Quality Rev Issues and MISC

Question 1

Aggressive revenue recognition, why and what assertion is effected

Answer 1

• can come from pressure of wanting to boost revenues
• will effect the existence assertion of revenues
  consider if recognition practices are consitent with industry and previous reports (review)

Question 2

Improper amortization of intangibles, why and what assertion is effected

Answer 2

• make the amortization period too long so asset can last longer and expenses are smaller
• asset valuation
• expense existence

Question 3

Inventory valuation issue what is the principle and what assertion is effected

Answer 3

• must record at lower of cost or market value
• asset valuation assertion

Question 4

Contingent Liability not added, what assertions are effected

Answer 4

• Liability completeness assertion
• Presentation assertion

Question 5

If R&D is not capitalized when it should be, what assertions are effected

Answer 5

• completeness of expense
• completeness of asset

Question 6

What should be done with bonuses that are considered likely and what assertions are effected if not done?

Answer 6

• is considered likely should be accrued and expenses. not doing so will:
• expense completeness
• liability completeness

Question 7

inventory count should be done when and also what must be considered in terms of assertions the count is associated to?

Answer 7

• must be done as close as possible to YE after YE
• must consider whether the auditor traced (completeness) and vouched (existence), and if not, not claiming the assertion is correct

Question 8

should it be considered whether auditors are afraid to be connected to false or missleading onformation?

Answer 8

yes

Question 9

what are the 5 independence threats?

Answer 9

• self review
• self interest
• familiarity
• advocacy
• intimidation

Question 10

what is an example of self review threat

Answer 10

auditing a system or estimate that you helped management implement or you did for the management

Question 11

what is an example of self interest threat and who is also included in self interest

Answer 11

• having financial interest, such as shares, which are dependant on the companies financial performance
• includes spouse, parents or dependents having such interests

Question 12

what is the advocacy threat

Answer 12

the idea that you cannot promote the financial instruments of your client

Question 13

when can and can you not advocate for a client

Answer 13

• can advocate in court, and right is signed off on engagement letter
• cannot advocate for the purpose of selling their shares

Question 14

what are the main 2 threats in familiarity and how are they solved

Answer 14

• hard to be skeptical when you have audited a particular set of managment for long enough - solved by the mandtory 5 years partner rotation
• former firm partner working for audited client - 1 year cool off period where they cannot work for client and pass off the audit methodology

Question 15

what are 2 examples of the intimidation threat

Answer 15

• threaten to use another firm if not receiving an unmodified opinion
• threaten to cap off audit fees that are based off audit work hours

Question 16

should inventory on consignemtn be included for the consigner and consignee?

Answer 16

consigner - include
consginee - dont include

Question 17

what are the materiality percentages based on:
- normalized pre tax income
- assets
- equity
- revenue
- gross profits
- rev or exp of a NPO

Answer 17

• pre-tax income - 5-10%
• assets - .5-1%
• equity - 1-2%
• revenues - .5-1%
• gross profits - .5-5%
• NPO rev or exp - .5-2%

Question 18

what is perfromance materiality, why is it required, and what is the difference between US and Canada

Answer 18

• it is a reduced amount of materiality used for riskier audits in order to have have more room for error
• in US its .25 to .75 and in Canada its .5 to .75 of planning materiality

Question 19

what are the 5 components of an unmodified auditor’s opinion report?

Answer 19

• opinion segment
• basis for opinion
• key audit matters (KAM)
• management responsibility
• auditor responsiblity

Question 20

what is stated in opinion segment and what are some opinion examples

Answer 20

• auditors conclusion on the statements
• disclosure being adequate is an implicit assertion
• qualified, unqualified, adverse

Question 21

what does the basis of opinion segment indicate and identify

Answer 21

indicates that an audit was conducted and identifies the audit F/S

Question 22

what does the KAM section contain and what does it describe

Answer 22

• contains information that the auditors felt was relevant
• describes to users what issues presented difficulties, why, and what was done to address them

Question 23

what are some 3 examples of issues

Answer 23

• valuaiton of GW or LT assets
• valuation of financial instruments
• revenue recognition

Question 24

why is the KAM section needed

Answer 24

• the audit process is complex and this section clearly highlights the greatest issues for the final users

Question 25

what is KAM not? (4)

Answer 25

• not a separate opinion
• not a substitute for disclosure
• not a substitute for a modified opinion
• not a substitute for going concern

Question 26

what is the management responsibility section

Answer 26

Mmg’s responsibility that they have fairly presented their F/S and have designed, implemented and maintained I/C

Question 27

what is in the auditor’s responsiiblity section

Answer 27

that they have gathered enough SAAE to ensure that F/S are free from material misstatements

Question 28

what are the 4 audit examination standards

Answer 28

• Must conduct audit based on CAS standards
• must design audit procedures in accordance with CAS scope of audit
• must obtain reasonable assurance that F/S are free from material misstatements, fraud, or error
• plan and perform audit to reduce risk to an acceptably low level