. Cash receipts and accounts receivable.
An auditor may analyze the completeness of sales using cash receipts and accounts receivable (for example, an auditor may add year-end receivables to cash receipts and subtract beginning receivables to obtain an estimate of sales).
87
The completeness assertion deals with:.
whether all transactions have been included in the proper period.
88
An auditor usually examines receiving reports to support entries in the
A. Voucher register and sales returns journal.
B. Sales journal and sales returns journal.
C. Voucher register and sales journal.
D. Check register and sales journal.
A. Voucher register and sales returns journal.
Receiving reports will be prepared when
1 goods are received through purchase (as recorded in the voucher register) and when
2 goods are received through sales returns (as recorded in the sales returns journal).
89
These custody functions should not be performed by the payroll department which is a recordkeeping function. Under proper internal control recordkeeping, custody, and authorization of transactions should be segregated.
These custody functions should not be performed by the payroll department which is a recordkeeping function. Under proper internal control recordkeeping, custody, and authorization of transactions should be segregated.
90
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an
A. Understatement of revenues, receivables, and inventory.
B. Overstatement of revenues and receivables, and an understatement of inventory.
C. Understatement of revenues and receivables, and an overstatement of inventory.
D. Overstatement of revenues, receivables, and inventory.
C. Understatement of revenues and receivables, Items shipped without invoicing will result in a situation in which the accounting department is unaware of the sale. Therefore, debits to accounts receivable and credits to sales will not be recorded, resulting in an understatement of both revenues and receivables. Similarly, because accounting is unaware of the sale, no entry to reduce inventory will be made, resulting in an overstatement of inventory.
91
Substantive procedures are defined as:
tests of transactions,
direct tests of financial balances, or
analytical procedures.
92
To determine whether transactions have been recorded the auditor will test from:
the original source documents to the recorded entries.
93
In creating lead schedules for an audit engagement, a CPA often uses automated workpaper software. What client information is needed to begin this process?
Lead schedules include information such as account numbers, prior year account balances, and current year unadjusted information.
94
AU-C 230 states that the degree of documentation for a particular audit area should be affected by:
(1) the risk of material misstatement,
(2) extent of judgment,
(3) nature of the auditing procedures,
(4) significance of the evidence obtained,
(5) nature and extent of the exceptions identified, and
(6) the need to document a conclusion that is not obvious from the documentation of the work.
95
An advantage of preparing flow charts of transaction cycles relative to using internal control questionnaires is that
the flow charts are tailored to client-specific circumstances
96
A disadvantage of preparing written memoranda relative to using flow charts to document the auditor's understanding of internal control is that such memoranda may be more difficult for supervisors to review. T/F
F
97
Detection risk is effectively set by the auditor when
decisions about the nature, timing, and extent of substantive audit procedures are made.
98
3 objectives in the definition of internal control
1. reliability of financial reporting,
2. the effectiveness and efficiency of operations, and
3. the compliance with applicable laws and regulations
99
The auditor primarily obtains an understanding of the entity and its environment, including internal control, by
performing "risk assessment procedures."
100
The control environment sets the tone of an organization, influencing the control consciousness of its people. It includes the following factors:
1. integrity and ethical values,
2. commitment to competence,
3. board of directors or audit committee participation, 4.
4. management's philosophy and operating style,
5. organizational structure,
6. assignment of authority and responsibility, and
7. human resource policies and practices
101
The purpose of performing "tests of controls" is to
evaluate the operating effectiveness of the entity's internal controls. NOT to evaluate the adequacy of the design of the entity's internal controls
102
The auditor's written communication on internal control deficiencies identified in an audit should include a
disclaimer of opinion on the effectiveness of internal control over financial reporting.
103
The auditor's written communication about significant deficiencies and material weaknesses identified in an audit is required to include a paragraph describing the "inherent limitations" of internal control over financial reporting. T/F
F
104
When management issues a written response along with the auditor's communication on internal control matters identified in the audit to specify corrective actions taken by management, the auditor should include
a disclaimer of opinion on management's response
105
In the definition of "material weakness," the degree of likelihood that is used is
"reasonable possibility.
106
When no material weaknesses are identified by the auditor, the auditor is allowed to include a statement in the auditor's communication related to internal control that no material weaknesses were found T/F
T
107
When no significant deficiencies are identified by the auditor, it is appropriate to include a statement in the auditor's communication related to internal control that no significant deficiencies were found. T/F
F
108
According to AICPA standards, the auditor's written communication on internal control matters identified in an audit is best made by
the auditor's "report release date," although the communication may be issued as late as 60 days after the report release date
109
The auditor's written communication about significant deficiencies and material weaknesses identified in an audit is required to include a paragraph describing the "inherent limitations" of internal control over financial reporting. T/F
F
110
The auditor is required to apply analytical procedures as a substantive procedure during the fieldwork of an audit engagement. F
The auditor is required to apply analytical procedures in planning the audit engagement. T
111
The concepts of inherent risk, control risk, and detection risk, associated with the "audit risk model," apply to the financial statements taken as a whole and to individual account balances or classes of transactions T/F
F
The concept of audit risk applies to the financial statements taken as a whole and to individual account balances or classes of transactions. T
112
AICPA professional standards currently identify 3 categories of "assertions" relevant to the audit:
(1) assertions about classes of transactions and events; (2) assertions about account balances at the period end; (3) assertions about presentation and disclosure
113
There are 4 assertions applicable to account balances at the period end:
(1) existence;
(2) completeness;
(3) rights or obligations; and
(4) valuation and allocation
114
According to current AICPA professional standards, there are 3 categories of audit procedures that constitute the basis for the auditor's conclusions:
(1) risk assessment procedures;
(2) tests of controls; and
(3) substantive procedures
115
To evaluate the reasonableness of management's accounting estimates, the auditor is required to develop an independent expectation to compare to management's estimate T/F
F
116
In evaluating management's accounting estimates, the auditor primarily performs
inquiry and review procedures.
117
GAAP requires fair value measurements to be based on published price quotations in an active market T/F
F
118
AICPA professional standards identify "......" as the best indicator of fair value
"published price quotations in an active market"
119
Attorneys have a professional obligation to directly inform the auditors about any omissions of UNasserted claims (that are probable of assertion with at least a reasonable possibility of an unfavorable outcome) from the listing contained in the client's letter requesting information from the attorney. F
Attorneys have a professional obligation to directly inform the auditors about any omissions of Asserted claims from the listing contained in the client's letter requesting information from the attorney. T
120
The primary purpose of the management representations letter is to
document senior management's verbal responses to the auditor's inquiries about important matters throughout the fieldwork.
121
When dual dating is used, auditor responsibility for events subsequent to the completion of fieldwork is
limited to the specific event referred to in the notes to the financial statement. Note, however, that if the auditor chooses to date the report as of the date of the subsequent event, his/her responsibility for other subsequent events extends to the date of the audit report.
122
Substantial doubt about the entity's ability to continue as a going concern leads to
either an unmodified report with an emphasis-of-matter paragraph or a disclaimer of opinion.
123
In testing the existence assertion for an asset, an auditor ordinarily works from the
Accounting records to the supporting evidence
124
When related party transactions are identified for an audit client, the auditor should determine whether the terms and conditions of those transactions are the same as those of an arm's-length transaction. T/F
F
125
If an auditor has decided to use the original report date when reissuing an audit report, the auditor is still responsible for reviewing the entity's records, transactions, and events after that original report date T/F
F
126
When a material subsequent event requires only financial statement disclosure, the auditor may choose to date the entire auditor's report as of the later date at which that disclosure was evaluated T/F
T
127
When the entity's financial statements are properly adjusted after completion of fieldwork for a material subsequent event without providing any additional disclosure about the event, the auditor's report must be "dual dated" with respect to the subsequent event T/F
F
128
Material subsequent events require adjustment of the financial statements as of the entity's balance sheet date T/F
F
129
Suppose that subsequent to the issuance of the audit report, the auditor discovers that a procedure considered necessary under the circumstances was omitted, and that when the procedure was then performed, the results were in conflict with the unqualified opinion previously expressed. The auditor should
initially request the client's assistance in recovering the erroneous reports before contacting financial statement users or regulators
130
AICPA auditing standards require auditors to perform specific audit procedures to search for indications of an entity's financial difficulties related to going concern issues T/F
F
131
When the auditor has substantial doubt about an entity's ability to continue as a going concern, but the entity's financial statements adequately disclose the relevant circumstances, the auditor should issue
an unmodified audit report with an emphasis-of-matter paragraph after the opinion paragraph to draw the readers' attention to these going concern issues
132
The primary purpose of requesting a bank cutoff statement is
to test the items on a client's bank reconciliation supporting the recorded cash balance.
133
AU-C 505 states that negative confirmations may be used when
(1) the combined assessed level of inherent and control risk is low,
(2) a large number of small balances is involved, and
(3) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration.
134
An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to
Dividend record books produced by investment advisory services.
135
Sampling risk
arises from the possibility that an auditor's conclusions based upon a sample would differ from the conclusions which would be drawn from examining the entire population (i.e., the risk that the sample examined is not representative of the population).
136
What is the primary objective of using stratification as a sampling method in auditing?
To decrease the effect of variance in the total population. Stratified sampling is a technique of breaking the population down into subpopulations and applying different sample selection methods to the subpopulations. Stratified sampling is used to minimize the variance within the overall population.
137
The sample size will decrease when
the risk of assessing control risk too low is increased, the tolerable rate is increased, and the expected population deviation rate is decreased (Audit and Accounting Guide, Audit Sampling).
138
The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of 5%. In the review of client invoices the auditor should use
Attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence (Audit Sampling Guide)
139
When a decision is made not to make reference to the component auditor—that is, to take responsibility for that auditor's work—the group auditor should
perform additional procedures dependent upon the significance of the component.
140
In a comfort letter auditors provide an opinion as to
whether the audited financial statements comply in form with the accounting requirements of the SEC.
141
A comfort letter (also known as letter to an underwriter) is
sent by the independent auditor to the underwriter.
142
A typical objective of an operational audit is to determine whether an entity's
Specific operating units are functioning efficiently and effectively
143
Audits of recipients of federal financial assistance include reports on
(1) the financial statements, and (2) a separate or combined report on internal control and on compliance with laws and regulations. AU-C 806 provides requirements related to auditing entities that have received governmental financial assistance. In addition, guidance is provided by Government Auditing Standards (GAS), also referred to as the "Yellow Book," published by the Comptroller General of the United States.
144
In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is
Determined separately for each major federal financial assistance program.
145
Operational audits deal primarily with evaluating the efficiency and effectiveness with which operations function, often with the intention of
making improvements to accomplish the goals of management
146
A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include
The General Accounting Office's "Yellow Book" suggests that in addition to financial statements, such an audit may include consideration of (1) program results, (2) compliance with laws and regulations, and (3) economy and efficiency.
147
When performing an audit of a city that is subject to the requirements of the Uniform Single Audit Act of 1984, an auditor should adhere to
General Accounting Office Government Auditing Standards
148
Statements on Standards for Accounting and Review Services (SSARS)establish standards and procedures for
The Statements apply when a CPA either compiles or reviews the financial statements of a nonissuer.
149
In a compilation an accountant obtains what type of assurance,
In a compilation an accountant obtains NO assurance, not limited assurance; limited assurance is related to reviews.
150
Which nquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer's financial statements?
An accountant will make inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions, and accumulating information for disclosure in the financial statements.
151
Neither a compilation nor a review contemplates obtaining an understanding of internal control. T/F
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152
conditions required for an accountant to submit a written personal financial plan containing unaudited financial statements to a client without complying with the requirements of Statements on Standards of Accounting and Review Services, is that the
SSARS allow such an exception when the plan (1) is to be used to assist the client and the client's advisors in developing financial goals and objectives, (2) will not be used to obtain credit, and (3) when nothing comes to the accountant's attention that would lead him/her to believe that the statements will be used for credit or for any other purposes.
153
body designated to promulgate attestation standards?
Only the Auditing Standards Board, the Accounting and Review Services Committee, and the Management Consulting Services Executive Committee have been authorized to promulgate attestation standards.
154
AT 301 states that an accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that
(1) the specified parties involved have participated in establishing the nature and scope of the engagement and take responsibility for the adequacy of the procedures to be performed, (2) use of the report is to be restricted to specified parties involved, and (3) the prospective financial statements include a summary of significant assumptions.
155
The objective of an attestation engagement is
to form an opinion on the effectiveness of internal control.
156
the definition of a significant deficiency.
a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the financial reporting function
157
The WebTrust seal is designed to provide assurance on
website security, availability, processing integrity, online privacy and confidentiality.
158
The PCAOB has no responsibility for
promulgating or adopting accounting standards
159
For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is significant if there is more than a
Remote likelihood that it could contain material misstatements. (Standard 5 requires only more than a remote likelihood of material misstatement.)
160
A walk-through involves literally tracing a transaction from its origination through the company's information systems until it is reflected in the financial reports. A walk-through provides evidence to
(1) confirm the auditor's understanding of the flow of transactions and the design of controls, (2) evaluate the effectiveness of the design of controls, and (3) to confirm whether controls have been implemented.
161
What body establishes international auditing standards?
The International Auditing and Assurance Standards Board (AASB)of the International Federation of Accountants (IFA) establishes international auditing standards.
162
Independence standards of the GAO for audits in accordance with generally accepted government auditing standards describe three types of impairments of independence.
1. Personal.
2. Organizational.
3. External.
163
When no response is received for an individual customer's account selected for a negative confirmation request, alternate procedures should be performed T/F
F
164
The sales "cutoff" procedures primarily consist of
examining selected sales invoices and shipping documents a few days before and after year-end for agreement to verify that the transactions were recorded in the proper period
165
Kiting involves
an overstatement of the cash balance at year-end in connection with a transfer between bank accounts that is accounted for erroneously
166
When no response is received for a positive confirmation request of a customer's account receivable, the preferred alternate procedure is inspecting underlying documents. T/F
F
167
If the auditor is appointed near the end of the fiscal year for a first year audit, the auditor will most likely disclaim an opinion on everything but the balance sheet T/F
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168
In addition to performing test counts and price tests for inventory, the auditor should
test these extensions (quantify times cost),
verify the total dollar extensions of the final detailed inventory listing, and
trace the total dollar amount to the adjusted general ledger account for inventory
169
For a derivative designated a "cash flow hedge," changes in fair value for the "effective" portion of the hedge should be recognized in
"effective" portion -->other comprehensive income.
| "ineffective" portion --> income statement as a gain or loss
170
For a derivative that is designated a "fair value hedge," changes in the derivative's market value should be included on
the entity's income statement as a gain or loss
171
When referring to derivatives, the "notional amount" is
the specific number of units of measurement identified in the financial instrument.
172
For a continuing audit engagement, an audit approach using tests of ending balances (verifying individual assets associated with a sample of fixed asset tags) is usually not efficient. The year-end balance is, therefore, verified by
examining the documents underlying the relatively few transactions causing the balance to change from the prior year.
173
The "search for unrecorded liabilities" consists primarily of
reviewing cash disbursements subsequent to year-end and vouching selected transactions to their underlying documents to determine if the economic event should have been recognized as a liability at year-end.
174
The "search for unrecorded liabilities" is directed at the ......................... assertion.
completeness
175
Sampling 2 ways:
Attributes Sampling
| Variables Sampling
176
Attributes Sampling:
Sampling for purpose of deciding whether internal controls are working as designed (tests of controls)
-evaluating the effectiveness of internal control procedures-
177
Variables Sampling:
Sampling for purpose of deciding whether account balances are fairly stated
178
In sampling applications, the so-called "Type II error" (False acceptance)
the risk of over-relying on internal control (assessing control risk too low)-->Attributes sampling (tests of controls), or
the risk of incorrectly accepting the client's book balance --> Variables Sampling (substantive test of details)
relates to the "effectiveness" of the auditor's procedures,
179
"Type I error" relates to
the "efficiency" of the auditor's procedures.
180
"Type I error" (False rejection)
the risk of under-relying on internal control (assessing control risk too high)-->Attributes sampling (tests of controls), or
the risk of incorrectly rejecting the client's book balance --> Variables Sampling (substantive test of details)
relates to the "efficiency" of the auditor's procedures.
181
By definition, audit risk consists of:
| whereas sampling risk consists of:
Type 2 error,
| both the Type 1 error and the Type 2 error
182
For an attributes sampling plan, the auditor ordinarily determines the sample size using a table that considers
the acceptable risk of assessing control risk too low (Beta- the risk of false acceptance)
, the tolerable rate, and
the expected population error rate
183
The benefit of "stratifying" a population into groups of relatively similar sub-populations for a variables sampling application is
to reduce the effects of the overall variability of the population and achieve the sampling parameters with a smaller sample size.
184
In PPS sampling, sample size is calculated as:
```
Book value x "Reliability factor"/
Tolerable misstatement (net)
```
185
If management refuses to make changes in other information containing material inconsistencies prior to the report release date, the auditor may
include an other-matter paragraph in the auditor's report to address the material inconsistencies.
186
Because a designated accounting standard setter has established authoritative guidelines for the presentation of required supplementary information, the auditor is required to obtain sufficient appropriate audit evidence as a basis for reporting whether that required supplementary information is fairly stated T/F
F
187
The objective of a review of an entity's interim financial information is to
provide the auditor with a basis for communicating an awareness of any material modifications that should be made to conform with the applicable financial reporting framework.
188
Suppose that the auditor of a nonissuer's financial statements has been engaged to review the interim financial information of that entity. The report should express an opinion on the fairness of the interim information in relationship to the audited financial statements T/F
F
189
When financial statements prepared in accordance with a regulatory basis are intended for general use, the auditor's report should include
(1) an opinion pointing out that the financial statements are not presented in accordance with GAAP; and
(2) an opinion on whether the financial statements are presented in accordance with the regulatory basis.
190
When an auditor has been engaged to audit an entity's complete set of financial statements and to audit selected individual elements of the financial statements, the auditor may combine those engagements and report on the complete set of financial statements and the selected elements in a single, combined audit report. T/F
F
191
When engaged to report on an entity's compliance that is related to its audited financial statements (such as compliance with debt covenants), the auditor should express
negative assurance, rather than positive assurance, as to compliance with the identified requirements.
192
The user auditor may obtain an understanding of internal control relevant to the user entity's financial statements, in part, by
reading the service auditor's type 1 or type 2 report on internal controls at the service organization
193
When reporting on the adequacy of the "design" of internal control (i.e., the controls "placed in operation") as described by the service organization, the service auditor must perform tests of controls TG/F
F
194
The service auditor must be independent of the service organization and all applicable user entities T/F
F
195
Type 2 reports (on the operating effectiveness of internal control at the service organization) contain an opinion on
the suitability of controls placed in operation (the design) and
an opinion on the operating effectiveness of controls that were tested
196
When reporting on the adequacy of the controls placed in operation (a type 1 report), the service auditor should disclaim an opinion on the operating effectiveness of those controls T/F
T
197
Among other things, the comfort letter comments on previously audited financial statements referred to in the registration with positive assurance that those financial statements comply with the form required by the SEC T/F
T
198
Under Government Auditing Standards, the auditor is required to report suspected violations that could result in civil action T/F
F Government Auditing Standards require the auditor to report known instances of illegal acts that could result in criminal prosecution.
199
Government Auditing Standards are issued under the authority of the Governmental Accounting Standards Board (GASB) T/F
F
200
The Single Audit Act requires a single, coordinated audit of the aggregate federal financial assistance for an entity having expenditures of
at least $750,000 of federal assistance in its fiscal year
201
When issuing a combined report on an entity's compliance with applicable compliance requirements and on the entity's internal control over compliance under AICPA professional standards, the auditor
may express an opinion as to compliance, but should express a disclaimer of opinion with respect to internal control over compliance
202
Under AICPA professional standards, the auditor ordinarily does not need to perform tests of details, since analytical procedures are adequate to verify compliance. T/F
F
203
The accountant must be independent to accept an engagement to prepare an entity's financial statements in accordance with the SSARSs T/F
F
204
The SSARSs make a distinction between "assisting with preparing" financial statements (such as performing bookkeeping services) to which the SSARSs do not apply and "preparing" financial statements to which the SSARSs do apply T/F
T
205
When engaged to prepare an entity's financial statements in accordance with the SSARSs, the accountant is required to issue a disclaimer of opinion on the financial statements T/F
F
206
In a review engagement in accordance with the SSARSs, the accountant's primary procedures consist of
applying analytical procedures and making inquiries of management and other entity personnel
207
An accountant's review report should include a disclaimer of opinion in addition to negative assurance T/F
T
208
When supplemental information accompanies an entity's financial statements that have been subject to a compilation engagement, the accountant should indicate any responsibility taken for the supplemental information in
an other-matter paragraph in the compilation report (or in a separate report on that supplemental information)
209
Whenever a practitioner conducts an attestation engagement, compliance with
Statements on Standards for Attestation Engagements (SSAEs) is required by Rule 202, "Compliance With Standards," of the AICPA Code of Professional Conduct
210
The SSAE hierarchy consists of
(1) attestation standards,
(2) attestation interpretations, and
(3) other attestation publications
211
The attestation report for a review engagement includes................assurance and .................. opinion
negative assurance and a
| disclaimer of opinion
212
When engaged to apply agreed-upon procedures on a financial statement element, the CPA should present the report in the form of
procedures and findings
213
AICPA standards classify prospective (forward-looking) financial information as either of two types:
(1) forecasts and
| (2) projections
214
An examination report for an attestation engagement associated with prospective financial statements should include
an opinion as to whether the presentation conforms to AICPA guidelines and
whether the underlying assumptions provide a reasonable basis for the forecast or projection
215
A review report on pro forma financial information includes a
disclaimer of opinion in
| addition to negative assurance
216
An examination report on pro forma financial information includes a
positive expression of opinion as to the reasonableness of management's underlying assumptions and the appropriateness of the adjustments to the historical financial statements based on the pro forma adjustments reflecting those assumptions.
217
The same AICPA attestation standards govern engagements involving written assertions about compliance with laws, regulations, or contractual requirements and
engagements involving written assertions about the effectiveness of internal control over compliance with laws, regulations, or contractual requirements.
218
An integrated audit involves expressing opinions both on
the effectiveness of an entity's internal control over financial reporting and on the fairness of the entity's financial statements
219
The discovery of a material weakness related to an examination of internal control over financial reporting under AICPA standards will require
a modification of the accountant's report and
| the issuance of an adverse opinion on internal control.
220
An examination of internal control over financial reporting under AICPA standards can be either of two types:
(1) on design effectiveness; or
| (2) on operating effectiveness.
221
The 4 assertions embodied in the MD&A are:
Occurrence,
Consistency with the Financials,
Completeness of the Explanation, and
Presentation and Disclosure.
222
The examination of MD&A results in what type of assurance?
positive assurance
223
Assurance may address both
the relevance and the reliability of information
224
The term "Assurance Services" is defined as
the "independent professional services that improve the quality or context of information for decision makers
225
PCAOB standards require a public company to report whether a previously reported material weakness continues to exist. T/F
F
226
In defining a "material weakness," PCAOB auditing standards emphasize
"reasonable possibility" as the likelihood that a material misstatement of the financial statements will not be prevented or detected on a timely basis
227
Auditing Standard No. 6 requires the auditor to add an explanatory paragraph for two specific types of matters, if material, related to the consistency of a company's financial statements:
(1) a change in accounting principle; and
| (2) a restatement to correct a misstatement in previously issued financial statements
228
Under PCAOB auditing standards, the correction of a material misstatement in previously issued financial statements should be identified by
an explanatory paragraph added to the auditor's report
229
The fundamental objective of the engagement quality reviewer is to
evaluate the significant judgments made by the engagement team and the conclusions they reached in connection with an engagement report applicable to an audit or the review of interim financial information
230
One of the major differences between the PCAOB risk-assessment standards and those of the AICPA is that the PCAOB standards apply to integrated audits of an issuer's financial statements and internal control over financial reporting, whereas
the AICPA standards apply to audits of a nonissuer's financial statements specifically
231
One of the major differences between the PCAOB risk-assessment standards and those of the AICPA is that the PCAOB standards identify 5 financial statement assertions, whereas
the AICPA standards focus on 13 assertions across 3 categories, which is consistent with the approach used in the international standards on auditing.
232
PCAOB Auditing Standard No. 16 identifies the following four objectives:
(1) communicate to the audit committee the auditor's responsibilities and establish an understanding of the terms of the engagement;
(2) obtain information from the audit committee relevant to the audit;
(3) communicate to the audit committee information about the strategy and timing of the audit; and
(4) provide the audit committee with timely observations about significant audit matters. These objectives do not include enhancing communications between the audit committee and the entity's internal audit function.
233
If management makes an assertion that transactions with related parties were conducted on terms equivalent to those prevailing in arm's-length transactions, the auditor's report may include
a qualified or adverse opinion if evidence cannot be obtained to support management's assertion
234
AS No. 18 requires the auditor to obtain an understanding of the company's process for the following:
(1) identifying related parties and transactions with related parties;
(2) authorizing and approving transactions with related parties; and
(3) accounting for and disclosing relationships and transactions with related parties in the financial statements. There is no reason to expect that related-party transactions will have terms substantially equivalent to those associated with transactions with unrelated parties.
235
International Standards on Auditing applicable to related party issues are generally viewed as more extensive than PCAOB auditing standards. T/F
T
236
International auditing standards permit the auditor to indicate a division of responsibility in the primary auditor's report by referencing the participation of other auditors T/F
F
237
One of the major differences between U.S. and international auditing standards is the U.S. concept of an integrated audit (and the related notion of reporting on internal control over financial reporting), for which there is no similar international requirement or guidance T/F
T
238
IFAC's standard-setting board for ethical matters is the
"International Ethics Standards Board for Accountants."
239
The AICPA's conceptual framework is built around
Threats and Safeguards
240
An "acceptable level" is a level at which
a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's compliance with the rules is not compromised
241
Full disclosure and client consent will not remedy a true conflict of interest that endangers integrity and objectivity T/F
F
242
Members of a network firm have an obligation to search to determine whether other firms in their network might have relationships with the potential to give rise to a conflict of interest that might threaten integrity and objectivity. T/F
F
243
Members doing attest work may never act as advocates for their attest clients T/F
T
244
It is permissible to charge a contingent fee to prepare an amended tax return so long as the client is not an attest client as well. T/F
F
may receive a referral fee for sending a nonattest client to another professional for services so long as he discloses receipt of the fee to the client.
245
A covered member who owns shares in an undiversified mutual fund has ..... interest in the shares of companies held in the fund's portfolio.
an indirect
246
A covered member who owns less than 5% of the shares in a diversified mutual fund has ..... interest in the fund.
a direct
247
Member Fibble is a limited partner in a limited partnership that owns stock in ABC Co. Fibble's interest in ABC Co. is an indirect financial interest, unless Fibble participates in ABC's investment decisions or supervises them T/F
T
