Final Audit Review

Question 1

SECTION 1

Question 2

Section 1.3: Overview of Attestation Engagements

What is the purpose of Statement on Standards of Attestation Engagement (SSAE)?

Answer 2

• Attestation engagements are additional services that are the responsibility of another party, other than an audit, that a CPA performs
• An attestation engagement reports on subject matter other than traditional financial statements
• A party, who is not the practitioner, makes an assertion about whether the subject matter is measured or evaluated in accordance with suitable criteria

Question 3

Section 1.4: Additional Professional Services

What services are included in personal financial planning services?

Answer 3

• Assisting the client to act on personal financial planning decisions
• Monitoring progress in achieving goals
• Updating recommendations and revising planning decisions

Question 4

Section 1.5: Quality Control

Why would an engagement partner schedule a pre-audit conference with the audit team?

Answer 4

To provide guidance to the staff regarding such technical issues as the expected use of client personnel and the expectations of the audit team

Question 5

SECTION 2

Question 6

Section 2.1: Code of Professional Conduct

What is included in the AICPA Code of Professional Conduct?

Answer 6

• General ethical principles that are aspirational in character
• Set of specific, mandatory rules describing minimum levels of conduct a member must maintain
• All members should act in the best interest of the public

Question 7

Section 2.1: Code of Professional Conduct

What are the threats in independence?

Answer 7

• Adverse Interest Threat
• Advocacy Threat
• Familiarity Threat
• Management Participation Threat
• Self-Interest Threat
• Self-Review Threat
• Undue Influence Threat

Question 8

Section 2.1: Code of Professional Conduct

What is adverse interest threat?

Answer 8

The client is working against the CPA

Examples
* Is the client, or a 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

Question 9

Section 2.1: Code of Professional Conduct

What is advocacy threat?

Answer 9

The auditor advocates for the client. 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

Question 10

Section 2.1: Code of Professional Conduct

What is familiarity threat?

Answer 10

• 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 or a 10% shareholder of the client

Question 11

Section 2.1: Code of Professional Conduct

What is management participation threat?

Answer 11

• 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

Question 12

Section 2.1: Code of Professional Conduct

What is self-interest threat?

Answer 12

The auditor benefits with a client or persons associated with client (think Enron)

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

Question 13

Section 2.1: Code of Professional Conduct

What is self-review threat?

Answer 13

• 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

Question 14

Section 2.1: Code of Professional Conduct

What is undue influence threat?

Answer 14

The client threatens to fire the firm because of a disagreement over accounting principles

Question 15

Section 2.2: Independence

When is a CPA not independent?

Answer 15

• Preparing an actuarial report using assumptions not approved by the client
• The CPA owns investments that are material
• An investment held through a regulated mutual fund
• Determining which recommendations for improving internal control should be implemented for a non public attest client

Question 16

Section 2.2: Independence

What is an example of an indirect financial interest

Answer 16

An investment held through a regulated mutual fund

Question 17

Section 2.3: Integrity and Objectivity

What are the elements that underlies the development of an overall audit strategy?

Answer 17

Materiality and audit risk in determining the nature, timing, and extent of procedures to apply

Question 18

Section 2.6: Other Responsibilities

What are some of the requirements for the Form of Organization and Name Rule?

Answer 18

• Any CPA owners that are included on the letterhead must be members
• All CPA owners must be members

Question 19

Section 2.7: Other Pronouncements on Professional Responsibilities

What is one of the SEC guidelines for independence?

Answer 19

• Audit committees ordinarily must preapprove the services performed by accountants
• Approval must be either explicit or in accordance with detailed policies and procedures
• If approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed.
• Preapproval of accountants’ services may be in accord with detailed policies and procedures rather than explicit

Question 20

Section 2.7: Other Pronouncements on Professional Responsibilities

What does the PCAOB not have legal authority to do?

Answer 20

Prosecute violations by registered accounting firms

Question 21

SECTION 3

Question 22

Section 3.1: Pre-Engagement Acceptance Activities

What is usually communicated to management in an audit?

Answer 22

Arrangements that involve a predecessor auditor

Question 23

Section 3.2: Planning an Audit

What is the purpose of performing risk assessment procedures?

Answer 23

• To assess the risk of material misstatement of financial statements
• Financial statement accounts that more than likely will have a misstatement
• Conditions that require an extension of audit tests

Question 24

Section 3.2: Planning an Audit

What should be included in the audit plan?

Answer 24

• Nature, timing and extent of procedures
• Extent of risk of material misstatement
• Planned further audit procedures
• Procedures that relate to the financial statement assertions
• Other audit procedures required by GAAS and PCAOB

The auditor does not discuss the nature and timing of detailed procedures

Question 25

# Section 3.2: Planning an Audit When is the audit plan developed?

Answer 25

* After the auditor has an understanding of the existing internal control * After the auditor has established an overall audit strategy

Question 26

# Section 3.2: Planning an Audit What details do management and the auditor usually agree upon when discussing the general audit strategy with the client’s management?

Answer 26

* Objective and scope of the audit * Responsibilities of the auditor and management * Inherent limitations of the audit and internal control * Financial reporting framework * Expected form and content of audit reports * Schedules and analyses that the client’s staff should prepare * The extent of involvement of the client’s internal auditors

Question 27

# Section 3.2: Planning an Audit What inquries should be made to the predecessor auditor, and when should they be made?

Answer 27

**Before Accepting the Engagement** * Integrity of management * Disagreements with management * Communications about fraud and noncompliance * Any significant deficiencies or material weaknesses * What is the reason for the change in auditors **After accepting the engagement** * Matters that may raise concerns regarding the reporting consistency with prior and current years

Question 28

# Section 3.3: Audit Risk and Materiality What are judgmental misstatements?

Answer 28

* Judgmental misstatements occur when there are judgments of management about recognition, measurement, presentation, and disclosure. * They include the selection or application of accounting policies that the auditor considers unreasonable or otherwise inappropriate.

Question 29

# Section 3.3: Audit Risk and Materiality What does the auditor include when evaluating for uncorrected misstatements of an issuer?

Answer 29

* Prior years and misstatements detected in the current year that relate to prior years because the prior years affect the beginning balances of the current year's financial statements * Possible undetected misstatements * Accumulated uncorrected misstatements are material

Question 30

# Section 3.3: Audit Risk and Materiality What are extrapolations?

Answer 30

Extrapolations are projected identified misstatements in samples to the relevant population

Question 31

# Section 3.3: Audit Risk and Materiality According to clarified standards, how is materiality referred to in the planning stages of an audit?

Answer 31

* Materiality in the planning stages of an audit is referred to as performance materiality * The materiality is set by the auditor at less than the materiality for the financial statements as a whole

Question 32

# Section 3.3: Audit Risk and Materiality What would an auditor tolerate when decreasing the amount of misstatements in a class of transactions?

Answer 32

* When the amount of misstatements that an auditor will tolerate decreases, that means that the risk of material misstatement increases * Detection risk decreases * The auditor will perform planned auditing procedures closer to the balance sheet date

Question 33

# Section 3.5: Audit Data Analytics and Analytical Procedures How are the ratios interpreted?

Answer 33

**Return on Assets** * Net Income/Average Total Assets * The higher the ROA number, the better **Asset Turnover** * Sales/Average Total Assets * The higher the asset turnover, the better a company uses its assets to generate revenue **Inventory Turnover** * A higher ratio tends to point to strong sales and a lower one to weak sales **Accounts Receivable Turnover** * A higher turnover ratio means payments quickly converts its receivables into cash **Times Interest Earned** * A higher times interest earned ratio means that the company presents less of a risk to investors and creditors in terms of solvency.

Question 34

# Section 3.5: Audit Data Analytics and Analytical Procedures What is the purpose of analytical procedures?

Answer 34

* Analytical procedures focus on the relationships between financial and nonfinancial data at a high level using simple and complex models * The precision of the data is important to the auditor in determining on how to use analytical procedures as substantive procedures. * Study of how elements of the financial data is expected to conform to a pattern that is based on the entity's experience * The auditor will determine the best analytical procedure to use for testing the nature of an assertion

Question 35

# Section 3.5: Audit Data Analytics and Analytical Procedures What are considered analytical procedures?

Answer 35

* Review the sales trend to develop the expected sales rate * Computing accounts receivable turnover * Estimating payroll expense

Question 36

# Section 3.5: Audit Data Analytics and Analytical Procedures How does an auditor determine whether to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances?

Answer 36

The determination is whether the audit risk can be sufficiently reduced

Question 37

# Section 3.5: Audit Data Analytics and Analytical Procedures What would cause an increase in the inventory turnover?

Answer 37

* Inventory is being stolen * Constant sales and lower inventory also indicate higher turnover

Question 38

# Section 3.6: Consideration of Fraud in a Financial Statement Audit What are examples of misstatements?

Answer 38

* Inaccuracy of processing or obtaining financial data * Omission of an amount or disclosure * A disclosure is not presented * Incorrect accounting estimate is made by misstake * Unreasonable management judgments about accounting estimates * Inappropriate selection or application of accounting policies that the auditor considers inappropriate

Question 39

# Section 3.6: Consideration of Fraud in a Financial Statement Audit What is the auditor's responsibility regarding consideration of fraud in a financial statement audit?

Answer 39

Assess the risks of material misstatement due to fraud

Question 40

# Section 3.6: Consideration of Fraud in a Financial Statement Audit What is the difference between incentive, rationalization and opportunity?

Answer 40

* Incentives are reasons for management to feel motivated to commit fraud * Rationalization can relate to a person frequently justifying reasons for committing fraud * Opportunities occur when company management will have the opportunity to take advantage of ineffective internal control procedures or override those controls in order to take advantage for their own self-interest

Question 41

# Section 3.6: Consideration of Fraud in a Financial Statement Audit Why are new accounting requirements subject to being an incentive for fraudulent reporting?

Answer 41

Management may feel pressure to maintain financial stability while changing to the new accounting requirements

Question 42

Section 4

Question 43

# Section 4.1: Using the Work of Internal Auditors What would an auditor consider when assessing the competence and objectivity of an entity’s internal auditor?

Answer 43

* External quality reviews of the internal auditor’s activities * Discussions with management personnel * Previous experience with the internal auditor * Assessing the organizational status of the director of internal audit

Question 44

# Section 4.3: Related Parties What documents should be reviewed in order to identify a related party transaction?

Answer 44

* Minutes of board meetings and other committees * Filings with regulators * Conflict of interest statements * Transactions with major customers, lenders and borrowers * Accounting records for large or unusual transactions or balances * Invoices of law firms * Confirmations of compensating balance transactions

Question 45

# Section 4.3: Related Parties What documents should be reviewed in order to determine a related party transaction?

Answer 45

* Evaluting management's procedures * Request from management the names of all the related parties * Review SEC filings * Names of all pension and other trusts * Review shareholder listings * Review prior year's audit documentation * Inquire predecessor auditor * Review material investment transactions

Question 46

# Section 4.3: Related Parties What documents should be examined in order to determine a related party transaction?

Answer 46

* Obtain an understanding of the business purpose or transaction * Examine invoices, agreements, contracts and documents * Is the transaction approved by governance * Test for reasonableness * Audits of interentity balances * Inspect and confirm the transaferability and value of collateral * Discuss significant information with intermediaries, such as banks or attorneys * Confirm the transaction amount and terms, including guarantees and other significant data, with the other parties.

Question 47

# Section 4.4: Accounting Estimates and Fair Value What are the auditor's responsibilities for accounting estimates?

Answer 47

* Maintain an attitude of professional skepticism * Review and evaluate the process used * Determine if bias exists * Communicate to those charged with governance about significant estimates * Determine that all needed estimates have been developed

Question 48

# Section 4.4: Accounting Estimates and Fair Value What are management's responsibilities for accounting estimates?

Answer 48

* Take action on subjective as well as objective factors * Determine that all needed estimates have been developed * Maintain internal control over the process of development

Question 49

# Section 4.4: Accounting Estimates and Fair Value What is most likely to be used in evaluating the reasonableness of an entity’s accounting estimates when an auditor considers whether assumptions are significant?

Answer 49

Deviations from past experiences

Question 50

Section 5

Question 51

# Section 5.1: Introduction to Internal Control What are the types of inherent limitations of internal control?

Answer 51

* Faulty human judgment * Simple errors or misstakes * Management override * Cost-benefit considerations * Losses * Lawsuits and other contingencies * Violations of laws and regulations * Warranties * Theft Override by a **low-level employee is not considered** an inherent limitation

Question 52

# Section 5.2: Internal Control Components What are the components of a control environment?

Answer 52

"THE CROP" * **T**hose charged with governance (aka Tone at the Top) * **H**uman Resources polices and practices. Assignment of authority and responsibility * **E**thical and Integrity Values (including hiring personnel) * **C**ommittment to competence * **R**esponsibility and Accountability. Removing incentives that increase the probability of dishonest or unethical acts (i.e. bonuses for high rate of growth revenues) * **O**rganizational structure * **P**hilosophy and operating style of Management

Question 53

# Section 5.2: Internal Control Components What are the components of control activities?

Answer 53

* Performance reviews * Information processing * Physical controls * Authorization * Segregation of Duties * Performance indicators

Question 54

# Section 5.2: Internal Control Components What are the components of Risk Assessment in Internal Control?

Answer 54

* Identify risks relevant to the preparation of the financial statements * Estimate their significance * Assess the probability * Decide about responses to them * Corporate restructurings may cause a change in the level of risk in the entity

Question 55

# Section 5.2: Internal Control Components What are the components of Monitoring internal control?

Answer 55

* Monitoring ongoing activities (i.e. supervision) * The actions of internal auditors * Consideration of communications from external parties (i.e. customer complaints)

Question 56

# Section 5.2: Internal Control Components What are the components of the Information System of Internal Control?

Answer 56

* Physical and hardware components * Software * People * Procedures * Data

Question 57

# Section 5.3: Understanding Internal Control What understanding of an entity’s information system should an auditor obtain?

Answer 57

* Processes used to prepare significant accounting estimates * Classes of significant transactions * How the transactions are recorded * If the transactions are electronic or manual * How the transactions are captured * Controls over journal entries * Design of the controls included in the internal control components

Question 58

# Section 5.3: Understanding Internal Control What are the steps in performing risk assessment procedures to evaluate the design of relevant controls and determine if they have been implemented?

Answer 58

"DADE" * **D**etermine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented * **A**ssess the risks of material misstatement * **D**esign further audit procedures * **E**valuate the operating effectiveness of relevant controls.

Question 59

# Section 5.3: Understanding Internal Control What are the risk assessment procedures an auditor should do to evaluate the design of relevant controls?

Answer 59

* Inquiries * Observations * Inspection of documents and reports * Tracing transactions

Question 60

# Section 5.3: Understanding Internal Control What is the primary purpose of an auditor to trace several transactions through the control process?

Answer 60

To determine whether the controls have been implemented

Question 61

# Section 5.5: Internal Control and Information Technology What is included in general controls?

Answer 61

* Controls over operations are effective and efficient * The procedures used to acquire, test, develop, etc. * Access of the equipment and data * Documenting and approving programs and changes to programs * Control over data center and network operations * Systems software acquisition and maintenance * Access security * Application system acquisition, development, and maintenance.

Question 62

Section 7

Question 63

# Section 7.1: Purchases Responsibilities/Organizational Structure What is the systems process for purchases and payables?

Answer 63

1. Inventory Control: Authorizes a purchase requisition to the purchasing and accounts payable departments. 2. Purchasing: Creates a purchase order based on the requisition with the approved vendor. 3. Receiving: Receives a blind copy of the purchase Order 4. Vendor: Receives the purchase order 5. Vendor: Ships Goods 6. Receiving: Receives the goods and compares the information on the packing slip with the purchase order 7. Receiving: Creates a receiving report 8. inventory Control: Updates inventory records based on receiving report. 9. Accounts Payable (Vouchers Payable): Receives receiving report and enters information in the A/P file for payment.

Question 64

# Section 7.1: Purchases Responsibilities/Organizational Structure What are the responsibilities of the accounts payable (vouchers payable) department for effective internal control?

Answer 64

Matching the vendor’s invoice against the corresponding purchase order and receiving report.

Question 65

# Section 7.1: Purchases Responsibilities/Organizational Structure What would be the segregation of duties in accounts payable to avoid potential areas of fraud?

Answer 65

* Cash disbursements * Vendor invoice verification

Question 66

# Section 7.1: Purchases Responsibilities/Organizational Structure What are the responsiblities of the purchasing agent?

Answer 66

* Approves the appropriate vendor * Receives a requisition request once inventory levels fall below the reorder point * Enters the invoice information into the invoice program to test the information against that in the open purchase order file * Receives the invoice from vendor and enters invoice information into the invoice program

Question 67

# Section 7.1: Purchases Responsibilities/Organizational Structure What is considered the best evidence of the transfer of accountability for incoming material from the receiving department to other departments or activities?

Answer 67

An authorized signature on the transfer form

Question 68

# Section 7.4: Payroll Responsibilities/Organizational Structure What internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

Answer 68

* Time tickets should specifically identify labor hours as direct or indirect * Compare daily journal entries with the factor labor summary

Question 69

# Section 7.6: Other Cycles What test of controls would be included for raw materials in production?

Answer 69

* Examine prenumbered requisitions for proper authorizations, quantities, descriptions and dates * Reperformance of relevant activities and client controls * Examining material requisitions

Question 70

# Section 7.6: Other Cycles Which controls are appropriate for property, plant, and equipment?

Answer 70

* Detailed property records and physical controls over assets * Written policies for capitalization and expenditure and review of application of depreciation methods * Proper authority for acquisition and retirement of assets **Disposal of fully depreciated assets is not a control**

Question 71

# Section 7.6: Other Cycles What is the most important control over acquisitions of property, plant, and equipment?

Answer 71

* Using a budget to forecast and control acquisitions and retirements * This control will alert management to any transactions that are unusual, appear unnecessary, or are unauthorized.

Question 72

SECTION 8

Question 73

# Section 8.1: Assessing Risks of Material Misstatement (RMMs) Why may an auditor not place a reliance on controls for some assertions?

Answer 73

* The auditor believes that the controls are likely to be ineffective * Performing only substantive procedures would effectively reduce audit risk to an acceptably low level

Question 74

# Section 8.2: Auditor’s Response to Risks What audit procedures should be combined with other audit procedures when testing the operating effectiveness of controls?

Answer 74

From Most Effective to Least Effective: * Reperformance of a control * Inspection of relevant documentation * Observation * Inquiry (Combined with other audit procedures i.e. observation and inquiry, etc.) **Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.**

Question 75

# Section 8.2: Auditor’s Response to Risks What is the difference between test of controls and test of details?

Answer 75

Test of Controls: * Testing that controls are operating effectively * **Overreliance** is considered * Yes or No answer Test of Details: * Testing for specific management assertions

Question 76

# Section 8.2: Auditor’s Response to Risks What are included in test of controls?

Answer 76

Reperformance Observation

Question 77

# Section 8.2: Auditor’s Response to Risks What procedures are used in tests of controls?

Answer 77

* Tracing * Examining * Reperforming

Question 78

# Section 8.2: Auditor’s Response to Risks What are test of details?

Answer 78

* The auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels to design and perform further audit procedures * Tests of details are substantive procedures * They should be performed for all relevant assertions related to each material transaction class, balance, and disclosure * The auditor’s objective is to obtain sufficient appropriate evidence to form an opinion on whether statements are materially misstated

Question 79

# Section 8.2: Auditor’s Response to Risks What are examples of overall responses to assessed RMM?

Answer 79

* Professional skepticism * Increased supervision * Assignment of staff with more experience and expertise * Greater unpredicability of audit procedure choices * Changing nature, timing and extent of audit procedures

Question 80

# Section 8.2: Auditor’s Response to Risks What are the components of the Nature, Extent and Timing of substantive testing?

Answer 80

* Nature: The auditor takes a more effective approach to testing (change in controls, change the level of the test from negative confirmations to positive confirmations) * Extent: The extent is the amount. The auditor increases the quantity of the testing (i.e. the balance on the account is larger) * Timing: The auditor changes the timing of the substantive test (i.e. interim inventory count to end of year count)

Question 81

# Section 8.2: Auditor’s Response to Risks What will an auditor normally find in performing tests of controls?

Answer 81

The rate of deviations in the sample exceeds the rate of error in the accounting records

Question 82

# Section 8.2: Auditor’s Response to Risks What should an auditor do if the audit risk is low?

Answer 82

* Detection risk is low * Risk of Material Misstatement is high * A lower acceptable level of audit risk indicates a need for more persuasive audit evidence

Question 83

# Section 8.2: Auditor’s Response to Risks Why should an auditor decide to perform only substantive procedures for certain assertions?

Answer 83

* The auditor believes that the controls are not relevant to the assertions * Testing of controls may be inefficient

Question 84

# Section 8.2: Auditor’s Response to Risks What shold an auditor do when the client does not have any procedure manuals or flowcharts?

Answer 84

Adopt a substantive approach

Question 85

# Secton 8.3: Assessing Risk in a Computer Environment What are the advantages and disadvantages of the Test Data Approach?

Answer 85

Advantages * This approach directly tests specific controls * The auditor can create a dummy transaction specifically designed to test the transaction Disadvantages * Test processing is done at only one moment in time, but not throughout the year with the system.

Question 86

# Secton 8.3: Assessing Risk in a Computer Environment What is the difference between an Integrated Test Facility (ITF) and the Test Data Approach?

Answer 86

* ITF requires the auditor to create a dummy record within the client’s actual system * Test data approach has the auditor create a set of dummy transactions for testing a particular transaction

Question 87

# Secton 8.3: Assessing Risk in a Computer Environment What are the advantages and disadvantages of Integrated Test Facility?

Answer 87

Advantages * It tests the actual program in operation. Disadvantages * It requires considerable coordination. * The dummy transactions must be purged prior to internal and external reporting.

Question 88

# Secton 8.3: Assessing Risk in a Computer Environment What are the advantages and disadvantages of the Embedded Audit Module?

Answer 88

Advantages * It permits continuous monitoring of online, real-time systems. Disadvantages * Audit hooks must be programmed into the operating system and applications program.

Question 89

# Secton 8.3: Assessing Risk in a Computer Environment What are the advantages and disadvantages of parallel simulation?

Answer 89

Advantages * Since the testing does not occur with the actual system, the transactions throughout the period may be processed and the results can be compared with the client’s results. * Provides Assurance that edit checks have been applied during the period. Disadvantages * Cost of obtaining the program and the coordination effort required to obtain transactions to reprocess.

Question 90

# Secton 8.3: Assessing Risk in a Computer Environment How does an auditor obtain evidence that user identification and password controls are functioning as designed?

Answer 90

Examine a sample of password holders and access authority to determine whether they have access authority incompatible with their other responsibilities

Question 91

SECTION 9

Question 92

# Section 9.1: Communicating Internal Control Related Matters Identified What should be included in the communication of significant control deficiencies?

Answer 92

* Purpose of the Audit was to report on the financial statements, not to provide assurance on internal control * Definition of Significant Deficiency * Definition of Material Weakness * Report of any significant deficiencies or material weaknesses * **Restricted Report**

Question 93

# Section 9.1: Communicating Internal Control Related Matters Identified What is the level of importance between a significant deficiency and a material weakness

Answer 93

A material weakness is more severe than a significant deficiency

Question 94

# Section 9.1: Communicating Internal Control Related Matters What is a design deficiency?

Answer 94

The control is operating effectively * Is the control satisfying the objective? * Can the control prevent, detect or correct fraud or errors that can result in a material misstatement? * Is there documentation regarding the operation? * Is the control operating when observing the performance?

Question 95

# Section 9.1: Communicating Internal Control Related Matters What are the questions to identify an design deficiency?

Answer 95

**How do these controls look on paper? Were they designed to complete the objective?** Procedures to Test to I/C Design: * Walkthrough * Inquiry * Observe * Inspect documentation

Question 96

# Section 9.1: Communicating Internal Control Related Matters What is an operating deficiency?

Answer 96

**Are the controls working as intended?** Procedures to test I/C Operating Controls: * Observation * Inspection of documentation * Recalculation and reperformance of the control (This is the most persuasive test)

Question 97

# Section 9.1: Communicating Internal Control Related Matters What are examples of internal control operational failures?

Answer 97

* Failure to reconcile accounts * Management override of internal controls

Question 98

# Section 9.2: The Auditor’s Communication with Governance What matters is an auditor required to communicate to those charged with governance?

Answer 98

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process.

Question 99

# Section 9.3: Reporting on an Entity’s Internal Control What are examples of entity-level controls?

Answer 99

* Control environment * Controls over management override * Monitoring results of operations * Controls over period-end financial reporting process * Monitoring other controls * Risk assessment process

Question 100

# Section 9.3: Reporting on an Entity’s Internal Control When would an auditor issue an adverse opinion in a report on internal control?

Answer 100

* When a material weakness is discovered * The auditor believes that the internal control is not effective

Question 101

# Section 9.3: Reporting on an Entity’s Internal Control What would an auditor evaluate when planning an engagement to audit the effectiveness of the entity’s internal control in an integrated audit of a nonissuer?

Answer 101

* Preliminary judgments about the effectiveness of internal control * Type of available evidence pertaining to the effectiveness of the entity’s internal control * Extent of recent changes in the entity and its operations

Question 102

# Section 9.4: Service Organizations What is an auditor's responsibility concerning making reference to service provider's report?

Answer 102

* An auditor is not responsible for including a reference to the service provider's report if the service auditor was not responsible for examining any portion of the user entity's financial statements. * The user auditor should not refer to the service auditor if the user auditor issued an unmodified report * If the user auditor’s opinion is modified, the service auditor’s work may be referred to if it is relevant to understanding the modification

Question 103

# Section 9.4: Service Organizations What is the difference between SOC Type 1 and Type 2 Reports?

Answer 103

**SOC Type 1** * Includes a disclaimer of opinion related to the operating effectiveness of internal controls * Contains and opinion on whether management’s description of the system is fairly stated * Reports at a **specific point in time** * Further audit testing is required by the user auditor **SOC Type 2** * Reports on the design and **operating effectiveness** of internal control * Contains and opinion on whether management’s description of the system is fairly stated * Report is based **over a period of time** * The user auditor can reduce its overall control risk assessment

Question 104

# Section 9.4: Service Organizations In the integrated audit, how does an auditor evaluate whether the service auditor’s report on controls provides sufficient appropriate evidence?

Answer 104

* Assess the results of the test of controls * Assess the service auditor's opinion on the operating effectiveness of the controls * The service auditor's professional competence and independence * The adequacy of the standards under which the report was issued

Question 105

# Section 9.4: Service Organizations What should an auditor consider in the planning stages regarding internal controls of the organization?

Answer 105

The auditor should determine whether management has adequately described complementary user controls

Question 106

SECTION 10

Question 107

# Section 10.1: Nature, Sufficiency, and Appropriateness When is audit evidence more reliable?

Answer 107

* Obtained from independent sources * Generated internally under effective internal control * Is obtained directly by the auditor * Is in documentary form, whether paper, electronic, or other medium * Consists of original documents

Question 108

# Section 10.1: Nature, Sufficiency, and Appropriateness What audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?

Answer 108

* Direct observation is the most reliable * Inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control

Question 109

# Section 10.2: External Confirmations What is the difference between a positive confirmation, a negative confirmation and a blank confirmation?

Answer 109

* A positive confirmation requires a reply no matter if there is balance due or not. * A negative confirmation asks for a reply only if the client disagrees with the information * A blank confirmation requires the client to enter the information as it does not include any information that needs to be verified.

Question 110

# Section 10.2: External Confirmations When should negative confirmations be used?

Answer 110

* When the acceptable audit risk is high * The assessed risk of material misstatement is low * When many there is a small number of accounts that have small balances * A very low exception rate is expected * The auditor has no reason to believe that the recipients of the requests are unlikely to consider them * The auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls

Question 111

# Section 10.2: External Confirmations When would a blank form of accounts receivable confirmation be used?

Answer 111

Recipients are likely to sign other types of positive confirmations without careful investigation

Question 112

# Section 10.3: Audit Documentation When is specific documentation sufficient when reviewing audit evidence?

Answer 112

* The specific document should be identified * It should refer to a note without explicitly stating a number in the audit documentation

Question 113

# Section 10.3: Audit Documentation What is the purpose of a lead schedule?

Answer 113

* Lead schedules are summaries of detailed schedules * Examples include summarized banking information and listing of individual A/R accounts.

Question 114

Section 11

Question 115

# Sections 11 and 12 What are the objectives of the assertions?

Answer 115

Completeness: Do the applicable balances contain all of the transactions in the period? Occurrence: Did the transaction occur in the reporting period? Existence: Are the transactions valid as of the reporting date? Rights and Obligations: Is the entity responsible for the obligation? Valuation, allocation and accuracy: Are the amounts recorded appropriately?

Question 116

# Section 11.1: Substantive Testing of Sales and Receivables Assertion Testing for Sales and Receivables

Answer 116

**Completeness** * Compare subsidiary ledger to the general ledger * Account for numerical sequence of shipping documents and invoices * Compare shipping documents with sales invoices and journal entries * Analytical Procedures **Accuracy, Valuation and Allocation** * Obtain management representations about sales and receivables * Compare general ledger and financial statement balances * Age the accounts receivable * Trace subsequent cash receipts **Existence** * Confirmation * Vouch recorded A/R to shipping documents **Rights and Obligations** * Ask management if any receivables have been factored or pledged * Track cash receipts to see if the company is depositing and collecting cash into the company account **Occurrence** * Vouching from ledger to customer orders and shipping documents

Question 117

# Section 11.1: Substantive Testing of Sales and Receivables What is the best way to test for overstatement/understatement of sales?

Answer 117

Overstatement: * Vouch the sales account to the shipping documents because their may not be supporting documentation from the sale * Test for Existence: Accounting records with source documents Understatement: * Shipping documents to sales invoices * Test for Completeness: Source documents to accounting records

Question 118

# Section 11.1: Substantive Testing of Sales and Receivables What does it mean when the A/R turnover increases?

Answer 118

The higher the turnover ratio, the faster the business is collecting its receivables.

Question 119

# Section 11.1: Substantive Testing of Sales and Receivables What is the best way to determine the collectibility of A/R?

Answer 119

* Review cash collections to find out if the receivable was paid. * Collectibility is based on the valuation assertion

Question 120

# Section 11.1: Substantive Testing of Sales and Receivables Why is trend analysis used as substantive testing?

Answer 120

* Trend analysis is used because it shows an assumption of how the company performs either in side-by-side basis (i.e. quarterly) or through industry trends * It can help determine if any unusual transactions have occurred.

Question 121

# Section 11.2: Substantive Testing of Cash Assertion Testing for Cash

Answer 121

**Completeness** * For cash receipts, trace the daily remittance list to the last validated deposit ticket * For cash disbursements, determine last check written and trace to the accounting records * Analytical Procedures **Accuracy, Valuation and Allocation** * Compare daily remittance listings with deposits, journal entries and ledger postings * Compare general ledger and financial statement balances * Review currency and hedge holdings **Existence** * Counting cash * Obtaining bank confirmations * Performing bank reconciliations * Examining cutoff bank statements * Preparing schedules of interbank transfers * Preparing proofs of cash **Rights and Obligations** * Tracking cash receipts to determine that an entity is collecting and depositing the proceeds into bank accounts **Occurrence** * Vouching a sample of recorded sales transactions to customer orders and shipping documents **Cutoff** * Recording of cash receipts to accounts receivable * The auditor should inspect and trace the daily remittance list for several days prior to and after year end

Question 122

SECTION 12

Question 123

# Section 12.1: Substantive Testing of Accounts Payable and Purchases What is most important for an auditor who is auditing a public warehouse?

Answer 123

* Inspection of receiving and issuing procedures in order to disclose for unrecorded liabilities * Shipping orders and receiving reports that are not reflected in the records suggest that transactions are not being properly recorded.

Question 124

# Section 12.1: Substantive Testing of Accounts Payable and Purchases How does an auditor determine whether all merchandise for which the client was billed was received?

Answer 124

Review the vendor invoices to trace them to the receiving report

Question 125

# Section 12.1: Substantive Testing of Accounts Payable and Purchases How does an auditor search for unrecorded liabilities?

Answer 125

* Compare cash payments with the liability trial balance * Review the receiving report for items received before year end but not recorded * Vouch cash disbursements with receiving reports and vendor's invoices * When a public warehouse is used, the auditor will inspect receiving and issuing procedures to determine if there are any unrecorded liabilities

Question 126

# Section 12.1: Substantive Testing of Accounts Payable and Purchases Assertion Testing for A/P

Answer 126

**Completeness** * Unvouchered payables * Source documentation to ledger * Analytical Procedures **Accuracy, Valuation and Allocation** * Obtain management representations about purchases and payables * Compare general ledger and financial statement balances * Ratios **Existence** * Confirmation **Rights and Obligations** * Get management representation about the nature of recorded payables **Occurrence** * Vouching from ledger to documentation

Question 127

# Section 12.2: Substantive Testing of Inventory Assertion Test for Inventory

Answer 127

**Completeness** * Analytical procedures (i.e. ratios, vertical analysis, nonfinancial information) **Accuracy, Valuation and Allocation** * Compare recorded costs with current costs to replace the goods * Calculate the turnover ratio * Test costs of manufactured items **Existence (Validation)** * Observation * Using prenumbered tags and summary sheets * Performing test counts * Inventories held in public warehouses * Vouch items listed on listing schedule to inventory tags and the auditor's recorded count sheets **Rights and Obligations** * Vouch recorded purchases to documentation * Consider consigned goods **Occurrence** * Vouch sample of purchases to documentation * Vouch sample of recorded cost of sales to documentation

Question 128

# Section 12.2: Substantive Testing of Inventory How is a turnover formula used in an assertion?

Answer 128

* A turnover is used to determine the accuracy, valuation and existence assertion * For inventories, it identifies slow-moving, excess, defective or obsolete items in inventory

Question 129

# Section 12.3: Substantive Testing of Property, Plant, and Equipment What does an auditor do when few property and equipment transactions occur during the year?

Answer 129

* Perform extensive tests of current year property and equipment transactions * The auditor also may not rely on controls after obtaining an understanding of internal control

Question 130

# Section 12.3: Substantive Testing of Property, Plant, and Equipment How does an auditor test for unrecorded assets?

Answer 130

* Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities * Select items of equipment from the accounting records and then locate them during the plant tour

Question 131

# Section 12.3: Substantive Testing of Property, Plant, and Equipment How should an auditor test when equipment is under a finance lease?

Answer 131

The auditor should review the interest rate used in discounting the future lease payments

Question 132

# Section 12.3: Substantive Testing of Property, Plant, and Equipment Assertion Testing for PP&E

Answer 132

**Completeness** * Analytical procedures * Reconciliation of subsidiary and general ledgers * Analyze repairs and maintenance **Accuracy, Valuation and Allocation** * Inspect records of purchases * Vouch additions and disposals * Test depreciation **Existence** * Inspect plant additions * Physically examines new additions listed on an analysis of plant and equipment * Ratio Analysis (i.e. gross manufacturing equipment cost to units produced) * Obtain a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service **Rights and Obligations** * Examine titles and leases * Inspect insurance policies **Occurrence** * Test of authorization, execution, recording and custody of transactions

Question 133

# Section 12.4: Substantive Testing of Investments Assertion Testing for Investments

Answer 133

**Completeness** * Analytical procedures * Reconciliation of subsidiary and general ledgers with control accounts * Evaluate contracts and agreements * Compare expected returns with the amounts actually recorded **Accuracy, Valuation and Allocation** * Recalculate interest revenue * Compare general ledger balances with financial statement balances * Vouch recorded amounts for securities to market quotations * Determine unrealized gains and losses are properly accounted for * Determine transfers between categories are reported at fair value * Inspect records and documents * Obtain audited financial statements from the investees if using equity method * Evaluate goodwill for impairment **Existence** * Physically inspect and count securities * Confirm securities **Rights and Obligations** * Trace dividend and interest revenue **Occurrence** * Vouch recorded costs to documentation

Question 134

# Section 12.5: Substantive Testing of Noncurrent Debt How does an auditor audit for unrecorded noncurrent debt?

Answer 134

* Compare interest expense with the bond payable amount for reasonableness * The recorded interest expense should reconcile with the oustanding debt * If the interest expense is overstated, then an unrecorded noncurrent liability may exist

Question 135

# Section 12.5: Substantive Testing of Noncurrent Debt What step does an auditor perform to audit noncurrent debt?

Answer 135

Correlating interest expense recorded for the period with outstanding debt

Question 136

# Section 12.5: Substantive Testing of Noncurrent Debt What is a bond identure?

Answer 136

* A bond trust indenture is the contractual agreement between the bondholders and the bond issuer. * A bond issuer normally employs the services of an independent financial institution as trustee * It contains: 1. The date of issue and the date of maturity of the bond issue. 2. The amount of the bonds 3. Interest rates 4. Payment dates 5. Descriptions of collateral 6. Provisions for conversion or retirement 7. Trustee duties 8. Sinking-fund requirements 9. Restrictions on the borrower

Question 137

# Section 12.5: Substantive Testing of Noncurrent Debt What analytical procedure that an auditor most likely would use while auditing a company’s notes payable?

Answer 137

* Compare prior-period amounts recorded for notes payable with current amounts * Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded

Question 138

# Section 12.5: Substantive Testing of Noncurrent Debt Assertion Testing for Non-Current Debt

Answer 138

**Completeness** * Analytical ratios (i.e. Debt-to Equity ratios) * Reconciliation of subsidiary and general ledgers with control accounts **Accuracy, Valuation and Allocation** * Make inquiries of management * Compare the general ledger balances with the financial statement balances * Vouch recorded debt to debt instruments * Test amortization **Existence** * Confirm debt **Rights and Obligations** * Evaluate existing agreements * Examine Bond trust indentures **Occurrence** * Review contracts and agreements

Question 139

# Section 12.6: Substantive Testing for Equity Assertion Testing for Equity

Answer 139

**Completeness** * Analytical procedures * Reconciliation of subsidiary and general ledgers with control accounts **Accuracy, Valuation and Allocation** * Make inquiries of management regarding equity related actions, activities and balances * Compare the general ledger balances with the financial statement balances * Trace entries to equity accounts * Test sales of treasury stock * Net income has been closed to retained earnings **Existence** * Confirm shares issues and outstanding * Inspect stock certificates held by treasury * Inspect stock certificate book **Rights and Obligations** * Inspect the articles of incorporation and bylaws **Occurrence** * Vouch entries to supporting documents

Question 140

# Section 12.7: Substantive Testing of Payroll What procedure would an auditor do to detect fraud by preparing erroneous W-2 forms?

Answer 140

Multiply the applicable FICA rate by each individual’s gross annual taxable earnings

Question 141

# Section 12.7: Substantive Testing of Payroll Assertion Testing for Payroll

Answer 141

**Completeness** * Perform analytical procedures * Reconcile payroll tax expense and payroll tax returns **Accuracy, Valuation and Allocation** * Make inquiries * Compare the general ledger balances with the financial statement balances * Trace costs to inventories * Recalculate pension and OPEB costs **Existence** * Observe distribution of paychecks **Rights and Obligations** * Inspect cancelled checks **Occurrence** * Vouch a sample of employee transactions

Question 142

SECTION 13

Question 143

# Section 13.1: Consideration of Litigation, Claims, and Assessments Which of the following statements from an attorney's letter would require more clarification?

Answer 143

* Without Merit. No liability expected, so no additional clarification necessary * Action will not result. No liability expected, so no additional clarification necessary * Nominal in amount. Possible liability for an immaterial amount. No additional clarification necessary **Problems establishing liability = Clarification needed Settled for less than damages claimed = Clarification needed** **Meritorious defenses to this action = Clarification needed**

Question 144

# Section 13.1: Consideration of Litigation, Claims, and Assessments What would be included in legal counsel's response to an auditor's request?

Answer 144

* The legal team would provide an explanation regarding any limitations on the scope of the response * The letter of inquiry would include a statement regarding the nature and reasons for any limitation on legal counsel’s response

Question 145

# Section 13.2: Subsequent Events and Subsequently Discovered Facts What procedures should an auditor perform in order to obtain evidence about subsequent events?

Answer 145

* Reading the latest subsequent interim statements, if any * Inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters * Reading the minutes of meetings of owners, management, and those charged with governance * Obtaining a letter of representations from management * Inquiring of legal counsel * Obtaining an understanding of management’s procedures for identifying subsequent events.

Question 146

# Section 13.2: Subsequent Events and Subsequently Discovered Facts What is the difference between subsequent events and subsequently discovered facts?

Answer 146

* Subsequent events occur between the date of the financial statements and the date of the auditor's report * Subsequently discovered facts become known to the auditor after the date of the auditor's report

Question 147

# Section 13.3: Written Representations What are the materiality limits in regard to the management representation letter?

Answer 147

* Materiality limits are usually set by the auditor in order to efficiently perform the audit * Materiality limits would ordinarily apply to related party transactions

Question 148

# Section 13.3: Written Representations What should be included in the management representation letter with regard to uncorrected misstatements?

Answer 148

* Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole * A list of the immaterial missstatements is attached to the representation letter

Question 149

# Section 13.4: Auditor’s Consideration of an Entity’s as a Going Concern What should an auditor do if they have substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time?

Answer 149

Considering the adequacy of disclosure about the client’s possible inability to continue as a going concern

Question 150

SECTION 14

Question 151

# Section 14.1: Sampling Fundamentals What's the difference between sampling for attributes and sampling for variables?

Answer 151

**Sampling for Attributes** * Used for testing of controls * Actual deviation rate > Tolerable **deviation rate** = Increased Risk * Overreliance/Underreliance * 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

Question 152

# Section 14.1: Sampling Fundamentals What is block sampling?

Answer 152

Block sampling randomly selects groups of items as sampling units instead of individual units.

Question 153

# Section 14.1: Sampling Fundamentals When is Monetary-Unit Sampling Used?

Answer 153

* For accounts subject to the risk of overstatement (e.g., assets) * If few misstatements are expected * Does not require a measure of variance to determine the sample size or interpret the results * This method is based on the Poisson distribution to approximate the binomial distribution

Question 154

# Section 14.1: Sampling Fundamentals Why may a stratified mean-per-unit (MPU) sampling be more efficient than unstratified MPU?

Answer 154

Produces an estimate having a desired level of precision with a smaller sample size

Question 155

# Section 14.1: Sampling Fundamentals What is the difference between Mean-per-Unit and monetary-unit sampling?

Answer 155

Mean per unit is based on samples Monetary unit is based on dollars

Question 156

# Section 14.1: Sampling Fundamentals What is Unrestricted Random Sampling?

Answer 156

Unrestricted random sampling is when each item in the population has an equal or nonzero chance of being selected.

Question 157

# Section 14.1: Sampling Fundamentals What is systematic sampling?

Answer 157

* Systematic sampling is based on a certain number. * The items should be arranged randomly * The value of the number selected is computed based on the population and the number of sampling units.

Question 158

# Section 14.1: Sampling Fundamentals What is an advantage of statistical sampling over nonstatistical sampling?

Answer 158

Since sufficiency is based on the quantity of evidence, using statistical sampling helps the auditor to measure the sufficiency of the evidence

Question 159

# Section 14.1: Sampling Fundamentals What is random sampling?

Answer 159

* Large Population * Each unit has the same signifance

Question 160

# Section 14.1: Sampling Fundamentals What is ratio sampling?

Answer 160

* Audit calculated amounts are proportional to client carrying amounts. * This results in a smaller precision

Question 161

# Section 14.2: Statistical Attribute Sampling in Tests of Controls How is the allowance for sample risk calculated?

Answer 161

Achieved upper deviation limit (Sample deviation rate)

Question 162

# Section 14.2: Statistical Attribute Sampling in Tests of Controls What's the difference between sampling and non-sampling risk?

Answer 162

Does the conclusion only effect the sample? = Sample Risk Does the conclusion effect past the sample? = Non-Sampling Risk

Question 163

# Section 14.2: Statistical Attribute Sampling in Tests of Controls What is sampling risk?

Answer 163

* Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion if the same audit procedure were applied to every item in the population * Underreliance is one aspect of sampling risk * An example of sampling risk is the auditor coming to the wrong conclusion based on sample data

Question 164

# Section 14.2: Statistical Attribute Sampling in Tests of Controls When statistical sampling is used to test the effectiveness of controls, what are the results from the auditor's procedures?

Answer 164

* The relation of the population deviation rate to the tolerable rate * Attribute sampling allows the auditor to estimate the occurrence rate of deviations * Allows the auditor to determine the relation of the estimated rate to the tolerable rate

Question 165

# Section 14.2: Statistical Attribute Sampling in Tests of Controls What causes and incorrect acceptance (effectiveness) when testing controls?

Answer 165

Auditor's sample deviation rate < the tolerable misstatement True deviation rate > the tolerable misstatement.

Question 166

# Section 14.2: Statistical Attribute Sampling in Tests of Controls What causes an underrealiance in attibute sampling of test of controls?

Answer 166

* The deviation rate in the auditor's sample is greater than the tolerable popular deviation rate * The deviation rate in the population is less than the tolerable population deviation rate

Question 167

# Section 14.2: Statistical Attribute Sampling in Tests of Controls Attribute Sampling Example

Answer 167

**Expected Error Rate** Increases from 2% to 3%; Sample Size increases **Tolerable Deviation Rate** Increases from 5% to 6%; Sample size decreases **Allowable Level of Sampling Risk** Decreases from 90% to 95%; Sample size increeases

Question 168

# Section 14.3: Classical Variables Sampling (Mean-per-Unit) What is the effect on sample size with respect to the population size in variable sampling?

Answer 168

* For smaller populations, 200 - 2,000, sample size is reduced by the effect of population size * For larger populations, the population size has little effect on the sample size

Question 169

# Section 14.3: Classical Variables Sampling (Mean-per-Unit) What is dual-purpose testing?

Answer 169

* Duel 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 larger of the two samples.

Question 170

# Section 14.3: Classical Variables Sampling (Mean-per-Unit) What is the calculation to determine the Point Estimate?

Answer 170

Number of items in a population x Average Amount Based on Sample

Question 171

# Section 14.3: Classical Variables Sampling (Mean-per-Unit) What is the calculate for the Population Misstatement?

Answer 171

Point Estimate (Client Established Amount)

Question 172

# Section 14.3: Classical Variables Sampling (Mean-per-Unit) What are the steps to calculate Mean-Per-Unit?

Answer 172

Step 1: Calculate the Point Estimate (Extending the Average) Step 2: Calculate the Estimating the Population Misstatement Step 3: Calculate the Margin of Error

Question 173

# Section 14.3: Classical Variables Sampling (Mean-per-Unit) What is the calculate to determine the Margin of Error?

Answer 173

Number of Items in Population x Average Deviation Amount

Question 174

# 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?

Answer 174

* Population Size * Estimate of Population Variation (Standard Deviation) * Risk of Incorrect Rejection * Tolerable Misstatement

Question 175

# Section 14.4: Monetary-Unit Sampling (MUS) How is the projected misstatement calculated when the recorded amount is greater than the sampling internval in Monetary-Unit Sampling?

Answer 175

If the recorded amount is greater than the sampling interval, then the projected misstatement will be the recorded amount of the item.

Question 176

# Section 14.4: Monetary-Unit Sampling (MUS) How is the sampling interval calculated?

Answer 176

Two Types of Calculation * Tolerable Misstatment/Confidence Factor * (Tolerable Misstatement - (Anticipated Misstatement x Expansion Factor)) / Confidence Factor

Question 177

# Section 14.4: Monetary-Unit Sampling (MUS) How is the MUS sample size calculated?

Answer 177

Recorded Amount of Population / Sampling Interval

Question 178

SECTION 15

Question 179

# Section 15: Reports What types of reports are issued when there is pervasive issues?

Answer 179

Adverse: Pervasive and material misstatement to the **Financial Statements** Qualified: Pervasive and not a material misstatement to the **Financial Statements** Qualified: Pervasive and not a material misstatement to the **scope** of the audit Discontinued: Pervasive and material misstatement to the **scope** of the audit

Question 180

# Section 15.1: The Auditor’s Reporting Responsibility What is the objective of the audit of GAAP-based financial statements?

Answer 180

* The objective of the audit is to express an opinion on the fairness of the **financial** statements * The auditor's judgment regarding the financial statements is applied within the framework of **GAAP**.

Question 181

# Section 15.1: The Auditor’s Reporting Responsibility What financial information must be must disclosed in audited financial statements?

Answer 181

* Changes in method in accounting inventory * Pledged assets * LIFO Reserves

Question 182

# Section 15.2: The Auditor's Report What is a critical audit matter (CAM)?

Answer 182

A critical audit matter (CAM) is any matter resulting from the audit of the **issuers** financial statements that: * Is either communicated, or must be communicated to the audit committee. * Relates to material accounts and disclosures (i.e. possible material loss). * Involves challenging, subject or complex auditor judgement. * A possible material loss due to an uncollectible receivable

Question 183

# Section 15.3: Addressing and Dating the Report When does an auditor decide whether to dual date the audit report?

Answer 183

The auditor is willing to extend the audit procedures

Question 184

# Section 15.3: Addressing and Dating the Report When would audited financial statements be marked as "Unaudited"?

Answer 184

When an event occurs after the date of the original auditors report

Question 185

# Section 15.4: Qualified Opinions What type of report will an auditor issue if they were unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary?

Answer 185

* Qualified or disclaimer, depending on pervasiveness * Auditor is unable to obtain sufficient audit evidence

Question 186

# Section 15.4: Qualified Opinions What causes a Qualified Opinion?

Answer 186

A qualified opinion is issued when: * There is a material misstatement related to specific amounts in the financial statement that is not pervasive. * Circumstances not controlled by the entity * Circumstances related to the nature or timing of work due to the late engagement. * Limitations imposed by management. * Unjustifed change in accounting principle * Scope limitation * Omitting a financial statement from the audit (i.e. Statement of Cash Flow).

Question 187

# Section 15.4: Qualified Opinions What type of opinion is expressed when the financial statements are materially, but not pervasively, misstated?

Answer 187

Qualified opinion

Question 188

# Section 15.5: Adverse Opinions What are the causes of an adverse opinion?

Answer 188

Sufficient evidence is obtained to conclude the that financial statements are materially misstated and pervasive.

Question 189

# Section 15.6: Disclaimers of Opinion What type of opinion is expressed if the client refuses the suggestions of an auditor in regard to disclosure of the financial statements?

Answer 189

* An adverse opinion will be issued if the financial statements lack adequate disclosure, and the client refuses to the auditor's suggestions to correct the issue. * The disclaimer of opinion should include a description of the departure, which should state the nature of the departure and the effects on the financial statements, as well as any other necessary information.

Question 190

# Section 15.6: Disclaimers of Opinion What type of opinion is expressed if the client refuses to include one of the financial statements (i.e. cash flows)?

Answer 190

* The auditor should provide the information in the report, but they are not required to prepare the report. * A qualified opinion is issued because of material misstatement * The reason for the qualified opinion is explained in a separate paragraph of the report

Question 191

# Section 15.6: Disclaimers of Opinion What causes a disclaimer of opinion?

Answer 191

* The auditor cannot obtain sufficient appropriate evidence, which results in the financial statements being materially misstated and pervasive. * A scope limitation that results from circumstances not controlled by the entity. * A scope limitation because of circumstances related to the nature of timing of the work (i.e. unable to confirm beginning inventory). * A scope limitation due to limits imposed by management * The auditor is unable to determine information due to an employee fraud scheme

Question 192

# Section 15.6: Disclaimers of Opinion What should an auditor do when they suggest appropriate revisions to the financial statements for an **issuer**, but management refuses to accept the CPA’s suggestions?

Answer 192

* Under PCAOB standards, the auditor discloses the departure in the report * If possible, the auditor should describe the nature of the departure from GAAP in the report and state the effects on the financial statements

Question 193

SECTION 16

Question 194

# Section 16.1: Group Audits and Component Auditors What are the responsibilities of the group engagement team in regard to the component auditor?

Answer 194

* The group engagement team should have an understanding of the component auditor's professional competance and compliance with ethical requirements. * Confirm that the component auditor meets the same ethical requirements as the group engagement team.

Question 195

# Section 3.6: Consideration of Fraud in a Financial Statement Audit How should an auditor identify and assess risks that may result in material misstatements due to fraud in a financial statement audit?

Answer 195

Evaluating whether the entity's related controls have been suitably designed and implemented

Question 196

# Section 16.2: Consistency of Financial Statements What is a change in reporting entity?

Answer 196

A change from presentation of statements of individual companies to presentation of consolidated statements

Question 197

# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs What is included in the Emphasis-Of-Matter paragraph?

Answer 197

* 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

Question 198

# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs How are emphasis paragraphs reported for an issuer (PCAOB)?

Answer 198

Under PCAOB, an emphasis paragraph is * Never required * Not a substitute for Critical Audit Matters (CAM) * Not referred to in the opinion section

Question 199

SECTION 17

Question 200

What are the types of audit procedures and reports used for Other information, RSI, Supplemental Information (SI), and Summary Financial Reports?

Answer 200

**Interim Financial Information (IFI)** * Review Report * To determine whether material modifications that should be made for such information to conform with the applicable financial reporting framework. * Limited procedures (i.e. inquiries, analytical procedures, and obtaining written representations from management) **Other Information** * Read for consistency with the financial statements * Material misstatements and inconsistencies are reported in the Other Information section of the auditor's report * Included in the auditor's report under the Other Information section **RSI** * Apply limited procedures * In a seperate section in the auditor's report **Supplemental Information (SI) in Relation to the Financial Statements as a Whole** * Audit * Either a separate section in the report or a separate report **Summary Financial Reports** * Is the information in the report consistent with the financial statements? * A seperate report is issued that refers to the audit report * States the opinion about consistency and complete audited financial statements

Question 201

# Section 17.2: The Auditor's Responsibilities to the Annual Report What is the purpose of including Other Information in the annual report?

Answer 201

Other information contains financial and nonfinancial information that are not reported on the audited financial statements. Examples include * Annual Report to Owners * Management Report on Operations * Selected Quarterly Data * Financial Summaries * CEO's Letter in the Annual Report

Question 202

# Section 17.2: The Auditor's Responsibilities to the Annual Report What should an auditor do when management refuses to correct a material misstatement in other information?

Answer 202

* Aware governance and/or counsel * Withhold the report * Withdraw from the engagement **The auditor does not modify the opinion**

Question 203

# Section 17.3: Required Supplementary Information (RSI) What is included in the RSI Section of the Auditor's Report?

Answer 203

A section after the opinion paragraph is added for the RSI * RSI reference and the applicable reporting framework. * Statement that the RSI is the responsibility of Management * Statement that the auditor has applied procedures in accordance with GAAS * Statement that the auditor does not express an opinion or provide any assurance on the RSI

Question 204

# Section 17.4: Supplementary Information in Relation to the FS What is the basis of the procedures used to express an opinion on supplementary information?

Answer 204

The materiality level used for the audit of the financial statements

Question 205

# Section 17.4: Supplementary Information to the Financial Statements What are management’s responsibilities surrounding supplementary information (SI)?

Answer 205

* Preparing SI in accordance with applicable criteria * Providing written representations * The auditor’s report on the SI with the SI and the audited statements are included in the report packet

Question 206

# Section 17.4: Supplementary Information to the Financial Statements When auditor is engaged to report on statistical data presented with audited financial statements, what type of data should be used?

Answer 206

The statistical data should be limited to data derived from the entity’s audited financial statements

Question 207

# Section 17.5: Engagements to Report on Summary Financial Statements What procedures are performed by an auditor in an engagement to report on supplementary financial statements?

Answer 207

* Determine whether the summary statements agree with the related information in the audited statements. * Determine that information in the summary statements can be recalculated based on the related information in the audited statements * Comparing the summary statements with the related information in the audited statements * Evaluate whether the summary statements are prepared in accordance with the applied criteria applied by management * Obtain a representation letter from management

Question 208

# Section 17.5: Engagements to Report on Summary Financial Statements What type of report is isueed for summary financial statements?

Answer 208

An opinion on whether the summary financial statements are consistent, in all material respects, with the audited financial statements that the summary financial statemens are based on

Question 209

# Section 17.6: Financial Statements Prepared in Another Country What is included in the auditor's report for financial statements prepared in accordance with a reporting framework generally accepted in another country and intended for use in the U.S.?

Answer 209

* An emphasis-of-matter paragraph identifying the reporting framework used in the preparation of the financial statements * An emphasis-of-matter paragraph indicating that the framework differs from accounting principles generally accepted in the U.S. * The auditor should report using the U.S. form of report

Question 210

# Section 17.6: Financial Statements Prepared in Another Country What are the types of reports that are appropriate to issue when an audit is prepared for outside the US?

Answer 210

* 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

Question 211

# Section 17.7: Reports on Application of Requirements (AU-C 915) When are the standards for AU-C 915?

Answer 211

* By an accountant in public practice * Applies to an actual transaction given specific facts and circumstances of a specific entity. * Addresses whether a reporting framework applies to a proposed transaction involving facts or circumstances of a specific entity. * Addresses how a completed transaction of a specific entity may be accounted for under the existing reporting framework. * Does not apply to a current, or continuing, auditor * Independence is not required, but must disclose the lack of independence

Question 212

# Section 17.7: Reports on Application of Requirements (AU-C 915) How should AU-C 915 be applied?

Answer 212

* Applied by the reporting accountant (not an employee or continuing accountant) * A written report based on the application of requirements of a financial reporting framework to a specific transaction * Reports on circumstances of a specific entity or type of report that may be issued on a specific entity's statements * Applies to oral advice that is considered an important factor

Question 213

# Section 17.8: Special Purpose Frameworks Audits When issuing and audit report on a special purpose framework, what if the statements are not suitably titled?

Answer 213

If the auditor believes that the statements are not suitably titled. * The auditor should disclose any reservations in a basis for qualified opinion section. * The auditor will qualify the opinion.

Question 214

# Section 17.9: Key Audit Matters (KAM) What are key audit matters (KAM)?

Answer 214

* Key audit matters are generate for **non-issuers** * Key audit matters are matters that are most significant in the **current** period audit. * Key audit matters are based on the auditor's professional judgement. * The communication of key audit matters gives users more information to facilitate their understanding of matters that may affect the entity, the statements or the audit.

Question 215

# Section 17.9: Key Audit Matters (KAM) What should an auditor consider in determining key audit matters?

Answer 215

* Areas of higher assessed risks of material misstatements. * Significant risks * Significant auditor judgements about areas involving significant management judgements. * The audit effect of significant events or transactions during the period.

Question 216

SECTION 18

Question 217

# Section 18.2: Preparation of Financial Statements (AR-C 70) What is management's responsibility in the engagement letter as it relates to the preparation of financial statements?

Answer 217

* Management's agreement about certain matters * It acknowledges and understands its responsibilities * Accuracy and completeness of records * The accuracy of significant judgments it provides for the preparation of the financial statements

Question 218

# Section 18.2: Preparation of Financial Statements (AR-C 70) What is the purpose of a preparation service under SSARs?

Answer 218

* A preparation service allows the accountant to generate financial statements and release them to the client or third parties without a report. * Each page should stated that the prepare provides no assurance. * Independence is not required, and does not need to be reported to management

Question 219

# Section 18.2: Preparation of Financial Statements (AR-C 70) What are the accountant's responsibilities when engaged to prepare financial statements?

Answer 219

* A statement on each page that no assurance is provided * The agreed-upon terms of the engagement should include identification of the applicable financial framework to be used * The engagement documentation should include the engagement letter and a copy of the prepared financial statements

Question 220

# Section 18.2: Preparation of Financial Statements (AR-C 70) When does the Preparation of financial statements according to AR-C 70 apply?

Answer 220

* When an accountant in public practice is engaged to prepare financial statements * The determination of whether the accountant has been engaged to prepare financial statements depends on the services requested * Assisting the the preparation is not applicable

Question 221

# Section 18.3: Compilation of Financial Statements (AR-C 80) What does the guidance of a compilation apply to?

Answer 221

* Prospective financial information * Proforma financial information * Other historical financial information

Question 222

# Section 18.3: Compilation of Financial Statements (AR-C 80) What is the objective of a compiliation of financial statements?

Answer 222

* To apply accounting and financial reporting expertise to assist management in the presentation of financial statements * **No assurance is provided**

Question 223

# Section 18.3: Compilation of Financial Statements (AR-C 80) What is included when an accountant compiles the financial statements of a nonissuer?

Answer 223

* The accountant does not express an opinion or a conclusion * The accountant does not provide any form of assurance on the statements

Question 224

# Section 18.4: Review of Financial Statements (SSARS) What type of analytical procedures are performed in an nonissuers review of financial statements?

Answer 224

* Read the financial statements to confirm that they conform with GAAP * Reconcile the financial statements with the accounting records * Obtain written representation from management * Comparison of current and prior year account balances * Compare current year budget to forecast * Industry benchmarks

Question 225

# Section 18.4: Review of Financial Statements (SSARS) What is included in the review report of a nonissuers financial statements?

Answer 225

* For a review, an accountant expresses a **conclusion**, not an opinion. An opinion is issued for audits. * The accountant expresses limited assurance on the financial statements * A review is substantially less in scope than an audit * Information about subsequent events * “...not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.”

Question 226

# Section 18.5: Compilation of Pro Forma Financial Information (PFFI) What are the reporting components of the PFFI compilation?

Answer 226

* Independence: Not required, but lack of requires a modification to the report * Complete financials must be included with the PFFI * A summary of significant assumptions must be included with the PFFI * Based on historical information that might have resulted if the transaction occurred earlier * The statements must have been reviewed, compiled or audited in order to be included in the document. * The accountant assists management to present the PFFI.

Question 227

SECTION 19

Question 228

# Section 19.1: Concepts Common to All Attestation Engagements (AT-C 105) What documentation is required for an Examination under SSAE?

Answer 228

Required documentation for an examination is the same as for an audit * A description of the nature, timing and extent of the procedures performed. * Specific items or matters tested are identified * Who performed the work * The date the work was completed * Who reviewed the work * The date and extent of the review

Question 229

# Section 19.1: Concepts Common to All Attestation Engagements (AT-C 105) What happens if a responsible party **who is not the engaging party** refuses to provide a written assertion for an attestation examination or review?

Answer 229

* The auditor discloses the refusal in the report * Restrict the use of the report to the engaging party

Question 230

# Section 19.1: Concepts Common to All Attestation Engagements (AT-C 105) When are assertions required?

Answer 230

**Examination** * Is it a direct examination? No * Is it a forecast? Yes **Reviews** * Is the client the responsible party? Yes. The written assertion is required by the responsible party * Is the responsible party not the client? The non-client provides the assertion, but they do not need to supply a written assertion **Agreed-Upon Procedures** * No assertion required

Question 231

# Section 19.2: Examination Engagements (AT-C 205 and AT-C 206) When will a a practitioner disclaim an opinion on an examination of prospective financial statements?

Answer 231

The practitioner cannot perform certain procedures that are necessary to complete the engagement

Question 232

# Section 19.3: Review Engagements Under SSAE (AT-C 210) In an attestation review engagement, which party is responsible for the representation letter?

Answer 232

* The responsible party is responsible for the written letter of representations. * If the engaging party is not the responsible party, then the practitioner should obtain written representations from both parties.

Question 233

# Section 19.4: Agreed-Upon Procedures Engagements (AT-C 215) If an auditor of a nonissuer concludes that reasonable justification exists to change an audit engagement to an agreed-upon procedures engagement, then should be included in the report?

Answer 233

* The auditor should not include a reference to the original audit engagement but may include a reference to procedures that have been performed * The report will state the results of applying agreed-upon procedures to specific subject matter should be in the form of procedures and findings * All findings should be reported, and any agreed materiality limits should be described

Question 234

# Section 19.5: Prospective Financial Information (AT-C 305) What is the difference between a financial projection and a financial forecast?

Answer 234

Financial Projections * A financial projection is based on estimates of conditions that are be based on one or more hypothetical assumptions. * Reporting is for limited use ** Reviews are not reported** Financial Forecasts * Based on historical information * A financial forecast is based on assumptions based on conditions that are expected to exist and courses of action expected to be taken. * Only examination reports are for general use **Reviews are not reported**

Question 235

# Section 19.5: Prospective Financial Information (AT-C 305) What is a hypothetical assumption?

Answer 235

A hypothetical condition is an assumption made contrary to fact, but which is assumed for the purpose of discussion, analysis, or formulation of opinions

Question 236

# Section 19.6: Reporting on Pro Forma Financial Information (AT-C 310) What are the conditions that must be met in regard to the historical financial statements when reporting on pro forma financial information?

Answer 236

* For an examination, which is similar to an audit, the related historical financial statements must have been audited. * For a review, the related historical financial statements must have been either audited or reviewed.

Question 237

# Section 19.7: Compliance Attestation (AT-C 315) What is the auditor's objective when performing an engagement to examine an entity’s compliance with specified laws, regulations, rules, contracts, or grants?

Answer 237

* A compliance attestation provides a legal determination of an entity’s compliance * Express an opinion about whether 1. The entity complied, in all material respects, with the specified requirements 2. Management’s assertion about compliance with specified requirements is fairly stated in all material respects

Question 238

# Section 19.8: Management’s Discussion and Analysis (AT-C 395) What is MD&A Control Risk?

Answer 238

In relation to MD&A, control risk is the risk that material misstatements may occur because the entity's internal control did not detect the MD&A misstatement in a timely manner.

Question 239

# Section 19.8: Management’s Discussion and Analysis (AT-C 395) What are the assertions related to MD&A?

Answer 239

Occurrence * The reported transactions occurred in the year reported Consistency with the financial statements * The MD&A is a written assertion that may be examined or reviewed by the practitioner. * Whether the historical financial statement amounts are accurately derived from statements and related records. * Reported transactions, events and explanations are consistent with the statements. * Nonfinancial data have been accurately derived from related records. Completeness. Descriptions of transactions and events in order to understand the entity's: * Financial condition * Changes to the transactions or events * Results of operations * Capital committments included in the MD&A Presentation and disclosure

Question 240

SECTION 20

Question 241

# Section 20.1: Government Auditing Standards What are the elements of a finding in a financial audit under GAGAS?

Answer 241

* Criteria: The requested expectation * Condition that a situation exists * Cause reason for the explanation for the condition * Effect or potential effect

Question 242

# Section 20.1: Government Auditing Standards What is included in a report of internal control in GAGAS?

Answer 242

* A description of the scope of the auditor's testing of compliance with laws and regulations. * A description of significant deficiencies and material weaknesses in internal control **The report on internal control provides does not provide an opinion**

Question 243

# Section 20.1: Government Auditing Standards When may an auditor be required to report fraud and noncompliance directly to parties external to the audited governmental entity?

Answer 243

If the entity still does not report the noncompliance to the outside entity

Question 244

# Section 20.1: Government Auditing Standards What government management function would cause the CPA to be impaired?

Answer 244

Developing entity program policies

Question 245

# Section 20.1: Government Auditing Standards What Governmental nonaudit services violate the overarching principles?

Answer 245

* Operate the audited entity’s information technology system * Perform internal audit services * Prepare accounting records

Question 246

# Section 20.1: Government Auditing Standards What are types of significant deficiencies that would be reported on compliance with laws and regulations during a financial statement audit under GAGAS?

Answer 246

* Significant deficiencies and material weakness in internal control * Instances of fraud and noncompliance with provisions of laws and regulations that have a material effect on the audit, as well as cause attention to those charged with governance. * Noncompliance with provisions of contracts and grant agreements that has a material effect on the audit. * Abuse that has a material effect on the audit.

Question 247

# Section 20.1: Government Auditing Standards What are examples of attestation engagements under Government Auditing Standards?

Answer 247

* Reporting on the reliability of performance measures * Internal control over financial reporting * Compliance with requirements of specified laws, regulations, policies, contracts, or grants * MD&A

Question 248

# Section 20.1: Government Auditing Standards What type of reports are issued under GAGAS?

Answer 248

* Financial statement audit * Written report on internal control over financial reporting **The report on internal control provides does not provide an opinion**

Question 249

# Section 20.1: Government Auditing Standards What is a performance audit under GAGAS?

Answer 249

Performance audits include economy and efficiency audits. Groups included in performance audits consist of: * Government entities, programs, activities and functions * Government assistance administered by contractors, not-for-profit entities and other nongovernmental activities.

Question 250

# Section 20.1: Government Auditing Standards What are the components of a performance audit under GAGAS?

Answer 250

* Program effectiveness and results * Economy and efficiency * Internal control * Compliance with legal requirements * Providing prospective analysis, guidance and summary information.

Question 251

# Section 20.2: Compliance Audits What is the main objective of a government compliance audit?

Answer 251

* To obtain sufficient appropriate evidence in order to form an opinion on the compliance * To express an opinion whether the entity maintained compliance with applicable requirements * The auditor follows the auditing standards of GAAS, but uses judgement to adapt the standards in order to perform an audit on compliance

Question 252

# Section 20.3: Federal Audit Requirements and the Single Audit Act What is an auditor required to do when auditing a nonfederal entity’s administration of a federal award pursuant to a major program under the Single Audit Act?

Answer 252

* Obtain evidence related to compliance * Express or disclaim an opinion on compliance

Question 253

# Section 20.1: Government Auditing Standards What is a performance audit under GAGAS?

Answer 253

Performance audits include economy and efficiency audits. Groups included in performance audits consist of: * Government entities, programs, activities and functions * Government assistance administered by contractors, not-for-profit entities and other nongovernmental activities.

Question 254

# Section 20.3: Federal Audit Requirements and the Single Audit Act What is the single audit act?

Answer 254

* The emphasis of the audit is on major programs related to federal awards administered by nonfederal entities that expends $750,000 or more in federal awards in one fiscal year. * Audit is in accordance with GAO and OMB Requirements. * The auditor determines on whether a deficiency in internal control is a signficiant deficiency or a material weakness in relation to the type of compliance. * The auditor should identify all significant deficiences and material weaknesses.