First AUD Flashcards

Question

PERVASIVE meaning (pervasive effects on the FS)_____ CHATGPT: In the context of an auditor's opinion, "pervasive" refers to the extent or severity of an issue found in the financial statements. Specifically, if an issue is described as "pervasive," it means that the problem or misstatement is widespread and significantly impacts the overall reliability and presentation of the financial statements. Pervasive Issues: Affecting multiple areas: The issue is not isolated to just one aspect of the financial statements, but instead, it has a broad or significant effect on various parts. Materially impacts the financial statements: The issue is so significant that it would affect users' understanding of the company's financial position and results. Not easily corrected: The effect of the issue is difficult to overcome through additional explanations, disclosures, or adjustments.

Answer 1

1. Far reaching effects(wide-spread) across several accounts e.g. 70% of assets is inventory 2. If specific to only one account, it -represents a significant portion of the FS -Has issues with disclosues that are fundamental to the users understanding.

Answer 2

1. conclude that the possible effect is material and pervasive 2. Deny rendering an opinion as they: are unable to gather sufficient appropriate audit evidence

Answer 3

QUALIFIED = Material but NOT PERVASIVE

Answer 4

1. HAVE MISTATEMENTS that are material and pervasive 2. DO NOT present fairly e.g. Inadequate disclosure of a material related party transaction would result in a qualified or adverse opinion. Inadequate disclosure of material information is a departure from GAAP and may result in either a qualified or adverse opinion, depending on materiality.

Answer 5

SECTIONS: 1. OPINION - Framework reference (i.e. GAAP) 2. BASIS for OPINIONS (GAAS referenced) 3. Responsibilities of Mgt for the FS (Framework reference ie. GAAP) 4. AUDITOR's responsibilities for the AUDIT of the FS (GAAS referenced)

Answer 6

The auditor references both auditing standards in the: 1. Basis for opinion section 2. Auditor's responsibilities for the audit of the FS section

Answer 7

CHATGPT: Adverse Opinion: If the issue is pervasive (widespread) and significantly affects the financial statements as a whole, the auditor issues an adverse opinion, stating that the financial statements do not present a fair and accurate picture of the company. Disclaimer of Opinion: If there is a pervasive scope limitation (e.g., insufficient evidence), the auditor may disclaim an opinion, meaning they cannot form any opinion about the financial statements. Example: Non-pervasive Issue: A company fails to report a small number of transactions, but the rest of the financial statements are unaffected. This may lead to a qualified opinion. Pervasive Issue: A company fails to follow accounting standards across multiple areas of their financial statements, resulting in a major misrepresentation of the financial position. This may lead to an adverse opinion because the issues are widespread and significantly impact the financial statements as a whole.

Answer 8

KEY AUDIT MATTERS are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the FS of the current period. These matters were adressed in the context of our audit of the FS as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. E.g. KAMr are complex issues, judmentally difficult, required audit attention. ORDER OF KAMs listed is a JUDGEMENT DECISION. KAMs section can be added anywhere in the report after the 2nd section. (OPINION section and BASIS for OPINION SECTION) KAMs should NOT include the matters giving rise to: 1. A QUALIFIED OPINION - should be referenced in the BASIS for OPINION section for further explanation 2. SUBSTANTIAL DOUBT existing about an entity's ability to continue as a going concern *Should be referenced elsewhere in the report.

Answer 9

Audit Documentation (Working Papers) The principal record of procedures performed, evidence obtained, and conclusions reached; also called "working papers" or "workpapers." Audit Evidence The underlying information used by the auditor in reaching audit conclusions. The information corroborates or contradicts assertions in the financial statements. Audit Objectives Goals of audit testing, developed in light of financial statement assertions. Audit Plan A listing of audit procedures necessary to accomplish the objectives of the audit; required for every audit. Audit Risk The risk that an auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated. Audit Risk of Noncompliance The risk that the auditor may unknowingly fail to appropriately modify the opinion on compliance in a compliance audit. It comprises the risk of material noncompliance and detection risk of noncompliance.

Answer 10

OPINION and BASIS FOR OPINION

Answer 11

FS or GAAP issues = Adverse opinion

Answer 12

IDENTIFICATION OF CAMs (IPAD): 1. Identify each CAM in the audit report 2. Describe the PRINCIPAL CONSIDERATIONS that led the audiot to determine a CAM 3. Describe how the CAM was ADDRESSED in the AUDIT 4. Refer to the relevant FS accounts and disclosures A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.

Answer 13

ISSUER: (CRITICAL AUDIT MATTERS) CAMS are REQUIRED for an ISSUER (when an unqualified/qualified opinion is issued): 1. Opinion on the FS 2. Basis for OPINION 3. CRITICAL AUDIT MATTERS The auditor's report must include any CAMs arising from the current period's audit of the financial stateemnts. Report wording in opinion section and basis for opinin section is often boiler plate and does not provide much visibility into the audit. The CAM section provides more visibility into the more challenging areas of the audit.

Answer 14

The following non-issuer headings will change when modified opinions are isued: 1. OPINION 2. BASIS FOR OPINION

Answer 15

Unmodified/Unqualified (CLEAN=FS free from material misstatements in all respects) opinion 1. Sufficient evidence 2. Follows GAAP 3. Immaterial or no issues

Answer 16

Supplementary information is outside the basic financial statements, so problems with this information do not prevent the issuance of an unmodified opinion on the basic financial statements. The situation should result in a modified opinion on the supplementary information as expressed in a separate section of the auditor's report with the heading "Supplementary Information." Since supplementary information is outside the basic financial statements, an unmodified opinion on the basic financial statements is still appropriate.

Answer 17

MANAGEMENT RESPONSIBILITES: 1. Determine the applicable FIN REPORTING framework and prepare an adequate description of the framework for inclusion in the FS 2. Designing and Implementing programs and controls to prevent, deter and detect fraud. INTERNAL CONTROL helps in Preventing, detecting and correcting MISTATEMENTS on a timely basis.

Answer 18

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatement whether caused by error or fraud.

Answer 19

In the FS, including accompanying notes fail to disclose info that is required by GAAP, the auditor should express a QUALIFIED OR ADVERSE OPINION, depending on PERVASIVENESS. An auditor of a nonissuer concludes that a client's illegal act, which has a material effect on the FS, has not

Answer 20

Unqualified, Unmodified.

Answer 21

RESULTS IN DISCLAIMER ______________________________ 1. Not independent 2. Unaudited FS 3. Refusal of management to provide written representation and/or to acknowledge its responsibility for the fair presentation of the FS in conformity with GAAP (may also withdraw) A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and relates to accounts or disclosures that are material (not immaterial) to the financial statements. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves a particularly complex judgment made by the auditor (not a complex transaction made by management.)

Answer 22

The REASONS for the inability to obtain sufficient appropriate audit evidence should only be described in the Basis for Qualified Opinion section of the auditor's report and the Management's Responsibility section should remain unchanged. The reasons for the inability to obtain sufficient appropriate audit evidence should be described in the BASIS for Qualified Opinion section of the auditor's report.

Answer 23

Management’s refusal to provide written representations (a type of audit evidence) is a significant client-imposed restriction on the audit, which may result in a disclaimer of opinion. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality. An auditor may issue a qualified or disclaimer of opinion when an auditor is unable to obtain sufficient appropriate audit evidence. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and a qualified or disclaimer of opinion may be appropriate

Answer 24

A justified departure from GAAP results in the addition of an emphasis-of-matter paragraph to the unmodified opinion. Engagement Completion Document- A document identifying all significant audit findings and issues; required by PCAOB standards for audits of issuers. Applicable for ISSUERS only Engagement Letter A written communication documenting the understanding between an accountant and a client. Engagement Partner The partner responsible for the overall quality of the engagement. Engagement Quality Review A review required by PCAOB standards that is performed by a partner who is not otherwise associated with an issuer audit engagement. The engagement quality reviewer evaluates the significant judgments made by the engagement team and the overall conclusion reached on the engagement. Entity-Level Controls Controls related to the control environment, management override of controls, the company's risk assessment process, centralized processing, monitoring the results of operations, monitoring other controls, period-end financial reporting, and policies that address significant business controls and risk management practices. Error An unintentional misstatement or omission of an amount or disclosure in the financial statements.

Answer 25

Explanatory Paragraph An explanatory paragraph is included in the auditor's report when required by PCAOB auditing standards or at the auditor's discretion whenever the auditor wishes to emphasize a matter regarding the financial statements. Explanatory paragraphs are used for issuers only.

Answer 26

PRIOR YEAR FS REVIEWED OR COMPILED 1. When the current period FS were reviewed or compiled and the report of the PRIOR PERIOD is not reissued, the auditor should include an other-matter paragraph (non-issuer) or explanatory paragraph (issuer) that includes: (a) The service (review or compilation) performed in the prior period (b) The date of the prior period report (c) a description of any material modifications described in the report. (d) A statements that the service was less in scope than an audit and does not provide the basis for expressing an opinion on the FS as a whole (review) or (d) A statement that no opinion or other form of assurance is expressed (compilation)

Answer 27

UNMODIFIED (a DEPARTURE from US GAAP is permissible when circumstances indicate that a financial presentation in accordance with US GAAP would be misleading.

Answer 28

The word INDEPENDENT should be included in the report TITLE and not the OPINION PARAGRAPH in an auditor's report. A description of the auditor's responsibility would be included in a SEPARATE PARA stating the auditor's responsibility rather than in the opinion paragraph. An indication of mgt's responsibility for the fair presentation of the FS should be included in a separate PARA explaining mgt's responsibility rather than in the opinion para. Emphasis of matter paragraphs are used when required by SAS or when the auditor believes they are necessary. They are used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users' understanding of the FS. This para does not affect the auditor's opinion.

Answer 29

explicitly represented in the Auditor's responsibility section of the nonissuer audit report.

Answer 30

Within the Auditor's Responsibility section of the report, the following statement is explicitly made: "Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements." The consistency of the application of accounting principles is implicit while the examination of EVIDENCE on a test basis is explicitly stated in the Auditor's Responsibility section.

Answer 31

The auditor's report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. The auditor may not have received sufficient appropriate evidence by the last day of fieldwork. For example, the partner's review of the audit evidence may take place after the last day of fieldwork. The final assembly of the audit file often occurs after the date of the audit report. This assembly may occur up to 45 or 60 days following the report release date for issuers and nonissuers, respectively. Audit documentation may be completed after the date of the audit report. Generally, changes to audit documentation after the date of the audit report are administrative in nature. For example, the auditor may sort and cross-reference workpapers.

Answer 32

The CPA's report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors.

Answer 33

The audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: "Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement.. The audit report does not state that the auditor evaluated the overall internal control. The correct statement is "In performing an audit in accordance with GAAS, we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstance..." The audit report does not state "The financial statements are consistent with those of the prior period." Consistency is implicitly reported; only if there is an inconsistency is an explicit statement included

Answer 34

In an auditor's report, there is a section for explicitly stating both management and the auditor's responsibilities related to the audit.

Answer 35

GAAS = The Basis for Opinion section would refer to GAAS rather than GAAP. GAAS = The Auditor's Responsibility section of the report would refer to GAAS rather than GAAP. GAAS = . The Auditor's Responsibility section would refer to GAAS rather than GAAP, which the Management's Responsibility section would include a reference to GAAP.

Answer 36

Audit procedures to identify illegal acts 1. Read the minutes 2. Inquire of management, in-house counsel and external legal counsel concerning litigations, claims and assessments 3. Perform substantive tests of details of classes of transactions, account balances, or disclosures 4. Examine large or unsual transactions When mgt or those charged with governance are involved, the auditor should communicate to the next higher level of authority. If no higher level of authority exists, the auditor should consider obtaining legal advice.

Answer 37

An auditor reporting on the audit of financial statements of an issuer is required to refer to PCAOB standards. There is no requirement to reference GAAS. An auditor reporting on the audit of financial statements of an issuer should indicate in the audit report that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.

Answer 38

OPINION ______________________________ DISCLAIMER = MATERIAL AND PERVASIVE

Answer 39

1. Time constraints 2. Inability to obtain sufficient appropriate audit evidence, such as: (a) inability to observe inventory (b) inability to confirm receivables (c) inability to obtain audited FS of a consolidated investee (d) Restrictions on the use of auditing procedures (e) Inadequacy of accounting records (f) Refusal of client's attorney to respond to inquiry

Answer 40

1. Not independent 2. Unaudited F/S 3. Refusal of mgt to provide written representation and/or to acknowledge its responsibility for the fair presentation of the FS in conformity with GAAP (may also withdrawal) 4. Audit/Evidence issue - CEO is unwilling to sign the mgt representation letter. 5. Audit/EVIDENCE issue - The client refuses to permit the auditor to confirm certain AR or apply alternative procedures to verify their balances.

Answer 41

1. Don't follow GAAP 2. Inappropriate accounting principles 3. Unreasonable estimates 4. Inadequate disclosure 5. Incorrect numbers 6. No reasonable justification for change in accounting principles 7. GAAP issues

Answer 42

1. Sufficient evidence 2. Follows GAAP 3. Immaterial or no issues

Answer 43

When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor's opinion should state "In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . ."

Answer 44

A material change in accounting principle would result in the addition of an emphasis-of-matter paragraph to the unmodified opinion.

Answer 45

Substantial doubt with regard to the entity's ability to continue as a going concern should be disclosed in either an emphasis-of-matter paragraph (optional when doubt is alleviated) or a separate section of the auditor's report (doubt remains) appended to an otherwise unmodified (unqualified) opinion. The client's refusal to provide access to the minutes of the Board of Directors' meetings would result in a disclaimer of opinion.

Answer 46

1. Observe technical stds 2. Observe ethical stds (e.g. Code of professional conduct) 3. Strive to improve competence (professional education) 4. Perform duties diligently

Answer 47

e.g. 2011 - qualified opinion 2010 - unmodified opinion

Answer 48

Reporting with predecessor auditors In determining if previously presented financial statements are still appropriate as issued, the predecessor auditor should: 1. Read the statements for the current period 2. Compare the audited statements with the current period statements 3. Obtain a letter of representation from the successor auditor stating whether the successor auditor's audi revealed any matters that may have a materal effect on the statements reportedon by the predecessor auditor. 4. OBTAIN a letter of representaton from management stating whethr ny previous management representations have change or whether any subsequent events have occurred that may require adustment or disclosure in the reissued FS

Answer 49

It is not appropriate for the auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the current period audit. Conversely, review of the predecessor auditor's working papers (audit documentation) is appropriate and customary to facilitate the auditor's audit. If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, the current auditor should review the risk assessment of the opening balances of the financial statements.

Answer 50

COMPONENT - An entity or business activity that prepares Financial info that is included in the group FS COMPNENT AUDITOR: An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit.

Answer 51

If control risk is assessed at a low level, the auditor is likely to focus more on tests of controls and less on substantive audit procedures. The firm name is generally not included in the Auditor's Responsibility section. The Opinion section includes a reference to generally accepted accounting (not auditing) principles. A Basis for Opinion section including a reference to generally accepted auditing standards is a required component of the auditor’s unmodified opinion.

Answer 52

E.g. PY FS are restated to conform with GAAP e.g. a previous report that was qualified or adverse due to a departure from GAAP would no longer be appropriate in the event of the restatement of the PY's FS to be in conformity wit GAAP.

Answer 53

ADVERSE OPINION = GAAP ISSUE

Answer 54

AUDITOR'S RESPONSIBILITIES 1. Maintaining PROFESSIONAL SKEPTICISM 2. Complying with relevant ethical requirements 3. Exercising professional judgment throughout the planning and performance of the audit 4. Obtaining sufficient appropriate audit evidence 5. Complying with GAAS (AUDITING STANDARDS) The auditor should neither assume that mgt is DISHONEST nor assume UNQUESTIONED HONESTY. A belief that management is honest and has INTEGRITY does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less than persuasive evidence. Example of impediments 1. Unconscious human bias 2. DEV of inappropriate level of trust or confidence in mgt, which may result in the auditor not taking as questioning a stance as needed. 3. Pressure to avoid potential negative interactions with or consequences to individuals whom auditors know (e.g. mgt ) instead of representing the int of investors. 4. scheduling and workload demands, which may result in auditors making shortcuts in judgement, such as seeking audit evidence that is easier to obtain rather than evidence that is more reliable and relevant or giving more weight to supporting evidence without considering contrary evidence.

Answer 55

MONITORING The monitoring component or function of the internal control framework is designed to ensure that controls continue to operate effectively. Monitoring of internal control effectiveness is done to provide an assessment of the performance of the system of internal control over time. Monitoring is designed to ensure that controls operate effectively. . Periodically comparing and updating the mission vision and values of a not-for-profit could best be classified as a monitoring activity. Monitoring is the process that assesses the quality of control performance over time. Monitoring may include, among other things, the evaluation of communications from external parties such as customers, regulatory agencies, and external auditors.

Answer 56

A management letter is a formal document that auditors provide to a company’s management at the end of a financial audit. It includes observations and recommendations about internal controls, accounting practices, and operational efficiencies that were noted during the audit but are not serious enough to be included in the auditor’s main opinion or report. Key points about a management letter: Not part of the official audit report: It's a supplementary document. Focuses on improvements: It often suggests ways to improve internal controls, compliance, efficiency, or accuracy in financial reporting. Addresses weaknesses or risks: It highlights things like lack of segregation of duties, outdated policies, or minor errors that could become issues if not addressed. Management response may be included: Management might respond to each point with corrective actions or explanations. Helps governance: It’s useful for boards, audit committees, and senior management to monitor risk and performance. Example observations in a management letter: Inventory reconciliation not done monthly. Employees with access to both cash handling and recording. Lack of documented IT backup procedures.

Answer 57

material misstatements

Answer 58

Major Programs Generally speaking, programs that expend $750,000 or more in federal financial assistance (specific guidelines are based on formulas prescribed in federal regulations and the Single Audit Act). Management Override of Controls The circumvention of established controls by executives of a company. (CO-PILOT - Management override of controls refers to situations where senior management bypasses or manipulates established internal controls within an organization. While internal controls are designed to safeguard assets, ensure accurate financial reporting, and maintain compliance, management override can undermine these objectives. The term circumvention refers to the act of overcoming a problem or difficulty, often in a clever or indirect way. For example, it can involve finding a way around rules or obstacles without directly confronting them. It's like taking a detour to avoid a roadblock! This can happen for legitimate reasons, such as addressing urgent business needs, but it often poses significant risks, including fraud, financial misreporting, or operational inefficiencies. For example, management might override controls to record revenues prematurely or inflate profits, which can lead to financial statement fraud2. To mitigate these risks, organizations can: Establish clear policies on when and how overrides are allowed. Implement a formal approval and documentation process for overrides. Regularly monitor and audit override activities to identify patterns or misuse)

Answer 59

less than $100 million in annual revenue

Answer 60

To be filed within 35 days AFTER THE AUDIT REPORT If incuded with reg statemnt - muat

Answer 61

MODIFY auditor's responsibility section in the case of DISCLAIMER , since there are lot of things that we could not do or complete due to incomplete info?

Answer 62

The auditor's report gives credibility to the FS. The auditor's as a group independent of mgt, have an objective view and can report on a company's activities without bias or conflict of interest. FS of an enterprise are prepared by the mgt of the enterprise NOT the independent auditor.

Answer 63

THe overall objectives of the auditor when conducting an ERISA plan FIN STATEMENT Audit are: 1. Accept an ERISA plan audit engagement when the basis upon which it is to be performed has been agreed upon through establishing whether the preconditions for the audit are present.

Answer 64

non-public entity

Answer 65

Involvement of another auditor does not prevent the issuance of an unmodified opinion. Other Auditor-An auditor who examines a portion of the financial statements but is not deemed to be the principal or lead auditor.

Answer 66

BOD or Audit Committee (may also refer to members of the entity's legal structure, external parties such as legal committees)

Answer 67

not make significant audit decisions,

Answer 68

management

Answer 69

Material Concentrations - Volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year. Material Weakness - A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. Materiality - Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. Mean-Per-Unit (MPU) Estimation - A sampling plan that uses the average value of the items in the sample to estimate the true population value. Misappropriation of Assets (Defalcation) Theft of an entity's assets, when the effect of that theft causes the financial statements not to be presented in conformity with GAAP.

Answer 70

The engagement letter would include the scope of the audit and the scope of any additional services to be provided by the auditor to the entity. The engagement letter is a means by which the parties agree to the terms of the engagement.

Answer 71

Chatgpt Audit = Reasonable assurance, detailed testing, auditor opinion. Review = Limited assurance, analytical procedures, no opinion, just a statement of no material misstatements.

Answer 72

Management Decision: In cases where a full audit isn’t required by law (for example, smaller private companies or certain non-public organizations), the company’s management and board can choose to have a review done instead of an audit. They might make this decision to save costs, simplify the process, or for other business reasons. However, they must still ensure that their financial statements comply with relevant accounting standards and regulations.

Answer 73

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, the current auditor should review the risk assessment of the opening balances of the financial statements.

Answer 74

MANAGEMENT SPECIALIST- Hired by client to assist entity in preparing the FS

Answer 75

It came in Trupti's exam

Answer 76

Management override

Answer 77

Internal Audit function is part of MONITORING

Answer 78

The control environment component of the internal control integrated framework includes such principles as commitment to competency, accountability, and organizational structure, etc. The risk assessment component of the internal control integrated framework includes such principles as specify objectives, identify/analyze risks, and consider fraud and control changes. The risk assessment component of the COSO framework includes principles associated with management's consideration of the risk of material misstatement, not the assurance that controls continue to operate effectively. The control activities component of the internal control integrated framework includes such principles as deployment of policies and procedures and the selection and development of controls around information technology. The information and communication components of the COSO framework consider those systems that identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives, not the assurance that controls operate effectively. The information and communication component of the internal control integrated framework includes such principles as internal and external communication as well as obtaining and using information

Answer 79

The "tone at the top" represents the culture of an organization in terms of the standards related to controls and conduct that senior management and the board of directors set for an entity. When employees are focused on doing the right thing, when management quickly addresses and resolves issues, and when fairness and honesty prevail in dealings with internal and external people, a positive tone for the organization is established.

Answer 80

General controls are designed to ensure that an organization's control environment is stable and well-managed. Information-processing controls can be automated or manual, and apply to the processing of information and transactions to help ensure transactions occurred, are authorized, and are completely and accurately processed and reported.

Answer 81

Communication should be made within 60 days (FOR NON ISSUER) of the report release date. (14 DAYS FOR ISSUER)

Answer 82

EXTERNAL FACTORS - Business cycles, regulatory factors, industry factors

Answer 83

Respond with financial level response (i.e. increase level of supervision)

Answer 84

Inherent risk * Control risk Assertion - COVERUP

Answer 85

Drafting the audit plan 1. OBJECTIVE - All AR exist 2. ASSERTION - Existence 3. AUDIT PROCEDURE - Confirm(NATURE) 25 (EXTENT) AR as of 12/31/year 1 (TIMING)

Answer 86

1. Used to detect material misstatements to transaction classes, account balances, and disclosures. 2. Includes other audit procedures required by GAAS (i.e. letter of lawyer inquiry) Test of Details - Applied to transaction classes, account balances and disclosures. Consist of audit procedures used to gather evidence to support the account balances as reflected in the financial statements. SUBSTANTIVE ANALYTICAL PROCEDURES 1. Evaluations of Fin Information made by a study of plausible relationships among both Financial and nonfinancial data 2. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor.

Answer 87

1. HUMAN resources 2. Engagement/Client Acceptance and Continuance 3. Leadership Responsibilities 4. Performance of the engagement 5. Monitoring 6. Ethical Requirements

Answer 88

1. Complexity 2. Subjectivity 3. Change 4. Uncertainty 5. Mgt bias or fraud risk 6. Significance 7. Volume or lack of uniformity

Answer 89

Fraudulent Financial Reporting- Intentional misstatements or omissions of amounts or disclosures in the financial statements that are designed to deceive financial statement users.

Answer 90

computerized and manual environments

Answer 91

Going Concern Assumption The belief that an entity will continue to operate into the foreseeable future. Government Audit An engagement that provides an opinion on financial statements as well as testing and reporting on compliance with the laws and regulations that authorize the spending of public funds. Group Engagement Partner The partner or other person in the firm who is responsible for the group audit engagement and for the auditor's report on the group financial statements. Group Engagement Team The team, which includes the group engagement partner, other partners, and staff, that establishes the overall audit strategy, communicates with component auditors, performs work on the consolidation process, and evaluates the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements. Group Financial Statements Financial statements that include the financial information of more than one component.

Answer 92

Assertion level in the context of auditing refers to the specific representations made by management in the financial statements regarding the accuracy and completeness of the financial information. These assertions are made about individual transactions, account balances, and disclosures in the financial statements. When auditors perform their work, they need to test these assertions to determine whether the financial statements are fairly presented in accordance with the applicable accounting framework (e.g., GAAP or IFRS). These assertions help auditors identify areas where misstatements might occur and guide the audit process. The key assertions typically covered during an audit include: Existence (or Occurrence) Meaning: The items or events actually exist or have occurred. Example: The company’s reported assets, like inventory, actually exist at the balance sheet date. Completeness Meaning: All transactions, balances, and disclosures that should have been included are indeed included. Example: All liabilities are reported and none are left out. Rights and Obligations Meaning: The entity has the legal rights to the reported assets, and it is obligated for the reported liabilities. Example: A company reports ownership of its property and has responsibility for any reported debts. Valuation or Allocation Meaning: The amounts are properly valued and recorded in the correct accounting period. Example: Inventory is valued correctly based on its cost or market value, and no overstatements are made. Presentation and Disclosure Meaning: The financial statements are properly classified, described, and disclosed in accordance with the applicable financial reporting framework. Example: The financial statements clearly present the entity’s activities, and all required disclosures are made, such as contingent liabilities or related-party transactions. Accuracy Meaning: Transactions and events have been recorded at the correct amounts. Example: The sales figures recorded reflect the accurate amount billed to customers. By evaluating these assertions, auditors assess whether the financial statements present a true and fair view of the company's financial performance and position. The assertion level is crucial for auditors to focus their testing on areas of high risk or potential misstatements.

Answer 93

1. CUTOFF - Cutoff A financial statement assertion in the "transactions and events" category indicating that transactions and events have been recorded in the correct accounting period. 2. Occurrence A financial statement assertion in the "transactions and events" category indicating that transactions and events that have been recorded have occurred and pertain to the entity. 3. Rights and Obligations A financial statement assertion in the "account balances" category indicating that the entity holds or controls the rights to assets, and that liabilities are the obligations of the entity.

Answer 94

Inherent Limitations of an Audit The provision that the auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of the nature of financial reporting, the nature of audit procedures, the timeliness of financial reporting, and the balance between cost and benefit. Inherent Limitations of Internal Control The provision of only reasonable (as opposed to absolute) assurance regarding the achievement of internal control objectives. Inherent limitations arise due to human error, deliberate circumvention of controls by collusion, management override, and the difficulty of achieving appropriate segregation of duties in smaller entities. Inherent Limitations Paragraph A paragraph included in a report on an entity's internal control indicating that undetected misstatements may occur, and that projections of the evaluation to future periods are subject to the risk that conditions may change. Inherent Risk The susceptibility of a relevant assertion to a material misstatement, assuming that there are no related controls. Inherent Risk Factors Characteristics of circumstances that affect the susceptibility of an assertion about a class of transactions, account balance, or disclosure to misstatement (e.g., complexity, subjectivity, or uncertainty). Inherent Risk of Noncompliance The susceptibility of a compliance requirement to noncompliance that could be material, assuming that there are no related controls.

Answer 95

All material matters have been adequately disclosed to the AUDITOR

Answer 96

engagement letter - mandatory

Answer 97

Cutoff Bank Statement A bank statement sent directly to the auditor, usually shortly after period end. Cutoff Testing An examination of transactions occurring several days before and several days after year-end, to ensure that they were recorded in the proper accounting period. Defalcation (Misappropriation of Assets) Theft of an entity's assets when the effect of the theft causes the financial statements not to be presented in conformity with GAAP. Walk-Throughs Procedures performed by the auditor around the flow of data from origination to final disposition to obtain an understanding of the system and controls. Working Papers (Audit Documentation) The principal record of procedures performed, evidence obtained, and conclusions reached; also called "workpapers" or "audit documentation." Yellow Book A publication of the U.S. Government Accountability Office (GAO), entitled "Government Auditing Standards," which represents the source of GAGAS.

Answer 98

Interim Audit Work The performance of auditing procedures before year-end. Interim Financial Information Financial information covering a period less than a full year or a 12-month period ending on a date other than the entity's fiscal year-end. Internal Auditor A company employee who performs auditing functions for use by management and the board of directors. Internal Control Questionnaire - A list of questions, typically answered by a yes or no response, addressing relevant control procedures.

Answer 99

Flowchart- A symbolic diagram representing the sequential flow of authority, processes, and documents. Narrative- A written version of a flowchart describing the auditor's understanding of the system of internal control. Nature (of an Audit Test) The quality of an audit test as measured in terms of the relevance and reliability of the evidence it provides. The nature of an audit procedure includes both its purpose and its type. Negative Assurance- A statement indicating that, as a result of performing certain procedures, nothing came to the accountant's attention indicating that the subject matter in question did not meet a specified standard. Negative Confirmations A confirmation in which a response is requested only if the amount stated is incorrect.

Answer 100

Foot-To verify the mathematical accuracy of a statement or schedule by adding columns of numbers from top to bottom. Form AP- A form that auditors of issuers are required to file with the PCAOB for each audit report issued and which includes information about the audit. COPILOT - Form AP is a document used by registered audit firms to disclose the names of engagement partners and other accounting firms involved in audits of public companies. This form is required under PCAOB Rule 3211 to enhance transparency in the auditing process. It allows investors and others to identify who is leading and participating in these audits.

Answer 101

Procedures to test OPERATING effectiveness: 1. INQUIRIES 2. OBSERVATION 3. INSPECTION 4. REPERFORMANCE Used exclusively for testing operating effectiveness.

Answer 102

E.g. Interim testing period

Answer 103

every third year

Answer 104

1. Test of details - Applied to transaction classes, account balances, and disclosures Consist of audit procedures used to gather evidence to support the account balances as reflected in FS. 2. Substantive Analytical procedures - Evaluations of FI made by a study of plausible relationships among both financial and nonfinancial data. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor.

Answer 105

materiality

Answer 106

Less complex indicators" 1. Fewer business lines 2. More centralized accounting functions 3. Few levels of management

Answer 107

1. Risk assessment Procedures 2. Further Audit procedures - further into 2 categories - A. TEST OF CONTROLS (if applicable) and B. SUBSTANTIVE PROCEDURES (required)

Answer 108

1. Nature refers to the type of procedure that's going to be performed 2. Extent refers to number of items 3. Timing refers to the testing period or testing as of date.

Answer 109

Tolerable Misstatement (Issuer) Tolerable Misstatement In sampling, the maximum monetary misstatement in an account balance or class of transactions that may exist without causing the financial statements to be materially misstated. Tolerable misstatement is the application of performance materiality to a particular sampling procedure.

Answer 110

1. Inaccuracies in the collection of processing of data 2. Departures from GAAP 3. Omissions 4. Inappropriate selection or application of accounting policies 5. Inappropriate classification, aggregation, or disaggregation of information

Answer 111

1. FACTUAL (about which there are no doubt) 2. JUDGEMENTAL (differences arising from the judgments of mgt, including those concerning recognition, measurement, presentation, and disclosure in the FS(including the selection or application of accounting policies that auditor considers unreasonable or inappropriate) 3. PROJECTED (These are the auditor's best estimate of misstatements identified in audit samples to the entire population from which the samples were drawn.)

Answer 112

The components of audit risk may be assessed either: 1. Quantitatively (e.g. as a %); or 2. Nonquantitatively (e.g. High, medium, low, etc.)

Answer 113

Fraud Triangle 1. Incentives/Pressures - a reason to commit fraud. e.g. excessive pressure for mgt to meet aggressive goals 2. Opportunity - a lack of effective controls. Example -weak controls over cash (no locks on cash register) 3. Rationalization/Attitude - an attempt to justify fraudulent behavior. Example includes: Disregard for authority (i.e. known history of violations of securities law)

Answer 114

Total transactions = Total revenue

Answer 115

Report in Other Matter Paragraph Other-Matter Paragraph A paragraph included in the auditor's report, when required by GAAS or at the auditor's discretion, that refers to matters other than those presented or disclosed in the financial statements that are relevant to the users' understanding of the audit, the auditor's responsibilities, or the auditor's report. Other‑matter paragraphs are used by nonissuers only.

Answer 116

Examination can be an assertion based examination or a direct examination

Answer 117

1. COMPLETENESS - all account balances, transactions, and disclosures that should have been recorded and included in the FS. 2. CUTOFF- Transactions - Transactions have been recorded in the correct accounting period. 3. VALUATION, ALLOCATION AND ACCURACY - Account balances, transactions and disclosures are recorded and described fairly and measured at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. 4. EXISTENCE AND OCCURRENCE - Account balances exist, and transactions that have been recorded and disclosed have occurred and pertain to the entity. (Existence A financial statement assertion in the "account balances" category indicating that assets, liabilities, and equity interests exist.) 5. RIGHTS AND OBLIGATIONS - The entity holds or controls the rights to assets and liabilities are the obligations of the entity. Account balances and disclosures. 6. UNDERSTANDIBLITY OF PRESENTATION AND CLASSIFICATION- Transactions have been recorded in the proper accounts and appropriately aggregated or disaggregated. Fin Information is appropriately presented and descibed and disclosures are clearly expressed and understandable in the context of the applicable financial reporting framework.

Answer 118

Inverse relation

Answer 119

Inherent risk is a component of audit risk and not of detection risk. Detection risk is a component of audit risk and not vice versa.

Answer 120

The effect that independent impairments if present will have on the expected form of the accountant's report.

Answer 121

Non issuers = 60 days after report release date, 5 years

Answer 122

1. Evaluate his competence and objectivity 2. Assess the risk of material misstatement with the subject matter 3. Understand and evaluate the external IT auditor's or specialist's work 4. Verify any relationships with the client are appropriate

Answer 123

1. CONTROL baseline - Understand internal controls (I/C) system and develop baseline 2. Change IDENTIFICATION - identify changes in I/C effectiveness through ongoing and/or separate evaluations 3. Change management - Implement I/C Changes are needed. 4. Control revalidation/update Develop new baseline after I/C revisions

Answer 124

IT Is LESS SEVERE than a MATERIAL WEAKNESS.

Answer 125

Auditors cannot/do not express an opinion

Answer 126

CEO, CFO, Controller, Director of internal audit

Answer 127

LAGGING INDICATORS - inventories to sales ratios, prime rate charged by banks

Answer 128

Contraction - Decrease in economic activity, when the economy is contracting

Answer 129

. In every audit, the auditor should obtain a sufficient understanding of the design of relevant controls pertaining to financial reporting in each of the five internal control components.

Answer 130

Computing Corp. violated the preventive control of segregation of duties. To implement this control, organizations identify job role functions that have conflicts of interest or functions that should otherwise not be performed by the same person because that could lead to fraudulent behavior or errors. If Janice is both a security administrator and a programmer, she would have the ability to create an application that circumvents network security protocols, violating the control of segregation of duties.

Answer 131

An auditor is not required to evaluate operating effectiveness as part of understanding the system of internal control. Tests of controls are performed when the auditor's risk assessment is based on the assumption that controls are operating effectively or when substantive procedures alone are insufficient (e.g., when the entity makes extensive use of information technology).

Answer 132

PERSONAL, ORGANIZATIONAL and EXTERNAL

Answer 133

Yellow book

Answer 134

GAO rules (Govt Accountability office)

Answer 135

A risk that a misstatement can go undetected

Answer 136

Training, knowledge and experience

Answer 137

STRUCTURAL THREAT - GAO

Answer 138

1. Familiarity Threat- The threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective. 2. Management Participation Threat The threat that results from an auditor's taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit. 3. Self-Review Threat The threat than an auditor or audit organization that has provided non‑audit services will not appropriately evaluate the results of previous judgments made or services performed as part of the non-audit services when forming a judgment significant to an audit. 4. Self-interest threat - The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior. 5. Bias threat is the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective. 6. Management participation threat is the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.

Answer 139

risk of material misstatement is low

Answer 140

e.g. assertions/ claims made by another party. examination/forecasts 1. examination 2. reviews 3. agreed upon procedures

Answer 141

COVERED member

Answer 142

Blank confirmations require the customer to input the amount that they owe the company (your audit client). Blank forms will often provide a greater amount of assurance; however, they will often result in lower responses as people are less likely to make the effort to fill them out. Blank confirmations provide the highest level of assurance.

Answer 143

Fraud Triangle

Answer 144

DISCLOSED.

Answer 145

Voucher Packets A group of matched documents related to a particular purchase (i.e., a requisition, purchase order, receiving report, and vendor invoice)

Answer 146

Partial Presentation- A presentation of prospective financial information that excludes one of the following essential elements: sales, gross profit (or cost of sales), unusual or infrequent items, income tax expense, discontinued operations, income from continuing operations, net income, earnings per share, or significant changes in financial position. Payroll Register- An accounting journal containing a record for each employee, with each record including data such as name, identification number, gross pay (regular and overtime), income taxes withheld, other deductions, and net pay. Performance Audits A range of engagements with specific governing standards from the Yellow Book that may embrace one of four objectives: effectiveness, economy, and efficiency; internal control; compliance; or prospective analysis. Performance Materiality The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Permanent File A collection of audit documentation that has a continuing interest from year to year. Pervasive Effects on the financial statements that, in the auditor's professional judgment, are not confined to specific elements, accounts, or items of the financial statements, or, if so confined, represent a substantial portion of the financial statements, or are disclosures fundamental to the users' understanding of the financial statements. Physical Controls Controls used to safeguard assets (e.g., security devices, limited access to restricted areas, periodic counting and comparison, etc.).

Answer 147

Undue Influence Threat The threat that external influences or pressures will affect an auditor's ability to make independent and objective judgments. Unmodified Opinion - MN An auditor's report for a nonissuer stating that the financial statements are presented fairly in all material respects in accordance with the applicable financial reporting framework. Unqualified Opinion - IQ An auditor's report for an issuer stating that the financial statements are presented fairly in all material respects in accordance with the applicable financial reporting framework. Updated Report A report on previously issued financial statements that takes into consideration information that the accountant has become aware of during the current engagement, and includes any necessary revisions to the original report. Upper (Maximum) Deviation Rate In sampling, the sum of the sample deviation rate and the allowance for sampling risk. User Auditor The auditor of a company that makes use of an outside service organization. Qualified Opinion An auditor's report stating that "except for" the effects of the matter(s) to which the qualification relates, the financial statements are presented fairly, in all material respects. Quality Control System - 5 ELEMENTS A system designed to ensure that services are competently delivered and adequately supervised. A firm's quality control system is composed of five elements of engagement quality: acceptance and continuance of clients and engagements; independence, integrity, and objectivity; monitoring; personnel management; and engagement performance. Questioned Costs Expenditures deemed to be non-allowable, undocumented, or unreasonable for reimbursement under a grant.

Answer 148

add EMPHASIS MATTER para

Answer 149

Other matter PARA

Answer 150

Qualified opinion e.g. GAAP DEPARTURE Does not issue/omit cash flow statement

Answer 151

Recurring transactions after year-end are a usual business occurrence. Related party transactions would most likely be nonrecurring.

Answer 152

To be assured beyond a reasonable doubt would require that the auditor test near or at 100% of the items in the population for a given audit procedure. This is not practical in many cases.

Answer 153

Type 1 Report- DESIGN AND IMPLEMENTATION - A report on management's description of the service organization's system and the design and implementation of a service organization's controls as of a specified date. It does not provide assurance on the operating effectiveness of controls. Coverage - Single point in time - Are the controls properly designed - focus. Lower assurance Type 2 Report - OPERATING EFFECTIVENESS THROUGHOUT A SPECIFIED PERIOD A report on management's description of the service organization's system and the design, implementation, and operating effectiveness of a service organization's controls throughout a specified period. coverage - period of time (6 to 12 months). FOCUS - Are the controls properly designed and operating effectively? Higher assurance.

Answer 154

Sampling internal control

Answer 155

Audit Strategy An overall plan for the audit, typically used to develop the more detailed audit plan. Audit Trail Evidence indicative of the sequential flow of accounting operations. Auditing Procedures Tasks performed to accomplish the objectives of the audit. Bank Confirmation An independent bank verification of year-end bank balances; also may provide information regarding loans, contingent liabilities, discounted notes, pledged collateral, and guarantees or security agreements. Bank Reconciliation A schedule that compares the cash balance reported by the bank with the cash balance reported by the client, and explains any differences. Bank Transfer Schedule A schedule that itemizes transfers of cash among banks, including the record date per the client and the transaction date per the bank. Bias Threat The threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective. Bill of Lading A shipping document issued by a carrier evidencing receipt of goods and terms of transport. Blank Confirmation A confirmation in which the recipient is requested to fill in the balance. Capsule Financial Information Unaudited summarized interim information for subsequent periods. Combined Approach An audit approach in which both tests of the operating effectiveness of controls and substantive procedures are used. If controls are operating effectively, less assurance will be required from substantive procedures. Common Size Financial Statements Restated financial statements in which each balance sheet component is expressed as a percentage of total assets, and each income statement component is expressed as a percentage of total revenue. = IS = % of TOTAL REVENUE; BS = % of TOTAL ASSETS Compilation An engagement in which an accountant presents in the form of financial statements information that is the representation of management. Completeness A financial statement assertion appearing in all three assertion categories and indicating that all transactions, events, assets, liabilities, and equity interests that should have been recorded have been recorded, and that all disclosures that should have been included in the financial statements have been included. Compliance Audit An attest engagement under GAAS (and sometimes GAGAS) in which the auditor reports on whether the entity or compliance audit client(s) complied, in all material respects, with the compliance requirements applicable to its programs. Additional Single Audit Act requirements may apply. Component An entity or business activity that prepares financial information that is included in the group financial statements in the audit of a nonissuer. Component Auditor An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit of a nonissuer. A component auditor may be part of the group engagement partner's firm, a network firm, or another firm. Components of Internal Control Interrelated elements of the system of internal control used to achieve an entity's objectives; control components consist of: control environment, risk assessment, information and communication systems, monitoring, and (existing) control activities. Concurring Approval of Issuance Approval of the issuance of the engagement report granted by the engagement quality reviewer under PCAOB standards. A firm cannot give an issuer permission to use the engagement report until concurring approval of issuance has been granted. Condensed Financial Statements Historical financial information that is presented in less detail than a complete set of financial statements, in accordance with an appropriate financial reporting framework. Condensed financial statements may be separately presented as unaudited financial information or may be presented as comparative information. Confidence Level (also called Reliability) In sampling, a measure of how certain the auditor wants to be that his or her results are accurate. Note that the confidence level plus the risk of being ineffective equals 100 percent. Confirmation A direct written response to the auditor from a third party, either in paper form or by electronic or other medium. Consigned Goods Goods belonging to one party that are held for sale by another party; the seller does not pay the owner until the goods have been sold. Consistency A measure of the comparability of financial statements from one year to the next. Contingency An event that may, but is not certain to, occur. A loss contingency that is probable and that can be reasonably estimated should be reflected in the accounts.

Answer 156

Attributes of Risk Four characteristics used in analyzing risk: type, significance, likelihood, and pervasiveness.

Answer 157

spreadsheet, data mart data - structured data

Answer 158

Scatter plots - analyzing relationships

Answer 159

Propotional make up of analysis of category of population

Answer 160

A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques.

Answer 161

. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.

Answer 162

Dollar unit sampling or In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable misstatement, risk of incorrect acceptance (reliability factor), and the recorded amount of the population being sampled.

Answer 163

An other-matter paragraph is used to refer to matters other than those presented or disclosed in the financial statements.

Answer 164

. If substantial doubt remains, a separate section should be added to the auditor's report with the heading "Substantial Doubt About an Entity's Ability to Continue as a Going Concern." If management's plans alleviate the substantial doubt, an emphasis-of-matter may be added (optional). When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and that doubt remains (is not alleviated by management's plans) and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. A separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern," rather than an emphasis-of-matter paragraph, should be added to the auditor's report. This paragraph should include the phrases "substantial doubt" and "going concern." If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the separate going concern section included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included.

Answer 165

Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion.

Answer 166

Risk of incorrect rejection: Deciding from the sample that the balance is materially misstated when it is really correct; affects audit efficiency.

Answer 167

Risk of assessing control risk too high: The risk that the assessed level of control risk is greater than the true risk, which is caused by thinking that the control is less effective and reliable than it really is; affects audit efficiency.EFFICIENCY (incorrectly rejected)

Answer 168

When the client refuses to accept the modified opinion due to noncompliance issues, the auditor should withdraw from the engagement and notify those charged with governance in writing. Accounting estimates are imprecise and can be susceptible to unintentional or intentional management bias, which in turn increases the risks of material misstatement of accounting estimates. Consistency is ONLY mentioned in the report IF it is LACKING (otherwise not required to be mentioned explicitly)

Answer 169

1. Risk of assessing control risk too low (inverse relationship) 2. Tolerable deviation rate (inverse relationship) - In sampling, the maximum rate of deviation from a prescribed procedure that the auditor will tolerate without modifying planned reliance on internal control. 3. Expected deviation rate (direct relationship) - Expected Deviation Rate. In sampling, the auditor's best estimate of the rate of deviation from a prescribed control procedure. 4. Population size (not an issue if the population is large)

Answer 170

(The upper deviation rate is the sample deviation rate plus an allowance for sampling risk)

Answer 171

Substantive procedures include both tests of details and substantive analytical procedures. Substantive procedures are required for all relevant assertions related to each significant transaction class, account balance, and disclosure item. An auditor would most likely respond to a heightened assessed risk of material misstatement by using substantive tests of details at period end, when appropriate. Substantive analytical procedures are often used when there is a large volume of predictable transactions and when the risk of material misstatement is low.

Answer 172

If the auditor determines that testing the operating effectiveness of controls would not be efficient, he or she may choose to use only substantive procedures to evaluate specific assertions and risks.

Answer 173

e.g. A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice.

Answer 174

A dual-purpose test is defined as a test of controls that is performed concurrently with a test of details on the same transaction.

Answer 175

Substantive procedures are always be necessary for all assertions relevant to material transaction classes, account balances, and disclosures. Assuming inventory is material, tests of controls alone would not be sufficient.

Answer 176

Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance. Note that inquiry alone is not sufficient as the auditor should use a combination of procedures.

Answer 177

Calculation is used as a substantive test rather than as a test of controls. Confirmation represents a substantive test rather than a test of controls.

Answer 178

. A substantive procedure test the dollar amount of an account, balance, or disclosure. A test of controls is where the auditor tests controls that exist at the client. A combined approach refers to the auditor performing both a test of controls and a substantive procedure.

Answer 179

The auditor most likely would perform tests of controls at period end because it provides greater assurance. Testing at interim is often performed when the risk of material misstatement is low.

Answer 180

If the auditor determines that testing the operating effectiveness of controls would not be efficient, he or she may choose to use only substantive procedures to evaluate specific assertions and risks.

Answer 181

If it would take less time or be more efficient to perform substantive tests than it would to perform tests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronic processing), the auditor would not be likely to test controls.

Answer 182

Substantive auditing procedures provide the audit evidence that an auditor needs in order to opine on the financial statements. Substantive procedures include substantive analytical procedures and tests of details. These types of procedures are performed in a financial statement audit but not in the audit of internal control.

Answer 183

Nonsampling Risk All aspects of audit risk that are not due to sampling (e.g., selecting inappropriate audit procedures, failing to recognize a misstatement in documents examined, etc.).

Answer 184

Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance. Note that inquiry alone is not sufficient as the auditor should use a combination of procedures.

Answer 185

Tests of controls are required to support the auditor's assumption that controls are operating effectively. Obtaining an understanding of each of the five components of internal control is required before making an assessment of control risk. The entity's accounting system (part of the information and communication component) and control environment are part of the five components. Considering whether control activities can have a pervasive effect on financial statement assertions is part of the auditor's risk assessment process.

Answer 186

CONTROL/OPERATING EFFECTIVENESS OF OPERATION - Reperformance of a control by the auditor is used to evaluate the effectiveness of the operation of that control. Inquiry, observation, inspection, recalculation, and reperformance are procedures used to test operating effectiveness of controls. SUBSTANTIVE PROCEDURES - Confirmation, verification, and analytical procedures are substantive procedures. Recalculation related to the BALANCE of accounts is a substantive procedure. Recalculation related to a CONTROL would help the auditor obtain evidence of the control's effectiveness.

Answer 187

Analytical procedures do not provide evidence about the operating effectiveness of a control. However, analytical procedures may be used in the testing phase of the audit as a substantive procedure to provide evidence about the dollar balance of an account.

Answer 188

Extent of Testing The degree to which an audit test is performed; a greater extent of testing is achieved by increasing sample size, performing testing at a more detailed level, or performing more extensive tests. External Evidence Information obtained from independent sources outside the enterprise, excluding those acting in the capacity of a management's specialist. Factual Misstatement Misstatements about which there is no doubt. Fair Presentation Accurate representation in the financial statements, within a range of acceptable limits, of a company's financial position, results of its operations, etc. Fair Presentation Framework A financial reporting framework that requires compliance with the requirements of the framework, acknowledges explicitly or implicitly that it may be necessary for management to provide disclosures beyond those specifically required by the framework in order to achieve fair presentation of the financial statements, and acknowledges explicitly that it may be necessary for management, in extremely rare circumstances, to depart from a requirement of the framework to achieve fair presentation of the financial statements. Fair Value The amount at which an asset could be bought or sold (or the amount at which a liability could be incurred or settled) in a current transaction between willing parties.

Answer 189

Full employment

Answer 190

High unemployment, high inflation

Answer 191

A characteristic of statistical sampling is it uses the laws of probability to select a sample. A characteristic of statistical sampling is each item in the sample has an equal probability of being selected.

Answer 192

Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size.

Answer 193

In both statistical and nonstatistical sampling, the sample size is determined based on the sampling risk that the auditor is willing to accept based on their professional judgment.

Answer 194

The risk of incorrect acceptance is a sampling risk related to the effectiveness of an audit.

Answer 195

Detection risk is not associated with the efficiency of an audit and is not a sampling risk. Detection risk is the risk that the auditor will not detect a material misstatement that exists in a relevant assertion.

Answer 196

Analytical procedures -(Required at PLANNING AND REVIEW STAGE) are required during the planning and final review stages, but optional (yet common) during the substantive phase.

Answer 197

Preliminary judgments about materiality levels might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls. The auditor’s desired level of detection risk might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls.

Answer 198

Consumer price index measures rate of inflation.

Answer 199

Government Accountability Office. Governmental Auditing Standards (the Yellow Book)

Answer 200

For example, the analytical procedure may consist of reviewing changes in account balances from the prior year to the current year using the unadjusted trial balance, and for others, it may be a more detailed analysis of a monthly or quarterly financial statement. Analytical procedures may be done using a variety of tools or techniques, including automated tools, such as a spreadsheet or a more sophisticated form of software used for performing audit data analytics.

Answer 201

During planning, the auditor is specifically required to perform analytical procedures related to revenue in order to identify unusual or unexpected relationships that might indicate material misstatement, including material misstatement due to fraud. The auditor should also take into account analytical procedures performed during interim reviews (if performed).

Answer 202

High level review with an intention of inspection e.g. auditors scanned the repairs account to find unusually large amounts.

Answer 203

$$ amount = SUbstantive procedure

Answer 204

INDIRECT FINANCIAL INTEREST

Answer 205

Lapping A scheme whereby a current receipt of cash (or a check) is stolen. To prevent detection, a subsequent receipt is applied to the previously unrecorded customer account. A lockbox system is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts.Lock Box-A system in which customers send their payments directly to the bank, preventing access by company employees. The use of prenumbered remittance advices is not effective in preventing theft of receipts by employees because it does not prevent employee access to cash receipts. While the performance of monthly bank reconciliations is a good control, it would not be effective in preventing the theft of receipts because it does not prevent employee access to cash receipts. (It might, however, be effective at detecting a theft that has already occurred). Daily deposit of cash receipts is not an effective control for preventing theft of receipts by employees because it does not prevent employee access to cash receipts. Logical Control A control that addresses the authorization for access to computer programs and data files.

Answer 206

Lead Auditor The accounting firm that bears responsibility for issuing the auditor’s report. The lead auditor supervises the work of other auditors involved in the audit of an issuer and determines whether to divide responsibility. Letter of Audit Inquiry A direct letter sent to the client's attorney detailing any pending or threatened litigation matters and requesting the attorney to provide his or her evaluation directly to the independent auditor. Limited Use Report A report that is intended only for specified parties.

Answer 207

IT Auditor Someone possessing specialized knowledge in information technology (IT) participating in the audit. Hypothetical Transaction A transaction not involving the facts or circumstances of a specific entity.

Answer 208

PROHIBITED Contingent fee Contingent fees are prohibited for audits of a client's financial statements. Contingent fees are not allowed for a review engagement of a client's financial statements. Contingent fees are prohibited for an examination of a prospective client's financial information.

Answer 209

Statements on Standards for Accounting and Review Services (SSARS) are applicable for a compilation of a nonissuer. Statements on Auditing Standards (SAS) apply to audit engagements for nonissuers. Statements on Standards for Attestation Engagements (SSAE) provide guidance for attestation engagements for issuers and nonissuers. Generally accepted auditing standards (GAAS) apply to audit engagements for issuers and nonissuers. (SAS provide guidance on GAAS for auditors of nonissuers and the PCAOB provides guidance on GAAS for issuers.)

Answer 210

A compilation of financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS) presents information that is the representation of management in the form of financial statements. A compilation does not provide assurance on the financial statements. A compilation of financial statements is not limited to presenting accounting data that conforms to a special purpose framework. A compilation of financial statements may present accounting data that conforms to frameworks other than special purpose frameworks, such as GAAP. A compilation of financial statements is not limited to presenting unaudited financial statements that omit substantially all required GAAP disclosures. Compilation of financial statements also includes compiling financial statements that present all required GAAP disclosures. A compilation of financial statements is not limited to presenting supplementary information that has been subjected to inquiry and analytical procedures. Supplementary information may or may not be subjected to compilation procedures, and compilation engagements do not require analytical procedures.

Answer 211

SSARS applies to the preparation of financial statements that are presented "alongside" the entity's tax return. Note: SSARS would not apply if the preparation of the financial statements with the tax return were solely for submission to taxing authorities.

Answer 212

The accounting and review services committee is the authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of a nonissuer (i.e., an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities). Choice "A" is incorrect. The Financial Accounting Standards Board (FASB) is responsible for GAAP standards. Choice "B" is incorrect. The General Accounting Office (GAO) is responsible for audit standards under the federal "Single Audit Act." Choice "D" is incorrect. The Auditing Standards Board (ASB) is responsible for auditing standards under GAAS.

Answer 213

Continuing Accountant An accountant with whom the client has an ongoing relationship, as opposed to an accountant hired only to report on the application of accounting principles. Control A policy or procedure that an entity establishes to achieve control objectives. Control Deficiency A weakness that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Control Environment The tone of an organization, including management attitude, participation of those charged with governance, organizational structure, and human resource policies. Control Risk The risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity's system of internal control. Control Risk of Noncompliance The risk that noncompliance with a compliance requirement that could be material will not be prevented or detected on a timely basis by an entity's system of internal control. Controlled Processing - ACTUAL PROCESSING RUN A form of parallel simulation in which the auditor observes an actual processing run and compares the actual results to the expected results based on the auditor's own program. Controlled Reprocessing - ARCHIVED COPY A form of parallel simulation in which the auditor uses an archived copy of the program in question (generally the auditor's control copy) to reprocess transactions. The results are then compared with the results from the normal processing run. Corroborating Evidence Support that gives validity to recorded accounting data. Credit Memo = AR An internal document used to indicate a credit to a particular account, typically accounts receivable. Parallel Simulation (Reperformance Test) A technique by which the auditor reprocesses some or all of the client's live data (using the auditor's own software) and then compares the results with the client's files.

Answer 214

COMPILATION, REVIEW and AUDIT - Attest engagements

Answer 215

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because the auditor cannot infer that all nonrespondents have verified their account information. Negative confirmations returned do produce information (e.g., errors noted in accounts) that can be statistically quantifiable.

Answer 216

When there are unreturned positive confirmations of accounts receivable, the auditor would first respond by sending second confirmation requests.

Answer 217

he auditor would only increase detection risk in response to a decrease in inherent and/or control risks, which is not the case here. Additionally, confirmation relates to the existence assertion, not the valuation assertion.

Answer 218

Purchase orders should be issued by the purchasing department, not the accounts payable department. Internal control is enhanced if check mailing is performed by the treasury (cash disbursements) department. Mailing disbursement checks and remittance advices should be controlled by the employee who signs the check last. This employee is generally in the treasury department. Approving the vouchers for payment and matching the receiving report, purchase orders, and vendor's invoices are functions of the vouchers payable department. When a mechanical check-signing device is used, there is generally dual control. One person maintains possession of the device itself, and the other controls the signature plates. The person with possession of the device would not mail disbursement checks, since mailing should be done by the last check signer.

Answer 219

The purchasing department is responsible for preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment. Once signed, the check should be mailed to the payee by the check signer or an employee operating under the supervision of the check signer to prevent defalcations of checks. Generally this occurs in the treasurer's department. The check signer should have access to supporting documentation so that it can be reviewed before the check is signed. Under an effective system of internal control, the accounts payable clerk should ensure that supporting documents (invoice, receiving report, and purchase order) are in agreement before the voucher is submitted for payment.. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be resubmitted for payment.

Answer 220

In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.

Answer 221

Allowance for Sampling Risk In sampling, a "cushion" for protection against undetected deviations that is added to the sample deviation rate to arrive at the upper deviation rate.

Answer 222

Analytical Procedures Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.

Answer 223

Attest Engagements An engagement in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, that is the responsibility of another party.

Answer 224

The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank. Choice "A" is incorrect. Purchase commitments are not typically confirmed on an accounts payable confirmation request. Choice "C" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank) and inventory on consignment (confirmed with the consignee) are not confirmed together. Choice "D" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not typically confirmed along with trade accounts receivable.

Answer 225

The SEC has strongly recommended that companies establish audit committees, but does not require this action-NOT MANDATORY by SEC. Choice “A” is incorrect. The use of an audit committee does strengthen the public’s sense of the independence of the external auditor. Choice “B” is incorrect. Large accounting firms strongly support the function of an audit committee. Choice “D” is incorrect. The New York Stock Exchange requires listed companies to have audit committees.

Answer 226

Same CPA firm that audits financials will take care of your assessment of internal control. due to cost benefit analysis

Answer 227

Internal control - main role is to detect, prevent and correct errors/frauds. Internal Monitoring is for MONITORING that internal controls are present and are functioning effectively.

Answer 228

A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected/corrected.

Answer 229

For nonissuers, if an auditor has communicated other deficiencies in a prior period and management has chosen not to correct the deficiencies for cost or other reasons, the auditor need not repeat the communication in the current period.

Answer 230

The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

Answer 231

The auditor should not indicate to management that no significant deficiencies were noted during the audit, as this might cause misinterpretation of the auditor's responsibility in such cases.

Answer 232

Communication of a significant deficiency and material weakness (even though corrected during the audit) is required to be reported in writing to management and those charged with governance by the report release date, with a window extending 60 days beyond the report date being acceptable. Earlier communication is also acceptable and is not required to be in writing; however, this does not negate the requirement for eventual written communication of all significant deficiencies and material weaknesses.

Answer 233

Tests of controls are designed and applied to evaluate the risk of financial statement misstatement, and to determine the nature, timing, and extent of substantive tests to be performed. They are not designed to discover significant deficiencies in internal control.

Answer 234

UNAUDITED - The Statements on Standards for Accounting and Review Services (SSARSs) is the appropriate authoritative literature for unaudited financial statements or information of a nonissuer. ATTESTATION Engagements - The Statements on Standards for Attestation Engagements (SSAEs) is the appropriate authoritative literature for attestation engagements.

Answer 235

PCAOB Standards require Jackson to perform an integrated audit, which includes audits of both the financial statements and the effectiveness of internal control. PCAOB Standards require the same auditor to perform the audit of the financial statements and the audit on the effectiveness of internal control. An audit of internal control is required, regardless of the type of opinion rendered on the financial statements.

Answer 236

Periodic comparison of actual assets with amounts shown in the accounting records is a control activity related to the existence of specific assets. It is not an entity-level control. Risk assessment process controls, biannual distribution of the code of conduct, and period-end financial reporting controls are considered entity-level controls, as they have a pervasive effect on a company’s internal control.

Answer 237

The "top-down approach" used during an audit of internal control over financial reporting begins by understanding the overall risks to internal control over financial reporting at the financial statement level.

Answer 238

An entity-level control exists independently of the audit. Controls over the completeness of deposited cash relates to controls at the account level and NOT ENTITY Level. The evaluation of risk factors is the same for both an audit of the financial statements and an audit of internal control. Confirmation is an audit procedure that is performed during substantive procedures. Operating effectiveness of controls can be tested through inspection, reperformance, or recalculation. OPERATING EFFECTIVENESS = INSPECTION, REPERFORMANCE OR RECALCULATION DESIGN EFFECTIVENESS = Recalculation is NOT Included.

Answer 239

In a financial statement audit, communication of significant deficiencies must be made within 60 days of the report release date, whereas in an audit of internal control, the communication must be made by the report release date. An auditor’s consideration of internal control in a financial statement audit is more limited than that of an auditor engaged to examine the effectiveness of internal control. An opinion on financial statements is over a period of time, and an opinion of internal control is at a point in time. In a financial statement audit, communication of significant deficiencies should include restricted use language, whereas in an audit of internal control, no restriction on the use of the report is required.

Answer 240

NON-ISSUER - COMBINED report on ICFR (Nonissuer) 1. Opinions on the FS and ICFR 2. Basis for opinion 3. MGT Responsibilities for the FS and ICFR 4. Auditor's responsibilities for the audits of the FS and ICFR 5. Definition and inherent limitations of ICFR 6. Report on other legal and regulatory requirements 7. Report on audit of ICFFR 8. Basis for adverse opinion on ICFR (if applicable)

Answer 241

In a DISCLAIMER of opinion, the auditor should (a) modify the first sentence of the introductory paragraph slightly (we were engaged to audit) and omit the last sentence. (b) Omit the scope paragaph (ISSUER) or amend the auditor's responsibility paragraph (nonissuer) to state: OUR responsibility is to conduct an audit of ABC company's ICFR in accordance with GAAS. However, because of the matter described in the basis for DISCLAIMER OF OPINION on ICFR section, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Separate paragraph for reason of disclaimer

Answer 242

The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee. Identification of a material weakness results in an adverse opinion. Restrictions on the scope of the engagement may result in a disclaimer of opinion or withdrawal from the engagement.

Answer 243

DIRECT FINANCIAL INTERESTS, even if Immaterial ALWAYS IMPAIR INDEPENDENCE INDEPENDENCE IS NOT REQUIRED FOR COMPILATIONS AND CONSULTING engagements

Answer 244

Detection Risk The risk that an auditor will not detect a material misstatement that exists in a relevant assertion. Detection Risk of Noncompliance-The risk that the auditor will not detect material noncompliance that exists. Documentation Completion Date- The end of the period during which the auditor assembles the final audit documentation file. After this date, existing documentation must not be deleted, and additions to the workpapers must be documented as such. Auditing standards define this date as 60 days following the report release date; PCAOB standards define it as 14 days following the report release date. Dual Purpose Test An audit procedure in which the auditor uses the same transaction as both a test of controls and a substantive test.

Answer 245

AICPA uses management ASSESSMENT PCAOB uses management ASSERTION DESIGN EFFECTIVENESS - e.g. Walkthroughs which include inquiry, observation and inspection of documentation OPERATING EFFECTIVENESS - tested through inquiry, inspection of documentation, observation, recalculation and reperformance.

Answer 246

MIstatement rate is generally lower than pertinent deviation rate.

Answer 247

2 members must be CPA - Sarbanes-Oxley act

Answer 248

Impairment of Independence 1. Any direct financial interest or a material indirect financial int in the plan or the plan sponsor 2. An interest was held during the period of the engagement, at the date of the opinion or during the period covered by the FS 3. An accountant or a member of the accounting firm maintaining financial records for the employee benefit plan. 4. Connection to the plan or the plan sponsor as a promoter, underwriter, investment advisor, voting trustee, director, officer or employee.

Answer 249

OCBOA or Special Purpose Frameworks - Cash basis, tax basis, regulatory basis, contractual basis.

Answer 250

ISSUER Explanatory paragraph The explanatory paragraph generally should include an appropriate title and should describe the matter being emphasized and the location of relevant disclosures about the matter in the financial statements.  The explanatory paragraph will generally follow the opinion paragraph when added to an unqualified report.

Answer 251

Financial projection - Prospective financial statement-requires a PARA stating RESTRICTS the USE AND DISTRIBUTION OF THE REPORT. Projection - Statements on Stds for ACCOUNTING AND REVIEW SERVICES

Answer 252

Probability-Proportional-to-Size (PPS) Sampling- A sampling technique in which the sampling unit is defined as an individual dollar in a population. Once a dollar is selected, the entire account (containing that dollar) is audited. Program-Specific Audit A governmental audit used in situations when no overall opinion is rendered on the financial statements. A program-specific audit must follow specialized rules designed for the particular type of program involved. Projected Misstatement In sampling, an estimate of the total error in a population, determined by finding the error in a sample and adding an adjustment for sampling risk. Prospective Financial Statements Financial statements that attempt to reflect a company's expected financial position and expected results of operations. See also financial forecast and financial projection. Public Company Accounting Oversight Board (PCAOB) A regulatory body created pursuant to the Sarbanes-Oxley Act of 2002. The PCAOB establishes auditing and related professional practice standards to be used in the preparation and issuance of audit reports for "issuers." Purchase Order A document or form generated by a customer (typically within the customer's purchasing department), identifying goods or services to be purchased.

Answer 253

Reissued Report A report that is issued subsequent to the date of the original report, but which bears the same date as the original report, indicating that no additional work has been performed since that date. Related Parties A reporting entity's affiliates, principal owners, and management; also, any members of their immediate families. Relevant Assertion An assertion about a class of transactions, an account balance, or a disclosure that has an identified risk of related material misstatement. Report Release Date The date on which the auditor grants the client permission to use the report. Reporting Accountant An accountant in public practice who prepares a written report (or provides oral advice) on the application of accounting principles or on the type of opinion that may be rendered. Representative Sample A sample whose characteristics are comparable to the characteristics of the population from which the sample was drawn. Retention Period The period for which audit documentation must be kept. Auditing standards define this period as five years from the report release date; PCAOB standards define it as seven years from the report release date.

Answer 254

Risk Assessment (performed by the auditor) The process by which an auditor obtains an understanding of an entity and its environment, including its system of internal control and the applicable financial reporting framework, in order to evaluate the likelihood of material misstatement. Risk Assessment (performed by the entity) An entity's identification and analysis of risks to the achievement of its objectives. Risk of Assessing Control Risk Too High In sampling, the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control (i.e., sample results indicate a greater deviation rate than actually exists in the population). Note that this risk relates to tests of controls and to audit efficiency. Risk of Assessing Control Risk Too Low In sampling, the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control (i.e., sample results indicate a lower deviation rate than actually exists in the population). Note that this risk relates to tests of controls and to audit effectiveness.

Answer 255

Risk of Material Misstatement The susceptibility of the financial statements to error based on the likelihood and magnitude of potential misstatements. The risk of material misstatement is composed of inherent risk and control risk. RMM = IR*CR Risk of Material Noncompliance The risk that material noncompliance exists, composed of the inherent risk of noncompliance and control risk of noncompliance.

Answer 256

Sampling Unit In sampling, an item selected from the population for testing. Sarbanes-Oxley Act of 2002 Legislation that amended federal securities laws after a series of corporate financial scandals exposed serious weaknesses in the self-regulating system that had been intended to provide reliable company financial statements. Scope Limitation A restriction on an engagement that occurs when the accountant is unable to fully complete necessary procedures. Search for Unrecorded Liabilities Audit procedures that aid the auditor in identifying obligations that should have been recorded at the balance sheet date but were not. Securities and Exchange Commission (SEC) A governmental commission of the United States given the authority to set guidelines for publicly traded companies. Segment Information Information about certain portions of an enterprise, presented in the annual financial statements of public companies (e.g., information about products and services, about geographic areas, or about major customers). Segregation of Duties- The separation of the: (1)authorization, (2) record keeping, and (3) custodial functions to ensure that individuals do not perform incompatible duties. Selected Financial Data Additional financial information presented by management that is not a required part of the basic financial statements. Significant Audit Findings Findings that should be included in the audit documentation because they are related to the selection and application of accounting principles or to possible material misstatements in the financial statements; or because they cause significant difficulty in, or indicate the need for significant revision of, necessary audit procedures; or because they may result in modification to the auditor's standard report. Significant Class of Transactions, Account Balance, or Disclosure When a class of transaction, account balance, or disclosure has an identified risk of material misstatement at the assertion level. Single Audit An audit of entities expending federal assistance and that has two main components: an audit of the entity's financial statements and separate schedule of expenditures of federal awards, and a compliance audit of major federal awards. Single Audit Act A federal act requiring entities that expend federal assistance equal to or in excess of $750,000 annually to have a program-specific or entity-wide audit that complies with the act. Special Purpose A financial reporting framework other than GAAP that is one of the following bases of accounting: cash basis, tax basis, regulatory basis, contractual basis, or any other basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in the financial statements. Specialist A person or firm with special skills in a field other than accounting or auditing (e.g., actuaries, appraisers, attorneys, engineers, etc.). Spectrum of Inherent Risk A range, from lower to higher, that the auditor uses to apply judgment to the significance of the combination of the likelihood and magnitude of a misstatement. Standard Deviation A mathematical measure of population variability. Statements on Auditing Standards (SAS) Standards issued by the Auditing Standards Board (ASB) of the AICPA. Statements on Auditing Standards (SAS)- Standards issued by the Auditing Standards Board (ASB) of the AICPA. Stock Certificate Book A collection of the documents used to evidence ownership of shares in a corporation. Stock Transfer Agent A person hired to maintain records with respect to the transfer (i.e., purchase, sale, etc.) of corporate securities.

Answer 257

Statements on Standards for Attestation Engagements (SSAE) Standards issued by senior technical bodies of the AICPA regarding attest engagements, including engagements with respect to agreed-upon procedures; financial forecasts and projections; pro forma financial statements; internal control over financial reporting; compliance; and management's discussion and analysis.

Answer 258

Structural Threat The threat that an audit organization's placement within a government entity, in combination with the structure of the government entity being audited, will affect the audit organization's ability to perform work and report results objectively. Subsequent Events Review Procedures the auditor is required to perform for the period after the balance sheet date up to the date of the auditor's report. Subsequent Period The period between the date of the financial statements and the date of the auditor's report. Substantive Approach An audit approach in which only substantive procedures will be performed, either because controls are nonexistent or because it would be inefficient to test controls. Sufficient (Sufficiency of Audit Evidence) The measure of the quantity of audit evidence considering both the auditor's assessment of risk and the quality of audit evidence obtained. Systematic Selection In sampling, a method of sample selection whereby every nth item in the population is chosen as part of the sample. Test Count An auditor's tally of a specific inventory item, which is later compared with the physical inventory report as a means of testing that report.

Answer 259

Tests of Controls - OPERTAING EFFECTIVENESS Audit tests used to obtain evidence about the operating effectiveness of a control by determining how, by whom, and with what level of consistency controls have been applied. Tests of controls include inquiry, inspection, observation, and reperformance, and they are performed when the auditor's risk assessment is based on the assumption that controls are operating effectively.

Answer 260

Tracing - completeness

Answer 261

NO OPINION, only NEGATIVE ASSURANCE - If an auditor reports on compliance with contractual agreements in a separate report, but the report is in connection with an audit of financial statements, it is not correct to include a statement that the audit was directed primarily toward obtaining knowledge regarding compliance. The audit was performed in accordance with auditing standards for the purpose of expressing an opinion on the financial statements.Negative assurance is given with a compliance report issued in connection with audited financial statements. OPINION - The purpose of examination procedures applied to compliance requirements is for the practitioner to accumulate sufficient evidence regarding an entity's compliance with specified requirements to allow for the practitioner to issue an opinion with reasonable assurance. Specific findings are presented when an agreed-upon procedures engagement is performed and not when an examination is performed.

Answer 262

ATTESTATION RISK = Inherent risk *control risk * detection risk 2 CFR 200 single audit allows auditors to use a risk-based approach to determine major grants. The Single Audit Act does not require that all balances be tested.

Answer 263

. Assurance (in the form of an opinion) is provided on the compliance requirements for major programs. . Reasonable assurance is provided on the entity's compliance with requirements of the major program (not on compliance tests.) If material instances of noncompliance are identified, a disclaimer of opinion is not appropriate.

Answer 264

CHATGPT Simple Regression Predicting house price based only on square footage Price = β₀ + β₁*(SquareFeet) + ε Multiple Regression Predicting house price based on square footage, location, and number of rooms Price = β₀ + β₁*(SquareFeet) + β₂*(Location) + β₃*(Rooms) + ε The term auditee refers to: 🔍 The individual, department, organization, or entity whose activities, processes, or records are being audited.

Answer 265

Know what an audit committee is (subset of the board; three to five members are outside directors) and its main functions/responsibilities within the corporation. * The Sarbanes-Oxley Act requires auditors of issuers to report to and be overseen by the audit committee. * The auditor should meet with the audit committee without management present at least once each year. * Among other things, the audit committee is responsible for the selection and appointment of the external auditor.

Answer 266

CClassical variable sampling = understatement

Answer 267

REVIEW 1. Inquiry is part of REVIEW engagement and not the compilation 2. A review primarily includes applying analytical procedures to management's financial data and making inquiries of company management. 3.Obtaining a management representation letter is required in a review and an audit, but is not required for a compilation engagement 4. A review report, not a compilation report, includes the phrase, "is substantially less in scope than an audit." 5. The accountant expresses no such assurance in a compilation engagement; limited assurance (i.e., "…accountant is not aware of…") is expressed in a review engagement. REVIEW Acronym (ULIARCPA) 1. U - Understanding with client should be established 2. L - Learn and/or obtain sufficient knowledge of the entity's business 3. I - Inquiries should be addressed to appropriate individuals 4. A - Analytical procedures should be performed. 5. R - Review - OTher procedures should be performed 6. C - Client representation letter should be obtained from mgt 7. P - Professional Judgement should be used to evaluate results 8. A - Accountant (CPA) Should communicate results.

Answer 268

CHATGPT: Types of CAATs Generalized Audit Software (GAS): Tools like ACL, IDEA, and TeamMate that allow auditors to import and manipulate data for analysis. Data Mining: Using algorithms to analyze data for hidden patterns or relationships. Automated Testing Scripts: Scripts that perform specific audit tests on data automatically. Excel-Based Tools: Simple yet powerful for data analysis, auditing tools can be built within Excel for small to mid-scale audits. Benefits of CAATs Efficiency: Automates routine tasks and analyzes large datasets faster than manual methods. Accuracy: Reduces human error in data handling and testing. Comprehensive Coverage: Can analyze entire populations of data, not just a sample. Fraud Detection: Helps uncover fraudulent activities that are hidden in large datasets. Cost-Effective: Can lower audit costs in the long run by streamlining processes. Challenges of CAATs Complexity: Requires specialized knowledge to use the software and interpret results. Data Quality: If the data fed into CAATs is incomplete or inaccurate, it could lead to incorrect conclusions. Security: Auditors must ensure that the data being accessed and analyzed remains secure and confidential. BECKER ADA Tools and Technology ADAs can be done manually, however, that approach is typically tedious and inefficient. As a result, most ADAs are performed using software. The types of software used include: Data Extracts and Preparation: This software is used to extract, transform, and load (ETL) data in preparation for analysis by allowing auditors to connect to data sources, clean the data to remove errors and inconsistencies, scrub the data to address integrity issues, adhere to data quality standards, allow for normalization, combine data from different sources, and summarize data. These tools also facilitate the automation of data collection by recording each of the ETL steps for reuse with new data: y Spreadsheet tools y Database or structured query language (SQL) explorer y Data transformation and cleaning software y Robotics process automation (RPA) software Data Modeling: This specialized software provides a platform for common data analytics procedures, in some cases tailored for common audit analytics, such as Benford's law analysis or sampling. In some cases, more robust or computationally intensive models require connecting to more powerful cloud-based service: y Data analytics software and plug-ins y Data mining software y Programming scripts Data Visualization: This software is useful for creating charts, graphs, diagrams, and dashboards to help emphasize trends, relationships, and composition of data elements. More advanced software can create graphs using text prompts instead of building visuals from scratch: y Charts and graphs y Data visualization software y Natural language processing (NLP) tools

Answer 269

ANALYTICAL PROCEDURES IN OVERALL REVIEW STAGE 1. Determine whether additional evidence is needed to explain UNEXPECTED BALANCES or RELATIONSHIPS identified PREVIOUSLY 2. Identify ADDITIONAL UNEXPECTEED BALANCES or relationships 3. Are performed by PARTNER OR MANAGER with broad knowledge of the entity and its industry PERFORMING AN ANALYTICAL PROCEDURE: 1. Develop expectation of amount based on other information (e.g. Prior year results) 2. Compare expectation to recorded amounts and consider whether differences are reasonable 3. Investigate significant differences.

Answer 270

ANALYTICAL PROCEDURES are used in the: 1. Planning 2. Substantive testing (optional) 3. Overall review stages of audits But NOT in TESTS of Controls

Answer 271

TEST OF CONTROLS 1. R-Reperformance 2. I-Inspection 3. I-Inquiry 4. O-Observation

Answer 272

TRACE - From Source to Books to determine a transaction's completeness.

Answer 273

Compilation but not preparations require an accountant to read the compiled information, consider whether it's in an appropriate form and issue a report.

Answer 274

PREVENTIVE CONTROLS - e.g. You try to enter Feb 31st - System prevents it from entering. Segregation of duties DETECTIVE CONTROLS - Bank reconciliation; normally performed after processing has been completed such as double entries or missed entries. Why it's a detective control: It helps detect errors, such as double entries or missed entries. It can reveal fraud, like unauthorized withdrawals or altered checks. It identifies timing differences (e.g. outstanding checks, deposits in transit). Imagine a company performs a monthly bank reconciliation. In the latest reconciliation: The company’s cash ledger shows $50,000. The bank statement shows $48,500. Upon investigation, the accountant discovers a bank fee of $1,500 was deducted but not recorded in the books. ➡️ This reconciliation detected an error (unrecorded expense), allowing the company to adjust the books — demonstrating it is a detective control.

Answer 275

Omission of statement of cash flows - Qualified opinion (GAAP departure) Results when FS disclosures are INADEQUATE

Answer 276

FINDINGS, NO ASSURANCE

Answer 277

Review - Conclusion (Negative assurance or limite assurance)

Answer 278

SOC 2 - For service organizations e.g. ADP whose controls impact their end customers' OPERATIONS, COMPLIANCE and COMPUTERSHARE (non-financial data). SOC2 is a reporting framework as opposed to security framework. SECURITY - mandatory in SOC2 5 AICPA TRUST SERVICE CRITERIA (TSC) 1. Availability 2. Processing Integrity 3. Confidentiality 4. Privacy 5. SECURITY SOC 2, TYPE 1 - Fairness and presentation of the service organization's control design at a point in time (without testing of historical operating effectiveness) SOC 2, TYPE 2 - Includes testing of operating effectiveness over a period of time. Most service organizations first do a type 1 and then after a period of 6-12 months, have their first annual TYPE 2 Performed

Answer 279

SOC 1 and SOC 2 are both audits of a service organization’s controls. SOC 1 is appropriate for service organizations whose controls impact their end customers’ financial reporting, payroll processing companies SOC 2 is appropriate for service organizations whose controls impact their end customers’ operations and compliance. Managed services such as cloud service providers, Software as a Service, (SAAS), Infrastructure as a service (IAAS), Platform as a service, (PAAS) A SOC 2 Type 1 is a report on the fairness and presentation of the service organization’s control design at a point in time, but without testing of historical operating effectiveness. A SOC 2 Type 2 includes testing of operating effectiveness over a period of time. Most service organizations first do a Type 1, and then after a period of six to 12 months, have their first annual (12 month period) Type 2 performed. SOC 3 Reports are much more condensed report compared to SOC 1 and SOC 2. * SOC 3 report is suitable for public use,unlike SOC 1 and SOC 2 which result in restricted use. * The advantage of SOC 3 over SOC 2 is that SOC 3 reports become valuable tools to market the effectiveness of your control environment. * In order to obtain a SOC 3 report, your entity must complete a SOC 2 type audit. Looking at operative effectiveness over time regarding security or possibly additional criteria. * The scope of a SOC 3 report is similar to a SOC 2 report in that a similar set of criteria would be audited. A SOC 3 report results in an actual certification which can be published on the company’s website. *It is more of a certificate rather than a report. This is different from SOC 1 and SOC 2 reports which are formal audit reports and are restricted. * A SOC 3 report is condensed and does not contain details regarding the control environment and the extent of testing compared to a SOC 2. * SO3 available for marketing purpose A SOC 3 report is an opinion, an assertion and a high level description of services. * The scope is similar to a SOC 2 in that the same criteria is used, security plus any of the other four criteria may be audited against. * Security, Availability, processing integrity, confidentiality, and privacy. SOC2 Type 2 is annual report

Answer 280

Long run supply curve is VERTICAL (no relation between Long run price move and supply)

Answer 281

Expansion is the first phase of the cycle. Above the line!

Answer 282

Real GDP measures the value of all goods and services produced within a nation's borders but removed the effects of inflation, constant prices. (not impressive)? REAL GDP is the most common measure of economic activity because it factors in the inflation. GDP deflator or inflator

Answer 283

INTERNAL CONTROL - The auditor's understanding should include an evaluation of the design and implementation of the entity's controls. The understanding is obtained through the following procedures (which must be documented): * Walk-throughs * Inquiry of entity personnel * Observation of the application of controls and of the entity's premises and plant facilities * Inspection of documents and records

Answer 284

Negative Confirmations Negative confirmations differ from positive confirmations in that customers are requested to respond to the auditor only if they disagree with the stated amount owed. Negative confirmations may be used to confirm accounts receivable when: * the combined assessed level of inherent and control risk is low; * a large number of SMALL account balances are being confirmed; and * there is no reason to expect that recipients of the requests will ignore them. Negative confirmations are less effective than positive confirmations because lack of a response does not provide explicit verification of the existence of the receivable.

Answer 285

In order to maintain accurate perpetual inventory records, periodic inventory counts should be used to adjust perpetual records. An auditor most likely would compare a sample of creditor balances to supporting invoices, receiving reports, and purchase orders to verify that the accounts payable exist. The search for unrecorded payables is primarily used to support the completeness assertion. An auditor most likely would compare cash payments made after the balance sheet date with the accounts payable trial balance in searching for unrecorded payables. The auditor is looking for items that should have been recorded as of the balance sheet date, but were not.

Answer 286

Responding to RMM: Tests of Controls  Tests of controls are performed when the auditor's risk assessment is based on the assumption that controls are operating effectively, or when substantive procedures alone are insufficient. * When performing tests of controls, the auditor must obtain evidence that the controls selected for testing were designed effectively and operated effectively during the period of reliance. * Inquiry, inspection, observation, and reperformance are used to test the operating effectiveness of controls. (It should be noted that inquiry alone is insufficient, and observation relates only to a specific point in time.) The two types of substantive procedures are tests of details and substantive analytical procedures.  Know the ways in which an auditor can vary the nature, extent, and timing of both tests of controls and substantive tests

First AUD Flashcards

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