Quiz 1

Question 1

Management Assertions

Answer 1

Statements made by a company’s management about the accuracy and completeness of its financial statements.

Question 2

Assertions are used by the auditor to consider

Answer 2

the different types of potential
misstatements that may occur

Question 3

Assertions about classes of
transactions and events, and
related disclosures, for the period
under audit: Think _____

Answer 3

Income Statement

Question 4

Assertions about account
balances, and related disclosures,
at the period end: Think ______

Answer 4

Balance Sheet

Question 5

Assurance

Answer 5

Provides INDEPENDENT and professional services that improve the quality or context of information for Decision Makers

Question 6

Relationship between auditing, attest, and assurance services

Answer 6

Assurance is the most broad –> Attest is the second most broad –> Auditing is the most specific

Question 7

Attest Services

Answer 7

Focuses on whether the management’s subject matter complies with applicable criteria for measurement and disclosure (Like auditing but goes beyond financial statements)

Question 8

*The Big Three Fundamental Concepts in Conducting a Financial Statement Audit:

Answer 8

1. Materiality
2. Audit Risk
3. Evidence

Question 9

Audit Risk

Answer 9

Risk the auditor mistakenly expresses a clean audit opinion
when the financial statements are materially misstated

Question 10

Audit Evidence

Answer 10

all the information used by the auditor to determine the
conclusions on which the audit opinion is based

Question 11

Sufficient vs Appropriate Evidence

Answer 11

Sufficient = quantity of evidence
Appropriate = quality of evidence

Question 12

Two measures of appropriateness:

Answer 12

Reliability and Relevance

Question 13

*Audit Opinion Types:

Answer 13

Unqualified
Qualified/Except for
Adverse
Disclaimer

Question 14

Unqualified Opinion

Answer 14

The gold standard. The best type of opinion an organization can receive from an auditor. It means that the financial statements have been audited properly

Question 15

Qualified Opinion

Answer 15

Material misstatement included in financials

Question 16

Adverse Opinion

Answer 16

Pervasive material misstatement (FS not fairly stated)

Question 17

Disclaimer Opinion

Answer 17

Unable to provide an opinion

Question 18

Relationship between materiality and extent of testing

Answer 18

High Materiality = Low Testing
Low Materiality = High Testing

Question 19

*Relationship between audit risk and extent of testing

Answer 19

High Audit Risk = Low Testing
Low Audit Risk = High Testing

Question 20

Types of Auditors:

Answer 20

External
Internal
Government
Forensic

Question 21

*Sarbanes-Oxley Public Company
Accounting Reform and Investor Protection Act. (SOX)

Answer 21

Passed in 2002 because of all of the fraud cases happening. Regulation of the audit profession. Established independence requirements for external auditors. Creation of the Public Company Accounting Oversight Board (PCAOB)

Question 22

Corporate Governance

Answer 22

managers are overseen and supervised

Question 23

What does the PCAOB do?

Answer 23

Audit the auditor. Oversee audits, determine audit standards.

Question 24

Audit Standards

Answer 24

Rules an auditor must Follow

Question 25

The 4 principles underlying an audit:

Answer 25

Purpose Responsibilities Performance Reporting

Question 26

What is the straw that stirs the drink?

Answer 26

Independence

Question 27

What code must you follow for auditing private companies?

Answer 27

AICPA Code

Question 28

What code must you follow for auditing public companies?

Answer 28

AICPA + PCAOB + SEC Codes

Question 29

Layout and enforceability of the AICPA Code of Professional Conduct

Answer 29

Starts broad with Principles, moves to general rules, and then to detailed interpretations Principles not enforceable General Rules enforceable Interpretations not enforceable but departures must be justified

Question 30

*Important covered member example

Answer 30

A partner, partner equivalent, or manager who provides more than 10 hours of non-attest services to the attest client within any fiscal year non-attest service – accounting related, think maybe tax preparation

Question 31

All the time, Independence requirements extend to the CPA’s:

Answer 31

immediate family members (spouse, spouse equivalent, dependents)

Question 32

Members are prohibited from any financial relationship that may impair independence. This includes

Answer 32

direct or material indirect financial interest.

Question 33

Great example of an indirect financial interest

Answer 33

Mutual fund

Question 34

Are blind trusts allowed to keep independence?

Answer 34

NO

Question 35

Is an insurance policy issued by attest client allowed to keep independence?

Answer 35

As long as the policy was purchased under the insurance company’s “normal” terms and conditions and does not offer an investment option

Question 36

Unpaid fee for services provided more than one year prior to the date of the audit =

Answer 36

Independence impaired

Question 37

Unpaid audit fee due to bankruptcy =

Answer 37

Allowed

Question 38

Former employee of an Attest Client (joins CPA firm) is not independent when:

Answer 38

Independence is impaired if the CPA performs a managerial or other significant role for an entity’s organization during the time period covered by an attest engagement

Question 39

*Expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work (Impairs independence) IF

Answer 39

Auditor must conclude that the client intention to sue is probable (if remote then independence is fine)

Question 40

Do Tax Preperation services impair independence?

Answer 40

No, they are allowed

Question 41

Partner Rotation

Answer 41

Lead and quality review Partners must rotate after 5 years and stay off for 5 years (“Five On, Five Off Rule”) Other partners must rotate off after 7 years and stay off for 2 years (“Seven On, Two Off Rule”)

Question 42

One year cooling off period

Answer 42

An employee of CPA firm that leaves to work for client may not work in a financial oversight role until one year has passed

Question 43

*Audit Date

Answer 43

Day where the auditors conclude auditing and feel like enough work is done. Different than the fiscal year date.

Question 44

*Very important element contained in an audit report.

Answer 44

The audit report location and date

Question 45

*Critical Audit Matters (CAMS)

Answer 45

Any matter arising from the audit of the financial statements that are communicated, or required to be communicated, to the audit committee and that: 1. relate to accounts (or disclosures) that are material to the financial statements 2. involved especially challenging, subjective or complex auditor judgement

Question 46

he auditor has no responsibility to make any inquiry or carry out any auditing procedures for the period after

Answer 46

Auditing date

Question 47

*Explanatory Language

Answer 47

Additional language that is necessary to give Financial Statement users extra information. Extra information that provides a fuller understanding of the audit report

Question 48

If there are multiple auditors on a report

Answer 48

They all share the opinions and accept full responsibility.

Question 49

Principal auditor must assess

Answer 49

The professional reputation and independence of other auditor as well as quality of its work: Based on this Disclose or Not Disclose

Question 50

When the Other Auditor does not issue a CLEAN Opinion

Answer 50

-If not material to overall Financial Statements, then no need to refer to departure. -If material, then need to refer to the issue driving other auditor’s qualified opinion. Must indicate how the departure affects the overall audit opinion

Question 51

Auditor has responsibility to evaluate whether there is substantial doubt about the entities ability to operate as a going concern over a reasonable period of time:

Answer 51

one year from issuance of the financial statements

Question 52

*Three reasons we depart from an unqualified opinion:

Answer 52

-Scope Limitation -Not in conformity with GAAP -Auditor not independent

Question 53

Scope Limitation

Answer 53

Results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

Question 54

*Three levels of materiality

Answer 54

-Immaterial -Material, not pervasive -Pervasively material

Question 55

Pervasively material

Answer 55

Affects everything, very widespread

Question 56

Scope limitation leads to

Answer 56

Either qualified or disclaimer

Question 57

Not in conformity with GAAP leads to

Answer 57

Either qualified or adverse

Question 58

Auditor not independent leads to

Answer 58

Disclaimer only

Question 59

The auditor’s report is generally addressed to the

Answer 59

Stockholders of the company