Terms Flashcards
audit risk equal what
audit risk equal inherent risk multiply control risk multiply detection risk
detection risk equal what
detection risk equal analytical procedure multiply test of details
when to use negative confirmation?
control is good, expect there is not to be a lot of exceptions, i think people pay attention to them . when client record a large number of relatively small balances
effective application of analytical procedure
When the expectations of the auditor are more precise, there is a greater likelihood that significant differences from the expectations are due to misstatements. This is due to the fact that auditors are better able to anticipate appropriate client results and results that are inconsistent with the auditor’s expectations are likely to be the result of some form of financial statement error or fraud.
control risk vs inherent risk
control risk is the risk that a meterial misstatement will not be prevented or detected on a timely basis by the client’s internal control
inherent risk is the risk that auditor will not detect a material misstatement
risk assessment include
inquiries of management and others
analytical procedures
observation and inspection
Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year-end?
Performing substantive procedures (such as confirmation of accounts receivable) at an interim date without undertaking additional procedures at a later date increases the risk that the auditor will not detect misstatements that may exist at the period-end. This risk increases as the remaining period is lengthened.
when an accountant examine projected financial statement, the accountant report should include a separate paragraph that
describe the limitation on the usefulness of the presentation
include the intended recipient
Analytical procedure
nalytical procedures, which consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data, can be used by the auditor in the planning phase, to obtain an understanding of the entity and its environment, as a substantive test, and as an overall review in the final stages of the audit. Analytical procedures are used for obtaining audit evidence (confirmation and recalculation, used in the incorrect answer choices, are two of those other procedures). Analytical procedures involve comparing recorded amounts (such as current-year balances) to expectations or anticipated results (such as a budget). This is a comparison that would occur in the planning phase of the audit. Scanning the payroll files for terminated employees would be an analytical procedure used during substantive testing, not the planning phase.
What is the most likely source of the following statement?
“Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below.
standard financial institution confirmation request
when adverse opinion is issued ?
An adverse opinion is issued when the financial statements are not presented in accordance with GAAP. An adverse opinion is expressed when the auditor, having already obtained sufficient appropriate audit evidence, concludes that misstatements are material and pervasive to the financial statements.
what is reasonable test
A reasonableness test compares a known, recorded amount (number of overtime hours in a week) with an estimated, or expected, amount (the average of weekly overtime during a similar period in a prior year). The auditor looks to see if the actual number is reasonable based on prior historical data. This test is a type of analytical procedure.
sarbanes oxley act prohibit what ?
The Sarbanes-Oxley Act of 2002 specifically prohibits a registered accounting firm from providing internal audit outsourcing services during an audit, actuarial services related to the audit contemporaneously with the audit, and advice on financial information system design during an audit.
When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may provide negative assurance concerning:
When an issuer sells securities, the underwriter for those securities often asks an accountant to provide a comfort letter regarding the financial information filed with the SEC. The comfort letter provides “negative assurance” to the underwriters that “nothing came to our attention that would indicate that the information does not meet the specified standard.” The comfort letter is not an audit report.
If an accountant performs a review of interim financial information, he or she may then express negative assurance on whether “any material modifications should be made to the unaudited interim financial information for it to be in accordance with the applicable financial reporting framework” and whether “the unaudited interim financial information complies as to form in all material respects with the applicable accounting requirements of the [Securities Act of 1933] and the related rules and regulations adopted by the SEC.” (AU-C 920.46
Under PCAOB Auditing Standard 1215, the auditor should complete the final set of audit documentation within how many days following the report release date?
45 days
when determining a sample size for test of control, the auditor should consider ?
When determining a sample size for a test of controls, the auditor should consider the tolerable rate of deviation from the controls (expressed in %), the likely rate of deviations (expressed in %), and the allowable risk of assessing control risk too low (the reliability level).
bills of landing and account receivable confirmation are generated from ?
Bills of lading are generated by the carrier for goods being shipped to the entity.
Accounts receivable confirmations audit evidence comes from information generated by the entity’s clients when they respond to the auditor.
what a management representation letter include ?
a confirmation that the entity has compiled with contractual agreements
Normally, the only time a CPA can disclose confidential information is with the client’s consent. The exceptions to client’s consent are:
a peer review by state CPA society
a subpoena or court summon to release confidential information
an inquiry that is made by a recognized investigatory body
what is allowance for sampling risk ?
an allowance for sampling risk is the difference between the upper precision limit and the sample deviation rate
what is the objective of the analytical procedure in the overall review stage of an audit ?
The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation. The auditor may, at this time, determine that additional audit evidence may be needed.
Once the auditor is in the overall review stage of the audit, he is no longer evaluating the effectiveness of the internal control activities. An analytical procedure applied to balances at period end would not assist the auditor with identifying or understanding subsequent events. The workpaper review would be when the auditor determines if audit procedures were omitted by the staff accountants.
what treasurer department should not do ?
The treasurer’s department should not approve vendor’s invoices for payment as it would put the treasurer’s department in control of both authorization and information processing. This would not be a proper segregation of duties
what items that the client’s lawyer can respond to the auditor’s letter of inquiry ?
The client’s lawyer is only asked to respond by providing information about pending or threatened litigation, claims and assessments (or unasserted claims that are probable of assertion and that would have a reasonable possibility of a negative outcome) to which he has “devoted substantive attention on behalf of the company in the form of legal consultation or representation.” (AU-C 501.22)
It is outside the scope of the lawyer’s response to speculate about whether or not the client can continue as a going concern. Considering this possibility is the auditor’s responsibility.
what is test data approach ?
The test data approach (sometimes called the test deck approach) is a way to audit “through the computer.” Test data is introduced into the client’s computer system using the same program to operate the application being tested. The output is compared to the auditor’s predetermined results. The test data approach does not involve a separate program.
An integrated test facility introduces a fictitious entity (such as a dummy subsidiary) with real entries in the master files of the client’s computer system. The auditor then compares the processing of data through the fictitious entity with what should be there in order to test that the data processing is reliable. Like the test data (or test deck) approach, an integrated test facility uses the client’s system.
what stuffs to consider in the planning and performance of an audit ?
audit risk , materiality, statistical sampling
what are the elements of a CPA firm quality control system ?
leadership responsibilities for quality within the firm,
relevant ethical requirements,
acceptance and continuance of client relationships and specific engagements,
human resources,
engagement performance, and
monitoring.
what does the “introductory paragraph” include ?
“identify the entity whose financial statements have been audited,
“state that the financial statements have been audited,
“identify the title of each statement that the financial statements comprise, and
“specify the date or period covered by each financial statement that the financial statements comprise.”
Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:
Applying substantive tests at an interim date, rather than at the balance sheet date, increases audit risk that a misstatement may occur between the interim and year-end dates and exist at the balance sheet date. This increase in risk is the incremental audit risk. Therefore, before auditing asset accounts at an interim date, an auditor should assess the difficulty in controlling the incremental audit risk (i.e., extending the audit conclusion over the remaining period from the interim date to the balance sheet date).
It is not necessary to assess control risk below the maximum level, or materiality for the accounts tested as insignificant, before auditing at an interim date. If inherent risk is at the maximum level, the auditor should consider whether or not using interim procedures will be cost effective, since this assessment affects the nature, timing, and extent of substantive tests to cover the remaining period.
when a disclaimer of opinion can be issued ?
A disclaimer of opinion is issued when a significant (sufficiently material or client-imposed) scope limitation prevents the auditor from forming an opinion on the financial statements. A disclaimer is a report that states the auditor does not express an opinion. If an auditor is unable to observe the physical inventory count (and the inventory is material to the financial statements) and cannot perform alternate procedures to verify the accounting assertions associated with the inventory account balance, then the auditor should issue a disclaimer of opinion.
when a unmodified opinion can be issued ?
An unmodified opinion is a clean opinion. It states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of the company. The auditor would be precluded from issuing an unmodified opinion in this circumstance.
when a qualified opinion can be issued ?
A qualified opinion has an “except for” paragraph which highlights any material scope limitations or departures from an applicable financial reporting framework. These are items that are material, but not sufficiently material as to require a disclaimer or adverse opinion. Excepting the items mentioned in the report, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of the company.
when a adverse opinion can be issued ?
An adverse opinion states that the financial statements do not present fairly the financial position or the results of operations or cash flow in conformity with an applicable financial reporting framework. Adverse opinions result from a sufficiently material departure from an applicable financial reporting framework. The auditor must disclose the reason(s) for the adverse opinion.
risk of accessing control risk too low
The risk of assessing control risk too low is an aspect of sampling risk related to tests of controls. It is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. It causes the auditor to rely on a control when the true deviation rate does not justify reliance. It relates to the effectiveness of the audit—the auditor fails to perform additional work that should be performed. Risk of assessing control risk too low is more serious than the risk of assessing control risk too high. The risk of assessing control risk too low varies inversely with the sample size (as the sample size increases, the risk of assessing control risk too low decreases).
Test of Control Client's Internal Control Is:
Sample
Indicates: Reliable: Unreliable:
--------------- -------------------------------------------
Accept Correct Risk of assessing
Decision control risk too low
Reject Risk of assessing Correct
control risk too high Decision
when the control risk is accessed too low ?
When control risk is assessed too low, the deviation rate for the sample is less than the true deviation rate of the population (or, as stated in the question, the deviation rate of the population is more than the deviation rate in the auditor’s sample).
After considering an entity’s negative trends and financial difficulties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include management’s plans to:
Plans to dispose of assets
Plans to borrow money or restructure debt
Plans to reduce or delay expenditures
Plans to increase ownership equity
when an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that
When an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
what happen when the auditor change an audit or review to a review or compilation , what happen to the new engagement ?
The accountant is permitted to use professional judgment in deciding whether or not to change the engagement. If the change is justified, the new engagement should not make any reference to the original engagement, any procedures that were performed under the original engagement, or why the engagement changed.
The auditor’s report on an integrated audit of internal control for an issuer should include which of the following?
PCAOB AS 2201.85 states that the auditor’s report on the audit of internal control over financial reporting must include a definition of internal control which is the same description of the entity’s internal control as management uses in its report.
The other items listed are reporting elements for an agreed-upon procedures report on controls
what is comfort letter and who sign it ?
A comfort letter is a letter issued to underwriters concerning the financial information contained in registration statements filed with the SEC in connection with the issuance of securities.
A comfort letter is sent (and signed) by the independent auditor to the underwriter.
what is confirmation ?
Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting the financial statements. A confirmation for a third party would be the most efficient process, since the inventory is being held by the third party (public warehouse).
While observation or inspection could provide evidence as to the existence, it would not be the most efficient method available
When the auditor reissues a report of the financial statements, the date of the reissued report should be:
same as the original report
as the detection risk decrease, the auditor may ?
n this question, the auditor must reduce detection risk (a high risk of material misstatement has made it necessary to lower detection risk so that overall audit risk is acceptable). In order to reduce detection risk, the auditor will vary the nature, timing, or extent of testing. Moving substantive testing to year-end reduces the risk that errors at the balance sheet date may not be detected.
The auditor may also increase the extent of substantive testing (not reduce it). It is not possible to ignore the assessed level of inherent risk in planning, and the auditor must have a reason to lower the assessed level of control risk (such as tests of controls indicate that controls may be relied upon).
Which of the following procedures would the principal auditor most likely perform after deciding to make reference to another CPA who audited a subsidiary of the entity?
Whether or not the principal auditor decides to make reference to the audit of the other auditor, he or she should make inquiries concerning the professional reputation and independence of the other auditor. However, if the principal auditor decides to make reference to another CPA who audited a subsidiary of the entity, he or she is not required to review the working papers and audit programs of the other CPA, visit the other CPA and discuss the results of the other CPA’s audit procedures, or determine that the other CPA has a sufficient understanding of the subsidiary’s internal control.
Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for ————— as members in public practice.
objectivity
when a negative confirmation can be used ?
this form of confirmation is used only under specific conditions, such as when the combined assessed level of inherent and control risk relative to accounts receivable is low. Negative confirmations are also used when there are a large number of small balances involved and the auditor expects a small number of errors.
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
test the operating effectiveness of such control in the current audit
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
The use of the ratio estimation sampling technique is most effective when the calculated audit amounts are approximately proportional to the client’s book amounts. Ratio estimation takes the ratio of the mean of the sample audit values to the mean of the sample book values and applies it to the total book value. This would provide a valid statement about the total population if the calculated audit amounts are approximately proportional to the client’s book amounts.
which auditing procedure would assist auditor to identify related party transaction ?
A guarantee is a responsibility for the payment of a debt or performance of some obligation if the person primarily liable fails to perform. The presence of a guarantee would be a possible indicator of a related party transaction. Of the responses provided, reviewing confirmations of loans receivable and payable for indications of guarantees most likely would assist an auditor in identifying related party transactions. Loans and guarantees are commonly entered into with related parties.
how should a practitioner present the result of applying agreed upon procedure ?
A practitioner should present the results of applying agreed-upon procedures to specified subject matter in the form of findings.
an accountant should perform analytical procedure during an engagement to ?
Analytical and inquiry procedures are performed as part of a review engagement that allows the accountant to provide limited assurance on the reviewed financial statements. A compilation engagement provides no assurance on the compiled financial statements, thus no analytical procedures are performed.
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
If an entity prepares its financial statements on its income tax basis, a note to the financial statements should describe the special-purpose framework.
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
An auditor may reissue an audit report; however, the auditor may become aware of an event that occurred subsequent to the date of the original report that requires adjustment or disclosure in the financial statements. In this situation, the auditor should make inquiries to determine how the information will affect the prior-year financial statements.
If an adjustment or disclosure is needed, the dating of the reissued report can be either of the following:
“Dual dating” allows for the disclosure of subsequent events. With dual dating, the auditor’s responsibility is limited to the specific event referred to in the note.
The auditor may date the report for a later date. In this case, the auditor’s responsibility for subsequent events extends to the date of the report, and subsequent event procedures should be extended to that date.
the risk of accessing control risk too high ?
The risk of assessing control risk too high is the risk that the assess level of control risk based on the sample is greater than the true operating effectiveness of the control. The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. The risk of incorrect acceptance is the chance that the statistical evidence might support fair statement of a materially misstated book value. The risk of incorrect rejection is the chance that the statistical evidence might fail to support fair statement of a correct book value.
Since the sampling results in this question were on tests of details, the risk would only be concerned with the risk of incorrect acceptance or the risk of incorrect rejection. The sample results concluded that the recorded balance was materially misstated, when in fact it was not materially misstated. This is an example of incorrect rejection.
what does section 404 include ?
Section 404 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that each annual report filed with the SEC contain an internal control report. This report states the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It also includes an assessment of the effectiveness of the internal control structure and procedures.
what does section 402 include ?
Section 402 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.
what does section 403 include ?
Section 403 requires disclosures from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to Section 12 of the Securities Exchange Act of 1934.
what does section 406 include ?
Section 406 requires disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not). Any change in or waiver of this code requires disclosure as well.
If an auditor is obtaining an understanding of an issuer’s information and communication component of internal control, which of the following factors should the auditor assess?
Internal controls consist of five interrelated components: control environment, risk assessment, information and communication, control activities, and monitoring.
Information and communication systems support the identification, capture, and exchange of information and consist of the procedures and records relevant to financial reporting objectives (including the accounting system). As such, the auditor should obtain sufficient knowledge of the information system to understand the following:
Significant classes of transactions in the entity’s operations
Manual and automated procedures by which transactions are initiated, authorized, recorded, processed, and reported in the financial statements
The related accounting records supporting information, and specific accounts in the financial statements involved in initiating, authorizing, recording, processing, and reporting transactions
The financial reporting process used to prepare the entity’s financial statements, including significant accounting estimates and disclosures
Controls surrounding journal entries
Assessing management’s integrity, ethical values, philosophy, and operating style are related to the control environment component, not information and communication.
An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the:
The practitioner’s standard report on a compilation of prospective financial statements should include a statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the prospective financial statements or the assumptions.
The projection may be included in a document with audited historical financial statements. The practitioner does not have a responsibility to update the projection for future events and circumstances limited to one year. A financial forecast, not a projection, omits all hypothetical assumptions and presents the most likely future financial position.
the engagement letter of compilation include ?
objective of the compilation
no opinion or any form of assurance
Acknowledgment of management’s representation and agreement that the financial statements are not to be used by third parties
what does analytical procedure include ?
comparable information for prior periods,
anticipated results (e.g., budgets or forecasts including extrapolations from interim or annual data),
relationships among elements of financial information within the period,
similar industry information (e.g., gross margin information), and
relationships of financial information with relevant nonfinancial information.
Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics is a procedure used to interpret the result of statistical sampling, and is not an analytical procedure.
ineffective general control by themselves….. ?
Ineffective general controls by themselves do not cause misstatements; however, they can permit application controls to operate improperly and allow misstatements to occur.
what does substantive analytical procedure applicable ?
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. Tests of details are more appropriate to obtain audit evidence regarding certain relevant assertions about account balances, including existence and valuation.
Analytical procedures can encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate from significantly predicted amounts.
Data subject to audit testing in prior years and transactions subject to management decisions have no bearing on analytical procedures. The relationships involving balance sheet items are not predictable over time and do not have plausible relationships.
what does section 303 do ?
The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in civil proceedings.
Although Section 303 gives the Securities and Exchange Commission (SEC) exclusive authority to enforce the section, in practice the PCAOB enforces compliance and levies civil monetary penalties while the SEC oversees the PCAOB’s operations.
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?
The auditor’s workpapers must reflect that the auditor has performed risk assessment procedures to assess the risk of material misstatement both at the financial statement and relevant assertion levels. Risk assessment begins with obtaining an understanding of the entity and its environment. The auditor must document the sources of information from which the understanding was obtained.
Part of obtaining the understanding of the entity and its environment involves evaluating the design of internal controls and whether they have been implemented. For example, the auditor could create a flowchart for the workpapers that documents this understanding.
Procedures manuals and organizational flowcharts would be only two out of many possible sources of information about the entity and its environment used to assess the risk of material misstatement. The lack of one specific source to obtain the understanding would not constitute a scope limitation, nor would the auditor be limited to assessing control risk at the maximum level.
what are some of the example of attribute sampling ?
An attribute is any characteristic that is either present or absent. In tests of controls, the presence or absence of evidence of the application of a specified control is sometimes referred to as an attribute (e.g., the proper approval by supervisors for a purchase order, in a credit sale, credit approval before the sale is initiated is the attribute or control condition of the credit sale). Absence of, or rate of occurrence of deviation from, the attribute is measured in tests of controls and used to determine whether a control is reliable.
The incorrect answer choices (making independent estimate of recorded payroll expense, determining all payables are recorded at year-end, and selecting accounts receivable for confirmation of account balances) are not examples of attribute testing.
when can the auditor perform substantive test of control in the interim date ?
An auditor may perform substantive procedures at an interim date, and she is more likely to do so for certain account balances and classes of transactions over others. The auditor would favor interim testing if:
the assessed risk of material misstatement is low,
the controls are strong,
the auditor can reduce the risk that misstatements that exist at the period-end are not detected by performing appropriate procedures, and
GAAS does not require testing at the balance sheet.
Travel and entertainment expenses are the only classes of transactions for which interim testing would increase the efficiency of the audit.
Subsequent events are those events that occur after the balance sheet date but before the date of the report, and they cannot be tested at an interim date. The search for unrecorded liabilities also must be performed as of the balance sheet date. The response from the attorney must cover the entire year under audit and would not be useful to the auditor if it were dated prior to the balance sheet date
what does section 404 do ?
Section 404 of the Sarbanes-Oxley Act of 2002 requires that the audit report attest to, and report on, the internal control assessment made by management. This internal control assessment will not be the subject of any other separate engagement.
the use of ratio estimation sampling technique is most effective when ?
The use of the ratio estimation sampling technique is most effective when the calculated audit amounts are approximately proportional to the client’s book amounts. Ratio estimation takes the ratio of the mean of the sample audit values to the mean of the sample book values and applies it to the total book value. This would provide a valid statement about the total population if the calculated audit amounts are approximately proportional to the client’s book amounts.
If a registered public accounting firm is in violation of any rule or regulation of the SEC or PCAOB:
they may not prepare or issue any audit report with respect to that issuer.
what should an auditor perform to obtain an understanding of the entity and its environment ?
the auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control:
Inquiries of management and others within the entity
Analytical procedures
Observation and inspection
The auditor is not required to perform all the risk assessment procedures described above for each aspect of the understanding. However, all the risk assessment procedures should be performed by the auditor in the course of obtaining the required understanding. Confirmation of significant receivables is a substantive audit procedure. Monitoring is an element of an entity’s internal control. Sampling is used in testing controls or in substantive tests.
Which of the following types of engagements is not permitted under the professional standards for reporting on an entity’s compliance?
practitioner should not perform a review of an entity’s compliance with requirements of specified laws, regulations, rules, contracts, or grants.
what is the differences between a deficiency, a significant deficiency and a material weakness ?
A deficiency exists when the design or operation of one or more of the internal control components does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.
A significant deficiency is a deficiency in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
A material weakness is a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. All material weaknesses are significant deficiencies; they merit attention by those charged with governance due to their severity and their potential effect on the financial statements.
An auditor is required to report material weaknesses and significant deficiencies to those charged with governance. “Although the auditor is required…to make the communications…no later than 60 days following the report release date, the communication is best made by the report release date because receipt of such communication may be an important factor in enabling those charged with governance to discharge their oversight responsibilities” (AU-C 265.A16).
The two types of deficiencies do not have to be reported separately.
what can auditor do to identify possible litigation, claims and assessments (LCA)?
The auditor should perform procedures to identify possible litigation, claims, and assessments (LCA) by:
discussing with management the policies and procedures that management uses for identifying, evaluating, and accounting for LCA;
obtaining a list of all LCA from management, along with assurance that all LCA have been disclosed; and
examining documents in the client’s possession that would contain information concerning LCA.
The only answer choice that represents a source of information that could reveal outstanding litigation, claims, and assessments to the auditor is reading the file of correspondence from taxing authorities. In this file, the auditor may discover delinquent tax notices and substantial unpaid interest and penalties.
Title II of the Sarbanes-Oxley Act prohibits registered public accounting firms from providing certain nonaudit services. These services include all of the following
Title II of the Sarbanes-Oxley Act of 2002 specifically prohibits bookkeeping, financial information systems design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, management functions, broker or dealer services, and legal services. Tax services are permissible, but must be preapproved by the audit committee.
procedure to conduct a review are usually limited to what ?
The process used by management to determine the balance for accrued wages would not be performed for a review engagement. Procedures for conducting a review of financial statements generally are limited to performing analytical procedures (e.g., comparing financial information with statements for comparable prior periods, giving consideration to known changes), making inquiries of company personnel and management, and other procedures that address significant accounting and disclosure matters relating to the financial statements to be reported. Written representations are required from management for all financial statements and periods covered by the accountant’s review report.
The objective of a review of interim financial information of an issuer is to provide an accountant with a basis for reporting whether:
The objective of a review of interim financial information of an issuer is to provide the CPA with a basis for reporting whether material modifications should be made to the interim information to comply with the applicable financial reporting framework.
what to do when you notice there is an unjustified accounting change and a material weakness ?
The auditor is required to state whether GAAP has been consistently applied. Inconsistency in the application of GAAP is a common reason for qualified opinions by auditors. Therefore, an unjustified accounting change would not result in an unmodified opinion with an emphasis-of-matter paragraph. Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance. However, this is done in a separate communication and is not included as an emphasis-of-matter paragraph to an unmodified opinion in the auditor’s report.
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer’s financial statements without impairing independence?
A registered public accounting firm is not independent of its audit client, or any affiliate of the firm, if during the audit and professional engagement period, the firm provides any nonaudit services to the audit client.
Only the answer choice “reviewing a proposed transaction and informing the client of the tax consequences” is allowed during the engagement period; otherwise, the registered public accounting firm would not be considered independent.
The other answer choices cannot be performed during the professional engagement period.
when an accountant is engaged to compile financial statement that omit all disclosure with no reference to basis but are otherwise in conformity with special purpose framework ?
When financial statements have been prepared on a comprehensive basis of accounting other than GAAP and omit substantially all disclosures, the first paragraph of the accountant’s compilation report should include a sentence that states, “The financial statements have been prepared on the [describe appropriate basis of accounting], which is a comprehensive basis of accounting other than generally accepted accounting principles.”
in regard to perform concerning litigation, claim, and assessment, what would be the most likely audit procedure ?
“Management is responsible for adopting policies and procedures to identify, evaluate, and account for litigation, claims, and assessments as a basis for the preparation of financial statements, in accordance with the requirements of the applicable financial reporting framework” (AU-C 501.A41). Therefore, the audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments would be to discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. Although a letter of inquiry to the client’s lawyer is a primary means of obtaining corroborating evidence of litigation, claims, and assessments, the letter only asks the lawyer to evaluate the outcome and estimated range of potential loss of the asserted and unasserted claims as listed by management and to state whether there are any others management should list. The attorney is not asked if these claims represent a going concern problem, if they are recorded or disclosed in the financial statements, or if the auditor may examine the documents in the lawyer’s possession.
when an auditor is requested to change from an audit to a compilation, what should auditor do ?
When requested to change from an audit to a compilation engagement, an auditor should consider the additional audit effort necessary to complete the audit and the reason management has requested the change. He should also consider what it will cost to complete the audit. If the reason to change the engagement is reasonably justified by Tech Resources, for example, because:
due to a change in circumstances, Tech no longer has a need for an audit, or
Tech misunderstood the nature of an audit.
Davis could issue a compilation report. However, the auditor should evaluate the propriety of the request if:
there is no reasonable justification for the change,
a scope restriction has been placed on the audit (and the related financial statement information), or
the audit procedures are substantially complete.
what do auditors do in the planning stage of an audit ?
in the planning stage of an audit: auditor would make a preliminary judgement about materiality
what do auditors do in the fieldwork stage of an audit?
during the fieldwork stage of an audit, the auditor would confirm a sample of the entity account payable with known creditors . also, obtain written representations from mangement that there are no unrecorded transactions
what does auditor do in the reporting stage of the audit ?
during the reporting stage of the audit, auditor would communicate management ‘s initial selection of accounting policies to the audit committee
does accountant need to limit the distribution of the report when doing the review ?
A review, while still an attest engagement, offers only limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. As a review does not offer the same level of assurance that an audit does, the requirements and procedures are different.
The review would involve asking about actions taken at board of directors’ meetings, as well as obtaining an understanding of the client’s business and utilizing inquiry and analytical procedures. It would not involve obtaining an understanding of internal control, assessing fraud risks, or testing accounting records (confirming accounts receivable balances). The accountant would not need to limit the distribution of the accountant’s report.
In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning:
Test data is introduced into the client’s computer system and processed with the client’s software in order to determine if specified controls are operating effectively. When using test data, the auditor is looking for controls that are built into the system, not controls that operate outside of the computer. Thus, the auditor would not be testing controls concerning control over and distribution of unclaimed paychecks.
Section 409 of SOX Title IV, “Real Time Issuer Disclosures,” dictates dictate what ?
Section 409 of the Sarbanes-Oxley Act (SOX) dictates that issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations.
what is the definition of control risk ?
control risk is the risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls
what is the definition of detection risk ?
The risk that the auditor will not detect a material misstatement
to express an unmodified opinion using an unmodified report covering single year financial statement…. ?
To express an unmodified opinion using an unmodified report covering single-year financial statements:
comparative financial statements are not presented—i.e., the prior year’s financial statements audited by another CPA are not presented.
the prior report expresses an unmodified opinion.
A qualified opinion is issued when the auditor is unable to obtain an investee’s audited financial statements (scope limitation), or a statement of cash flows is not presented (departure from an applicable financial reporting framework, although material, does not justify an adverse opinion). Comparability is not affected, since only single-year financial statements are presented.
how an auditor test of controls over the issuance of raw material to production ?
Material requisitions are received by the store’s department for the purpose of issuing such materials to production. Thus, examining material requisitions and then re-performing client controls designed to process and record issuances is the best method to test controls.
what is an audit trail ? does it related to analytical purpose ?
An audit trail in a computer system, as in a manual system, assists in discovering fraud and therefore acts as a deterrent to perpetration of such acts.
Other major reasons for an audit trail include:
monitoring the system and the data produced, and
answering queries by tracking a specific transaction through the accounting records or tracing a transaction back to the original source and observing how it is processed through the system.
Analytical purposes are not a major factor for maintaining an audit trail in a computer system. Analytical review can be performed by retrieving recorded data stored in the computer system or on hard copy
what include in a analytical procedure ?
Analytical procedures evaluate significant ratios, operating statistics, and trends in financial data. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristic is a use of tests of details, not analytical procedures.
what is check digit verification ?
A check digit is a specific type of input control, consisting of a single digit at the end of an identification code that is computed from the other digits in a field. If the identification code is mis-keyed, a formula or algorithm will reveal that the check digit is not correct, and the field will not accept the entry.
In this situation, the difference is one digit at the end of an identification code (4 versus 5). Based on the algorithm or formula involved, the check digit verification process would have detected this error.
Under PCAOB Auditing Standard 1215, audit documentation should be retained no fewer than how many years following the report release date?
7 years
what are the seven type of circumstance that could lead to threat of independence from GAO ? Government accoutability office
The Government Accountability Office (GAO) has identified seven types of circumstances that could lead to threats of independence:
Self-interest Self-review Bias Familiarity Undue influence Management participation Structural threats
the written report under Government Auditing standard should include what ?
The reporting standards under Government Auditing Standards require that written audit reports should include weaknesses in internal control considered to be significant deficiencies; any indication of fraud, abuse, or noncompliance with laws and regulations; and significant violations of contracts or grant agreements.
the analytical procedure effectiveness depend on what ?
Analytical procedures may be effective and efficient tests for assertions in which potential misstatements would not be apparent from an examination of the detailed evidence or in which detailed evidence is not readily available. The expected effectiveness and efficiency of an analytical procedure in identifying potential misstatements depends on, among other things:
the nature of the assertion,
the plausibility and predictability of the relationship,
the availability and reliability of the data used to develop the expectation, and
the precision of the expectation.
An example of reporting on information accompanying the basic financial statements when the information has been subjected to auditing procedures follows
“Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The [identify accompanying supplementary information] is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.”
what consider consulting service ?
Advisory services, implementation services, and product services all fall within the broad category of “consulting services.” Such services are subject to the Statements of Standards for Consulting Services and also include consultations, transaction services, and staff and other support services.
in understanding the business rationale , the auditor should consider what ?
In understanding the business rationale, the auditor should consider the following:
Whether the form of such transactions is overly complex (for example, involves multiple entities within a consolidated group or unrelated third parties)
Whether management has discussed the nature of and accounting for such transactions with the audit committee or board of directors
Whether management is placing more emphasis on the need for a particular accounting treatment than on the underlying economics of the transaction
Whether transactions that involve unconsolidated related parties, including special purpose entities, have been properly reviewed and approved by the audit committee or board of directors
Whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity under audit
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs
The assessed level of inherent and control risk is the level of risk that the auditor uses in determining the detection risk to accept for a financial statement assertion and, accordingly, in determining the nature, timing, and extent of substantive tests. For control risk, this level may vary along a range from maximum to minimum as long as the auditor has obtained audit evidence to support that assessed level. The lower the assessed level of control risk, the fewer substantive tests that will be needed. The assessed level of control risk is arrived at by compliance testing of controls. Therefore, an auditor who plans to assess control risk at a low level usually performs tests of controls and only limited tests of details or substantive tests.
The written communication regarding significant deficiencies and material weaknesses identified during the audit of financial statements should:
include a statement that indicates the purpose of the auditor’s consideration of internal control was to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity’s internal control over financial reporting.
in a review engagement, the accountant issue a report prepared in accordance with applicable standard… ?
In a review engagement, the accountant issues a report prepared in accordance with applicable standards—the Statements on Standards for Accounting and Review Services (SSARS). In this report the accountant indicates that the degree of responsibility assumed for the financial statements is to express limited, not reasonable, assurance regarding the financial statements. That is, the accountant does not express an opinion, but rather states, “Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.”
the accountant would be required to perform analytical procedure designed to identify relationships that appear to be unusual in where ?
The accountant would be required to perform analytical procedures designed to identify relationships that appear to be unusual in a review engagement, but not in a compilation engagement.
how to classify “measurement and review of the entity financial performance ?
The control environment involves those factors that set the tone for the entire entity. In evaluating the entity’s control environment, the auditor should consider the following elements and how they have been incorporated into the entity’s processes:
Communication and enforcement of integrity and ethical values
Commitment to competence
Participation of those charged with governance
Management’s philosophy and operating style
Organizational structure
Assignment of authority and responsibility
Human resource policies and practices
Measurements and review of the entity’s financial performance would be classified as control activities.
what is record count ?
A record count is a total of the number of input documents to a process or the number of records processed in a run.
What is the most likely source of the following statement?
“Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below
A standard financial institution confirmation request would contain a statement addressed to the auditor concerning the results of a search for the existence of deposit or loan accounts.
what auditor is not required to communicate with the audit committee ?
The auditor is not required to communicate with the audit committee regarding the degree of reliance the auditor placed on the management representation letter. However, if an audit committee exists separate from management, the auditor should communicate the representations requested from management. The auditor may provide the audit committee a copy of the management representation letter.
what is the purpose of segregation of duties ?
Tests regarding segregation of duties would be performed in order to determine control risk
judging the reasonableness of accounting estimate is what ?
Judging the reasonableness of accounting estimates would be a substantive procedure used to audit the assertion of valuation and allocation.
what auditor do to identify related party transaction?
Review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.
what type of analytical procedure used in planning ?
Analytical procedures used in planning the audit may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications. These procedures are usually performed at a high level; for example, comparing current-year to prior-year sales volumes
what type of analytical procedure used as substantive test ?
Ratio analysis, such as comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior year’s ratio, would be an example of an analytical procedure used as a substantive test (not one used during the planning phase of an audit). Reading the financial statements and considering the adequacy of evidence is not an analytical procedure. Analytical procedures rely on comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Reading the letter from the client’s attorney is an important audit procedure, but it is not an analytical procedure.
what is CPA responsibility when undertaking a consulting service engagement ?
inform the client of significant reservations concerning the benefits of the engagement.
When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive:
negative assurance on capsule information
what is the primary focus of an auditor in the examination of liability ?
The primary focus of an auditor in the examination of liabilities (e.g., accounts payable) is to verify that all of the entity’s liabilities have been recorded
auditor’s engagement letter include what ? and doesnt include what?
include: objective of the engagement, management responsibility, auditor responsibilities, limitation of the engagement , limit the auditor responsibility to detect fraud
does not include: significant deficiencies, audit procedure, substantial doubt about entity to continue as a going concern
what factors related to control activities impact an auditor’s consideration of the effect of IT on internal control:
information processing, segregation of duties, physical control .
no impact factor: resolution of defiencies,
In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
In this question, one-half of the sample ($5,000 out of $10,000) has been audited. The misstatement is for $1,000 ($5,000 − $4,000). Projecting the same error rate for the unaudited half of the sample, the projected misstatement is for $2,000.
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
The debit memo is usually a notification from a buyer to a seller that tells the seller that a debit was made in the seller’s account on the buyer’s book. In other words, a debit memo is a way for a buyer to inform a seller that it wants a refund on its purchase. In the instance when nonconforming goods are returned to a vendor, the purchasing department should prepare a debit memo to be sent to seller with a copy sent to accounting in order for accounting to remove the resulting payable from the accounting records.
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
A scope limitation occurs when the auditor is not able to collect sufficient appropriate audit evidence to support an opinion regarding the financial statements being in conformity with GAAP. No scope limitation exists when auditors are limited in their activities but use alternative sources of information to support an opinion. When no alternatives are available, however, as when clients refuse to acknowledge their responsibility for the fair presentation of the financial statements in conformity with GAAP, the auditor cannot determine if the financial statements are in accordance with GAAP and cannot issue an unmodified opinion.
Section 104 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB) has t
Section 104 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB) has the mandate and authority to conduct compliance inspections of each registered public accounting firm. Firms that audit more than 100 issuers are inspected annually. Firms that audit 100 or fewer issuers are inspected every three years.
