ACC358C Exam 2

(1) is proposed by the firm with (2) a primary goal to avoid taxes and (3) does not meet the "more likely than not to be upheld" standard

A firm is not independent with respect to an audit client if tax advice:

tax shelters

A firm is not independent with respect to an audit client if tax advice: relates to certain types of _____

opinion; integrated

Application of auditing standards: -developing and communicating an ____ on financial statements -as a part of an ____ audit on a client's internal control over financial reporting

related; manageable; accounting cycle

Audit Opinion Formulation Process: Accounting Cycles -similar transactions that are linked by procedures and controls that affect ____ accounts -convenient way to break the audit up into ____ sections of related accounts -individual auditors or teams of auditors are typically assigned to audit a particular _____

particular cycle; material misstatement; risks; audit procedures; audit evidence

Audit Opinion Formulation Process: Accounting Cycles Auditor focuses on: -flow of transaction with a _____ -identifying: --points where _____ can occur --controls that have been designed and implemented to mitigate those ____ -understanding risks and controls within each cycle --helps determine specific _____ to be used and specific _____ to be obtained

working papers; planned; performed

Audit Opinion Formulation Process: Audit Documentation -Audit documentation: --also called _____ --provides evidence that the audit was ___ and ____ in accordance with audit standards --serves other purposes

litigation; deep-pocket theory; expectations gap; clients

Audit-related ____ is costly! Driven, frequently, by joint and several liability (_______), class action suits, contingent fees for lawyers, and a fundamental misunderstanding of what an audit opinion represents ("_____") Lawsuits may be brought by ____ or third parties, under contract law, common law, and/or statutory law

subpoenaed; legal proceedings

Auditors MUST provide audit-related information if it is ____ in ______

not permitted; tax services

Contingent fee arrangements with an audit client (public or private) are ____; this includes any contingent fees for ____ provided for an audit client

effectiveness; implementation; ineffective; substantive; account balances; effective; substantive; account balances

Control Risk Assessment -focuses on design ___ and ____ -High Control Risk: --weak or ____ internal controls --auditor cannot rely on controls to reduce ____ procedures for _____ -Low Control Risk: --____ internal controls --auditor will test operating effectiveness of controls to reduce _____ procedures for _____

immediate family members; key

Covered members cannot have ____ who hold ____ positions in the audited company

independent audit committee; critical; higher power

Ethical challenges in auditing It is difficult to take a stand against the party that is paying your fee. This is why the enhanced role of the ________ (which must assess your firm's independence prior to engagement) as the auditor's "client" under SOX and PCAOB guidance is _____. As an auditor, you should not feel pressured to satisfy company management -- you answer to a "______" -- but this is easier said than done.

going concern; estimates

Ethical challenges in auditing Motivated reasoning can lead auditors to rationalize problems away. Audit example: evaluating _____ issues. _____ and accounting choices are also difficult areas

effort; outcome

Ethical challenges in auditing: Additional audit ____ usually does not change the ____

Human nature; skepticism; confrontation

Ethical challenges in auditing: ____ is to be friendly, flexible, and helpful. We like to be liked! However, effective auditing requires maintaining consistent standards, ____, and sometimes _____

paying your fee

Ethical challenges in auditing: It is difficult to take a stand against the party that is ____

motivated reasoning

Ethical challenges in auditing: ______ can lead auditors to rationalize problems away

direct; material indirect; covered members

For both public and private companies: No ____ or ______ financial interest in an audited company by a CPA connected with the audit ("______")

5%; any

For both public and private companies: no interest > ____ of total equity of an audited company for ___ employees of the audit firm

objectivity and integrity

In the performance of any professional service, a CPA shall maintain ______. This rule applies to ALL CPA's, whether or not the CPA is conducting audits

existing rules

Independence does not only mean compliance with _____

exclusive; imprudent; dangerous

Knowing codifications of ethical principles is very important, but ____ reliance on written rules is _____ and _____

commissions or referral fees

No _____ for directing businesses to an audit client or third parties, except for ____ where disclosed to the client

unusual/nonroutine/investment loans

No ______ between audit client and covered members; normal loans on standard terms permitted

coercive or misleading solicitation

No ______ of new audit business

confidential business information

Other than as prescribed under AICPA/PCAOB standards, an auditor may not communicate _____ concerning audited companies to outside parties

(1) Making client acceptance and continuance decisions (2) Performing risk assessment (3) Obtaining evidence about internal control operating effectiveness (4) Obtaining substantive evidence about accounts, disclosures, and assertions (5) Completing the audit and making reporting decisions

Overview of the Audit Opinion Formulation Process

flow; opinion formulation process; numbering convention

PCAOB Standards: -PCAOB's standards do not necessarily attempt to converge with the AICPA and the IAASB -Organized by topical areas that follow the ___ of the audit ____ -____ (purposely different from the convention used by the AICPA and IAASB)

independence-impairing; background checks; questionable; internal control deficiencies; business failure; personnel

Phase I: Making Client Acceptance and Continuance Decisions -In making client acceptance and continuance decisions, the auditor will perform various procedures in assessing the client including: --inquire of client and audit firm personnel whether there are any potential _____ relationships --obtain _____ on management to assess management integrity --perform a review of any ____ accounting policies that might indicate management's lack of commitment to GAAP --review regulatory findings and inquire management about any _____ --analyze client and industry financial statements to assess the possibility of ____ --assess the background and experience of the potential client's accounting _____

material misstatement; disclosures; assertions; materiality; disclosures; inherent; control

Phase II: Performing Risk Assessment -Identifying and assess risks of ______ --requires identification of significant accounts, _____, relevant ____ --auditor establishes a ____ level overall and for specific accounts and _____ -___ risk -___ risk

effectively; year-end; year; inquiry; relevant; reperforming; substantive procedures

Phase III: Obtaining Evidence about Internal Control Operating Effectiveness -auditor tests controls to determine whether controls are operating _____ --at ____ (for opinion on internal control effectiveness) --throughout the ____ (for the financial statement audit) -selecting controls to test -performing tests of controls --____ --observation --inspecting ___ documentation --____ a control -considering the results of tests of controls -summary of audit decisions prior to determining _____

analytical; account balances; misstatement; extent

Phase IV - Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions -substantive procedures include: --substantive ____ procedures --tests of details of ____ -Considerations in determining appropriate substantive procedures --source of potential ____ --___ and type of potential misstatement

review; communication; opinions; financial statements; internal control; one; two separate

Phase V - Completing the Audit and Making Reporting Decisions -completing various ___ and ___ activities -making a decision about what types of ___ should be issued -deciding on the appropriate opinion to be issued: --it can be based on ___ and ____ --it can be issued in __ report or ___ reports

material misstatement; misstatements; audit strategy; controls reliance; substantive

Responding to Identified Risks of Material Misstatement -purpose of risk assessment procedures --identify risks of ____ --determine where ____ in financial statements may occur --design appropriate _____ -____ audit: includes tests of controls and substantive procedures -_____ audit: includes substantive procedures and does not include tests of controls

management; fraud; error; analytical; observation

Risk Assessments Procedures: -typically include: --inquiries of ____ and others within the entity who may have information to assist in identifying risks of material misstatement due to ____ or ____ --planning ____ procedures --____ and inspection of documentation

affiliates; persons with a FROR at the company

The PCAOB has also adopted rules requiring audit firms to give written notice to the audit committee of all relationships between (1) the firm and its _____ and (2) the company and ______ that may reasonably bear on the firm's independence

AICPA; privately held

The _____ rules on non-audit services are more lenient for audits of _____ companies and other entities that are not publicly traded

rule; comfort

The mere fact that an action didn't violate a ___ will be of little ____ if felt wrong to you

(1) risk assessment procedures (2) tests of controls (3) substantive procedures

What are the 3 audit procedures?

payment dependent upon certain actions/results

What is a contingent fee?

provide assurance to public that audits are conducted in a quality manner

What is the common objective as it relates to professional auditing standards?

(1) members of the engagement team (2) fellow partners of the lead engagement partners, resident in the same office (3) those in a position to influence employment/compensation of engagement team

Who is considered a covered member?

For their opinion to have value

Why is it important that an auditor is both independent in fact and independent in opinion

audit evidence

____ is the core of the audit

personal tax advice; financial reporting oversight role (FROR)

a firm is also not independent with respect to a public audit client if it provides ______ to any person who is in a ______ (aka someone who prepares or influences the financial statements)

AICPA; PCAOB; IAASB

auditors in the US follow auditing guidance issued by:

cornerstone

independence is the _____ of auditing

fact; appearance

the auditor must be both independent in ____ and independent in _____

independence

the most important ethical responsibility of an auditor is to maintain _____