CPA studying
Auditing by manually testing the input and output of a computer system.
Auditing Around the Computer
The financial statements of ABC Company as of December 31, 20X1, were audited by other auditors whose report dated March 31, 20X2, expressed an unqualified opinion on those statements.
Auditors Report
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
Effectiveness of the audit.
When an entity's auditor 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.
(Issuer v. Non-Issuer) Required compliance with international standards on auditing
Neither
Uses a generalized Audit Software Package prepared by the auditors
Parallel Simulation
Examine debt instrument agreements and characteristics for proper classification
Presentation and Disclosure
A terminal control to limit access to programs or files to authorized users.
Professional Identification Codes
If a privately held company issues financial statements that purport to present its financial position and results of operations, but omits the statement of cash flows, the auditor ordinarily will express a(n)
Qualified Opinion
An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditor should express either a(n)
Qualified opinion or an adverse opinion.
Financial Reporting Oversight Role
such as when the person is a member of the board of directors or similar management or governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.
What is PPS sampling?
(Probability proportional to size) When samples from different sized subgroups are used and sampling is taken with the same probability, the chances of selecting a member from a large group are less than selecting a member from a smaller group
In our opinion, because of the effects of the matters discussed in the Basis for Adverse Opinion paragraph, the financial statements referred to above do not present fairly the financial position of ABC Company as of December 31, 20X1, or the results of their operations or their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Adverse Audit Report
The risk that the auditor issues an inappropriate audit opinion when the financial statements are materially misstated.
Audit Risk
Input, processing, and output controls
Application control procedures
At the conclusion of our audit, we will request certain written representations from you about the financial statements and related matters.
Audit Engagement Letter
The Company's management is responsible for adjusting the financial statements to correct any material misstatements and for affirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
Audit Engagement Letter
Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters as to which your views may differ from those stated and an identification of the omission of any pending or threatened litigation, claims, and assessments or a statement that the list of such matters is complete
Audit Inquiry Letter to Lawyers
(Issuer v. Non-Issuer) Auditors of such companies must use professional judgment and exercise due care.
Both
A control to ensure that jobs run simultaneously in a multiprogramming environment cannot change the allocated memory of another job.
Boundary Protection
A digit added to an identification number to detect certain types of data transmission or transposition errors.
Check Digit
I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.
Compilation Report on Financial Statements
Perform a search for unrecorded liabilities
Completeness
Trace inventory test counts to inventory subsidiary accounts
Completeness
The risk that a misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or in the aggregate with other misstatements
Control Risk
The risk that a misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or in the aggregate with other misstatements.
Control Risk
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into
Cost of Goods sold
Control performed by person who lacks the necessary authority or competence to perform the control effectively
Deficiency in operation
The objective of tests of details of transactions performed as substantive tests is to
Detect material misstatements in the financial statements
Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date
Detection
The risk that the auditor's procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
Detection Risk
Evidential matter concerning proper segregation of duties ordinarily is best obtained by
Direct personal observation of the employees who apply control procedures.
If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do not disclose the basis of accounting used, the accountant should
Disclose the basis of accounting in the accountants report
Electronically initiated transactions between companies
Electronic data interchange
The auditor is required to communicate to those charged with governance (such as the audit committee) the process used by management in formulating sensitive accounting estimates and about the basis for the auditor's conclusions regarding the reasonableness of those estimates.Analytical procedures used in planning an audit should focus on
Enhancing the auditor's understanding of the client's business.
What type of evidence would provide the highest level of assurance in an attestation engagement?
Evidence obtained from independent sources.
In our opinion, management's assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction
Examination Report on Pro Forma Financial Information
Confirm a sample of accounts receivable
Existence
Vouch recorded payables to invoices, purchase orders, and receiving reports
Existence
Review board of director meeting minutes for proper authorization of all current-year debt and equity transactions
Existence, Occurrence, or completeness.
(True/False)An audit client of Larry's firm gave Larry a bottle of wine on his birthday. This gift impairs independence.
False
(True/False)Larry bought into a condominium complex. His firm audits the homeowners' association. This absolutely creates an independence problem.
False
(True/False)Larry loves to play golf and joined the Preston Country Club (PCC) so he could do so. Larry is a tax partner at the firm that audits PCC. His golfing membership creates an independence problem.
False
(True/False)Larry's firm's client, ABC Co., had to withdraw and restate its financial statements. For a brief period, there was some bitter litigation between ABC, who sued claiming that Larry's firm had botched the audit, and Larry's firm which counterclaimed arguing that ABC's employees had misled the audit team. The case was soon settled out of court. But Larry's firm would violate independence rules if it just went back to the next audit of ABC.
False
(True/False) PPS sampling results in a smaller sample size when numerous small misstatements are expected
False : the more expected misstatements, the larger the sample size
True/False) One does not need a book value for individual items to evaluate a PPS sample
False: PPS sampling uses book value in its application
(True/False) PPS sampling is "preferred" by the professional standards
False: Professional standards do not specifically recommend PPS.
(True/False) A PPS sample eliminates the need to project results to the overall population.
False: The error needs to be projected to the overall population
Documentation of the auditor's understanding of an entity's internal controls for major transaction cycles by a symbolic representation of the systems.
Flowcharts
A total of one field for all the records of a batch where the total is meaningless for financial purposes.
Hash Total
Large cash receipts near year-end have been received based on cash sales for which there is no documentation.
Illegal Act
Unexplained payments have been made to government officials.
Illegal Act
A review engagement provides ______ assurance and a compilation provides ______ assurance
Limited, no
Hardware and software that is interconnected throughout an entity's building.
Local Area network
Errors may occur due to misunderstandings, carelessness, or fatigue
Inherent Limitations
The susceptibility of an assertion about a transaction, account balance, or disclosure to a misstatement that could be material, either individually or in the aggregate with other misstatements, before considering any related controls.
Inherent Risk
Have you had any disagreements with any member of senior management over accounting or auditing issues?
Inquiry of predecessor auditor
Fictitious and real transactions are processed together without the client's operating personnel knowing of the testing process.
Integrated Test Facility
May include a simulated division or subsidiary into the accounting system with the purpose of running fictitious transactions through it.
Integrated Test Facility
(Issuer v. Non-Issuer) Audit work guided by PCAOB
Issuers
(Issuer v. Non-Issuer) Required opinion on internal controls
Issuers
(Issuer v. Non-Issuer) Requires compliance with SOX 2002
Issuers
Sharona, Inc., is a public company. Its audit cycle runs from June 1 to May 31. Mit is on PCH's audit team that audits Sharona. On Sept. 1, 2014, Sharona offers Mit a job as its CFO. Mit immediately accepted and cut all ties with PCH. When may Mit start working in that position for Sharona
June 1, 2016
Nothing came to our attention as a result of the foregoing procedures, however, that caused us to believe that any material modifications should be made to the unaudited condensed consolidated financial statements ... included in the registration statement, for them to be in conformity with (GAAP).
Letters for Underwriters and Certain Other Requesting Parties
We believe that the effects of the uncorrected financial misstatements summarized in the accompanying schedule are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
Management Representation Letter
The company has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral.
Management Representation Letters
There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices.
Management Representation Letters
A control that will detect blanks existing in input data when they should not
Missing Data Check
(Sample Size Tests of Controls) The audit team had originally anticipated that misstatement in the reported accounts receivable balance of up to $26,500 could be tolerated. However, upon further review, that amount has been increased to $31,000
No impact on the sample size (if not a material amount, otherwise would decrease)
(Issuer v. Non-Issuer) Optional opinion on internal controls
Non-Issuers
(Issuer v. Non-Issuer) Audits must comply with clarified statements on auditing standards
Non-issuers
(Issuer v. Non-Issuer) Standard-setting body for audit work is guided by AICPA
Non-issuers
Which of the following procedures is more likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement?
Obtaining a representation letter from the chief executive officer
In obtaining an understanding of an entity's internal control structure, an auditor is required to obtain knowledge about the
Operating Effectiveness of policies and procedures : No - Design of policies and procedures: yes
The combination of inherent risk and control risk
Risk of Material Misstatement
Accounting policies, Articles of incorporation, Bylaws, Chart of accounts, Director list, History of the client organization, internal controls documentation, organization chart, prior years audit report, minute of board meeting, lease agreement, schedule of capital asset and capital stock.
Permanent File
When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as
Precision
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
Receiving Reports
PPS Sample interval calculation
Recorded amount / sample size
A note payable has an interest rate well below the market rate at the time at which the loan was obtained.
Related Party Transaction
The company exchanged certain real estate property for similar real estate property.
Related Party Transaction
The company has a properly documented loan but the loan has no scheduled repayment terms
Related Party Transaction
In our opinion, the schedule of profit participation referred to above presents fairly, in all material respects, Paul Newman's participation in the profits of XYZ company for the year ended December 31, 20X1, in accordance with the provisions of the agreements referred to above.
Report on Audit of Financial Statements Prepared in Accordance with Special Purpose Framework
The risk that the financial statements are materially misstated before the audit
Risk of Material Misstatement
The historical condensed financial statements are derived from the historical unaudited financial statements of XYZ Company, which were reviewed by us, and of ABC Company, which were reviewed by other accountants ..
Review Report on Pro Forma Financial Information
Inquire about accounts receivables that have been sold or factored
Rights and Obligations
Inquire whether any inventory is out on consignment at year-end
Rights and Obligations
Obtain and inspect the title documents to such fixed assets
Rights and Obligations
Which of the following is not an assertion embodied in management's discussion and analysis (MD&A)?
Rights and obligations
(Sample Size Tests of Controls) The audit team initially had anticipated an error rate of 3% for this particular procedure. However, upon further review, the team decided that the tolerable deviation rate should be only 2%.
Sample Size should be increased
(Sample Size Tests of Controls) Initially, the audit team felt that the allowable audit risk of relying on this particular control procedure would be relatively low. Later, after examination of other available controls, the team decided that the allowable risk for relying on this control could be a bit higher.
Sample size should be decreased
(Sample Size Tests of Controls) The audit team had anticipated initially that an upper deviation rate of 6% could be tolerated. Upon further review, it was decided that an upper deviation rate of 4% would be more appropriate.
Sample size should be increased
Audit procedures that must be performed when evaluating the operating effectiveness of internal control.
Tests of Control
Collect evidence that the balances, disclosures, and underlying transactions associated with a clients financial statements are correct.
Tests of Details.
An auditor's documentation should
Show that the accounting records agree or reconcile with the financial statements.
deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Significant Deficiencies
An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that
Substantially all disclosures required by GAAP are included in the financial statements
Dummy transactions developed by the auditor and processed by the client's computer programs, generally for a batch processing system.
Test Data
Using known errors in data to determine whether an entity's internal control will identify those errors.
Test Data
To test the effectiveness of a control used by a client entity to prevent or detect material misstatements
Test of controls
For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the "as of date" is ordinarily
The last day of the fiscal period
(True/False)Larry is a member of the local credit union, which he joined while still in college. His firm can audit the credit union without independence being impaired.
True
(True/False) If no misstatements are expected, PPS sampling will usually result in a smaller sample size than classical variables sampling methods
True
(True/False) Increasing the expected misstatement will increase the sample size
True
(True/False) Individually significant items are automatically identified
True
(True/False) PPS sampling results in a stratified sample
True
(True/False) Size of a PPS is not based on the estimated variation of audited amounts
True
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and subsidiaries as of December 31, 20X2 and 20X1, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Unmodified Audit Report with Reference to Component Auditor
Compare accounts receivable write-offs with doubtful accounts estimate
Valuation and Allocation
Inquire about possible obsolete inventory at year-end
Valuation and Allocation
Recalculate current year depreciation expense
Valuation and Allocation
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning relevant assertions abou
Valuation and allocation
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of
Valuation or allocation
The AICPA's assurance service that facilitates electronic commerce.
Webtrust
CPA Hildy is a covered person regarding client ACF Corporation. She bought ACF shares and placed them in a trust as an educational fund for her minor child. The trust securities are not material to Hildy's wealth but are material to her child's personal net worth. Hildy is a trustee of the trust. Would Hildy's actions impair her independence regarding ACF?
Yes, because the stock would be a direct financial interest of Hildy's.
What is a member in business
members who are "employed or engaged on a contractual or volunteer basis in an executive, staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector and regulatory or professional bodies" including staff accountants, internal auditors, and other accountants not engaged in public practice.
