Study unit 1 - Engagement Responsibilities

Question 1

What is the purpose of an audit?

Answer 1

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (e.g., generally accepted accounting principles, cash a basis, etc.)

Question 2

What are the auditing standards applying to audits of (1) non issuers, (2) issuers, and (3) federal government entities, and who issues the standards?

Answer 2

Entity Auditing standards issuer of Standards

Nonissuers statements on AICPA’s Auditing
auditing standards Standards Board
(SASs)

Issuers auditing Standards PCAOB
(AS)

Federal Government Auditing Government Accountability
Government standards office (GAO)
Entities (the Yellow Book)

Question 3

What is the meaning of “presented fairly” in an auditor’s opinion?

Answer 3

Presented fairly means that the financial statements as a whole are free from material misstatement, whether due to fraud or error.

Question 4

What level of assurance of audits on financial statements?

Answer 4

Audits provide reasonable assurance but not absolute assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.

Question 5

Define professional skepticism.

Answer 5

Professional skepticism is an attitude that includes
- a questioning mind,
- alertness to conditions that may indicate material misstatement, and
- critical assessment of audit evidence.

Question 6

Describe the conclusion stated in an unmodified (unqualified) audit opinion.

Answer 6

An unmodified (unqualified) audit opinion is the conclusion that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Question 7

Describe the conclusion stated in a qualified audit opinion.

Answer 7

A qualified audit opinion is the conclusion that, except for the matter(s) described in the audit report, the financial statements are presented fairly, in all a material respects, in accordance with the applicable financial reporting framework.

Question 8

Describe the conclusion stated in an adverse audit opinion.

Answer 8

An adverse audit opinion is the conclusion that, because of the significance of the matters(s) described in the audit report, the financial statements are not presented fairly.

Question 9

Describe the conclusion stated in a disclaimer of audit opinion.

Answer 9

A disclaimer of audit opinion is the conclusion that, because of the significance of the matter(s) described in the audit report, the auditor has not been able to obtain sufficient appropriate evidence. Thus, the auditor should not express an opinion.

Question 10

What are the eight separate management assertions?

Answer 10

CAPE CROC:

C = completeness
A = Accuracy (valuation and allocation)
P = Presentation
E = Existance

C = Cutoff
R = Rights and Obligations
O = Occurance
C = Classification

Question 11

What are the three categories of professional requirements under the U.S. generally accepted auditing standards (GAAS)?

Answer 11

Unconditional responsibility - must be complied

Presumptively mandatory responsibility - Should be complied

Should consider - compliance depends on auditor’s professional judgement

Question 12

How do the reasons for modification of an audit report and the pervasiveness of the effect or possible effects on the statements affect the type of audit opinion expressed?

Answer 12

Reason for Modification Auditor’s Judgement about the
Pervasiveness of the Effects or
Possible Effects on the statements

								Material but not          Material and Pervasive
								Pervasive	

Financial Statement are Qualified Opinion Adverse Opinion
Material misstated

Inability to obtain Qualified Opinion Disclaimer of opinion
Sufficient appropriate
Audit evidence

Question 13

What are assurance and advisory services?

Answer 13

Assurance and advisory services are practitioner-provided engagements that enhance the quality, relevance, and usefulness of information or its context for decision makers.

Question 14

What are consulting services?

Answer 14

Consulting services are professional services that use the practitioner’s technical skills, education, observations, experiences, and knowledge of the consulting process.

Question 15

What are the differences between assurance services and consulting services?

Answer 15

Assurance Consulintg
Services Services

Focus Improving Providing
Information Services

One party monitoring Yes Yes
Another party?

Question 16

Compare traditional attest, assurance, and consulting services in terms of the requirement for independence.

Answer 16

Requirement for independence

Attestation Required

Assurance and Advisory Depends on nature of service

Consulting Not required

Question 17

What entity periodically evaluates quality control over the audits of public companies?

Answer 17

The PCAOB periodically inspects and evaluates quality control over the audits of public companies.

Question 18

What are the six elements of the Statements on Quality Control Standards (SQCSs)?

Answer 18

1. Leadership responsibilities for quality within the firm (the “tone at the top”)
2. Relevant ethical requirements
3. Acceptance and continuation of client relationships and specific engagements
4. Human Resources
5. Engagement performance
6. Monitoring

Question 19

Give examples of quality control requirements for audit engagements under the Sarbanes-Oxley Act of 2002.

Answer 19

• Second partner review and approval of audit reports
• Rotation of the lead partner and reviewing partner every 5 years
• Supervision of any associated person
• Expanded independence rule that prohibits the provision of certain nonaudit services
• Financial statements and disclosures certified by the client’s CEO and CFO
• Penalties for destroying documents to impede an investigation

Question 20

According to the PCAOB Engagement Quality Review, how frequently are PCAOB evaluations of quality control conducted for CPA firms with (1) 100 or more issuer audits and (2) fewer than 100 issuer audits?

Answer 20

CPA Firms with PCAOB Conducts Quality
Control Evaluations

> 100 issuer audits Every year

< 100 issuer audits Every 3 years