Uworld notes Flashcards
(31 cards)
AICPA impaired examples
- Hire or fire client employees
- Authorize transactions
- promote client’s products or securities
- Prepare source docs that evidence the occurrence of a transaction.
Accepting a commission usually impairs independence. However, if the client is not an attest client, independence is unnecessary and accepting the commission is not likely to be unethical
Not impaired examples
1. Provide advice, research or recommendations
2. Post journal entries based on mgt’s classifications
3. Prepare FS from client’s trial balance
NOTE: if the CPA does not make managerial decisions or engage in advocacy and if the client takes responsibility for the CPA’s work, independence generally is not impaired.
Acts discreditable to the profession
- Refusal to return client records
- Negligence in preparation of FS
- Illegal acts
- Solicitation or disclosure of CPA Exam questions
- False or misleading marketing
- Failure to follow requirements of a govt, commission or regulatory agency (e.g. PCAOB/SEC)
- Confidential information obtained from employment or volunteer activities
5 GAAS
SEJEC
S- Professional skepticism
E- Ethical requirements
J - Professional Judgement
E- Sufficient and Appropriate Audit Evidence
C - Compliance with GAAS
Inherent Limitations of Audit
- Nature of Financial reporting
- Nature of Audit procedures
- Timeliness of Fin reporting and the balance between benefit and cost.
Contingent fees prohibited for :
- Prep of tax return or refund claim
- Any engagement for client for whom a CPA performs:
(a) Audit or review of FS
(b) Compilation of FS used by 3rd party (unless lack of independence disclosed)
(c) Examination of prospective FS
CPA Services requiring independence
- Audit - Opinion
- Examination - Opinion
- Review - Conclusion
- Agreed upon procedures - Findings
Compilation does not require independence.
But lack of independence must be disclosed.
For each CAM identified, the audit report should include (IPAD)
- Identification of the CAM
- Description of the PRINCIPAL considerations that led the auditor to determine that the matter was a CAM
- Description of how the CAM was addressed in the audit
- Reference to the relevant FS accounts or disclosures.
If XYZ borrowed money when she was a student and long before she became a covered person in a corp, such loan is exempt under SEC rules and creates no independence issues.
In another example, If it is a secured loan and a person became covered person later - no independence problem arises.
SEC rules allow an accounting firm to buy goods and services FROM A CLIENT in ordinary course of business.
Services rendered by Third party service provider (TSP) where it does not pose a threat to INTEGRITY, OBJECTIVITY and INDEPENDENCE Rules.
Administrative support (e..g. record storage, software application hosting, authorized e-file transmittal services).
If TSP provides only administrative support, the CPA firm need not inform the client.
PCAOB standard does not use the term “performance materiality”. When planning an audit, the auditor determines the nature, timing and extent of testing based on an assessment of the RMM.
Lower materiality = apply to
Immaterial and indirect - allowed
Specialists (external) in audit - actuaries, appraisers, engineers - used for specialized skills in Audit.
9 management assertions - COCA CURVE
- Completeness
- Occurrence
- Cutoff
- Accuracy
- Classification
- Understandability
- Rights and Obligations
- Valuation and allocation
- Existence
An auditor may use the work of others in an audit to help perform audit procedures and gather evidence. An auditor may use the work of others to aid in
-Valuation of complex financial instruments
-Actuarial calculations of liabilities and clean-up costs
-Valuation of environmental liabilities and clean-up costs
-Estimation of oil and other mineral reserves
-Interpretation of contracts, laws and regulations
Parties that assist auditors in performing audit procedures and gathering evidence include:
DIRECTION & SUPERVISION is required by the auditors
- Internal auditors - audit evidence or direct assistance
- IT auditors - evaluate client’s IT system
- Auditor’s specialists
- Management’s specialists
- Component auditors - They can assist with a GROUP FINANCIAL AUDIT
A lead schedule is a working paper that summarizes like accounts (i.e. various cash accounts) associated with a F/S amount (i.e. cash).
Final audit file
Co. Assembled within Retained
ISSUERS 45 days a/r report release date 7 yrs
NONISSUERS 60 days a/r report release date , 5 yrs
Audit workpaper files
CURRENT FILE PERM FILE
1. Audit program
Engagement letter should include
1. The responsibilities of management (e.g. I/C) and the CPA
2. An identification of the applicable Financial reporting framework (e.g. GAAP)
3. The limitations to the engagement (i.e. F/S Preparation only)
Control activities
- Performance reviews
- Information processing controls
- Physical controls (access to assets)
- Segregation of duties
CONTROL RISK - The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
DETECTION RISK -The risk that the auditor will not detect a material misstatement.
INHERENT RISK - The susceptibility of material misstatement assuming there are no related internal control, policies or procedures.
COMPARATIVE STATEMENTS and CONSISTENCY BETWEEN PERIODS
1.When the FS of the previous year are shown alongside those of the CURRENT YEAR, the auditor will have the additional audit procedures to perform. If the auditor of the CURRENT YEAR ALSO AUDITED PRIOR YEAR, then the standard reprot will simply be updated so that BOTH YEARS are INCLUDED in the AUDIT report.
When reporting on COmparative F/S, the AUDITOR is required to PERFORM PROCEDURES in addition to those required when reporting on F/S for a SINGLE PERIOD.
The auditor will determine whether the:
1. Comparative F/S are presented in accordance with applicable framework
2. Comparative F/S and diclosures agrees with those reported in the prior period or they have been:
(a) Restated to correct a departure in the prior period
(b) Retrospectively adjusted for a change in ACCOUNTING PRINCIPLE
When the PY F/S are presented with the CY (ie, comparative presentation) and the auditor of the current F/S also audited the prior F/S, the report is updated to cover BOTH YEARS.
For e.g. if the PY’s report included a QUALIFIED OPINION but revisions have been made to the PY’s FS to make them conform with the reporting framework, then the auditor can express an UNMODIFIED OPINION on the restated F/S, the report is UPDATED to cover BOTH YEARS.
Year 1 - F/S, Audit report:Modified opinion
Year 2 - Year 1 FS RESTATED/CORRECTED; F/S Audit report: Unmodified opion
When the auditor’s opinion has CHANGED as in ABOVE EXAMPLE, the opinion will reflect the current situation, but an OTHER-MATTER PARAGRAPH will refer to the EARLIER REPORT indicating:
- The DATE of the PREVIOUS REPORT
- The TYPE OF OPINION previously expressed
- The SUBSTANTIVE REASONS for the DIFFERENT OPINION
- That the auditor’s OPINION on the AMENDED F/S differs from the PREVIOUS OPINION
When there is no reason to REVISE the report, the report will be REISSUED with the ORIGINAL REPORT DATE.
It sometimes happen that the auditor of the CY discovers information requiring that the PY’s FS be REVISED. E.g. PY F/S may contain A MATERIAL ERROR or there may have been a SUBSEQUENT CHANGE in ACCOUNTING PRINCIPLES.
When this OCCURS, the SUCCESSOR AUDITOR should request that management inform the PREDECESSOR AUDITOR and arrange a discussion among the 3 parties. THE SUCCESSOR AUDITOR will, with management’s PERMISSION, inform the PREDECESSOR of the RELEVANT INFORMATION.
MGT will decide whether and how to restate the PY F/S and
the PREDECESSOR will DECIDE whether the PY Report MUST BE revised, given the SUBSEQUENTLY DISCOVERED facts. Any revisions would result in the predecessor’s report being DUAL DATED to refer to any new information obtained.
SAMPLING - A deviation occurs when items are improperly canceled.
If auditors select voided items, they can replace the items ONLY after verifying that they were properly voided in adherence with RELEVANT CONTROL PROCEDURES.
In this scenario, the item that was properly voided and replaced DOES NOT constitute a DEVIATION.
A lack of DOCUMENTATION is ALSO considered a DEVIATION from the control because there is no evidence that the procedure took place.
When testing controls, auditors look for deviations from control procedures.
A DEVIATION occurs when
(1) items are IMPROPERLY CANCELLED or LACK PROPER DOCUMENTATION showing that CONTROL PROCEDURES were followed.
(2) ITEMS VOIDED in ADHERENCE with Control Procedures are NOT Considered DEVIATIONS.
SAMPLE DEVIATION RATE = No. of deviations/Sample size
Sampling is used for performing test of controls and performing substantive procedures
INPUTS IN DETERMINING SAMPLE SIZE; SAMPLE SIZE - TEA Mnemonic
- Tolerable rate of misstatement
- Expected deviation rate
- Allowance for sampling risk
*Tolerable rate applied to control tests while tolerable misstatement applies to substantive tests.
When auditors expect many erros, they increase the sample size to reduce the risk of not detecting them.
When auditirs intend to place high reliance on a specific control, they lower the tolerable error rate. This means they tolerate fewer deviations from that control, which results in more items BEING TESTED to ensure the CONTROL is RELIABLE. Therefore, there is an inverse relationship between the tolerable error rate and sample size.
E.g. T = 8%
E-2%
A = 5%
STRATIFY - Arrange or classify
Stratification is the process of separating items in a population into smaller groups (strata) with similar characteristics. The grouping is useful for allocating specific portions of a sample to each group.
STratified sampling is used to minimize the variance within the overall population.
EXPLICIT vs. IMPLICIT Representations in a NONISSUER’S STD AUDIT REPORT.
- Explicit - FS conform to GAAP IMPLIES : IMPLICIT CONSISTENT Application of ACCOUNTING PRINCIPLES
- Explicit : EXAMINATION OF EVIDENCE ON A TEST BASIS is EXPLICITLY mentioned in the AUDITOR’S RESPONSIBILITIES SECTION OF A NONISSUER’S AUDIT REPORT.
- An AUDIT REPORT EXPLICITLY mentions CONSISTENCY only IF IT LACKING IN THE FS, else CONSISENT APPLICATION OF ACCOUNTING PRINCIPLES should be IMPLICIT.
Current File
- Audit program
- Trial balance
- Lead schedules
- Auditor reconciliations
- Auditor analysis
- Responses to information requests
Permanent File
- company bylaws
- Articles of incorp
- Minutes (board, shareholder meetings)
- Control flowcharts
5.
