Final Audit Flashcards
1
Q
What are entity level controls?
A
- Entity level controls provide assurance that appropriate controls exist
- Entity level controls have a pervasive effect on the internal control system
- May pertain to multiple components of risk assessment and monitoring
2
Q
What are transaction level controls?
A
Controls over input data into information systems
3
Q
What is the auditor’s responsibility in regarding the information and communication of internal control?
A
- Understand how the transactions are started with the entity’s business process
- Understanding how transactions that were processed incorrectly are corrected.
4
Q
What is detective control?
A
- Detective control is used to determine if a fraud has occurred with respect to the financial statement assertions
- One example of detective control is surprise audits because the company would not have advanced notice that would enable them to conceal any fraud
5
Q
What does an auditor need to understand with regard to risk assessment of a company’s environment?
A
- The nature of the entity and its industry
- Objectives, strategies and related business risks that may cause a material misstatement in the financial statements
- The entity’s internal control
6
Q
Why would an auditor perform analytical procedures as risk assessment procedures?
A
- To enhance the auditor’s understanding of the client’s business
- Identify unusual transactions, events or amounts
7
Q
What should an auditor consider when assessing control risk?
A
- The auditor should consider evidence that was discovered in previous audits regarding the operational controls of procedures
- If the auditor determines that there is not enough evidence other than test of controls, then the auditor will stop at test of controls
8
Q
Is an emphasis of matter paragraph required in the auditor’s report?
A
- Non-Issuer: An emphasis of matter paragraph is required in order to emphasize a matter that is reported on the financial statement
- PCAOB: Not Required
9
Q
What are some types of audit evidence that is reliable, but not as reliable as external confirmations?
A
- Analytical procedures
- Inquiries
10
Q
What is a way to detect overstatement of sales?
A
Begin with the accounting records and review the source documents
11
Q
What is the difference between existence and occurrence?
A
- Occurrence relates to transactions (Income Statement)
- Existence relates to balance sheet items and presentation
12
Q
Section 4.4: Accounting Estimates and Fair Value
What are the key factors in evaluating reasonableness of an estimate?
A
- Significant accounting estimates.
- Variations
- Deviations from historical patterns
- Is the information possibly subject to misstatement and bias?
13
Q
Section 4.4: Accounting Estimates and Fair Value
What are the different approaches an auditor would use to evaluate the reasonableness of an accounting estimate?
A
- Review and test management’s process.
- Develop an independent expectation to corroborate the reasonableness of management’s estimate.
- Review subsequent events or transactions.
14
Q
Section 4.1: Using the Work of Internal Auditors
What areas may an internal auditor provide assistance?
A
- Assist the auditor in obtaining the understanding of internal control
- Perform test of controls
- Perform substantive tests
15
Q
Section 4.4: Accounting Estimates and Fair Value
What are some of the significant assumptions than an auditor considers in evaluating an entity’s accounting estimates?
A
- Economic conditions
- Management’s own modified assumptions based on their selection of market partcipant’s assumptions.
- Management’s plans
- Past experiences
- Prior-period adjustments
16
Q
Section 4.4: Accounting Estimates and Fair Value
What are the components of low estimation uncertainty?
A
- Accounting estimates that are not complex
- Accounting estimates that are frequently made and updated because they relate to routine transactions
- Accounting estimates derived from readily available data
- Fair value accounting estimates based on a method of measurement that is simple and applied easily
- Fair value accounting estimates based on a well-known or generally accepted model
17
Q
Section 4.4: Accounting Estimates and Fair Value`
What are the components of high estimation uncertainty?
A
- Accounting estimates due to litigation
- Accounting estimates for instruments not publicly traded
18
Q
What type of reports are created in a compilation engagement?
A
- Prospective Financial Statements
- Pro Forma Financial Statements
- Other Historical Information
19
Q
What are the preconditions of an audit?
A
The use of an acceptable financial reporting framework in the preparation and fair presentation of financial statements
20
Q
What does an auditor do for a recurring audit engagement?
A
- If the auditor concludes that a revision is not needed for the preceding engagement, then they should remind mangement, either orally or in writing, that the terms of the preceding engagement will govern the current engagement
- If the reminder is done orally, then it will need to be documented by the auditor
21
Q
Section 9.2: The Auditor’s Communication with Governance
What is the auditor required to communicate to with those charged with governance?
A
When the issue has a significant effect on the entity’s financial reporting process
* Material, corrected misstatments
* Suggested adjustments that were suggested by the auditor and recorded by management
22
Q
Section 13.2: Subsequent Events and Subsequently Discovered Facts
What procedures should an auditor perform in order to obtain evidence about subsequent events?
A
- Reading the latest subsequent interim statements, if any
- Ask management about subsequent events and various financial and accounting matters
- Reading the minutes of meetings of owners
- Obtaining a management letter
- Ask legal counsel about any litigation that occurred after year’s end
- Obtain an understanding of management’s procedures for identifying subsequent events.
23
Q
Section 13.2: Subsequent Events and Subsequently Discovered Facts
What are examples of issues that are not classified as subsequent events?
A
- Comparing financial statements being reported with prior period financial statements
- Communicate material weaknesses in internal control to the client’s audit committee
- Applying analytical procedures to the details of financial statements that were tested at interim dates
24
Q
Section 13.2: Subsequent Events and Subsequently Discovered Facts
What would be considered as a subsequent event?
A
- A loss that is probable at the reporting date and can be reasonably estimated (i.e. Reporting a loss on an A/R account that has claimed bankruptcy at the beginning of the following year)
- Obtaining a letter of representation from manager regarding any asset appropriations by governments or assets destroyed by natural disasters
- Any sudden customer bankruptcies
- Understanding management’s procedures for identifying subsequent events
- Inquiring about new commitments, borrowing or guarantees of related party debt that was entered into by management
25
# Section 13.2: Subsequent Events and Subsequently Discovered Facts
What is a Type I Subsequent Event?
When the financial statements need to be restated because of something that happened after the financial reporting year
26
# Section 13.2: Subsequent Events and Subsequently Discovered Facts
How are subsequent events that did not exist at the balance sheet date in order to prevent misleading financial statements reported?
* Presented in the pro forma financial statement
* It is not necessary to adjust the financial statements
27
# Section 13.2: Subsequent Events and Subsequently Discovered Facts
What is a Type II Subsequent Event?
An event that does not require the financial statements to be restated, but does require disclosure in the notes to the financial statements
28
# Section 13.3: Written Representations
What should management acknowledge in a management representation letter?
Their responsibilities for the design and implementation of programs and controls to detect fraud (ICFR)
29
# Section 13.3: Written Representations
When is materiality not a concern in a management representation letter?
* Fraud involving governance or management
* Availability of financial records
* Completeness of board of directors meeting minutes
30
# Section 12.1: Substantive Testing of Accounts Payable and Purchases
What is the assertion when renewing a note payable
Classification because it needs to be determined if the note payable will be classified as current or long-term
31
# Section 12.1: Substantive Testing of Accounts Payable and Purchases
What is the procedure when properly measuring accounts payable?
* Reviewing the Accounts Payable account to the supporting documentation
* This ensures that the money paid are for items and services received
* Will also reveal unrecorded liabilities
32
# Section 12.1: Substantive Testing of Accounts Payable and Purchases
How can an auditor determine unauthorized payments were issued?
Review the cancelled check and the attached supporting documentation
33
# Section 12.1: Substantive Testing of Accounts Payable and Purchases
What is an auditor's primary concern about the payment of a liability?
Accounts payable are not understated
34
# Section 12.1: Substantive Testing of Accounts Payable and Purchases
How does the auditor test for the completeness assertion for purchases?
Review the purchase order and receiving reports to the purchase journal and cash disbursements journal
35
# Section 12.3: Substantive Testing of Property, Plant, and Equipment
How does an auditor test for unrecorded retirements of PP&E?
* Review property ledger to see if the assets were recorded
* Tour the plant facility to see if the asset is still there
36
# Section 12.3: Substantive Testing of Property, Plant, and Equipment
How does an auditor test for the existence assertion for PP&E?
Inspect new additions listed on the analysis of plant and equipment
37
# Section 12.4: Substantive Testing of Investments
Why would an auditor use analytical procedures when testing investments?
* An auditor would use analytical procedures to test for the completeness of the invested income
* By calculating the expected rate of return, the auditor can determine if there was income from investment income or if any investments were sold
38
# Section 12.4: Substantive Testing of Investments
What audit provides the assurance of existence of the general ledger balance for investments in stocks and bonds?
* Vouching all changes made during the year to the broker's statements and advices
* inspect and count of stocks and bonds
* Confirmation with a broker-dealer
Paid Checks **Do Not** provide assurance
39
# Section 12.4: Substantive Testing of Investments
How does an auditor gather evidence on existence or occurrence and rights and obligations assertions for investments?
Confirm with an outside agent the securities that they are holding for the client
40
# Section 12.4: Substantive Testing of Investments
How does an auditor determine dividend income from investments?
* Review records produced by investment services
* Reconciling amounts received with published dividend records
41
# Section 12.5: Substantive Testing of Noncurrent Debt
How will an auditor obtain assurance from an affiliate regarding guaranteed indebtedness?
* Review the minutes of the board meeting
* Obtain a representation letter that all of the affiliate's guranteed indebtedness have been identified
***The auditor does not obtain written confirmation of indebtedness***
42
# Section 12.6: Substantive Testing of Equity
What is included when an auditor audits equity?
* Declared dividends were closed to retained earnings
* Trace the authorization of dividends to the board of directors meeting minutes
* Determine that dividends declared are in compliance with debt agreements
***The auditor DOES NOT perform detail checking of dividends paid***
43
# Section 12.7: Substantive Testing of Payroll
What substantive test for payroll are performed when the RMM is assessed as low?
* Applying analytical procedures (i.e. compare payroll costs with the company's standards or budgets)
* Recalculate payroll accruals to test for completeness and cutoff
44
# Section 12.7: Substantive Testing of Payroll
How does an auditor check for accuracy in hours worked?
* Compare clock cards with the shop job time tickets
* The job time tickets will show the total hours worked for each job
45
# Section 12.7: Substantive Testing of Payroll
Why would an auditor observe the distribution of regular payroll checks?
When payroll duties are not segregated and would not reduce the control risk
46
# Section 15.1: The Auditor’s Reporting Responsibility
How does an auditor report items marked as "unaudited" or "not covered by the auditor's report" when issuing an audit report?
If the auditor wants to reference these items in the auditor report, then it will be included in the "Emphasis of Matter" Paragraph
47
# Section 15.1: The Auditor’s Reporting Responsibility
How does an auditor express an opinion on the financial statements that are fairly presented?
By determining through sufficient and appropriate evidence that the audit risk is low
48
# Section 15.1: The Auditor’s Reporting Responsibility
What must a company disclose in the audited financial statements?
"CLiP"
* **C**hanges in method of accounting for inventory
* **LI**FO Reserves
* **P**ledged Inventory
49
# Section 15.1: The Auditor’s Reporting Responsibility
What is the auditor's basis regarding the overall financial statements
That the financial statements are within the framework of GAAP
50
# Section 15.5: Adverse Opinions
What changes in an Adverse Opinion when compared with the Unmodified Opinion?
Adverse Opinion: No Change
Basis for Adverse Opinion: Change
Management's Responsibility: No Change
Auditor's Responsibility: No Change
51
# Section 15.6: Disclaimers of Opinion
When does an auditor issue a disclaimer of opinion?
* When sufficient appropriate evidence cannot be obtained to determine whether the financial statements are fairly presented.
* If the financial statements are fairly presented, but a component is incorrect, then the report would be a qualified opinion
52
# Section 15.6: Disclaimers of Opinion
How does an auditor report when management does not provide a reasonable justification for a change in accounting principle?
* As a qualified or adverse opinion
* This situation **does not warrant** a disclaimer of opinion
53
# Section 17.1: Interim Financial Information
What is the objective of reviewing interim financial information?
* Whether material modifications should be made to conform with the applicable financial reporting framework
* A reason for a modification would include inadequate disclosures
54
# Section 17.3: Required Supplementary Information (RSI)
What is the auditor's responsibility when reporting supplementary information?
* Perform limited procedures
* Inquiry
* Compare the supplementary information to the financial statements
* The auditor does not express an opinion on RSI, but does include a paragraph after the opinion
55
# Section 17.4: Supplementary Information to the Financial Statements
What is the purpose of expressing an opinion on Supplementary Information?
An opinion to express on supplementary information is based on the materiality level used for the audit of the statements
56
What are the relative assertions of Existence and Completeness for cash?
Existence: Cash comes in
Completeness: Cash goes out
57
What types of gathering is used to determine Test of Details?
* Test of Transactions
* Test of Balances
58
What are the test of balances?
The auditor directly tests the amounts that are used to determine the ending balance
59
What is a test of transactions?
The auditor verifies the transactions that resulted in the account balance to change from the previous year
60
How are materiliaty limits referenced in the Management's Representation Letter?
Materiality limits are applied when it pertains to the financial statement amounts
61
What types of questions would a successor auditor ask a predecessor auditor?
* The reason for the change in accounts
* Integrity of Management
* Communications between the auditor and governance regarding internal control or fraud
62
What financial statement balances are based on estimates?
* Depreciation Expense
* Pension Expense
* Allowance for Doubtful Accounts
63
What is not required from an auditor before performing an engagement?
* Knowledge of the accounting priniciples used in the industry
* Knowledge of the auditing procedures for similar companies in the industry
64
What are examples of an auditor's professional skepticism?
* The auditor's belief that management is neither honor or dishonest
* The auditor is aware of evidence that contradicts other evidence
65
What is professional skepticism?
* Relates to unbiased and objective view with respect to the audit
* Because if the risk of material misstatement, the objective of the auditor is to perform the audit with an attitude of professional skepticism
66
What are the outcomes of accounting firms and PCAOB?
* Before PCAOB, accounting firms were completely self regulated
* Accounting firms must register with the PCAOB in order to perform audits for issuers
* Accounting firms registered with the PCAOB are subject to inspection, disciplinary proceedings and sanctions
67
Who is responsible for issuing GAAS?
The Auditing Standards Board, which is regulated by the AICPA, is responsible for the Statements on Auditing Standards
68
What are the overall objectives of an independent auditor when performing an audit?
* Obtain reasonable assurance as to whether the financial statements as a whole are free from material misstatement
* Express an opinion whether or not the financial statements are fairly presented in all material respects
69
How is the Accuracy and Valuation assertion determined in regard to cash?
* Compare the general ledger balance with the amount reported on the financial statement
* Cash receipts are recorded as they are received by the company at the end of the day
* An employee total all cash receipts to compare to the cumulative number
70
What should a predecessor auditor do in regard to comparative financial statements?
* Read the old statements being distributed to make sure that nothing has changed
* Read the new statements to make sure that there are no inconsistencies in relation to the previous year's financial statements
71
What procedure would an auditor do to determine if cash received in the subsequent year was recorded in the current year?
Compare the cash details journal entries with the daily deposit slips
72
How is a predecessor auditor's report included in comparative statements when only the current audit report is shown?
* In the Other Matters Paragraph, the sucessor auditor includes that the financial statements of the prior period were audited by the predecessor auditor
* The predecessor auditor should not be name, unless the predecessor auditor merged with the successor auditor
73
What is included in the Other Matters Paragraph when it relates to predecessor auditor?
* The date of the predecessor's auditor report
* The paragraph would include in the opinion expressed
* The reasons for the modifications (if the report was modified)
* If there was an Emphasis of Matter Paragraph, the nature of the paragraph that was included in the previous year's report
* If there was an Other Matters Paragraph, the nature of the paragraph that was included in the previous year's report
74
What procedure would an auditor perform if they suspect they are increasing cash by drawing one check on one account and depositing it in another account?
Prepare a bank transfer schedule
75
# Section 19.2: Examination Engagements
When will an accountant disclaim an opinion on an examination of prospective financial statements?
* When the accountant is not able to perform certain necessary procedures
* Management imposed scope limitation
76
# Section 19.2: Examination Engagements
What is the objective of an assertion-based examination attestation engagement?
Obtain reasonable assurance about whether the presentation of subject matter is free from material misstatement
77
# Section 19.5: Prospective Financial Information
When is an adverse opinion issued with respect to prospective financial statements?
* If signficant assumptions are not disclosed in the presentation
* The presentation omits all disclosures
* The assumptions did not provide a reasonable basis for the prospective financial statements
78
# Section 19.7: Compliance Attestation
What types of reports can be generated in a compliance attestation engagement?
* Provide assurance about compliance with specified requirements
* Obtain an understanding of the relevant portions of internal control over compliance
* Performs procedures to provide reasonable assurance of detecting material noncompliance
**It does not provide legal determination of compliance**
79
What happens when the engaging party who is the responsible party does not provide a written representation in a review?
* Scope limitation
* The CPA should withdraw if no written representations is provided
80
What happens when the engaging party who is not the responsible party does not provide a written representation in a review?
Refused to provide written representation
* The CPA should make inquiries of the responsible party and seek oral responses
* The auditor should report the refusal in the report
* Restrict report to the engaging party
Refused to provide written representation or oral responses
* It is a scope limitation and the auditor should withdraw
81
# Section 2.2: Independence
What is the difference between Independence of mind and Independence of appearance?
* Independence of mind allows the auditor to act with integrity, exercise objectivity and professional skepticism, and being free from bias.
* Independence in appearance is how the auditor is viewed by third parties.
82
# Section 2.1: Code of Professional Conduct
What are the six principles of the AICPA Code of Professional Conduct?
"RIP-SOD"
**R**esponsibilities
**I**ntegrity
**P**ublic Interest
**S**cope and nature of Service
**O**bjectivity and Independence
**D**ue Care
83
# Section 2.1: Code of Professional Conduct
What are the threats in independence?
* Adverse Interest Threat
* Advocacy Threat
* Familiarity Threat
* Management Participation Threat
* Self-Interest Threat
* Self-Review Threat
* Undue Influence Threat
* Structural Threat
84
# Section 2.1: Code of Professional Conduct
What is adverse interest threat?
The CPA is working against the client
Examples
* Is the client, or an officer, director or shareholder of the client, suing the Auditor?
* A claim is filed against the firm to get back insurance payments made to the client
* A lawsuit filed against the client, its officers and directors, and the auditor firm
85
# Section 2.1: Code of Professional Conduct
What is advocacy threat?
The auditor is more interested in the client’s interest or position that would impair their independence
Examples
* Performing forensic accounting services to the client who is in litigation
* Acting as an investment adviser for an officer, director or 10% shareholder of the client
* Underwriting or promoting a client’s shares
* Act as a registered agent for the client
* Endorses a client’s service or products
86
# Section 2.1: Code of Professional Conduct
What is familiarity threat?
* The auditor has a long or close relationship with the client
* The auditor becomes too sympathetic to the client’s interest or accepts the client’s work without performing due diligence
**Example**
* An auditor’s immediate family or close relative is employed by the client
* An auditor’s friend is employed by a client
* A former employee of the audit firm is employed by the client in a key position
* The auditor has a close relationship with the office, director of a 10% shareholder of the client
87
# Section 2.1: Code of Professional Conduct
What is management participation threat?
* The auditor will act on behalf of the client or assume client’s management responsibilities
* The auditor cannot act as the CEO of the company
88
# Section 2.1: Code of Professional Conduct
What is self-interest threat?
The auditor benefits with a client or persons associated with client
**Examples**
* The auditor has a financial interest in the client, and the audit will have an affect on the fair value of the company
* The auditor’s spouse enters into employment negotiations with the client
* The auditor’s firm has a contingent fee arrangement with the client
* The majority of the auditing firm’s revenue is based on the financial health of the client
89
# Section 2.1: Code of Professional Conduct
What is self-review threat?
* If the auditor performed the work, then there is no need to review it.
* The auditor may rely on the service performed when forming a judgement as part of the audit
**Example**
* The auditor creates the financial statements and then audits them in the same period.
* The auditor does bookkeeping for the client
* A partner in the auditor's firm is also associated with the client's company as an employee, officer, director or contractor
90
# Section 2.1: Code of Professional Conduct
What is undue influence threat?
The client threatens to fire the firm because of a disagreement over accounting principles
91
# Section 2.1: Code of Professional Conduct
What is a structural threat?
* A structural threat is unique to government auditing
* It is a threat that an audit firm's placement within a government entity, in combination with the structure of the entity being audited, will impact the auditor's ability to perform work and objectively report results
92
How would an auditor test for the occurrence assertion when it relates to equity transactions?
Review the entries to the supporting documents to make sure that the recorded transactions actually happened
93
What type of reports are generated for a compliance attestation engagement?
* Examination
* Agreed-Upon Procedures
94
Why would IT have an impact when documenting internal control?
* Information technology will affect the documentation of internal control because of the complexity of the system.
* It may require more extensive review, which would result in more documentation
95
What is the basis when issuing an opinion on supplementary information?
The basis of issuing an opinion on the supplementary information is the materiality level used for the audit of the financial statements
96
What is the purpose of performing analytical procedures?
* Analytical procedures is used to find data that is expected to exist, even if the there are conditions that would contradict the data.
* Examples include unusual events, accounting changes, misstatements or fluctuations
97
When are analytical procedures used in an audit?
Analytical procedures are used for substantive testing **not for testing of internal control**
98
What are control activities in COSO?
Control activites are policies and procedures that are performed in order to address risks that may affect the company's objectives
99
When would a group auditor refer to another auditor who audited an company's subsidiary?
When the audit report is based on
* GAAS
* PCAOB standards
* Required by law or regulation
100
Why should an auditor decide to perform test of controls?
* It would be more efficient to do test of controls than test of details
* The test of controls would reduce the need for substantive procedures
101
What audit procedures would be performed to identify related party transactions?
The focus should be on substantive testing
* Verify terms and conditions
* Evaluate the business purpose
* Analyze account records
102
What are the two categories of US GAAS professional requirements?
* The requirements are identified by a specific term, unconditional and presumptively mandatory
* The requirements describe the degree of responsibility it imposes on the auditors
103
What is the role of an auditor when assessing risk in an integrated audit of a non-issuer?
* Determine signficant classes of transactions
* Determine necessary evidence
* Select which controls to test
**The auditor DOES NOT conclude on the effectiveness of the control**
104
What is monetary unit sampling?
* Monetary unit sampling is also known as probability-proporational-to-size sampling
* The auditor can measure and control the risk associated without selecting the entire population
* The probability of selection is related to size of the item
105
How is the carrying amount of a population calculated when using monetary-unit sampling method?
Average Account Balance x Total Number of Transactions
106
How is the sampling interval calculated when using the monetary-unit sampling method?
Tolerable misstatement / Reliability Factor
107
How is the projected misstatement calculated when the recorded amount is greater than the sampling interval?
* The projected misstatement will be the difference between the recorded amount less then audit amount
* The auditor is estimating a misstatement in an account balance based on the sample error
108
How is the sampling size calculated when using the monetary-unit sampling method?
Carrying amount of the population / Sampling Interval
109
How is audit risk interpreted?
* A lower level of acceptable audit risk: More evidence is required
* A higher level of acceptable of audit risk: Less evidence is required
110
What procedures can be used with generalized audit software?
* Test of controls
* Substantive testing
111
How does using personal computers affect reviewing the work of audit staff?
The calculations that are recorded in the audit documentation may not be readily observable because the calculations may be more elaborate than what would be shown on paper for manual calculations
112
What are the two requirements that are crucial to achieve audit effectiveness and efficiency when using a personal computer?
Have the appropriate hardware and software
* The appropriate audit tasks for personal computer applications
* The appropriate software to complete the audit tasks
113
What is the primary purpose of performing audit procedures?
To gather evidence in order to obtain conclusions that are necessary for the auditor to form an opinion
114
Why is cost not an important consideration when deciding the audit evidence that needs to be obtained?
The auditor needs to consider how the cost of obtaining evidence and the usefulness evidence obtained, but it is not a reason to omit the procedure because it may result in relying on less than persuasive evidence
115
Why does an auditor not use negative confirmations as primary method of confirming?
* Negative confirmations are less effective than positive confirmations because nonresponse does not mean verification from the customer
* Negative confirmations do not provide explicit evidence
116
Why would an auditor use negative confirmations?
* When risk of material misstatement is low
* Small number of accounts with many small balances
* A very low exception rate is expected
* The auditor has obtained sufficient evidence regarding the effectiveness of the control through other means
117
Why is the income statement from a predecessor auditor not as important to the current auditor?
* The income statement does not contain beginning balances
* The current auditor should review the balance sheet to determine misstatements
118
What audit documentation is required under PCAOB Standards?
* The engagement complied with PCAOB standards
* Support for the basis of the conclusions about all relevant assertions
* The accounting records agree or reconcile with the financial statements
119
What are the maximum number of days for an auditor to assemble the final audit file following the release report date (document completion date)?
* Issuers: 45 Days
* Non-Issuers: 60 Days
120
What is the best way to detect an understatement of sales?
Supporting documents to the sales invoices (i.e. Shipping documents to the invoices)
121
How would an auditor uncover lapping?
* Comparing the dates the checks are deposited based on the bank statements with the dates that the remittances were recorded
* Send surprise confirmation requests to A/R customers
122
If an auditor confirmed at an interim date, how should the auditor confirm at year end?
* Review supporting documents for new large balances that occured after the interim date to find any unusual transactions
* Perform other analytical procedures or tests of details
123
What should an auditor do to uncover fictitious returned goods?
* Review the sales return with the receiving reports
* Review the returned goods with the receiving report
* The credit memo is created by a person that does not work in the sales department
124
What procedure does an auditor do to test for existence for cash?
* Review the recorded cash receipts with the accounts receivable and customer orders
* Count cash on hand
* Make sure that all checks are in the entity's name
* Confirming bank balances
125
What is aggregate demand?
* Aggregate demand is based on the needs of buyers
* Aggregate demand has an inverse relationship between price and quantity demand
* If price moves first, quantity demand will move in the opposite direction
126
What is aggregate supply?
* Aggregate supply is based on the needs of suppliers
* It is the maximum quantity producers are willing and able to produce at any given price level
* There is a direct relationship between price and aggregate supply
* As price increases, supply will increase because producers are willing to sell more items
127
What is short-run aggregate supply?
* The aggregate supply curve is short run because at one point the producer will run out of inventory and it may take a longer time to produce
* The slope of the short-run aggregate supply curve is upward sloping to the right
128
What is the difference between a movement and a shift?
* A movement is when the price level dictates the change in quantity demand and supply
* A shift is when something other than the price causes the change in the price, but not a change in quantity demand or supply (i.e season tickets after a championship win).
129
What is nominal GDP?
* Nominal GDP is uses price levels at the time of production based on current prices
* Nominal GDP includes inflation which would not provide a proper measurement
130
What is real GDP
* Measures the value of all goods and services produced within the country's borders
* Real GDP removes the effects of inflation
* The price level is constant
131
What is the calculation to convert from nominal GDP to Real GDP?
Formula: Nominal GDP/GDP Deflator
* Step 1: Calculate the current year by dividing the Nominal GDP by the GDP Deflator
* Step 2: Calculate the previous year by dividing the previous year's GDP by the previous year's GDP Deflator
* Step 3: Calculate the real change in GDP by subtracting 1 from (Current year real GDP/Prior Year Real GDP)
132
What is Real GDP per capita?
* = Real GDP/population
* GDP per capita is used to measure economic growth
133
What is type of investments are considered a direct financial interest that would impair an auditor's independence?
* An investment through an investment club
* An investment held in a blind trust
* An investment held by the trustee of a trust
* An investment held in a retirement plan
134
What are indirect financial interest?
The person has an economic stake in a business or investment, but the connection is not direct
* Interest through a family member
* Interest through another business entity
* A form of trust agreement
* Mutual Fund. If the company does well, then the person's investment increases
135
What service may a CPA perform for a contingent fee?
* When the fees are based on amounts fixed by the courts
* Representation of a non-attest client in an IRS examination
* A fee paid to a CPA client's audit firm for recommending a computer software system to the client
136
# Section 14.1: Sampling Fundamentals
What is the correaltion between acceptable levels of incorrect acceptance, desired assurance and tolerable misstatement?
* As incorrect acceptance is lower, desired assurance is higher and tolerable misstatement is lower.
* A smaller sample size is used to find misstatements.
137
# Section 14.1: Sampling Fundamentals
What's the difference between sampling for attributes and sampling for variables?
**Sampling for Attributes**
* Used for testing of controls
* Actual deviation rate > Tolerable **deviation rate** = Increased Risk
* Overreliance
* Effectiveness of Controls
* Assessing control risk to low
**Sampling for Variables**
* Used for testing of details
* Actual Misstatements > Tolerable **Misstatements** = Increased Risk
* Incorrect Acceptance/Incorrect Rejection
* Efficiency of Controls
* Assessing control risk too high
138
# Section 14.1: Sampling Fundamentals
How does sample evidence lead to erroneous conclusions about a sampled population?
* Each item in the population must have an equal or known probability of being selected
* A probability sample allows the use of statistical methods to quantify an estimate of sampling risk
139
# Section 14.1: Sampling Fundamentals
What is ratio estimation?
* Ratio estimation is based on the sample misstatement times the population carrying amount
* Ratio estimation is most effective when the calculated audit amounts are proportional to the client's carrying amounts
140
# Section 14.1: Sampling Fundamentals
What are the steps to calculate Point of Estimate in a population using ratio-estimation?
Step 1: Calculate the True Value
Step 2: Calculate the Point Estimate
141
# Section 14.1: Sampling Fundamentals
How is the true value calculated in Ratio Estimation?
Book Value / Aduit Value
142
# Section 14.1: Sampling Fundamentals
How is the Point Estimate calculation in Ratio Estimation?
True Value x Total Value of Population
143
# Section 14.1: Sampling Fundamentals
What is difference estimations?
* Difference estimation is based on mean difference of the carrying or audited amounts times the population
144
# Section 14.1: Sampling Fundamentals
Why do difference and ratio estimations produce audit efficiency?
* Because the variability of the populations are less than the populations of carrying amounts or audited values
* Difference estimation is based on mean difference of the carrying or audited amounts times the population
* Ratio estimation is based on the sample misstatement times the population carrying amount
**THE NUMBER OF SAMPLING UNITS IN THE POPULATION DOES NOT CHANGE IF THE SAMPLING METHOD CHANGES**
145
# Section 14.1: Sampling Fundamentals
What is the formula to calculate the ratio estimation?
* Step 1: Calculate sample misstatment (Auditor's sample - Book Balance Sample)/Book Balance Sample)
* Step 2: Calculate estimated population misstatement (Sample Misstatement x Total Records)
* Step 3: Calculate Estimated Balance (Estimated Population Misstatement + Population Book Balance)
146
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is dual-purpose testing?
* Dual purpose testing uses both attribute and variable testing.
* It is used when a deviation from a control is acceptable.
* It may require substantive testing
* The sample size is the larger of the two samples.
147
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is Mean-per-Unit Sampling?
* The mean-per-unit method projects the sample average of the total population.
* The mean-per-unit method is used it the underlying documents that support the account balance are not available.
148
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What are the steps to calculate Mean-Per-Unit?
Step 1: Calculate the Average Value
Step 2: Calculate the Point Estimate (True Population Value)
Step 3: Calculate the Estimating the Population Misstatement
Step 4: Calculate the Margin of Error
149
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
How is the average value calculated?
Audit Value / Sample Size
150
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculation to determine the Point Estimate (True Population Value)?
Number of Items/Records
x Average Value Calculated
151
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculate for the Population Misstatement?
Total Number of Records
x Standard Error Amount
152
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculate to determine the Margin of Error?
Point of Estimation
+/- Population Misstatement
153
# Section 14.1: Sampling Fundamentals
What is block sampling?
* Block sampling randomly selects groups of items as sampling units instead of individual units.
* An advantage of block sampling is that is avoids the use of random numbers to identify the population
154
# Section 14.1: Sampling Fundamentals
What is systematic sampling?
* Systematic sampling is based on a certain number.
* The items are arranged randomly in the population
* The value of the number selected is computed based on the population and the number of sampling units.
155
# Section 14.2: Statistical Sampling in Tests of Controls
What is a risk when using systematic sampling?
Since the population is based on every Nth item, then there may be a possibility that the sample may occur in a systematic pattern, which would destroy the randomness of the sample
156
What is the advantage of using statistical sampling over non-statistical sampling?
Statistical sampling helps the auditor to:
* Design an efficient sample
* Measure the sufficiency of the evidence obtained
* Evaluate the sample results
* Can be quantified and controlled
* The degree of reliability can be specified
* Provides an objective basis for quantitatively evaluating sample risks
157
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is Mean-per-Unit Sampling?
* The mean-per-unit method projects the sample average of the total population.
* The mean-per-unit method is used it the underlying documents that support the account balance are not available
* It determines the estimated population amount by averaging the audit amount of sample items and multiplies the average by the number of items in the population
* Useful for selecting samples about asset and liabilities balances
158
When is attribute sampling used?
* Attribute sampling is used to test the effectiveness of controls
* If a performance of a task leaves evidence, then it would be suitable to use attribute sampling
159
What is random sampling?
Random sampling is when each item in the population has an equal or nonzero chance of being selected
160
What is the sampling relationship with respect to tolerable deviation rate and expected population rate?
* Tolerable Deviation: Inverse Relationship
* Expected Population Rate: Direct Relationship
161
162
# Section 14.2: Statistical Sampling in Tests of Controls
What should an auditor do when expected deviation rate is more than the tolerable deviation rate?
* Project the detected sampling error to the entire population
* Increase the assessed risk of material misstatement
163
# Section 14.2: Statistical Attribute Sampling in Tests of Controls
What causes an overliance (effectiveness) when testing controls?
Auditor's sample deviation rate < the tolerable misstatement
True deviation rate > the tolerable misstatement.
164
# Section 14.2: Statistical Attribute Sampling in Tests of Controls
What causes an underreliance (efficiency) in attribute sampling test of controls?
Auditor's sample deviation rate > the tolerable misstatement
True deviation rate < the tolerable misstatement
165
# Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What are the four factors are considered in determining the sample size for mean-per-unit estimation?
* Population Size
* Estimate of Population Variation (Standard Deviation)
* Risk of Incorrect Rejection
* Tolerable Misstatement
166
What are the options that a government has regarding the peak phase of a business cycle?
* Raise taxes
* Reduce government spending
167
What is unit elasticity?
* A price decrease would have no effect on the quantity demanded because it would change by the same percentage.
* The price has no effect on revenue
168
# Section 14.4: Monetary-Unit Sampling (MUS)
What is monetary-unit sampling (MUS)?
* MUS is also known as probability-proportional-to-size sampling
* MUS is a type of variable sampling
* Results in every n-th item being selected
* The probability of the item selected is directly proportional to the size of the item
* The auditor can measure and control the risks without observing 100% of the population
* The auditor can quantify and measure the risk of acceptance
169
What is the formula to calculate the Price Elasticity of Demand?
**% Change in Quantity Demanded / % Change in Price**
170
What is Price Elasticity of Supply?
* If the price moves first, then quantities supplied will move in the same direction
* If the suppliers are able to store the product for a long period of time, then the price elasticity of supply is elastic
* If the suppliers can only store the product for a short time (i.e. perishables), then the price elasticity of supply is lower and is inelastic
* The supplier is already operating at full capacity will have an impact on price elasticity of supply
171
What is the formula to calculate the Price Elasticity of Supply?
**% Change in Quantity Supplied / % Change in Price**
172
What is cross elasticity?
* Cross elasticity looks at the inter-relationship between different products produced by the same manufacturer
* Cross elasticity is the percentage change in qualitity supplied of one good (product X) caused by the price change of another good (Product Y)
* Price moves first
* We measure the change in quantity supplied of either a substitute or a compliment product
* Substitutes in production have a negative cross elasticity of supply
173
What is the formula to calculate cross elasticity of supply
**% change in number of units of X supplied / % Change in Price of Y**
174
What is cross elasticity of supply for substitutes?
* Cross elasticity looks at the inter-relationship between different products produced by the same manufacturer
* Substitutes in production have a negative cross elasticity of supply
175
What is cross elasticity of supply for compliments?
* Complimentary products have a positive cross elasticity of supply
176
What is cross elasticity of supply for substitutes?
* Cross elasticity looks at the inter-relationship between different products produced by the same manufacturer
* Substitutes in production have a negative cross elasticity of supply
177
What is the formula to calculate cross elasticity of demand?
**% change in number of units of X demanded / % Change in Price of Y**
* If the % quantity demanded > the price %, product is elastic
* If the % quantity demanded < the price %, product is inelastic
178
What is cross elasticity of demand for substitutes?
* Cross elasticity of demand for substitutes looks at the of a product from different producers
* The demand for substitutes will have a positive cross elasticity of demand (i.e. price increased for Coke will cause more demand for Pepsi)
* Example: If the elasticity is +2.4, that means for every 1% increase in price, the demand will increase by 2.4%
179
What is cross elasticity of demand for compliments?
* Cross elasticity of demand for compliments looks at the different products that compliment one another (i.e. bread and butter)
* The demand for substitutes will have an inverse relationship with the cross elasticity of demand
* If the price of one product increases, then the quantity demanded for the other product will decrease
180
What is income elasticity of demand?
The income elasticity of demand measures the percentage change in the quantity demanded relative to the percentage change in income
181
What is the calculation for income elasticity?
% Change in Number of Units Demanded / % Change in Income
182
What is positive income elasticity?
* Income elasticity of demand greater than one signifies a luxury good
* As someone earns more income, they can demand better goods
* Normal goods have a positive income elasticity of demand
* As income increases, the demand for inferior goods goods decreases
183
What is negative income elasticity?
* Demand is negative
* As someone earns less income, they demand inferior goods
* Income elasticity of demand less than zero signifies an inferior good
184
What is the purpose of CPI?
To measure the rate of inflation
185
What is the calculation to determine CPI?
(Current Year % - Base Year %) / Base Year %
186
What is the calculation to determine the rate of inflation based on current and previous years/base year?
(Current Year CPI - Previous/Base Year CPI) / Previous/Base Year's CPI
187
What is the calculation to determine Change in Real Cost?
Ending Amount - (Beg. Amount x (1+ Inflation Rate))
188
What is cyclical unemployment?
* It is dependent of economic performance
* The amount of unemployment resulting from declines in real GDP during periods of recession
* It rises during a recession
* It falls during expansion
189
What are the components of natural unemployment?
* Natural rate of employment is independent of economic performance
* Full employment is when the economy is at the natural rate
* The calculation = Seasonal + Frictional + Structural
190
What are the types of unemployment are independent of economic performance?
* Frictional: Friction is created by the worker. Chose to give up job, laid off or delay until they get a new job
* Structural: Technology causes the workers skill obsolete
* Seasonal
191
What are economic indicators?
* They are categorized based on their timing releative to the business cycle
* Helps to understand where the econmy is headed and where it currently stands
192
What are the types of economic indicators?
* Leading
* Lagging
* Coincident
193
What is a leading economic indicator?
* They make predictions about future economic activity based on statistics
* Stock market
* Inventory levels
* Building permits
* Yield curve on bonds (waiting a longer time to get paid back)
* Inverted yield curve shows a slow down in the economy
194
What are coincident indicators?
* Changes at approximately the same time as the economy as a whole
* Consumper spending
* Gross domestic product is a primary gauge of the economy's current health
195
What is marginal revenue?
* Marginal revenue is the change in total revenue after one additional unit of product or service is sold
* Tends to decrease as the units sold increases
196
What is marginal cost?
* Marginal cost is the additional cost incurred when producing one additional unit
* In the short run, marginal cost decreases and the number of units increase
* Marginal cost can increase over a long period of time due to overtime pay, equipment wear and tear or the need to acquire more production facilities
* The marginal cost curve first declines, then increases after a certain level of ouput
197
What is the relationship between marginal revenue vs. marginal cost with respect to production?
If MR > MC, the firm should increase production
If MR < MC, the firm shoud decrease product
If MR = MC, profit maximization. The firm is maximizing profit at that level of production
198
What is economies of scale?
Increased production leads to decreased costs
199
What is law of diminishing returns?
Marginal cost will eventually increase after a certain point of production
200
# Section 16.1: Group Audits and Component Auditors
What must a group auditor know about another CPA who audited a subsidiary, no matter if they are referring to the component auditor?
The group auditor is satisfied with the other CPA's independence and professional reputation
201
# Section 16.2: Consistency of Financial Statements
How should an auditor evaluate a change in accounting estimate that is inseperable from a change in principle?
The auditor should evaluate the change
**propsectively as a change in in
principle, propsectively** and an emphasis of matter paragraph should be included in the auditor's report
202
# Section 16.4: Comparative Financial Statements
What is the continuing auditor responsible for when presenting prior-period financial statements with the current period financial statements?
Updating the report on the previous financial statement, no matter of the opinion previously expressed
203
# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs
What is purpose of the Other-Matter paragraph?
* The Other-Matter paragraph is used to enhance the user's understanding.
* It reports matters that are not required to be presented or disclosed on the financial statements.
204
# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs
What is the purpose of the Emphasis-Of-Matter paragraph?
* The Emphasis-of-Matter paragraph is used to enhance the user's understanding of matters that are already presented or disclosed on the financial statements.
* It is necessary to draw the attention to the matter.
* The matter is appropriately presented and disclosed in the financial statements.
205
# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs
What is included in the Emphasis-Of-Matter paragraph?
* An event that has, or will have, a significant effect on the entity's financial position (i.e. a departure from GAAP to prevent missleading reports).
* A material change in an accounting principle occurs
* An uncertainty related to a future outcome (i.e. litigation)
* Significant transactions with related parties
* Unusually important subsequent events
* A major catastrophe that has a significant impact on the financial position
206
# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs
How are the prior year's unaudited financial statements presented in comparison with this year's audited financial statements?
An Other-Matter paragraph is used for unaudited prior-period statement.
207
According to US GAAS, when is an auditor associated with financial information?
When the auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS
208
Why may there be some material misstatements in the financial statements that are found by the auditor?
* Because of inherent limitations
* An unavoidable risk may exist that some material misstatements may not be detected
209
# Section 17.2: Responsibilities to Other Information in Annual Reports
What are the responsiblities of an auditor for other information documents that are contained in audtited financial statements?
* Respond appropriately to information that will undermine the credibility
* Make sure that the other information is separate from RSI
* Reading other information for material inconcistencies with the audited statements
210
# Section 17.4: Supplementary Information to the Financial Statements
What are the procedures an auditor performs when reporting on SI?
* The auditor should report on all information when they are engaged to report on SI in relation to the financial statements
* Providing written representations because this is the responsibilty of management.
211
# Section 17.4: Supplementary Information to the Financial Statements
What are the procedures needed to express an opinion on SI?
The materiality level used for the audit of the financial statements
212
# Section 17.5: Engagements to Report on Summary Financial Statements
What is a criteria for the auditor to report on the summary of financial statements?
* The auditor audited the statements from which they are derived.
* The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria
* Management's written representation letter is required
213
# Section 17.5: Engagements to Report on Summary Financial Statements
What type of opinions are issued on the summary statements?
* Unmodified
* Adverse
Qualified and disclaimer are not appropriate since a scope limitation does not exist
214
# Section 17.6: Financial Statements Prepared in Another Country
What type of reports are issued when the financial statements are prepared in another country?
Report is intended for outside U.S.
* A U.S. form of report modified to report on the financial reporting framework of the parent’s country
* The report form of the parent's country
Report is intended for U.S. only
* U.S. form of report (Unmodified)
* An emphasis-of-matter paragraph indicating the type of framework used and that the framework differs from US GAAP
215
# Section 17.7: Reports on Application of an Applicable Framework
What is the purpose of Reports on Application of Requirements of an Applicable Financial Reporting Framework?
* To report on the applicable financial reporting framework to a specific transaction
* The specific transaction can either be completed or proposed
* The specific transaction involves facts or circumstances of a specific entity
* Independence is not required, but lack of independence must be disclosed in the report
* The report may change if there are any difference of facts, circumstances or assumptions presented
216
# Section 17.9: Key Audit Matters (KAMs)
What are Key Audit Matters (KAM)?
Key audit matters are decisions that were reported to governance
* Accounting estimates with a high uncertainty
* Significant risks
* Significant auditor judgements about significant management judgements
* The audit effect of significant events or transactions during the period
217
218
# Section 20.1: Government Auditing Standards
What is included in attestation engagements under GAGAS?
* Internal control over reporting
* Compliance with specified laws
* MD&A
* Prospective financial or performance information
* Accuracy of reliability of performance measures
* Contract costs
* Quantity, condition or valuation of Inventory or assets
