i-75 Flashcards

Question

what does gathering information about a potential client include?

Answer 1

-initial information is gathered (for integrity) to help the CPA decide whether to do the audit -the audit committee may be having the same discussions with several CPA firms at the same time -the audit committee must pre approve all services provided by the auditor

Answer 2

-those charged with governance refers to those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity -encompasses the board of directors and the audit committee -the auditor is required to communicate certain matters to those charged with governance -sometimes (not too common) management is roped into this term, since management is responsible for achieving the objectives of the entity

Answer 3

**consider ALL of these BEFORE acceptance -what is the industry? -who are the owners, do they have integrity? -what is the financing? -why does the company want an audit? -has there been previous auditors and if so, why are they being changed? -what is the history of the company? -what are the future plans for the company? -what types of systems and records are in place? can the company even be audited, do they have adequate records? -are there any accounting problems? -is there an audit committee or is management dominated by one individual?

Answer 4

-although the early appointment of the auditor allows the auditor to plan a more efficient audit, an auditor is permitted to accept an engagement near or after year end -the auditor should consider whether late appointment will interfere with the scope of the audit work which may lead to a qualified or disclaimer of opinion and should discuss this with the client

Answer 5

-the client is an issuer, the auditor must performed an integrated audit of the client's financial statements and the auditor will attest to management's assertions regarding internal controls over financial reporting -in an integrated audit, the auditor must report on both the fair presentation of financial statements and internal controls over financial reporting

Answer 6

-integrated audits may be performed for non issuers -when auditing non issuers, the auditor must determine if an audit is the most appropriate engagement or whether a review or compilation may be more appropriate

Answer 7

-auditor should determine very early in the process whether management maintains an adequate internal control environment sufficient to provide reliable financial reporting -the control environment is the foundation for all other components of internal control -managements disregard for its responsibility to maintain an adequate internal control environment may lead the auditor to decide not to accept a new engagement because the risk of financial statement misstatement is too high

Answer 8

-are all transactions posted? -are the ledgers and subsidiary ledgers in balance and up to date? responses of no is higher risk -are reconciliations up to date? responses of no is higher risk -look at past financial statements and latest interim statements as well as the tax returns for the last few years

Answer 9

-the audit committee should interview the candidates for the job and then extend an offer to the firm considered best suited for the work -the CPA firm should not accept the engagement without further investigation -further investigation: talking with third parties who have knowledge about the client's integrity

Answer 10

-one who was engaged to audit a prior financial statement audit even if they audit was not completed -if a new client relationship, it is presumptively mandatory to make inquiries of the predecessor auditor, and client permission is needed -if the client is unwilling, that's a red flag, and the new auditor needs to consider the implications and whether the engagement should be accepted

Answer 11

-oral or written -if the client refuses to give permission, the CPA may continue if the reason for the denial is viewed as legitimate (like an ongoing legal case)

Answer 12

-does the management have an appropriate amount of integrity? -were there any significant disagreements between the auditor and management? -what is the predecessor's understanding of the reason why the company decided the change auditors? -were there any communications between the auditor and those charged with governance regarding matters relating to internal control, fraud, or illegal acts?

Answer 13

-there are no authoritative guidelines, so it's up to the auditors professional judgment on how to decide whether to accept an engagement or not -some questions to ask: are there known accounting or auditing problems, any management imposed scope limitations (not being able to talk to management's outside legal counsel)? are the records in good shape so that an audit is actually possible (documents are available to view)? is the CPA firm completely independent of the report company? does the management have enough integrity so that the CPA feels comfortable? does the CPA firm have sufficient knowledge of the industry so that proper evaluations can be made?

Answer 14

-yes, the engagement can still be accepted IF the CPA plans to become familiar with both the industry and company prior to the start of audit fieldwork

Answer 15

-management lacks integrity -inadequate financial records or management is unwilling to provide all records -there is high risk of intentional manipulation of financial statements

Answer 16

-once the decision has been made to accept the engagement, the auditor is then concerned with the planning, internal control and evidence gathering through substantive testing -the first of these fieldwork standards is what we call the "planning" stage

Answer 17

-the procedures that an auditor may consider usually involve the auditor reading the records relating to the entity (if they did the audit last year) and discussion with other firm personnel and personnel of the client -an example of those procedures is to determine the extent of involvement, if any, of consultants, specialists, and internal auditors -analytical procedures are performed (unconditional): reads latest financials, quarterly statements, interim statements; perform ratio and trend analysis of sales from prior year to current year

Answer 18

-enhance the auditors understanding of the transactions and events that have occurred since the last audit -read the financial statements and compare sales trends, current year to prior year

Answer 19

-so much of GAAP is based on estimating -bad debt expense, depreciation expense, warranty expense. --> all based on estimates -the reasonableness of client estimates are assessed early in the planning stage as part of analytical procedures

Answer 20

-absolute requirement -specific form is up to the 2 parties; written is required BUT it should be an engagement letter, but that's up to the two parties -if it isn't an engagement letter, it still must be in writing (signed memo or other form that has all of the necessary elements in writing) -it can NOT be oral -the purpose of the audit needs to be clear so confusion isn't occurring later on

Answer 21

-management is responsible for preparing the financial statements, and for the selection and application of accounting principles -having adequate internal control -following all applicable laws -providing the auditor with a management representation letter at the end of the audit engagement -management is responsible for adjusting the financial statements to correct material misstatements identified by the auditor

Answer 22

-auditor will follow GAAS or PCAOB -will provide an reasonable basis of opinion on the financial statements based on the audit work which requires: -that the auditor obtain an understanding of the entity and its environment including internal controls sufficient to assess risk and design appropriate auditing procedures (internal control stage) -auditor will provide reasonable assurance about whether the financial statements are free of material misstatement whether caused by error or fraud (evidence stage)

Answer 23

-since an auditor obtains only reasonable assurance, a material misstatement may remain undetected -an audit is NOT designed to detect an error or fraud that is immaterial to the financials -an audit is NOT designed to provide assurance on internal control or to identify significant deficiencies (unless its public). however, the auditor is responsible for ensuring those charged with governance are aware of any significant deficiencies noted -if any significant deficiencies are discovered, the auditor must report them to the audit committee

Answer 24

-limitations of the engagement: "an audit is subject to inherent risks that fraud may exist and not be detected" -fees: include what the fee is based on (like a travel expense), so the auditor determines if they get paid up front or gets reimbursed -frequency of payment: is it weekly, monthly, one time up front? -rep letter at the end of the audit: client should be told in the engagement letter about the importance of the rep letter at the end of the audit -involvement of specialists, internal auditors, or even the predecessor auditor would be included -clients signature

Answer 25

-CPA gathers evidence to support your opinion -the engagement partner is responsible for planning the audit and supervising the work of the engagement team members

Answer 26

-nature of the company including its size and complexity -nature of the work assigned to each member of the team -risk of material misstatement -knowledge skill and ability of each team member

Answer 27

-anyone who reports to the engagement partner (interns to staff auditors) -they should be informed of their responsibilities and the objectives of the procedures that they are to perform -part of the assistants responsibility is to properly evaluate audit results, and the in charge auditor would likely discuss this with them

Answer 28

-once the engagement is accepted, the auditor must obtain an understanding -obtaining knowledge about the client's industry helps to highlight practices unique to that industry that may have an effect on the clients financial statements -the most common source of industry information is: AICPA accounting and audit guide -other sources: trade associations and publications, government publications, AIPCA accounting trends (like an annual survey of accounting practices)

Answer 29

-the auditor should obtain knowledge about the client's business before commencing the audit -understanding the client's business provides information regarding events and transactions that may affect the client's financial statements -auditor may tour the client facility: consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control --> the extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing and extent of audit procedures -business cycles and reasons for business fluctuations: helps to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests

Answer 30

-nature: what type of testing -timing: when to test -extent: how much testing

Answer 31

-overall audit plan regarding the NET of your audit work: -develop the audit plan early to help the auditor determine the resources needed to complete the audit -determine the involvement of other auditors, specialists and client's internal auditors -develop the assignment of staff to specific audit areas including assigning more experienced staff to higher risk areas -develop the timing of testing: interim vs year end and the timing of audit team meetings

Answer 32

-pre audit planning meetings are typically held to plan technical and personnel aspects of the audit -assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform

Answer 33

-entity, its locations, its reporting currency -knowledge about any parent subsidiary relationships within the entity -knowledge of the entity gained from prior experience with the entity -the use of service organizations (like ADP for payroll)

Answer 34

-knowledge of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of personnel of the entity -audit documentation from prior years may contain useful information about the nature of the business, its org structure, its operating characteristics, and transactions that may require special consideration like a multiple element arrangement

Answer 35

-factors that determine the focus of the audit teams efforts includes: -preliminary evaluations about materiality, audit risk (risk we give the wrong opinion) and internal control -areas where there is a higher risk of material misstatement -significant industry developments -managements commitment to the design and operation of internal control

Answer 36

-at the beginning of the audit, in the planning stage, the CPA should set a preliminary standard for the dollar amount that makes the difference -the quantitative aspect of materiality; all misstatements of this amount or more will be viewed as material -other misstatements will be judged based on their cause -based on past annual and interim financial statements using the size of net income or net assets -threshold can go up and down as more information is obtained and more evidence is gathered

Answer 37

-misstatement is viewed as being material if 1. the error is large enough to affect an outsider's decision or 2. if the error is a type that would affect an outsider's decision -one type of error that would affect an outsiders decision is an illegality found on the financial statements

Answer 38

-use the smallest level of misstatement that could be material to any one of the financial statements -materiality will be revised as the audit progresses

Answer 39

-recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important -auditor's consideration of materiality is influenced by the auditors perception of the needs of a reasonable person who will rely on the financial statements -materiality judgments are made in light of surrounding circumstances and involve both quantitative and qualitative judgments

Answer 40

-established by the auditor to help provide assurance that several immaterial misstatements do not combine to a material undetected amount of misstatement -set by the auditor at a lower level than that of materiality for the financial statements as a whole and less than materiality for the account balance (tolerable misstatement) being tested

Answer 41

-required in all financial statement audits -used to obtain an understanding of the entity and its environment including its internal control in order to assess the risk of material misstatement and determine the NET of further audit procedures -do not provide audit evidence sufficient to support an audit opinion -at the conclusion of risk assessment procedures, the auditor can finalize the audit plan and determine the NET of further audit procedures

Answer 42

-risk assessment will determine the further audit procedures -include tests of operating effectiveness of internal controls and substantive procedures -tests of controls are used to evaluate the operating effectiveness of internal controls in preventing or detecting material misstatements

Answer 43

-dollar size testing used to detect material misstatements and includes tests of details, account balances, disclosures and analytical procedures -the planning stage is where the auditor and management discuss the timing of the inventory testing -performed in response to the planned level of detection risk which in turn may be based on the results of tests of controls -detection risk is the risk that the auditor fails to detect a material misstatement

Answer 44

-risk that the auditor fails to detect a material misstatement

Answer 45

-risk that the auditor will give the wrong opinion on the financial statements -risk that the auditor gives an unmodified opinion when financial statements do no present fairly -chance that: material misstatement will occur in a company's accounting process (inherent risk) and not be detected or prevented by the company's own internal control procedures (control risk) and not be detected by the independent auditors so that it winds up in the financial statements (detection risk) -why we give only reasonable assurance

Answer 46

detection risk -only thing auditor can do for inherent and control risk is assess it and try to estimate how much risk there is

Answer 47

-possibility of a material misstatement before considering the client's internal controls -built in chance that a material misstatement will occur within the accounting system of the reporting entity -CPA must assess the level of this risk, no control over this -no amount of internal control or auditing can minimize inherent risk

Answer 48

-auditor will assess the risk that material errors exist in the clients financial statements prior to even considering the clients internal controls -auditor's assessment of the inherent risk of errors in the financials has nothing to do with the actual amount of errors and the auditor can do nothing to minimize the risk -auditor must assess inherent risk and respond to the auditor's assessment of inherent risk

Answer 49

-if turnover in the accounting department is high, that's risky -if the accounting department personnel are not CPA's, the auditor fears that they don't know basic GAAP rules -if many accounting estimates are present, the greater the assessment of inherent risk because estimates are subject to bias -certain accounts need to be estimated according to GAAP rules -the more estimates are present the higher the inherent risk; doesn't mean there is a problem, it means the auditor thinks there may be a problem -if many related party transactions are present, the auditor will assess inherent risk high because there may not be a legitimate business purpose behind all of them -if accounting transactions are complex and difficult to determine when revenue should be recognized, inherent risk will be assess high by the auditor -technological advances causing inventory to be obsolete is a serious risk to a company and if this happen during the period under audit, then there is a risk that inventory is overvalued --> external circumstance that is influencing business risk and this is why its important for the auditor to know the industry and the company before starting fieldwork

Answer 50

1. part of overall audit risk 2. inherent risk is assessed by the auditor very early in the audit process (planning stage) 3. auditor either assess inherent risk high or low depending on factors like client personnel, related party transactions, turnover, estimates in the financial statements, technological advances impacting inventory, complex transactions 4. although the auditor assess inherent risk, this assessment has nothing to do with the actual level of risk the auditor faces

Answer 51

5 components of internal control -control environment -risk assessment -information and communication -monitoring -existing control activities

Answer 52

-flowchart, narrative, questionnaire

Answer 53

-how much risk do we think we are facing? -did the controls catch errors or did errors end up on the financial statements? -start at the top: highest level of risk of risk is assumed until the auditor sees controls working -professional skepticism requires the auditor to initially assess control risk at the max, high risk for problems, until the auditor is satisfied otherwise

Answer 54

-risk that the client's own internal controls are not good enough to catch errors therefore those errors wind up as material misstatements in the financial statements -the auditor cannot minimize this risk, only assess -auditor's assessment will determine the next series of audit procedures --> NET

Answer 55

-after coming to an understanding of the five components of internal control, a preliminary assessment of control risk is made -if the assessment is that control risk appears to be poor, the auditor sets control risk at the max level and must lower detection risk, carrying out a max amount of substantive procedures (evidence gathering), or use substantive procedures that generate audit evidence of a particularly high level, lowering the extent of tests of controls -must document this

Answer 56

-start the evidence gathering process, known as the substantive approach to further audit procedures; internal control is over -no reason to spend time on internal controls after the auditor has gained an understanding of all 5 components and documented the weaknesses -auditor moves on to the evidence gathering stage of the audit and hopefully can gather enough evidence to support the opinion regarding fair presentation of the amounts in the financial statements

Answer 57

auditor has a decision to make: -would testing the internal controls further in order to reduce the assessment of control risk save audit time and cost? -in other words, would spending five hours to do tests of the specific controls in a system save the auditor more or less than five hours of substantive procedures time?

Answer 58

-there is no reason to carry out any tests of controls if overall audit time will not be reduced -must be documented --> "controls look good, decided not to test controls" -if no reduction in audit time is expected, control risk is set a max level and a max amount of substantive procedures is performed, and the substantive approach (not doing test of controls) is to test specific controls only if there's a benefit expected

Answer 59

-if as a result of coming to an understanding of internal control and documenting the understanding, if the auditor thinks the controls might be pretty good, if further testing of those controls will reduce audit time and effort, then the auditor should perform those tests of controls using a "combined approach" to further audit procedures -if the auditor tests the controls and the clients controls pass the auditor's tests, that's good news -result is that the auditor can do less evidence gathering, less substantive testing, saving time and cost -auditor can then assess control risk "below the max" IF the controls pass the auditors test (N - test of controls and substantive; E - not as much; T - some at interim which increases detection risk)

Answer 60

detection risk

Answer 61

-if the risk of material misstatement is high, the auditor has no choice but to lower detection risk and with it, overall audit risk can be lowered by performing more substantive tests -NET: substantive tests rather than test of controls; more testing rather than less; test closer to year end -auditor does NOT assess detection risk, but instead makes a decision to lower it or not

Answer 62

-auditor could take a chance and raise detection risk by deciding to perform less substantive tests, or perform them earlier in the year (interim), or test controls instead of substantive tests

Answer 63

-assurance provided by substantive tests -ex: if the accepted level of detection risk decreases, more assurance is required from substantive tests

Answer 64

-equity method (more than 50%) investees and subsidiaries -management, principal owners, and immediate family members of officers

Answer 65

-all companies have related parties and often engage in transactions with them -not illegal but it does pose risks for the audit -normal course of business: auditor is concerned about whether the transaction is accounted for properly and disclosed properly -outside the normal course of business: auditor is concerned about whether the transaction is accounted for properly, disclosed properly and whether the transaction was properly authorized --> look at board of director minutes -auditor's primary concern with related party transactions is whether they are appropriately accounted for and disclosed because if they are not, material misstatements can occur -if one party can influence the other, then free market dealings cannot be assumed; cannot assume "arms length" transactions -the entity need NOT include a statement that the related party transactions were consummated on terms equivalent to those that prevail in arms lengths transactions, the auditor expects that they are favorable terms; it's okay provided its properly accounted for and disclosed

Answer 66

disclose the related party transactions in GAAP based financial statements should include: -nature of the relationship (how are they related) -a description of the transaction (purchase and sale, services) -dollar value of the transactions (if there's no amount, this needs to be disclosed) -amounts due from or to the related party at the balance sheet date -how many periods will this transaction impact us -terms and manner of settlement if not obvious

Answer 67

-borrowing or lending at very high or very low interest rates compared to the current market rate (one company is absorbing expenses of the other) -real estate sales at amounts that are very different from appraised values -sale with as commitment to re purchase -although the auditor will obtain an understanding of the business purpose of the transaction, auditor will not attempt to establish whether a particular transaction would have occurred and what the terms would have been if the parties were unrelated

Answer 68

-the business structure may be deliberately designed to obscure related party transactions -related parties operate through a complex range of relationships and structures and a related party transaction could involve multiple related parties -information systems may be ineffective in summarizing transactions and outstanding balances between an entity and its related parties -related party transactions may not be conducted under normal market terms and conditions, some may involve no exchange of consideration

Answer 69

-FIRST THING: inquire to management about the identity of related parties, the relationship of the entity with those parties, whether transactions with those parties have occurred, the nature and purpose of the transactions -auditors should request from management the names of all related parties and inquire whether transactions occurred with them -review filings with the SEC for the names of related parties -the auditor performs procedures to identify material transactions that may be indicative of previously undetermined relationships -reviewing confirmations of compensating balance arrangements ($x left behind to satisfy the bank) for indications that balances were maintained for or by related parties

Answer 70

-while inspecting certain records and documents -bank confirmations and legal confirmations -minutes of meetings of shareholders and directors -loan covenants that include compensating balance requirements -conflict of interest statements

Answer 71

-an intentional act that involves the use of deception that results in a material misstatement in the financial statements

Answer 72

-must plan the audit to provide reasonable assurance of detecting material misstatements whether due to error or fraud (difference between error and fraud is intent) -much easier to detect a good faith error than a bad faith fraud, especially if there is collusion (two or more parties engaged in fraud) -in an audit, issuer or non issuer, the auditor must assess the risk of material misstatement due to fraud, and document it and discuss the risk in brainstorming sessions

Answer 73

-fraudulent financial reporting/management fraud: management overriding internal controls (there is a presumption in every audit that revenue is overstated due to fraud) -misappropriation: stealing, defalcation

Answer 74

-special consideration must be given at every step throughout an audit to the possibility that fraud exists -especially in assessing inherent risk (but also in assessing control risk and performing substantive procedures to reduce detection risk), the auditor must place extra emphasis on detecting fraud

Answer 75

-very important to maintain professional skepticism throughout the engagement -one of the challenges in detecting fraud in a specific audit is being able to anticipate how fraud might have occurred in a particular company, overstatement of revenue due to earnings management, management override of controls -brainstorming sessions must be carried out at the beginning of each audit and possibly throughout the audit periodically

Answer 76

-at beginning of the engagement -since every audit is unique, the goal of brainstorming is to assess the potential for material misstatement due to fraud -historically, auditors have sometimes failed to recognize and adapt to the risks of a particular audit -each audit is unique and each audit has its own particular problems -the brainstorming sessions help the audit team to focus on the unique characteristics of each audit engagement -documentation is required to include a description of the discussion regarding the risk of material misstatement due to fraud

Answer 77

incentives and pressure, opportunity, ability to rationalize

Answer 78

-fraud is more likely when the members of management or other employees have an incentive to commit fraud or they face pressures that make fraud more likely

Answer 79

-factors whose presence often have been observed in circumstances where frauds have occurred -a fraud risk factor is a specific situation or action that increases the likelihood of fraud occurring -do not prove that fraud has taken place nor do they automatically indicate that the risk of fraud is high; the presence of fraud risk factors will increase the auditors assessment of inherent risk

Answer 80

-significant, unusual or highly complex transactions, especially those happening near year end -a number of reported balances are based on significant estimations, each estimate presents an opportunity to cook the books -management is dominated by one person; can override all controls or a small group without compensating controls or ineffective oversight -there has been high turnover of senior management -lack of segregation of duties -high turnover of accounting or IT personnel

Answer 81

-fraud is more likely when the members of management or other employees have the opportunity to commit fraud -if proper controls are not in place so that officials have inappropriate access to records or to assets, the risk of fraud has to be considered to be elevated -if duties are not properly segregated, fraud is more likely

Answer 82

-fraud is more likely when the members of management or other employees are able to rationalize the action -ex: frequent disputes erupt between management and the auditor; known history of violations of securities regulations or other laws

Answer 83

-management or other employees have significant amount of personal debts -employee layoffs have occurred or are anticipated -compensation levels have recently changed and people may have gotten a salary reduction or not the raise they were expecting -job promotions were inconsistent with a person's expectations

Answer 84

-large amounts of cash are on hand -inventory items are small and are of high value -company holds assets (such as bearer bonds) that can be easily converted to cash -company does a poor job of screening employees with access to assets -lack of physical safeguards for assets such as cash and inventory -reconciliation of assets to the related records is not done in a timely fashion -there is inadequate record keeping so that periodic reconciliation is not possible -inadequate management understanding of IT controls -no mandatory vacation plan for employees

Answer 85

-apparent displeasure or dissatisfaction with the company -change in life style (country club, keeping up with members; suddenly downsizing) -just borrowing temporarily, planning to pay it back -not always easy to observe these but if discovered they would be considered high risk to rationalize theft -unusual delays, auditor requests take much longer than expected

Answer 86

-art and science of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data related to the subject matter of an audit through analysis, modeling, or visualization for the purpose of planning or performing an audit -are we trying to detect risk, or are we testing a control, or are we using we searching for material misstatements?

Answer 87

-risk assessment -test control -substantive procedures -evaluating conclusions

Answer 88

1. plan the ADA with the audit team 2. extract and prepare the data 3. consider the relevance and reliability of the data used 4. perform the ADA 5. evaluate the results of the ADA

Answer 89

plan the ADA with the audit team: -describe the objective of the ADA; is the objective a risk assessment objective (trying to obtain an understanding of the environment and its internal control for the purpose of assessing the risk of material misstatement) or more of a substantive purpose (focuses on detecting material misstatements at the relative assertion level) -use of ADA's should be brainstormed in the planning stage with the audit team as to where the best use them and the related audit objectives with each ADA used

Answer 90

extract and prepare the data: -auditor needs to harvest the data from its source and prepare the data for use in the ADA auditor should consider the type of data involved: -structured: includes data in a spreadsheet, structured, organized in columns and rows could be inventory control or sales transactions; data is typically in a relational database and easily searchable by human queries -semi structured: data that is tagged such as html or xml; doesn't reside in a relational database but does have some organizational properties that makes it easier to analyze items like emails -unstructured: data such as videos appearing on social media, or audio/text files on social media; not easily searchable and pose more of a challenge when using ADA process of accessing and preparing the data for use in the ADA includes ETL -extract: harvesting and pulling the data from its current source; auditor should understand where the data is stored prior to extraction and how the data will be extracted and by whom -transform: process of cleaning or correcting the extracting data so that the data can be used in the ADA; errors in the data or in the data fields may indicate that controls over the data are not operating effectively -load: the process of uploading the corrected data in the software that will be used to perform the ADA

Answer 91

consider the relevance and reliability of the data used; data should have all 6 of the following attributes: -accurate: data is free from significant errors -complete: all the data that should be included is, and there is no material omissions (data that is accurate and complete has integrity; encrypted data would be considered of higher integrity because its more likely to be accurate and complete) -consistent: the data files are well defined and managed -freshness: data file contains the most up to date changes -timeliness: the data is available when they are needed -clarity and relatedness: data fields are related to the audit objectives of interest

Answer 92

perform the ADA -auditor would identify and address any notable items -an item would be notable if it represents an items in the population that the auditor determine that the risk of material misstatement is suddenly higher than previously assessed -if there are many notable items, the auditor should use a grouping or filtering process to identify the attributes of interest common to those groups and then should perform appropriate audit procedures to address the risk of material misstatements associated with the various groups -if there is a small number of notable items, then the auditor can use a manual risk assessment and any further audit procedures should be made responsive to those risks of material misstatements -in forming an overall conclusion, ADAs may cause the auditor to revise the previous risk assessment or procedures as necessary

Answer 93

-evaluate the results of the ADA and decide whether the purpose and specific objectives have been achieved -evaluate whether the ADA has been appropriately planned and performed; if not, refine and reperform the ADA -documentation and considerations: document the performance of the ADA, the results of the ADA, and if any visualizations are used, include in the documentation any screenshots of graphics that support the auditor's conclusion

Answer 94

-use of various types of graphics such as bar charts, line charts, scatter plots or a combination of several graphics in formats such as what is known as a dashboard -purpose of visualization is to make any relationships of interest in large data sets more identifiable -use key performance indicators (KPI's) to show what happened and why it happened -see relationships between variables in a visual depiction to better illustrate a trend or unusual fluctuations in the relationship -exploratory (research and analyze data to better understand it for yourself) or explanatory (report and communicate data to end users)

Answer 95

-critical thinking is needed in order to apply an analytics mindset to the data set and then be able to communicate the results to stakeholders who may not be of the statistician mindset -the modern accountant will be able to analyze data using complex tools and models and then take that complex analysis and communicate it to a client in a visual way to make it more useful -accountants need to be trained to extract data, transform data and load data onto a system for analysis -accountants will also need knowledge of data visualization and analytics software like microsoft power BI and tableau **aka accounting skills of the future**

Answer 96

-increased use of ADA include improved understanding of an entity's operations and associated risks including fraud risk -increased potential for detecting material misstatements and improved communication with audit stakeholders because the communication will involve a visualization rather than just text

Answer 97

compare data across categories and should always begin with a zero vertical axis to avoid distortion

Answer 98

-shows changes in one variable, usually over time -the horizontal axis of a line chart is usually a time line

Answer 99

-allows the user to compare the subdivided totals across the years -shows parts of a whole and shows changes in data over time -typically four colors in the legend is enough

Answer 100

-weak choice for visualization -pie chart is better than a table though

Answer 101

-show the relationship between two sets of data -relationship between the two variables is called correlation (can be positive or negative) -relationship is positive when the values increase together; negative when one value decreases and the other increases - -1 to +1

Answer 102

-allows a user to monitor an ongoing process by showing key performance indicators in one location -the same dashboard might have a bar chart, a stacked bar chart, a line chart, and a table all in one place to track KPI's in order to make important decisions easier

Answer 103

-typo: use of fonts in visual displays -icono: choice of icons in visual displays like emojis

Answer 104

-tone at the top of the client company -auditor wants to know as early as possible whether internal control is a priority of the company to top management -auditor feels that if management displays ethical values, there is a chance that the rest of the company could fall in line -do they have integrity? is management dominated by one individual? if yes, there's a high risk for management override; if there's an audit committee, that's considered a low risk for management override -auditor is concerned with management's philosophy and operating style; look at an org chart

Answer 105

-what are the biggest risks to this client, to its industry and has the client considered those risks? -every company has risks; changes put a strain on company's financial reporting system, new territories, new personnel, new products -client's ability to foresee where problems might arise and take action in advance -auditor needs to know whether the client is staying ahead of a changing landscape of risks -client planning for changes adequately = risk assessed low; no steps to plan for risk = assessed high

Answer 106

-does the client have control policies and procedures in place to safeguard assets and segregate duties in response to the risk assessment? -auditor should already know the industry standards -no control activities = assessed high -the auditor can't minimize this risk only the client can by putting control activities in place

Answer 107

-are the accounting systems capable of delivering the proper information to the correct party in a timely fashion? -auditor wants to know if the information produced is reliable -auditor assess the risk that the client's accounting system is not capable of delivering the information in a timely manner -only the client can minimize the information and communication risk by having quality communication systems in place -know the information systems they are using -identify and record all valid transactions, describe on a timely basis in enough detail to determine proper classification, measure the value properly, record in the proper time period, properly present and disclose, and communication responsibilities to employees

Answer 108

-auditor seeks to determine whether the company makes a continuous assessment of its internal control over time so that the various procedures do not become outdated and lose their dependability -does the company work to make sure that internal control evolves with changes over time? -the auditor cant minimize this risk only the client can by having an internal audit staff -if the client has internal audit staff, the auditor will assess the monitoring risk low

Answer 109

-controls may be designed properly but not be put in place -controls may be designed and put in place but not operating effectively -only if all 3 are observed by the auditor, could the auditor lower the assessment of control risk -when the auditor is gaining an understanding of internal control, the auditor is not yet determining control effectiveness

Answer 110

-by inquiry of personnel or inspection of documents, auditor attempts to learn the design of a particular system -flowcharts (picture diagram with symbols - start and end, diamond = decision, pot looking = manual operation; useful with complex structure), memorandum (narrative description), or a questionnaire (yes = strength, no = weakness)

Answer 111

1. anticipate what material misstatements might arise within that system 2. learn the design of the system through writing a memo, drawing a flowchart or completing a questionnaire 3. look for specific control procedures that would prevent or detect the possible material misstatements that have been anticipated 4. make certain that those specific control procedures are operating effectively and efficiently as designed --> where testing comes in

Answer 112

to ensure significant controls are functioning as designed: -inquire: talk to the employees -re performance: see if the same results are achieved -observation: observe the employee performing their duties -inspection: looking for physical proof

Answer 113

-if a control passes the auditor's test, auditor may be able to do less substantive testing than originally planned (increasing detection risk); auditor may be able to substitute analytical procedures for certain tests of details and balances

Answer 114

-auditor knows that certain duties should be segregated -observation and inquiry is show to test for segregation of duties

Answer 115

-when electronic data is not maintained indefinitely, the auditor must be careful to consider the appropriate timing for audit tests, making sure that testing is performed while data is still available -an IT system may make it impossible to gather evidence using substantive procedures alone, in those cases, must do control testing as well

Answer 116

-auditor wishes to perform a test of controls over a procedure that leaves no audit trail, the auditor must use observation and inquiry to test the control

Answer 117

-manual: internal controls performed by people and are more suitable when judgment and discretion are required such as when there are large usual or nonrecurring transactions; potential misstatements are difficult to predict, changes in circumstances that require changes in controls; help monitor automated controls -automated: suitable for high volume or recurring transactions

Answer 118

-general: policies and procedures that relate to the proper operation of the entire information system; include passwords, backup/recovery, administrative rights to the network; include segregating duties between systems analyst/software development, system maintenance, and computer operations -application: relate to the processing of individual transactions and help to ensure that transactions occurred are authorized and are completely processed and reported; controls over input, and processing including controls over interfaces, e-commerce, manual follow ups of exception reports

Answer 119

-serves to increase efficient and effectiveness of internal control -ability to process large volumes of transactions and data accurately and consistently -improved timeliness and availability of information -facilitation of data analysis -reduction in the risk that controls will be circumvented -enhanced segregation of duties through implementation of security controls -enhanced ability to monitor the entity's activities and its policies and procedures

Answer 120

-potential reliance on inaccurate system -unauthorized access to data -unauthorized changes to data, systems or programs -failure tp make required changes or updates to systems or programs -inappropriate manual intervention -potential loss of data **auditor should perform tests more often during the year, not just once

Answer 121

regardless of how strong a company's internal control may appear, there are certain inherent limitations that prevent control risk from ever being reduced to zero: -human error: can't entirely prevent it, mistakes in judgment -cost/benefit/reasonable assurance: auditor can try to convince client to spend more time and money on internal control but client is not going to spend more for internal control than the expected benefit -situations and companies constantly evolve over time: controls need to change as well due to outdating -management is dominated by one individual who can override internal control -possibility of employee collusion: two people working together to steal from the company

Answer 122

weakness can be corrected with proper segregation of duties -so, segregation of duties is NOT an inherent limitation

Answer 123

-independent auditor may use the work of the client's internal audit staff when gathering evidence in low risk areas of the audit ONLY if the independent auditor assess the internal audit staff as being competent and objective -objectivity is typically strengthened by having the internal audit staff report to the audit committee of the board of directors -the internal auditor cannot be threatened if all reports are made to the independent members who make up the audit committee rather than to any individual within management -to further ensure objectivity, the internal audit staff should be free to do any testing that is considered necessary; management should place no limitation on the work of the internal audit department

Answer 124

-monitors the design of a company's internal control system on an ongoing basis as well as compliance with its policies and procedures

Answer 125

-department should keep internal control functioning at a high level -an assessment of this department impacts the auditor's overall view of a company's internal control -if internal audit department is very capable, the independent auditor might be able to do less testing than originally anticipated

Answer 126

-evaluated based on factors such as education, experience, certification, and a review of the work that has been produced

Answer 127

-evaluated based on the identity of the party to whom internal auditor reports -preferably, the internal audit department reports to the audit committee of the board of directors -there should be no limitations placed on the work of the internal audit department -internal auditor should be allowed to be suspicious of anyone

Answer 128

-substantive and other procedures can often require skills and abilities not possessed by every CPA -the use of an outside specialist is not unusual in an audit -a person possessing special skills or knowledge in a field other than accounting and auditing

Answer 129

-because the CPA is going to rely on the work of the specialist, the CPA must check the person's professional reputation as well as independence from the client company -specialist is not required to be independent but that impacts credibility of the findings -CPA must inform specialist of the intended use of the work

Answer 130

-CPA asks specialist to disclose all assumptions and methods that had to be used as well as any uncertainties in the findings -because of reliance, the CPA needs to know about all limitations (if the specialist is only 90% sure rather than 100%, the CPA needs to know that)

Answer 131

-if, as the result of the work performed by the specialist, the auditor decides to add explanatory language or change the audit opinion, the auditor may refer to the special in the auditor's report -otherwise, don't refer to the specialist in the report since its implied that an auditor will sometimes hire a specialist -if the findings of the specialist do not lead to any change in the audit repot, there is no need to mention the use of the specialist in the audit report -if findings did result in a change in the wording of the audit report, auditor can mention the work of the specialist and can even identify the specialist if they want

Answer 132

-audits of a service organization's controls -service companies get SOC audits performed every year showing that their systems and controls are up to date and functioning effectively -AICPA recognized the need for instilling confidence in these service centers with an attestation engagement (SOC reports) to provide assurance -as a result of SOC reports, service orgs have a CPA firm perform an engagement on their system processes and controls and issue a report which they could then provide to their clients and customers to instill confidence -without SOC reports, potential trading partners would have to come to your business and perform audit procedures or tests of controls

Answer 133

-service companies whose product rolls up into their customer's financial statements -appropriate for service organizations whose controls impact their end customers financial reporting, ADP -best suited for organizations that must instill confidence in their controls and safeguards over their customer's financial data

Answer 134

-addresses the suitability of a companies control design and implementation at a specific point in time -includes a description of the companies system and the auditor's opinion regarding if the description of the controls is fairly presented and if the controls are effectively designed

Answer 135

-concentrates on control design and operating effectiveness over a period of time rather than just at one point in time -contains a description of the tests performed and their results -an opinion on whether the companies controls are effectively operating over a specified period -audit firm examines the control environment over a period of time

Answer 136

-appropriate for service organizations whose controls impact their end customers operations and compliance, computershare -good fit if your organization is a third party vendor who stores, processes or protects your client's non financial data -common examples: SAAS, IAAS, PAAS

Answer 137

-security (mandatory): protection of data creation, data process, transmission and storage, as well as the systems that enable each activity and a set of organizational controls based on how you as an organization manage your team -availability: focuses on accessibility of the system, performance, monitoring, ensuring that there are sufficient backup controls in place over data, disaster recovery -processing integrity: focused on data delivery, ensuring that the data that you as an organization are processing is complete and accurate for your client; like quality assurance measures -confidentiality: how you as an organization, restrict data, preventing the unauthorized access of non public information, the focus is on m ore specific access controls, encryption standards -privacy: how your organization collects, uses, distributes, discloses and retains personal information

Answer 138

-there is flexibility as to how a particular outsourcing company meets that compliance -AICPA governed this -all about your information systems

Answer 139

while the IRS does not require a SOC 2, neither does PCAOB, many orgs may be required to obtain a SOC 2 report due to contractual requirements with trading partners --> a service org elects to pursue SOC 2 for one or more of the following reasons: -org desires to improve its security posture -prospect or client mandates it in a contractual agreement -prospective clients are asking about security or official certification during the sales cycle -your business is over burdened with security questionnaires or customer audits

Answer 140

-point in time -typically performed only the first year immediately following remediation to help get a report in hand faster -report on how well the entity fixes the holes and gaps -once the entity finishes "readiness" they want to get a report the day they have all their controls in place, "point in time" audit

Answer 141

-period of time -most common is 12 months but they very first year, a company may choose a 6 month report to receive the report quicker -the day the company receives it's soc 2 type 1 report, that beings the audit period for soc 2 type 2 -annual process, not one and done -customers and trading partners are savvy and will be looking for the dates to be recent on the report so there must be refresh reports done every year

Answer 142

-restricted -soc 1: restricted to your management team, the end users of your services and your customers auditors -soc 2: restricted to your management team, the end users of your services and their management team, business partners, regulators, as well as potential clients who have an understanding of the service org's industry

Answer 143

1. implement a security program 2. implement security controls 3. perform a SOC 2 audit with an independent auditor

Answer 144

-suitable for public/general use -value tools to market the effectiveness of your control environment -entity must complete a SOC 2 type audit to get a SOC 3 report -results in an actual certification which can be published on the company's website -opinion, an assertion and a high level description of services -scope is similar to SOC 2 in that the same 5 trust service criterias are used

Answer 145

-serves as the basis for the audit opinion -all the information the auditor uses to arrive at the conclusions on which the audit opinion is based -can be written, electronic, observing assets or client activities; even conversations that we have with the client that we document can be included as part of evidence (like the rep letter) -client financial statements, the accounting records and documentation is NOT evidence to support your opinion

Answer 146

-to avoid a scope limitation, the auditor should have access to all pertinent accounting data and corroborating audit evidence -ex: not just the income statement and sales journal but the sales invoice and shipping documentations provide evidence that the sale took place

Answer 147

-evidence must persuade the auditor that the ending balances in the financial statements are fairly presented -audit provides reasonable assurance regarding the fairness of the financial statements -cost benefit considerations prohibit an examination of 100% of the accounting data -auditor must rely on evidence that is persuasive (subjective concept, based on judgment and relates uniquely to each audit) rather than conclusive

Answer 148

-must be both reliable and relevant -the appropriateness of evidence depends on it being pertinent, objective, timely and corroborated by other evidence

Answer 149

-most reliable: direct personal knowledge, which often comes from observation, examination, inspection or recalc -evidence obtained from external sources, bank confirmations and receivable confirmations is next most reliable -evidence obtained from the client, internal evidence in writing, client prepared invoices and documents is next (if the auditor determines that the data was developed under a system with adequate internal controls, the auditor would consider the data that much more reliable, but still not as reliable as external confirmations and direct personal knowledge) -lease reliable: oral evidence obtained from the client (still considered evidence although it would likely need to be corroborated by additional evidence)

Answer 150

-evidence must relate to a financial statement assertion

Answer 151

-something that management wants the reader to believe -management is responsible for the financial statements and when they produce their financial statements they are making assertions about the items listed on the financial statements -making assertions about recognition, measurement, presentation and disclosure of information in the financial statements

Answer 152

-completeness, allocation and valuation, rights and obligations, existence (CARE) **account balances at the end of the period

Answer 153

-the client asserts that all assets, liabilities, and equity interests that were recorded on the balance sheet, exist at dec 31 -the auditor's concern is overstatement -the auditor sends out confirmations to gather evidence regarding overstatement, if any do not exist, the account is overstated

Answer 154

-valuation is when the client asserts that the account balance is properly valued (net realizable value) -AR: assets have a top line number and a bottom line number --> auditor tests net realizable value of accounts receivable by recalculating the aging schedule -fixed assets: client asserts that PPE is properly valued and the auditor would test by recalculating depreciation, determining whether the client's estimate of useful life is reasonable for gathering evidence regarding the end balance of AD of fixed assets -allocation deal with the inclusion of proper overhead amounts to inventory valuation -with valuation assertion for any asset, the client asserts that the bottom lien figure is properly valued and the auditor tests that by recalculating the contra asset

Answer 155

-client asserts that every liability that should have been recorded, has been -auditor is concerned with understatement of liabilities, that some liabilities should have been recorded but were not -we want to design procedures to make sure that transactions that should have been recorded, have been recorded

Answer 156

-the client asserts that the client has the ownership rights to all assets on the balance sheet as of the end of the year -receivables: client asserts that they have the right to collect the cash when the customer pays; the auditor fears that the client already traded the rights to the receivables for a loan or cash, factored or pledged --> read minutes of BOD meeting or inquire about pledged receivables -inventory: client asserts that they are the owner of the inventory, not just a party in possession of the inventory but the actual owner --> auditor would inspect the documentation, and the invoices would indicate ownership -PPE: client asserts that they own the warehouse and they are not just a lessee paying rent --> auditor inspects property tax records to determine who the rightful owner is -liabilities: all liabilities listed on the balance sheet are debts of the company and not debts of another company or individual --> auditor does inspection

Answer 157

-completeness, occurrence/existence, cutoff, classification, accuracy and valuation

Answer 158

-assertion is that transactions and events that have been recorded have occurred and pertain to the company -concern is overstatement -if the client recorded something that has not occurred, that is overstatement -we want to design auditing procedures to make sure that the transaction that has been recorded, really did occur

Answer 159

-clients asserts with cutoff, that they did not record any sales in the period under audit that were after the dec 31 cutoff -impacts occurrence assertion if there is an improper cutoff -impacts completeness assertion when there's an understatement of sales for the period under audit

Answer 160

proper accounts have been recorded

Answer 161

-pre numbered function as a control and to allow the auditor to test the completeness and existence assertion -one copy of the sales order should go to the credit department so they can review the credit file and authorize the granting of credit if specified qualifications are met -credit manager should report to the treasurer, not to anyone within the sales function **why do we need a credit check? to help the company determine the likelihood of a debtor's ability to pay; new customers may result in the company extending less credit to customers who are unlikely to pay, which may result in a lower bad debt expense; checking for proper valuation of AR --> loose credit policies result in an overvalued (valuation assertion) AR

Answer 162

-authorization: credit department needs a copy of the sales order form to authorize the customer's credit -custody: warehouse department needs a copy of the sales order to know how many cases to release to the shipping department; there isn't a sale yet though, so it can't be booked as revenue until shipment -reconciliation: execution shipping will reconcile the sales order from the credit department to the sales order from the warehouse -recording: billings department will prepare a sales invoice but only after goods have been shipped

Answer 163

1. sales order comes in to the sales department, one copy goes to the credit department for verification (authorization) 2. assuming credit is granted, one copy of the sales order goes to the warehouse department (custody) so they can release goods to the shipping department 3. assuming warehouse department has the goods, they release to the shipping department so that they can reconcile the sales order form received from the credit department to the sales order received from the warehouse. if they match, the shipping department prepares a bill of lading, which lists the content of the shipment. this is considered the origin of the transaction, and the earliest moment that revenue can be recorded 4. revenue is recorded by the billings or accounting department, it's a recording function, and the billing department prepares a sales invoice and mails the sales invoice to the customer

Answer 164

-warehouse: in charge of monitoring and safeguarding inventory (custody) -shipping: conveys merchandise to appropriate outside parties **internal control is strengthened by having these departments independent of each other, meaning goods cannot be removed from the company without having two departments involved; this offers a system of checks and balances

Answer 165

-shipping verifies the quantity, description, and condition of the inventory before accepting it from the warehouse -the warehouse must obtain a receipt from shipping to serve as evidence of the transfer

Answer 166

-upon receipt of the goods from the warehouse, the shipping department readies the goods for shipment to the customer -a shipping document (bill of lading) is produced to indicate the contents of the shipment -copies of this document are sent to several departments for both record keeping and control purposes: inventory accounting, general accounting, the billing department and to the customer

Answer 167

-billing department keeps a pending or open file -no action is taken by the billings department until a copy of both the sales order and the bill of lading are received -then they are compared and all authorizations are verified and reconciled -whenever two documents with similar information are received from two independent sources, the recipient should match the documents to make certain that no differences exist or that no authorized changes have been made -computer controls related to pricing and mathematical accuracy will reduce billing errors -if these documents match and are properly authorized, a sales invoice is produced and sent to the customer

Answer 168

-prepared by the billing department and mailed to the customer -all sales invoices are recorded immediately in a sales journal or daily sales summary -the billings department preparing and recording the sales invoice is an example of the recording function -the information on the sales journal is summarized and forwarded to general accounting so that the general ledger accounts can be updated, resulting in a debit to AR and a credit to revenue

Answer 169

whenever a document is produced, several procedures are performed: -document is reviewed and signed (authorization) -information on the document is recorded -a copy of the document is retained -copies are sent to various departments for later reconciliation, audit trails

Answer 170

-one copy of the sales invoice goes to the AR department where it is recorded in a subsidiary ledger by customer name -the age of these accounts is monitored (valuation assertion) and subsequent invoices are sent if payment is not received in a timely manner -at a certain point, if not paid, the balance is turned over to the collection department

Answer 171

-if payment is still not forthcoming, the receivable is recommended for write off -a party independent of the custody and record keeping functions should review all documentation and authorize the write off -treasurer should authorize the write off for good segregation of duties so that accounts receivable who will actually write the account off, doesn't authorize the write off and then execute it

Answer 172

1. sales order: sales department 2. bill of lading: shipping department 3. sales invoice: billing department

Answer 173

-an auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the collection of receivables -the revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test sales and receivables together

Answer 174

-when testing sales, the auditor is mostly concerned with overstatement (occurrence) but cannot totally forget about understatement (completeness) -how the auditor determines whether sales are over or under stated -where the auditor starts a two directional test determines whether the auditor is testing for under or overstatement -as a result, the auditor cant test for both under and over statement with the same test

Answer 175

1. sales order: sales department 2. bill of lading: shipping department 3. sales invoice: billing department -when testing for overstatement of sales, auditor starts with general ledger and the sales journal to see what was recorded as a sale and tests backwards to seek the documents like the bill of lading that supports the transaction to make sure sales are not overstated

Answer 176

1. sales order: sales department 2. bill of lading: shipping department 3. sales invoice: billing department -any recorded sales, where no shipping document can be located, the auditor presumes overstatement of revenue, fraudulent financial reporting -client recorded sales that never happened -to test for overstatement, the auditor starts at the end of the transaction cycle, and tests backwards seeking support

Answer 177

-when testing for understatement of sales (completeness), the auditor starts from the beginning, with the shipping document traces it forward to the sales journal and general ledger -this is to make sure that all client shipments were recorded as sales, and no goods were shipped out fradulentyl -if the auditor finds shipping documents but cannot locate a recorded sale in the sales journal, or general ledge, the auditor suspects theft

Answer 178

-what if the auditor finds that some shipping documents were not recorded as sales? such shipments may be goods being sent out on consignment or they may indicate the theft of the merchandise

Answer 179

-certain testing is done in the subsequent period -for sales, its cutoff testing

Answer 180

-done in current and subsequent period -examine a sample of transactions recorded 3-4 days prior to the end of the year to make sure they really should have been recorded in the current year -testing of existence or occurrence -did these transactions really occur in the year under audit? did the balances actually exist at the end of the year? -overstatement = sales recorded in late december and determining that shipment of those goods took place jan 4 -understatement = sales recorded in early jan and determining that shipment of the goods took place on dec 30

Answer 181

-examine a sample of transactions recorded 3-4 days after the end of the year to make sure they were not left out of the year under audit -this is testing completeness -did the recording of any transactions from the year under audit get delayed until the following year?

Answer 182

in the sub period, the auditor looks at certain types of transactions because they can help to substantiate the balances reported on the financial statements: -cash collections: examining cash collections just after year end provides evidence as to the existence assertion for AR -write offs of accounts: see how much was written off shortly after year end to provide evidence as to the valuation assertion for AR (allowance debit, AR credit)

Answer 183

-auditor is required to confirm AR if the AR balances are material to the financial statements -customers are contacted by the independent auditor (not the client) to obtain evidence about their AR balances -primarily intended to provide support for the existence assertion -confirmation goes to a third party, and the party under audit can't interfere (testing existence) -client could prepare the confirm, but the auditor must send it out and the response must be directed to the independent auditor -client can prepare BUT must be signed by the client giving permission for the release of information; must be reviewed prior to mailing the auditor and auditor must mail the confirm -responses are directed back to the auditor who investigate all problems noted; AR with zero balances need to be confirmed anyway, they could be shown as zero due to error or fraud

Answer 184

-if the client accidentally receives the confirmation, and then brings it to the auditor, they can accept the confirmation but verify the source and content through a telephone call to the customer

Answer 185

-present a balance and ask the customer to respond only if the balance is incorrect -provide evidence of a lower quality since no response is viewed as an indication that the balance is correct, so there's no real corroborating evidence -use when there are many small dollar transactions that are current, rather than old -use when internal control is strong

Answer 186

-request that the confirming party respond directly to the auditor by providing the requested information or by stating that the party agrees/disagrees with the information in the request -present a balance and ask the customer to respond to let the auditor know whether the balance is correct or not -more costly procedure but provides greater evidence since the auditor should receive a response in all cases, and the auditor must follow up if there's a no response -following up due to no response is usually with a letter vs a phone call -use when controls are weak and dollar amounts are significant, or for older balances, or accounts where inherent/control risk are high (and detection risk is low)

Answer 187

-type of positive confirmation -the recipient is requested to fill in the balance -blank forms provide a greater degree of assurance if they are returned but the recipient may be lazy and just discard the confirm rather than attempt to research the correct balance -used to reduce the risk that recipients will respond without verifying the information -to increase the chance of response, include the most recent payments

Answer 188

-method of fraud -cash collections (checks) from customers are stolen and the shortage is concealed by delaying the recording of subsequent cash receipts -cash is received from a customer and is stolen by an employee. subsequently, cash is received from another customer but is credited to the first customer's account so an overdue bill will not be mailed -will result in a delay in the recording of specific credits to customer accounts compared to when the checks were deposited -detect lapping by taking the customer remittance listings and see what dates they get applied to what customer in the AR sub ledger

Answer 189

-occurs most often when the same period has responsibility for custody and recordkeeping of the cash -prevented by proper segregation of duties -employee who opens the mail and deposits customers checks should not also be able to record and post the transaction to the customer's account and write off the AR -a lockbox would also prevent lapping because customers would be sending their payment directly to the bank -mandatory vacations would prevent and detect lapping

Answer 190

documents: 1. purchase requisition 2. purchase order 3. receiving report 4. purchase invoice --> approved voucher departments: -purchasing, warehouse, receiving, AP, cash disbursements

Answer 191

-need some type of pre numbered, multi copy purchase requisition form: quantity, type, description, etc -the requisition will be reviewed and authorized by the head of that department and sent to the company's warehouse in hopes that the items are in stock -a good internal control would be to have someone above approve purchase requisition --> authority therefore = 1 copy going to the manager of the department, 1 copy goes to the warehouse, and 1 copy goes to AP (if the warehouse doesn't have the good)

Answer 192

-requisition is signed by the warehouse and forwarded to the purchasing department -the signed purchase requisition shows that the goods have been requested but are not in stock -a copy of the requisition has to be sent to AP -purchasing should review the authorizations and make sure that the request follows company guidelines

Answer 193

-purchasing follows the company policy for acquiring desired merchandise at the lowest possible price -purchases should be made from vendors on an approved vendors list (competitive bids) to lessen the chance of collusion with outsiders -purchasing department should ensure both expected quality and lowest possible price -purchasing department will prepare the purchase order, the 2nd document in the purchasing cycle

Answer 194

-prepared by the purchasing department -one copy is sent to the vendor as well as to the company's own receiving room (sep from the warehouse) and AP department -AP should serve as a matching function -reconciliation: we want AP to match up the purchase requisition and the purchase order but still NOT pay the bill yet; we haven't incurred the liability yet and there's been no receipt of the goods

Answer 195

-custody function -to ensure a proper system of checks and balances, the receiving room that takes initial possession of items is a completely sep department from the shipping department and warehouse -receiving is sent a copy of the purchase order to serve as an authorizing document for acceptance of goods -to force the counting of merchandise, the quantity to be received is not included on this copy of the purchase order, blind copy (receiving should know items are coming in but not how many so they can count)

Answer 196

-when goods are eventually received by the company, the receiving room personnel count the items and verify the description against the purchase order -the condition of the goods should also be checked -policy should be in place to reject any damaged merchandise or any that does not agree with the purchase order

Answer 197

-if goods are accepted, the receiving room personnel completes a receiving report to provide all information on the merchandise -copies of this receiving report go to a number of different places within the company including: AP (now their third document received), inventory accounting, and the department that originally requested the merchandise

Answer 198

-purchase invoice will be received from the vendor -since this document is prepared outside the organization, it must be reviewed by an appropriate official within the company and sent to AP -fourth document AP reconciles and matches up before they get ready to prepare the voucher or authorize payment of the bill -a voucher is authorization to pay a bill -the terms, prices and the match should all be verified by AP; the purchase invoice should then be signed to show proper authorization

Answer 199

-a pending (or open) file is maintained in AP to gather the four documents in the purchasing cycle -when all are eventually received, they are matched and the authorizations are checks -then a voucher is prepared, which is the approval for payment -the vouchers department approves vendor invoices for payment; they don't actually sign the check but they often prepare the check and forward the approved voucher to cash disbursements who signs the check -control activities: authorization (vouchers payable), execution (cash disbursements), check signer who makes sure the check amount matches the invoice (treasurer)

Answer 200

-voucher is the document that acknowledges the liability and approves payment -the backup documentation (four forms) is attached in what is sometimes called the voucher package -the voucher is recorded in the voucher register which is summarized periodically for recording in the general ledger by general accounting -voucher package is forwarded to cash disbursements department

Answer 201

-cash disbursements files the voucher package -on the due date, a check is written -the treasurer compares the check to the voucher and the other backup documents -check is signed and the voucher is perforated/marked as paid (so the voucher won't be paid twice) -check is recorded in the check register (or cash disbursements journal) and mailed **check should never go backwards through the system

Answer 202

-completeness: client asserts books are complete so the auditor fears understatement -testing for completeness/liabilities: start with the purchase invoice, purchase order and receiving reports to look to see if liabilities were recorded at year end -existence: client asserts that all cash disbursements were for authorized expenditures, so the auditor is concerned that some expenditures were not properly authorized and payments are being made when they shouldn't be -testing for existence: start with the general ledger, seeing what was paid during the year under audit and make sure that there is an approved voucher, purchase invoice, receiving report, purchase order and purchase requisition. auditor fears overstatement of cash disbursements

Answer 203

-auditor could confirm accounts payable balances with vendors -positive confirms are used as the auditor would request that the balance due be provided by the vendors with whom the entity has previously done business (completeness assertion) -confirmation of payables is not a required audit procedure, but it may be useful in detecting unrecorded payables if controls are lacking and the same includes vendors for which the risk of understatement is high such a regular vendors -if controls are good, confirmation of payables is not generally performed -external confirmation need not be performed if the auditor can become satisfied as to the existence of recorded payables using evidence available directly for the entity

Answer 204

-if documentary evidence of the amount is lacking -confirm regular vendors if they happen to have zero or low recorded balances -the account is secured, involving collateral -client has made a major purchase from the creditor, regardless of the size of the balance

Answer 205

-greatest risk is having unrecorded liabilities at year end -send confirms to regular vendors with small and zero balances -in the sub period, auditor should examine cash payments made after the balance sheet date and compare them with the AP trial balance -since most companies pay their bills within 30 days, a payment to a vendor in jan was likely owed in dec

Answer 206

-cutoff assertion is where the client asserts that all transactions are recorded in the proper period -an entity should include goods in its inventory if it holds legal title to the goods -FOB shipping: goods in transit at year end belong to the buyer -FOD destination: goods in transit at year end still belong to the seller -include liabilities for goods in transit that have been shipped FOB shipping

Answer 207

-the auditor examines receiving reports for items received before year end, but not yet recorded -by the time the item arrives, it should be recorded and in the sub period, some of the last few receiving reports may not have been recorded yet -this would detect unrecorded payables at year end -some receiving reports in the sub period could indicate unrecorded liabilities, if the terms of the shipment were FOB shipping

Answer 208

-accuracy: the auditor will compare the general ledger balance of AP to the supporting detailed listing of payables, the two amounts should equal -valuation: generally not a concern since the client will presumably pay 100% of liabilities owed -rights and obligations: inspect the specific terms of the payables, any collateral, and inquire about any related party transactions where the company may erroneously have the liabilities -classification: sometimes a client converts AP to notes payable, paying interest until the amount is due; the auditor should verify that notes payable/other liabilities are reported sep from AP for ordinary operating activities (current liabilities vs long term)

Answer 209

-during the testing of any group of accounts, the auditor should be aware of the most likely types of MM -with an inventory procurement system, there are a number of common concerns about both inventory and the related AP (completeness) -inventory is damaged or obsolete; GAAP rule is write it down to FMV (lower of cost or NRV) --> valuation assertion -inventory is miscounted (error or fraud); easy to overstate ending inventory and increase net income

Answer 210

-beginning inventory + purchases = total avail for sale - ending inventory = COGS -sales - COGS = gross profit -sales and gross profit have a direct relationship -COGS and gross profit have an inverse relationship -ending inventory and COGS have an inverse relationship -ending inventory and profit have a direct relationship

Answer 211

-shipping terms will determine who owns the goods while in transit -FOB destination: seller is responsible all the way until the goods arrive at their destination; seller has title and risk of loss during shipment; seller owners goods while in transit -FOB shipping: sellers last point of responsibility is at the place of shipment; title passes from seller to buyer when UPS takes the goods off the sellers loading dock; buyer own goods in transit

Answer 212

-consignor is the true owner -consignor has given the inventory to a sales agent, known as a consignee -the consignee/sales agent has possession of the inventory in order to sell it but title still belongs to the consignor -the consignor owns the goods and hires a sales agent to try to sell the goods and ships the goods to the consignee -the cost of shipping the goods from consignor to consignee becomes part of the cost of inventory, cost of shipping the goods to the consignee is included in the consignors inventory cost

Answer 213

-the observation of the physical inventory counts. isa presumptively mandatory procedure -the observation of the client's inventory count provide evidence regarding existence, completeness, and valuation of ending inventory -an auditor who is NOT present to observe the physical inventory must use alternative procedures to justify any opinion expressed

Answer 214

-accuracy of physical inventory is responsible of the reporting company -auditor observes the process to determine reliability of the count -client count becomes the book value so the auditor needs to know the count is reliable

Answer 215

-auditor will make test counts of a client's inventory to be sure client count is accurate and for later verification of final cost figures -in performing test counts, the auditor selects a sample of inventory items, counts them and compares to client count -double check type test

Answer 216

-inventory report to inventory tags: existence (if there isn't a tag, that's overstated inventory, understating COGS) -inventory tags to inventory report: completeness (if there's a tag but the item didn't make it to the report, that's understating) -inventory report to test counts: existence -test count to inventory report: completeness -test counts <--> pre # inventory tags: accuracy -inventory report to general ledger: completeness/vouching (going forwards) -general ledger to inventory report: existence/tracing (going backwards)

Answer 217

helps with rights and obligation and valuation assertions

Answer 218

-auditor examines vendor invoices to ensure that the client has the rights to the inventory and that the obligation is that of the client -consigned inventory: auditor should ascertain that consigned inventory on hand is excluded from physical inventory count whereas goods shipped to others on consignment need to be included in inventory

Answer 219

-standard bank confirmation -YE bank statements: should be obtained directly from client's financial institution -bank rec: prepared by the accounting department and reviewed by controller -cut off bank statement: covers a brief period after the end of the period -bank transfer schedule: shows transfer activity between client owned banks, used to detect kiting

Answer 220

-client should authorize the request and the auditor should send the confirmation request to the client's bank -the auditor is interested in whose name the bank account is in, the account number, and the YE balance --> most concerned with existence assertion -for loans: balance, maturity date, interest rate, and date through which interest is paid, description of collateral --> most concerned with completeness assertion -should be sent to each bank the client held an account with during the year, even if the account was closed during the year (to ensure it actually closed) -can be mailed or securely sent electronically but it must be sent from the auditor and not the client, and must contain a signature from an authorized client employee -client authorizes, then the auditor mails it and responses must go directly to the auditor -limitations: bank employee who completes the confirm may not be aware of all financial relationships the client has with the bank

Answer 221

-client provided schedule comparing the cash balance per books to cash balance per bank statement -prepared by accounting department, reviewed by the controller -the bank rec starts with the ending bank balance and then reconciles to reach the true balance of cash -it determines whether the difference between cash per books and cash per bank statement is due to normal conditions such as unrecorded items due to timing or not so normal items such as error -outstanding checks: checks written by the client that are. on the client's books but have not yet cleared the bank due to timing; subtracted from bank balance to arrive at the true cash balance -deposits in transit: making a deposit 12/31 but the funds not clearing the bank until a few days later; added to bank balance to get true cash balance -bank errors: bank may have incorrectly charged or credited the client's account, or the bank may have failed to record a transaction; added or subtracted back to bank statement balance -items known to bank but not to client: interest income, notes collected by the bank, bank charges, checks returned for insufficient funds, client bookkeeping errors

Answer 222

-used by au auditor to verify the components (reconciling items) of the client's bank rec -the cut off statement beings with the year end statement balance and includes all deposits and checks that clear within 10-15 days following the year end as well as any other account activity -the auditor expects all deposits in transit to clear on the statement but knows that not all outstanding checks will have cleared -deposits: auditor traces items listed as deposits in transit on the bank rec to cleared deposits on the cut off statement to test for existence/occurrence -deposits: auditor fears overstatement of ending cash balance per books because if any deposit listed as in transit did not clear within a few days, it was not really in transit at year end and needs to be revered out of the client's ending cash balance -checks: auditor will start with checks dated prior to year end, that cleared in the cut off period, and trace them to the list of outstanding checks for completeness of the outstanding check list -checks: auditor fears that the client had more outstanding checks than were included in the bank rec and if so, the outstanding check list form the bank rec isn't complete; the cut off statement should help determine completeness and accuracy of the outstanding check list

Answer 223

-when internal controls over a cash process are not effective, the auditor reconciles the amounts recorded by the bank (beg bal, deposits, disbursements, end bal) and reconciles with amounts recorded by the entity for a period of time, usually one month

Answer 224

-petty cash is either not tested or analytical procedures are performed by comparing the current year general ledger balance to the prior year general ledger balance

Answer 225

-auditor will inquire of management regarding any restrictions on cash balances -any restrictions on cash balances should be disclosed -management rep letter should address any restrictions on cash

Answer 226

-auditor should be cognizant of the chance of kiting, especially at the very end of the year -kiting occurs when a check is written out of bank account #1 and deposited into bank account #2 -the reason this is a problem is that no disbursement is recorded on the books from bank account #1 until a few days after the end of the year -cash transfer is made at the end of year -one cash account is increased immediately while the other cash account is not reduced until the following year -the cash balances are overstated in the records because the first account has been increased without a corresponding decrease in the second -used to cover up a prior theft of cash

Answer 227

-auditor should review all checks and deposits clearing the bank up to two weeks after the end of the year -if found, these transactions should be scheduled to ensure that both the deposit and withdrawal are recorded in the correct time period -the cash deposits in transit at the end of a period and the paid checks returned with the bank statements of the next period must be examined -auditor should request a cut off bank statement for this purpose and prepare a bank transfer schedule

Answer 228

-shows the dates of all the transfers of cash among the client's various bank accounts -primary purpose is to help the auditor detect kiting -prepared by the auditor using various sources including bank statements before and after year end, and by using the client's cash receipts and disbursements journal -auditor will compare the dates checks are drawn on the disbursement bank account to the dates checks are deposited in the receiving bank account -what the auditor hopes to see is that a check cut in december from account 1 is recorded by the client in december -auditor also hopes to see that a check cut in jan from account 1 is recorded in the books from account 1 in jan

Answer 229

-if there is kiting, a check was cut in dec from account 1 but was not recorded on the books of account 1 (as a disbursement) until jan, even though it was deposited into the receiving bank account in dec -this type of kiting would make it appear that the company has more cash on hand at 12/31 and is a technique used to cover a cash shortage such as a prior theft

Answer 230

-when a company overstates cash causing it to be simultaneously included in two or more bank accounts at the same time -assumption is that any bank deposit should be recorded in the company records before the money is taken to the bank and goes through its accounting system -when the bank balance is increased prior to the company's own record keeping, especially at the end of the year, it appears that company is trying to make the balance in the bank look higher than it is -low average bank balance compared to a high level of deposits is an indication of transferring money back and forth between accounts and could be kiting

Answer 231

-easier to audit than other assets provided the auditor is a continuing auditor because not many transactions occur during the year -existence: if the continuing auditor can rely on the fixed asset, beginning balance, then they can back into the ending balance by quickly examining the few debits and credits that caused the beginning balance to change, this would prove that ending balances are valid since we already know that the beginning balance is correct --> test of transactions -efficient for the auditor to test existence using a test of transactions approach because there are likely to be only a few transactions during the year -another way to test existence would be to select a sample of fixed assets from the subsidiary ledger which would list the specific fixed asset ID tags and then see if the fixed assets can be located, but not as efficient as test of transactions

Answer 232

-for existence: test the few transactions, some of them will be additions, debits to PPE -additions: the auditor should examine the underlying documents that support the acquisition of the new FA such as the purchase order, purchase invoice, receiving report, payment documentation, check etc; for a large enough addition, there may be board approval needed, reading the minutes -disposals: auditor will trace proceeds from the sale of FA to the cash receipts journal and then look for the deposit on the bank statement. will involve debits to AD; when assets are retired, companies will modify their insurance policies, removing the old assets --> analysis of the insurance expense account, like a big drop in insurance expense, could detect unrecorded retirements of FA

Answer 233

-auditor would review repair and maintenance expense account for the year looking for big items that were expensed that maybe should have been capitalized -review lease agreements, especially from a few years ago where the entity could have recorded an operating lease and not shown the asset or liability on the BS --> after 2018, leases (even operating), should have an asset recorded, not an expense

Answer 234

-inquire of management as to whether any fixed assets are being used as collateral for loans, document in management rep letter and have management sign it, read debt agreements looking for any mention of fixed assets as collateral -examine the invoice to see who the rightful owner of the asset is -land and building: properly tax documents will indicate ownership

Answer 235

-always will involve the contra asset, recalculating depreciation expense will involve the contract asset balance, AD being testing -compare the useful lives and depreciation methods to the prior year for consistency and recalc depreciation of FA -whenever the auditor is interested in the net amount, the assertion is valuation -inquire of management as to impairments of FA and document that in the management rep letter and have management sign it

Answer 236

-auditor needs to recall the criteria for deciding whether the fair value through net income method or equity method should be used for the investments

Answer 237

-obtained by inspecting any securities that are held by a client (safety deposit box or a custodian like vanguard)) -a client employee should be present during the inspection to avoid confusion over any missing securities -in examining the security certificates, the auditor determine whether securities held are identical to the recorded securities (certificate numbers, number of shares, face value) -confirm securities held by custodians if the client took that route

Answer 238

-because of the liquid nature of securities, the auditors inspection of securities is generally performed at year end simultaneously with the audit of cash or bank loans

Answer 239

-evidence pertaining to valuation for long term investments for an investee may be obtained by examining investee audited financial statements and market quotations

Answer 240

-liquid nature of investments securities makes certain controls -treasurer should authorize purchase and sales up to a certain value -after that value has been reached, transactions should only be authorized by the board of directors -two client employees, rather than one, should be present when access to the securities is necessary -recorded balances for investments should periodically be compared with the actual securities held by individuals independent of the function

Answer 241

-inquire of management about pledging of investment securities and verify that appropriate disclosure is provided -review loan agreements for pledging of investment securities and verify that appropriate disclosure is provided

Answer 242

-if an auditor is unable to inspect and count securities held in a safety deposit box held at a bank until after the balance sheet date, a bank rep should be asked to confirm that there has been no access to the box between the balance sheet date and the security count date

Answer 243

-reconcile amounts of dividends received to dividend records (internet) to verify completeness and accuracy of investment income -analytical procedures should be used to test the predictable relationship between long term investments and investment income

Answer 244

-should be sep from payroll department, and should maintain personnel records, authorize changes in pay rates and promptly notify payroll of any terminated employees -control: all active employees should have a properly approved hiring authorization form in their employee personnel file -paycheck distribution: independent paymaster --> no other payroll function (direct deposit reduced theft of payments), unclaimed payroll checks should be given to someone with no other connection to payroll cycle and those checks should be locked up and eventually destroyed if not claimed -outsourcing payroll reduced payroll fraud risk because duties are segregated

Answer 245

-payroll prep: prepares payroll journal and unsigned payroll checks; most companies outsource to ADP -control: employees who record payroll should be bonded to a form of insurance that protects the employer against losses caused by dishonest employees and serves as a control when new employees are hired because a background check on that employee will be performed by the insurance company

Answer 246

-treasurer signs the payroll checks that have been authorized by personnel and prepared by payroll or ADP; some companies pay the net in cash, rather than a check -control: employees who handle cash or sign checks should be bonded, a form on insurance that protects the employer against losses caused by dishonest employees and serves as a control when new employees are hired because a background check on that employee will be performed by the insurance company --> more control: some companies use a sep payroll bank account, if so, this account should be reconciled by someone who is not part of prep of payroll check

Answer 247

-timekeeping: automation with scanned badge readers reduces risks of fraudulent timekeeping -control: if time clock cards are used, the cards should be approved by department supervisors, overtime should be approved by supervisors

Answer 248

-periodically compares the payroll department's file on each employee with the personnel records -this monitoring often catches payroll overstatement, employees that are still getting paid after termination or after contracts have expired, ghost employees, those who do not exist or never worked for the company

Answer 249

-W4: employee fills out when hired for income tax withholding purposes, this form has to be filled out once but could be adjusted if taxes are owed at year end -W2: report of wages and withholding for each employee; all W2's added together should tie into form W3 -W3: summary of all W2 forms; each line on form W3 should tie into the totals of all the W2 forms -941: showing all wages paid subject to tax for the current quarter and amounts withheld for income tax, FICA, medicare -940: annual form that includes total payroll for the year and total amount paid by employer for unemployment; useful to tie into the general ledger payroll figure on the income statement; the sum of the four quarterly 941's should tie into the total on form 940 -1099 misc: report of income paid to each independent contractor -1096: summary of all 1099 forms

Answer 250

-workforce inventory: list of employees by department. useful in catching ghost employees. if an auditor comes, they should be able to trace every payroll check to the workforce inventory. any payroll record where the individual cannot be located on the workforce inventory, indicates an overstatement of payroll, possible ghost employee. also useful in determining that terminations have been posted in a timely manner. people who have been terminated should not still be on the payroll -position control report: list of each position, job qualifications for that position, budgeted salary for that position, and whether that position is currently filled or vacant -skills inventory report: list of current employees and their current skills. useful when needing to assign individuals to new jobs or duties within the company. promoting internally, knowing who might be nominated to fill vacancies -cumulative earnings register: accumulates year to date, gross pay, deductions, net pay, by employee. needs to be reviewed to match pay rates and reviewed by supervisors to confirm overtime and regular hours

Answer 251

-debt is cheaper but risker, equity is more expensive but less risk -when a client issues bonds, they have to pay interest, if they miss even one interest payment, they can be forced into bankruptcy by the bondholders -but, once they pay that interest, nothing else need to be paid to the bondholder and the client keeps all the profits -so, if your audit client is a desperado, they will raise capital by issuing mostly debt

Answer 252

-from an auditor's perspective, debt capital involves. a contract between the client and the bondholders who are investors looking to earn interest -unless the bonds are convertible into shares of stock, the bondholders have only the right to interest payments on scheduled dates, and the return of their principle -the client may have obligations beyond just paying interest and repaying principal, so the auditor needs to be familiar with the bond indenture agreement (contract that spells out the client's obligations)

Answer 253

-when the client raises capital by issuing debt, the auditor knows there's going to be interest payments, principal has to be paid back also but what else might the bond indenture agreement obligate the client to do? --> -debt covenants: promise made by the client that they will maintain a D2E ratio of 3:1 or a current ratio of at least 2:1 the entire time the bonds are outstanding -if there are debt covenants, the auditor would be very interested in whether the client has violated any because this would cause the company to be in default even if all the interest payments were current

Answer 254

-covenant in the bond indenture regarding bond sinking fund requirements -if so, the client must contribute cash into a restricted bank account every month to help secure bond repayment -the bond indenture agreement usually requires the client to hire an independent financial institution as trustee -if so, the trustee has custody of the restricted cash in the sinking fund and the auditor would want to confirm with the trustee that the client was protecting the bondholders by depositing into the sinking fund, paying interest on time, and then confirm the year end balance of the sinking fund bc that amount should be reported as restricted cash, a non current asset on the BS

Answer 255

-other items listed in the agreement besides the issue date and maturity date of the bonds include the face amount of the bonds ($1000 * number of bonds issued) -whether the bonds are convertible into common stock --> if so, the conversion ratio would be included, 3 bonds equal to 1 share of common stock, or 1 bond equals 2 shares of common stock -provisions for retirement of the bonds would also be included bc both parties would want to know if the bonds can be called or redeemed early -whether any assets secured as collateral -auditor should examine any indenture to determine that the client is meeting the conditions of the contract

Answer 256

-bonds issued at par: debt cash, credit bonds payable -bonds issued at discount: debit cash, debit discount on bonds payable, credit bonds payable -bonds issued at premium: debit cash, credit bonds payable, credit premium on bonds payable

Answer 257

-some bonds may be maturing soon and if so, that amount should be listed as current liability on the BS and that might mean reclassifying some of the LT debt to short term

Answer 258

-auditor should review the minutes of the board of directors meeting for authorization of the bond issue -the amount issued should be no greater than the amount authorized in the minutes -analytical procedure: compare interest expense reported on the IS with bonds payable reported on BS; if interest seems high, this may indicate unrecorded bonds payable

Answer 259

-issue common and preferred stock to investors who take the big risk -for the issuer, its not as risky because dividends do not need to be paid -usually few, and for large dollar amounts -require authorization by the board, and the auditor will review the minutes to identify equity transactions (stock issuance, purchases of treasury stock, declaration of divs, issuance of stock options) -all divs are transfers from RE to either a cash div account or a stock div account and then those accounts get closed to RE at the end of the period

Answer 260

-declaration: debit div, credit div payable -date of record: no JE -date of payment: debit div payable, credit cash -closing entry: debit RE, credit div

Answer 261

-prevents improper issuances of stock, over issuance, maintains detailed SH records and facilitates transfer of shares -becomes important when divs are declared, and the client needs to know who the SH of record are on a given date to know who is entitled to the cash div -independent and reliable sources of evidence regarding shares issued and outstanding -if the client does the work in house, the auditor would test the div payment lis to gather evidence that payments were paid to the appropriate shareholders

Answer 262

-audit time required is small for SH equity -auditor would determine that the client's number of shares outstanding do not exceed the authorized limit in the articles of incorporation -if the client uses a transfer agent, the auditor confirms with computershare the number of issued and outstanding shares -transactions impacting SH equity: stock issuance, treasury stock transactions, divs and closing entries -closing entries include verifying that the div account was closed to RE and that NI was closed to RE -count the number of treasury shares on hand for existence -inspect the articles of incorporation and bylaws to determine each SH right and obligations as they pertain to the entity as a whole

Answer 263

-provide evidence about dollar balances being reported at year end -can be designed to provide evidence about the transaction totals for activity during the year -can be designed to provide evidence about a disclosure amount that is going to be presented in the footnotes

Answer 264

-objective: transactions performed as substantive tests is to detect material (dollar) misstatements in the FS -consist of audit procedures used to gather evidence to support the account balances as reflected in the financial statements -performed to test a number, either an ending balance amount or an income statement number, a CF amount, or a number in the footnotes -if an account has many transactions occurring during the year, the auditor will generally concentrate testing on the ending balance (IC must be strong) -details of transactions test is used when the account balance has relatively few transactions occurring during the year (like land and treasury stock)

Answer 265

-comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor -evaluation of financial information made by a study of plausible relationships among both financial and non-financial data -includes a review of the current and prior year's financial statements and current year budget -must use in planning and overall review of the audit -may decide to use as a substantive test -most efficient and effective for assertions in which potential misstatements are not apparent from an examination of the detail evidence or when such detail is unavailable

Answer 266

-determine the analytical procedures that are suitable for testing the assertions taking into account the assessed risks of material misstatement and the tests of details -evaluate the reliability of the data from which the auditor's expectation is to be developed (strong IC improves reliability) -develop an expectation of recorded amounts -perform the analytical procedures and compare the results with the expectations -investigate any significant differences by inquiring of management or performing other audit procedures as necessary -mismatch or significant difference indicates either a material misstatement or the fact that the auditor's expectation was flawed in some way -unexpected differences = FS might be materially misstated

Answer 267

-auditor's expectation -factors considered in the development of the expectation -results of the comparison of the expectation to recorded amounts -additional audit procedures performed in response to significant unexplained differences -results of such additional procedures

Answer 268

-occur after the date of the financial statements but before the statements are issued (issuer) or available to be issued (non issuer) -events or transactions that are material to the FS

Answer 269

-type 1, recognized: if the condition that occurs in the sub event, exists at dec 31, but the event occurred before the statements are issued, the event would require recognition on the FS, as of dec 31 -type 2, non recognized: if the condition did not exist at the BS date but occurs in the sub period, it just requires footnote disclosure **company issues new debt o equity in sub period, footnote only; significant business combo, footnote only

Answer 270

-GAAP: the cutoff date for sub events is the date the financial statements are issued or available to be used -IFRS: the cutoff date is the date the FS are considered authorized for issuance

Answer 271

-GAAP: the cutoff date for sub events is the date the financial statements are issued or available to be used -IFRS: the cutoff date is the date the FS are considered authorized for issuance

Answer 272

-GAAP: if the stock splits (or stock div occurs) in the sub period, the company must adjust the FS, changing the number of shares of common stock -IFRS: no restatement, disclosure only

Answer 273

-inquiries to management during the engagement often result in oral responses from management -we document their oral responses to our inquiries and then we gather all those inquiries and management responses and present them to management at the conclusion of fieldwork in the form of the rep letter -auditor must obtain a management rep letter form the client -purpose is to confirm management's oral's evidence supplied during the engagement -printed on client letterhead and signed by the client; no format required -client asserts that all material matters have been adequately disclosed to the independent auditor -final piece of evidence and covers the period up to the date of the auditors report (should have the same date)

Answer 274

-to confirm representations made by the client to the auditor, regarding inquiries made to the client and their previous oral responses -the indicate and document the containing appropriateness of such representations -to reduce the possibility of misunderstanding concerning the matters that are subject of the representations -failure to obtain a rep letter = scope limitation and auditor should withdraw or disclaim

Answer 275

-members of management responsible for financial and operating matters -usually CEO and CFO

Answer 276

-management acknowledges responsibility for fair presentation of financial statements in accordance with the applicable financial reporting framework -specific written representations obtained by the auditor should include a statement from management that the significant assumptions used by management in making accounting estimates are reasonable -management is responsible for the design, implementation and maintenance of IC relevant to the prep and fair presentation of financial statements that are free from material misstatement whether due to fraud or error -management has provided the auditor with all relevant information and access as agreed upon under the terms of the audit engagement -disclosure If sub events have occurred or not

Answer 277

-an auditor would apply materiality limits when obtaining written client rep pertaining to financial statement amounts because immaterial amounts and immaterial disclosures need not to be considered -materiality considerations do not apply to items not directly related to financial statement amounts, fraud involving management, whether all minutes and financial records were made available to the auditor -applying limits that might affect recognition, measurement and disclosure I nthe FS

Answer 278

-auditor gives an opinion, not just on the FS but also on the effectiveness of IC over financial reporting -rep letter should include some management reps not just on their IC but also their effectiveness

Answer 279

-written record of the basis for the auditor's conclusions that provides the support for the auditor's representations -serves as a basis for the review of the quality of audit work -documentation should be prepared in sufficient detail to permit an experienced auditor without prior connection to the engagement to understand the procedures performed and the conclusions reached (and to determine who performed the work and on what date) -demonstrates the engagement complied with PCAOB standards -belongs to CPA firm and can't be disclosed without client permission or a court order -required to indicate in the working papers that the accounting records agree or reconcile with the financial statements

Answer 280

-usually maintained to keep all info that rarely changes from one audit to the next -contracts, org charts, chart of accounts, bond indentures, pension plans, lease arrangements, articles of incorporation, items of the audit client

Answer 281

-maintained each year to store all evidence backing up the audit opinion that was rendered -summary of significant audit findings, actions taken and conclusions reached -records of tests of controls and substantive procedures, that include identification of specific items selected for testing -needs to show that the auditor followed US GAAS -engagement letter, audit plans and programs, a management rep letter, working trial balance, lead schedules (summaries and totals)

Answer 282

-auditor who gathers the evidence should prepare the documentation -proper headings with date of period covered -auditor needs to indicate with a heading which stage of the audit does the documentation cover -initials/signatures of preparer and date completed -source of work paper; prepared by client vs auditor -indexing: contents and glossary -tick marks and legend -auditors conclusion if appropriate

Answer 283

-all audit work must be reviewed by another auditor in the firm -the review is generally accomplished by a second auditor looking over the audit documentation -documentation should be able to provide a basis for review of the procedures performed, the evidence obtained, and conclusions reached -reviewer may determine that more testing is needed

Answer 284

-often the date on which the report is delivered to the client -the report release date is the date on which the auditor grants the client permission to use the report -used to define the beginning of the documentation retention period

Answer 285

-auditor is granted a certain window of time following the report release date in which to assemble the final audit documentation file -the end of this window = completion date -after this date, existing documentation must not be deleted and additions to the audit documentation must be documented as such

Answer 286

-timely completion of audit file but not later than nonissuers 60 days (45 days for issuers) following the release of the audit report -any subsequent changes must be clearly exchanges and the original documentation retained, no deletions after the 45 day period -must document report release date -non public clients, retain for 5 years -public clients, retain for 7 years

Answer 287

-litigation: cases in progress against your audit client -claims: cases that have not been filed yet, but client has exposure -assessments: client owes IRS and the client has received a letter from the taxing authority indicating the assessment

Answer 288

-contingent liabilities must be recognized if they are probable and estimable (debit loss, credit estimated liab) -if reasonable possible but not probable, a footnote is required -remote change of losing = no disclosure

Answer 289

-the client has liabilities for pending lawsuits that are not being shown on the BS or disclosed in the footnotes -primary concern is completeness -management is the primary source -auditor should obtain from management a description and evaluation of LCA existing at BS date and any contingencies arising after BS date -client's attorneys are primary method to corroborate info on LCA

Answer 290

-auditor will need to send a latter of inquiry to those attorneys -auditor should read minutes of all meetings of those charged with governance because all significant issues relating to legal liability affecting the FS would be disclosed

Answer 291

-primary source -ask who the lawyers are, examine the general ledger account for legal expense payments -auditor should obtain a description and evaluation of all pending contingencies at BS date and any contingencies arising after BS date, sub events -inquiring as to the policies and procedures adopted for identifying, evaluating and accounting for contingencies

Answer 292

-auditor should draft to the attorney but due to confidentiality, the lawyer would be unable to answer -the client gets involved and re types the letter on its letterhead and requests the same information to be sent to the auditor -should be sent to any law firm that has rendered litigation related services to the entity -purpose is to corroborate management's responses to the auditor's inquiries about legal related contingencies -need to be included in audit documentation -can send the entity's in house counsel if applicable -if there aren't any LCA, document that in work papers and in management rep letter

Answer 293

-someone has already filed a claim against the entity, or has at least announced the intention to file a claim -both pending and threatened litigation -they lawyer should inform the auditor directly about any omissions of asserted claims in the lawyer's letter responding to our letter of inquiry -before the letter of inquiry goes out to the client's attorney, the auditor and client management agree on materiality levels -ask lawyer to comment directly to us regarding asserted claims that existed at the BS date and up until the date of the lawyer's response

Answer 294

must be disclosed to GAAP if both conditions exist: -it is probable that a claim will be asserted -it is at least reasonably possible that a material unfavorable outcome will occur -represent potential litigation from certain exposure but no one has sued yet or even threatened to sue -lawyer will not inform the auditor directly regarding omission of unasserted claims -lawyer will tell the client about such omissions and request that client management then inform the auditor -lawyer will not inform the CPA of omissions from management's list

Answer 295

-lawyers letter or attorney's letter -lawyer will respond directly to asserted and unasserted claims that the lawyer has given substantive attention in the form of legal rep -the lawyer's response will often be limited to just those cases -certain limitations in the lawyer's response could be a scope limitation and the auditor's opinion would change from unmodified to either qualified or disclaimer -if the lawyer does not respond to the letter of inquiry, with a lawyers letter, disclaimer or major scope limitation -if the client does not allow the auditor to send a latter of inquiry to the lawyer, this is a scope limitation that would likely result in a disclaimer

Answer 296

-we believe that the plaintiff's case against the company is without merit --> this ones fine -we are of the opinion that this action will not result in any liability to the company -it is our opinion that the possible liability to the company in this proceeding is nominal in amount -it is our opinion that the company will be able to assert a massive defense

Answer 297

CREDIT the amount

Answer 298

-title: it'll say registered (to PCAOB) -addressee: "to the shareholders and BOD of x company" -1st section: opinion on financials -2nd section: basis for opinion -3rd section: CAM (unless its adverse or disclaimer) -signature city and state and date: firm information; include a tenure; date of audit report

Answer 299

-"we have audited balance sheets of issuer as of ..." -"in our opinion, the financial statements present fairly in all material respects...." -->unqualified opinion wording

Answer 300

-"these financial statements are the responsibility of the company's management" -"our responsibility is to express an opinion on the company's financial statements based on our audits" -"we are a public accounting firm registered with the PCAOB and are required to be independent...." -"we conducted our audits in accordance with the standards of the PCAOB...obtain reasonable assurance about whether the financial statement are free of MM whether due to error or fraud" -"our audits included performing procedures..." -"we believe that our audit provides a reasonable basis for our opinion

Answer 301

-explicit: mentioned in the report -implicit: implied but not expressed

Answer 302

-first section of audit report -"except for the effects of the matter to which the qualification relates, the financial statements present fairly in all material respects, financial position, results of operations and cash flows in conformity with GAAP" -all of the substantive reasons should be disclosed by the auditor in one or more sep paragraphs in the opinion section, immediately following the opinion para -words to include are "except" "except for" "with the exception of" for reasonings in the opinion para to reference what will be in the sep para explaining the reasons

Answer 303

-lack of sufficient appropriate evidence or restrictions on the scope that led the auditor to conclude that an unqualified opinion cannot be expressed but a disclaimer would be inappropriate -auditor believes that on the basis of the audit, the financial statements contain a departure from GAAP, and the effect of which is material, and the auditor has concluded not to express an adverse opinion, and it's not pervasive -statement of cash flows are missing from a complete set of financial statements

Answer 304

-yes -auditor's report must include the same basic elements and communication of CAM's as would be required in an unqualified report

Answer 305

-inability to obtain sufficient appropriate evidential matter -observation of physical inventories and the confirmation of AR by direct communication with debtors -accounting for LT investments when the auditor has not been able to obtain audited financial statements of an investee -can result in an unqualified, qualified, or disclaimer of opinion -basis for opinion section would be slightly different --> "except as discussed above..."

Answer 306

-first section: "in our opinion, except for the effects of X, as discussed in the following paragraph" -stay in first section but have a following para explaining the except for effects -second second: no modifications from scope qualified opinion

Answer 307

-financial statements do not present fairly in the financial position or the results of operations or cash flows in conformity with GAAP -expressed when, in the auditor's judgment, the financial statements taken as a whole are not presented fairly in conformity with GAAP -material and pervasive

Answer 308

-auditor should disclose in a sep para immediately following the opinion para of the report -disclose all the substantive reasons for the adverse opinion, and the principal effects of the subject matter of the adverse opinion on the financial position, results of operation, and cash flows, if practicable -if the effects are not reasonably determinable, the report should state that

Answer 309

-title: it'll say registered (to PCAOB) -addressee: "to the shareholders and BOD of x company" -1st section: adverse opinion on financials -2nd section: basis for adverse opinion -signature city and state and date: firm information; include a tenure; date of audit report

Answer 310

-"in our opinion, because of the effects of the matters discussed in the following paragraphs, the financial statements do not present fairly, in conformity with GAAP..."

Answer 311

-same as unqualified

Answer 312

-auditor does not express an opinion on the financial statements -whenever the auditor is unable to form an opinion as to the fairness of presentation of the financial statements in conformity with GAAP, disclaim -auditor's report should give all of the substantive reasons for the disclaimer -material and pervasive

Answer 313

-title: "disclaimer of opinion on the financial statements" -include the name of the company whose financial statements the auditor was engaged to audit -include a statement identifying each financial statement and any related schedules that the auditor was engaged to audit -"we were engaged to audit..." -"we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and we do not express an opinion -have a para following this to explain the substantive reasons

Answer 314

-very different from unqualified -need to omit a lot because we couldn't do the audit, the only two parts in it are quoted below -"these financial statements are the responsibility of company's management" -"we are a public accounting firm registered with the PCAOB and are required to be independent..."

Answer 315

-arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that 1. related to accounts or disclosures that are material to the financial statements 2. involved or especially challenging, subjective, or complex judgments **if none are found - "we determine that there are no CAM" -communication does not alter in any way our opinion on the financials, taken as a whole, and we are not, by communicating CAMs, providing sep opinions on the CAM or on the accounts/disclosures to which they relate

Answer 316

-the identification of the specific CAM -description of the considerations that caused the auditor to identify the matter as a CAM -description of how the CAM was addressed in the audit -reference to the related financial statement accounts/disclosures

Answer 317

-significant risks the auditor identified -relevant matters regarding the entity's accounting policies and estimates -significant unusual transactions -matters regarding the auditor's evaluation of any related parties and transactions with those related parties -matters identified that are significant to the oversight of the financial reporting process

Answer 318

-auditor files with PCAOB for each audit within 35 days after the audit report is first filed in a document with the SEC or within 10 days if the audit report is included in a registration statement form includes: -name of the CPA audit firm and its city and state of the office of the firm issuing the report -name of the issuer whose financial statements are audited -date of the audit report and whether the audit report is dual dated -end date of the most recent period's financial statements identified in the audit report -name of engagement partner on the most recent period's audit -whether other accounting firms participated in the audit and information about those firms (name, location and extent of participation of who participated in audit accounts for 5%+ of total audit hours; name and extent in total for those participating in the audit accounts less than 5% of total audit hours, no names) -whether the firm divided responsibility -signature of partner or authorized officer

Answer 319

-title: independent auditor's report -addressee -opinion -basis for opinion -responsibilities of management for the financial statements -auditor's responsibility for the audit of the financial statements -report on other legal and regulatory requirements (varies depending on nature of auditor's responsibilties) -signature of auditor's firm, city and state where the auditor's report is issued, date of auditor's report

Answer 320

-when the auditor considers it necessary to draw user's attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users understanding of the financials -will follow the basis for opinion section, titled "emphasis of matter" -opinion will not be modified with respect to any EOM matter

Answer 321

-draw user's attention to any matters other than those presented or disclosed in the financial statements that are relevant to user's understanding of the audit, the auditor's responsibilities, or the auditor's report -will follow the basis for opinion paragraph

Answer 322

-uncertainty relating to the future outcome of unusually important litigation or regulatory action -a significant subsequent event that occurs between the date of the financials and the date of the auditor's report -a fire, or more catastrophe that continues to have a significant effect on the entity's financial position -significant transactions with related parties -change in accounting principles where the auditor agrees with the reason for the change (if we don't agree, issue a qualified opinion)

Answer 323

-an alert or restriction of the use of an auditor's report -to alert the reader that the prior year was audited by a different auditor -to alert the reader that the prior year was reviewed and the current year was audited -to alert the reader of a change in audit opinion from last year to this year

Answer 324

-3 types: qualified, adverse, disclaimer occurs when: -the nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated (GAAP) or in a case of an inability to obtain sufficient appropriate audit evidence (GAAS) may be materially misstated -the auditor's judgment about the pervasiveness of the effects of possible effects of the matter of the financial statements

Answer 325

-financial statements are materially misstated (GAAP) --> material and not pervasive = qualified; material and pervasive = adverse -inability to obtain sufficient appropriate audit evidence (GAAS) --> material and not pervasive = qualified; material and pervasive = disclaimer

Answer 326

-scope limitation beyond the control of the entity, records seized by hostile foreign -scope limitation imposed by management -investee earnings are included in the income statement, unable to gather evidence regarding the investee -lack of observation of inventory, controls are ineffective and substantive procedures alone are not enough -lack of information regarding the outcome of an uncertainty

Answer 327

-selected accounting policies not appropriate or not applied correctly, inconsistent application or unintentional error -financial statement presentation is inappropriate, inadequate disclosure, not enough detail, terminology used, statement of cash flow missing

Answer 328

-in the "disclaimer of opinion section" change "we have audited the financials" to "we were engaged to audit the financials" -in the "disclaimer of opinion" section state that the auditor does not express an opinion on the accompanying financials -in the "disclaimer of opinion" section, state that because of significance of the matters described in "basis for disclaimer of opinion" section of report, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financials

Answer 329

-communication is only required when it's to governance, but not in the audit report unless the engagement letter so provides -for non issuers -matters addressed in the context of the audit of the financials as a whole and in forming our opinion, but we do not provide a sep opinion on KAM -would follow the basis for opinion section

Answer 330

-auditor has substantial doubt about an entity's ability to continue as a going concern, and the auditor is responsible for considering the possible effects on the financial statements and evaluating the adequacy of related disclosure in the financials -routine audit procedures are considered sufficient for going concern -when conditions or events are identified that raise substantial doubt that's when the auditor performs additional audit procedures, including evaluating the adequacy of going concern disclosures and any mitigating factors

Answer 331

-analytical procedure: looking for negative trends or adverse financial ratios such as a negative current ratio or quick ratio -attorney's letters for pending litigation -debt compliance -minutes of the board of directors meetings -inquires of management regarding whether they evaluated going concern -talk to 3rd parties who could be offering financial support and get written evidence if there are such parties -subsequent events: uninsured disasters

Answer 332

-increase cash inflows (additional debt or equity financing) -reducing cash outflows (reduced spending)

Answer 333

-only if a company's liquidation is imminent would the company need to prepare its financials under the liquidation basis (assets shown at liquidation value rather than GAAP) rather than going concern basis -auditor needs to obtain sufficient appropriate audit evidence whether management's use of the going concern basis of accounting is appropriate -auditor needs to evaluate financial statement effects including disclosure of those going concern matters, have they been properly disclosed including management's plans for survival -auditor needs to report the going concern in the appropriate way

Answer 334

-if the auditor determines that liquidation is imminent and the going concern basis is not appropriate for the financials, auditor issues an adverse opinion on the financials -if disclosure is inadequate but the auditor determines that the going concern basis is the proper basis, qualified opinion or adverse opinion on the financials -if the auditor is unable to obtain sufficient appropriate audit evidence regarding going concern issues, the auditor expresses either a qualified opinion or disclaimer on the financials -when there is substantial doubt about the entity's ability to continue as a going concern, but the auditor determines that liquidation is not imminent therefore the going concern basis is appropriate, the auditor must include a going concern section to the auditors report --> following the basis for opinion section

Answer 335

-presented outside the basic financials -schedule of investments of schedule of properties owned -not considered necessary for the financials to be fairly presented in conformity with the framework

Answer 336

-when engaged to report on supp info, the auditor's objective is to evaluate the presentation of the supp info and report on whether its fairly stated, in all material respects, in relation to the financials as a whole -auditor is not obligated to report on supp info -CPA who audited the financials is also asked to report on supp info -auditor must have rendered an unmodified or qualified opinion on the financials -supp info either accompanies the financials or must be readily available without further action by the audited entity

Answer 337

-auditor may issue a combined report or sep reports, one on the financials and the other ont he supp info -if supp info is determined to be misstated in relation to the financials, discuss with management and propose revision -if management does not revise, the auditor should modify the opinion on the supp info or withhold the sep report on supp info -need not be restricted

Answer 338

-FASB or GASB has already set the standard as to how this info is presented -RSI is not part of the basic financials but is associated because of FASB/GASB -financial statements of home owners associations (HOAs) must include estimates of future major repair costs and replacements of common property like sidewalks, required by FASB

Answer 339

-inquiry of management as to whether the RSI is presented according to guidelines -inquiry as to whether methods of presentation have changed since last period -any significant underlying assumptions regarding the RSI -obtain additional reps in the management rep letter -no tests of details are applied since the auditor doesn't audit the RSI

Answer 340

-add a section labeled "required supp info" --> auditor will point out that the info is included or is omitted or is partially omitted -the auditor disclaims an opinion on the RSI -RSI section follows the basis for opinion section

Answer 341

-historical financial info that is derived from audited financials but contain less detail than the complete financials from which they have been derived -if the summary financials are not presented alongside the audited financials, the auditor must determine whether the complete financials are readily available to users

Answer 342

-determine if reporting on summary financials is acceptable --> acceptable only if the CPA audited the complete financials AND if the opinion on those financials was unmodified or qualified -obtain a written agreement from management regarding management's responsibilities for summary financials -perform the necessary procedures to form an opinion -whether the summary financials are consistent with the audited financials from which they have been derived

Answer 343

-unmodified: consistent in all material respects, with the audited financials with which they have been derived, in accordance with the applied criteria -adverse: summary financials are not consistent with the audited financials **need not be restricted, is available for general use

Answer 344

-opinion section: mention the opinion on the audited financials and the date of that report -summary financials section: the summary financials do not contain all the disclosures, reading the summary financials is not a substitute for reading the audited financials -responsibilities of management: responsible for the summary financials in accordance with the criteria described in note x -auditor's responsibilities: express an opinion on whether the summary financials are consistent, in all material respects, with the audited financials

Answer 345

-remain alter for indications that a material inconsistency exists or a material misstatement of facts exist/other info is misleading -CEO's statement -corporate governance statements -management's internal control and risk assessment reports -employment data -names of officers and directors -quarterly data -any financial or non financial info included in the annual report that is not already included in the financial statements or auditor's report

Answer 346

-annual return/report of employee benefit plan -corporate social responsibility reports -sustainability reports -diversity and equal opportunity reports -product responsibility reports -labor practices and working conditions reports -human rights reports -cover letter of annual report

Answer 347

-discuss with management and determine whether a material misstatement of other information exists or worse yet, whether a material misstatement of the financial statements exist -when concluding that a material misstatement exists, the auditor requires that management corrects the other information (if management refuses, communicate to governance with a request to make the correction) -if other info has not been corrected after communicating with those charged with governance, the auditor should withhold the audit report or possibly withdraw from the engagement

Answer 348

-after the auditor's responsibilities section -include a statement that management is responsible for other info -identify the other info -disclaimer: include a statement that the auditor's opinion on the financials does not over the other info and no opinion/assurance will be expressed on the other info -statement that the auditor is required to read the other info and consider whether a material inconsistency exists

Answer 349

-examine much of the financial information -only one audit report ill be issued on the group financials, and it will be issued by the group auditor, signed by only the group auditor as well

Answer 350

-performs work on a component -may be a subsidiary, joint venture, or equity method investee -often an unrelated audit firm but doesn't have to be, and could be part of the group engagement partner's firm -could also be part of a network affiliated audit firm

Answer 351

-financials of more than one component -group engagement partner: responsible for the group engagement and for determining materiality levels; obtaining sufficient appropriate audit evidence and express an opinion on whether the group financials are prepared in accordance with the framework; communicate clearly with component auditors, and determine whether to refer to the work of the component auditor in the auditor's report on the group financials -component materially should be lower then materiality for the group financials as a whole -purpose: reduce the risk that the sum of uncorrected/undetected misstatements in the group financials is greater than materiality for the group statements as a whole

Answer 352

-group auditor usually takes responsibility for component auditor when the work of the component auditor is relatively small -group auditor must be satisfied with component auditor's independence and professional reputation, including ethical requirements -inability to become satisfied in this regard would constitute a scope limitation, resulting in a qualified opinion or disclaimer of opinion on the group financial statements

Answer 353

-when the group engagement partner assumes responsibility for the component auditor's work, the group engagement partner would not mention the component auditor in the audit report -to do so may cause a reader to misinterpret the degree of responsibility being assumed by the group auditor -when taking responsibility, the report is not impacted by the presence of the component auditor -group engagement auditor would generally assume responsibility for the component only after reviewing the audit documentation of the component auditor and possibly performing supplemental audit tests depending on the significance of the subsidiary

Answer 354

-when the group engagement partner finds it impractical to review the component auditor's work, or when. theFS audited by other auditors are material, the group engagement partner will make reference to the component auditor in the audit report -reference in a group engagement partner's report to the fact that part of the audit was performed by "other auditors" would be an indication of the division of responsibility for the audits of the components of the overall financial statements -made in the opinion section of the auditor's report

Answer 355

-If the component auditor issued a qualified opinion, can the group auditor still issue an unmodified opinion? -the principal may decide that the problem encountered by the component auditor is material to the consolidated statements of that decision is made, a qualified opinion should be rendered by the group auditor -however, a problem that was material to a portion of the statements may not necessarily be material to the consolidated statements are a whole -the group auditor is not required to issue a qualified opinion simply because the component auditor did -auditor's professional judgment would be the final determinate

Answer 356

-typically include financial statements prepared on the cash basis or income tax basis, or regulatory basis or contractual basis -cash basis revenue = what was collected in cash -cash basis expense = what is paid in cash -if the CPA audits these financial statements, the auditor follows GAAS even though the client did not follow GAAP -income tax basis = used to file tax returns; most corporate tax returns require the assets and liabilities to be presented, not just the income and deductions; if the client needs to prepare financial statements on the same basis of accounting as the tax return, that's a special purpose framework

Answer 357

-cash basis, instead of income statement = "statement of revenue collected and expenses paid" -cash basis, instead of balance sheet = "statement of assets and liabilities" -footnotes should also include a summary of significant accounting policies and a general description of how the special purpose framework differs from GAAP

Answer 358

-engagement acceptance: auditor should obtain an understanding of the purpose of these financial statements, who the intended users are and the steps management took to determine that the framework is acceptable and an engagement letter where management takes responsibility for the disclosures -planning and performance: auditor obtains sufficient appropriate evidence including evaluation of appropriate disclosures to judge the fairness of the presentation -forming an opinion and reporting on the financials: auditor's report is known as a special report and the auditor should given an opinion on fair presentation of the financial statements in accordance with the special purpose framework -EOM: needed to indicate the financial statements are based on a special purpose framework, should refer to the note in the financial statements describing the basis used and express that the basis of accounting is other then GAAP -cash basis and income tax basis are available for general use

Answer 359

-financial statements prepared using a contractual basis are when a third party requires the client to prepare financial statements using a basis of accounting that is only applicable to this party -the auditor uses GAAS but the client is not using GAAP -CPA will audit and issue a special report, and the report is restricted and should contain an OM paragraph

Answer 360

-not for general use: need EOM and OM -for general use: don't need EOM or OM **if for general use: report needs two opinions --> one regarding GAAP (adverse) and the other is whether or not the financial statements are prepared in accordance with the special purpose framework

Answer 361

-review is less in scope than an audit -reviews are designed to obtain evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications needed -management's year end financial statements are reviewed by the CPA possibly to renew a bank loan -review for a non issuer is not required, not very common -responsible party is management, CPA and intended users -follows SSARS

Answer 362

-CPA must be independent to performa review -CPA must get a signed written agreement with the client (like an engagement letter) -CPA must have basic knowledge of company, industry, accounting principles used -CPA is allowed to accept the engagement first, and hen acquire the knowledge of company and industry

Answer 363

-more of an overview of financial statements, the CPA is looking for signs of possible MM -the CPA looks for anything unusual in the financial statements but does not look to investigate individual transactions -the CPA looks for more general problems such as application of accounting principles, off balance sheet financing (company is in debt but there is no liability recorded), impairment of assets

Answer 364

-analytical procedures: perform reasonableness tests rather than substantive tests. the CPA would compare FS current year to prior year. compare ratios developed from client recorded amounts to expectations developed by the CPA. these analytical procedures are used to identify unusual relationships. compare payroll tax expense to payroll, days sales in receivables, inventory conversion -inquires of management about financing reporting issues: CPA would inquire about the entity's procedures for recording transactions, significant journal entires, adjustments, subsequent events. inquiries in a review tend to be internal, not external. inquires to outside parties are for an audit, not a review -no substantive auditing procedures are required, CPA is not required to gain corroborative evidence that the accounting records agree with the financial statements, but if they don't agree, request some additional information from the client -not required to corroborate responses with other information but should consider reasonableness and consistency of responses on an overall basis. responses are documented by the CPA and presented back to the client at the end in a management rep letter, dated same as the review report

Answer 365

-intro: "we have reviewed," "a review includes primarily applying analytical procedures," "we do not express such an opinion" -management's responsibility for the financial statement: "management is responsible for the prep and fair presentation...," "this includes the design, implantation and maintenance of internal control...whether due to fraud or error" -accountant's responsibility: "our responsibility is to conduct the review engagement in accordance with SSARS promulgated by AICPA," "obtain limited assurance," "results of our procedures provide a reasonable basis for our conclusion," "we are required to be independent" -account's conclusion: "we are not aware of any material modifications that should be made" --> best case scenario

Answer 366

-an extra paragraph is needed called a "basis for qualified conclusion" and is inserted before the conclusion paragraph -"as discussed in note x to the financial statements...." -new statement in accountant's conclusion: "based on our review, except for the matter discussed in the basis for qualified conclusion paragraph, we are not aware of any material modifications..." -then finish off with signature of firm, city and state where report is issued from, and the date of the report **what if it's adverse? "due to the significance of the matter described in the basis for adverse conclusion paragraph, the financial statements are not in accordance with the framework"

Answer 367

-when there is a substantial doubt about going concern, if disclosures are adequate, add a "going concern" section to the review report and still provide limited assurance without modifying the conclusion section of the report -if going concern is not disclosed adequately by the client, the matter would be addressed in the basis for conclusion paragraph, either basis for qualified or adverse conclusion section of the review report

Answer 368

-CPA could add an EOM paragraph to the review report to draw the reader's attention to matters that in the CPA's judgment are appropriately reported or disclosed in the financial statements such as significant related party transactions -the CPA could add an OM paragraph to the review report to draw reader's attention to mattes that are not already in the financial statements, such as last year's was compiled, this year reviewed

Answer 369

must keep a copy of: -engagement letter -rep letter -financial statements -review report

Answer 370

-sometimes after completing audit procedures, the non issuer client asks the auditor to step down from audit to a review -if the CPA agrees, the report issued will only be a review -no reference is made in the report to the reason for step down, nor is reference made to the CPA"s justification for the step down, nor would there by any list of audit procedures performed In the review report

i-75 Flashcards

(394 cards)