Final

Under the SEC's rules regarding independence, which of the following must an entity disclose? -Only fees for internal and external audit services provided by the audit firm. -Only fees for the external audit. -Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm. -Only fees for systems implementation and design and nonaudit services performed by the audit firm.

-Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm.

Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the entity's internal control? Test of Controls, Assess Control Risk, Determine Extent of Substantive Tests, Reassess Control Risk. Assess Control Risk, Test of Controls, Determine Extent of Substantive Testing, Reassess Control Risk. Assess Control Risk, Determine Extent of Substantive Testing, Test of Controls, Reassess Control Risk. Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

The primary objective of final analytical procedures is to: Obtain evidence from details tested to corroborate particular assertions. Identify areas that represent specific risks relevant to the audit. Assist the auditor in assessing the validity of the conclusions reached on the audit. Satisfy doubts when questions arise about an entity's ability to continue in existence.

Assist the auditor in assessing the validity of the conclusions reached on the audit.

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?

Completeness

Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue? Existence and occurrence. Completeness. Rights and obligations. Accuracy, Valuation and Allocation.

Completeness.

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does exist, is known as:

Detection RIsk

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? -Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements. -Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. -A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor's work. -An entity may have a poorly designed internal control system.

Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

The likelihood of assessing control risk too high is the risk that the sample selected to test controls

Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment.

Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements? -Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP. -Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement. -Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP. -Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement.

-Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

Which of the following statements best describes the role of materiality in a financial statement audit? -The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. -Materiality refers to the "material" from which audit evidence is developed. -The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. -The level of materiality has no bearing on the amount of evidence the auditor must gather.

-The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

An independent audit adds value to the communication of financial information because the audit: -confirms the exact accuracy of management's financial representations. -assures the readers of financial statements that any fraudulent activity has been corrected. -guarantees that financial data are fairly presented. -lends credibility to the financial statements.

-lends credibility to the financial statements.

An auditor desired to test credit approval on 10,000 invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing CR too low for the assertion that not more than 7& of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of invoices lacked approval. A sample of 200 invoices was examined, and 7 of lacked approval. The auditor then determined the computed upper deviation rate to be 8%. Based on the information above, the planned allowance for sampling risk was:

4.5%

For which of the following services is an auditor not required to be independent? Financial statement audits. Financial statement reviews. Any attest service. A compilation of financial statements.

A compilation of financial statements.

The examination of all of an entity's transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample? A decrease in the materiality level. A decrease in the desired level of assurance. An assessment that the account being audited is high risk. An increase in the desired level of assurance.

A decrease in the desired level of assurance.

AnnaLisa, an auditor, is prevented by the management of client from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no MWs in any other area of the entity'sICFR. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? An unqualified report. A disclaimer of opinion. An exculpatory opinion. An adverse report.

A disclaimer of opinion.

Which of the following is not part of the AICPA's auditor objectivity and independence principle? A member in public practice should be independent in appearance when providing auditing and other attestation services. A member should not enter into contingent fee arrangements. A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact when providing auditing and other attestation services.

A member should not enter into contingent fee arrangements.

Which of the following internal controls would be most likely to deter the lapping of collections from customers?

Segregation of duties between receiving cash and posting the accounts receivable ledger.

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the Senior management. External auditors. Internal audit department. Shareholders.

Senior management.

Which of the following statements is false concerning PCAOB and AICPA inspections of public accounting firms? The AICPA peer review program is mandatory for participating firms. The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines. These inspections focus on the system of quality controls put in place by the CPA firms. The "Big 4" CPA firms are a good example of a "registered" firm with the PCAOB.

The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines.

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because the auditor: believes the internal controls are unlikely to be effective. determines that the pertinent internal control components are not well documented. identifies internal controls that are likely to prevent material misstatements. performs tests of controls to restrict detection risk to an acceptable level.

believes the internal controls are unlikely to be effective.

When planning an audit, an auditor should: determine overall materiality for audit purposes. evaluate detected misstatements. consider whether the extent of substantive procedures may be reduced based on the results of tests of controls. conclude whether changes in compliance with prescribed internal controls justify reliance on them.

determine overall materiality for audit purposes.

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:

develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were:

fictitious sales in the current year.

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to:

find smaller errors

Regardless of the assessed level of control risk, an auditor would perform some: analytical procedures to verify the design of internal controls. dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk. substantive procedures to restrict detection risk for significant transaction classes. tests of controls to determine the effectiveness of internal controls.

substantive procedures to restrict detection risk for significant transaction classes.

Which of the following statements concerning monetary-unit sampling is correct? The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan. Overstated units have a lower probability of sample selection than units that are understated. The sampling distribution should approximate the normal distribution. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

the auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve:

write-offs of customer accounts.

Planned audit outcomes vs. Actual/achieved audit outcomes FIX, see ch 4 chart

***

Risk of material misstatement refers to a combination of which two components of the audit risk model?

IR & CR

In order to be able to set control risk at a lower level, the auditor must do all of the following except: Identify all general IT controls. Identify specific controls that will be relied upon. Perform tests of controls. Conclude on the achieved level of control risk.

Identify all general IT controls.

The concept of materiality as it applies to a financial statement audit Relates primarily to the audit fees involved. Generally involves less professional judgment for public companies. Is determined, in part, based on how financial statement users may be influenced in making decisions. Relates primarily to the quantity of audit procedures performed.

Is determined, in part, based on how financial statement users may be influenced in making decisions.

Which of the following types of statistical testing is likely to be used for a test of controls?

attribute sampling

Assessing control risk below high involves all of the following except: analyzing the achieved level of control risk after performing tests of controls. identifying specific controls to rely on. performing tests of controls. concluding that controls are ineffective.

concluding that controls are ineffective.

Which of the following types of evidence is most likely to utilize sampling?

confirmation

risk of incorrect acceptance relates to the:

effectiveness of the audit.

Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory?

existence

Tolerable misstatement is: materiality for the balance sheet as a whole. materiality used to establish a scope for the audit procedures for the individual account balance or disclosures. materiality for the income statement as a whole. the amount of misstatement that management is willing to tolerate in the financial statements.

materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

no reply to a positive confirmation request is received.

An auditor would be least likely to use confirmations in connection with the examination of: refundable income taxes. long-term debt. inventory held in a third-party warehouse. stockholders' equity.

refundable income taxes.

The assurance bucket is filled with all of the following types of evidence except: test of controls. tests of details. substantive analytical procedures. the audit report.

the audit report.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:

the auditor cannot infer that all nonrespondents have verified their account information.

An auditor desired to test credit approval on 10,000 invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing CR too low for the assertion that not more than 7& of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of invoices lacked approval. A sample of 200 invoices was examined, and 7 of lacked approval. The auditor then determined the computed upper deviation rate to be 8%. In evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of CR because the:

tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent).

Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States? 1. ASB 2. PCAOB Public company audits Nonpublic company audits Public company audits Public company audits Nonpublic company audits Nonpublic company audits Nonpublic company audits Public company audits

Nonpublic company audits Public company audits

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is: Reperformance. Inspection. Observation. Analytical procedures.

Observation

According to the text, the first step in applying materiality to an audit is To determine tolerable misstatement for each account balance. To determine a materiality level for the overall financial statements. To aggregate the misstatements found in each account and determine their overall affect on the financial statements. To ask management what constitutes a material amount in their business.

To determine a materiality level for the overall financial statements.

Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards? -Standards issued by the PCAOB are called "Auditing Standards" and standards issued by the AICPA Auditing Standards Board are called "Statements on Auditing Standards". -The AICPA sets auditing standards for use in audits of nonpublic entities. -The PCAOB sets auditing standards for use in audits of publicly held companies. -All of the above.

-All of the above.

Audit risk -Can be completely eliminated through appropriate sampling of transactions. -Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated. -Is what creates the demand for an audit. -Is the risk that a company may hire an incompetent auditor.

-Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated.

The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except -The auditor should maintain professional skepticism and exercise professional judgment throughout the planning and performance of the audit. -The auditor should obtain sufficient appropriate audit evidence about whether material misstatements exist in the financial statements. -The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement. -The auditor should have appropriate competence and capability to perform the audit.

-The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.

Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that -The buyer [or user] pays directly for this assurance in both situations. -There are often information asymmetry and conflicts of interest. -The cost of obtaining information is not relevant. -Independence is not relevant in either situation.

-There are often information asymmetry and conflicts of interest.

The Public Company Accounting Oversight Board: -is a quasi-governmental organization that has legal authority to set accounting standards for public companies. -is a quasi-governmental organization that is independent of the SEC in setting auditing standards. -is a quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards. -is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

-is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.

2 & 3

An auditor plans to use a monetary-unit sampling plan with a systematic sample selection on an account balance of $1,000,000. There are over 50 items that make up the account balance, ten of which are individually over $50,000. To ensure that all accounts with balances of at least $50,000 are selected, the minimum sample size should be

20

Which of the following best illustrates the concept of sampling risk?

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

In auditing a public company, Natalie, an auditor, identifies four deficiencies in client's ICFR. Three of the deficiencies are unlikely to result in financial MSs that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? An exculpatory opinion. A disclaimer of opinion. An unqualified report. An adverse report.

An unqualified report.

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? Desired Confidence -- Tolerable Deviation Rate -- Expected Population Deviation Rate Decrease Decrease Increase Decrease Increase Decrease Increase Increase Decrease Decrease Increase Increase

Decrease Increase Decrease

For which of the following audit tests would an auditor most likely use attribute sampling?

Examining supporting documentation for purchases for evidence of proper authorization.

Memo 1 - Demand for auditing

Audits are beneficial to both internal and external parties of an entity, as they convey transparency, assurance, and reliability. Beagle's claim that audits would not be sought if they were not required by law overlooks notable advantages that a company gains from having an audit. Evidence proves that, not only would audits still be sought, but that undergoing an audit bestows greater assurance of a company's merit when they are elected, rather than required. The main rationale for mandatory audits is to provide assurance for stakeholders. However, these authors claim that audits would be more informative to external users if they were not required by law. In this study, evidence shows that when mandatory, audits were performed with more lenient monitoring, and that companies were merely complying with law passively. When optional, the decision for or against an audit gives off a signal, which serves as indicative of a company's true character, according to this source. Companies that chose to be audited emitted a positive signal, by which they were deemed to be low-risk. Conversely, deciding against an audit was a negative signal, and indicated companies as high-risk. Ultimately, the audited, low-risk companies received higher credit ratings and less expensive debt financing than those companies that chose to remain unaudited. A 2nd source further disproves the Beagles' assertion. Audits existed centuries before they even became required by law, and have since gradually evolved into what now. Audits aim to minimize and prevent costs that may arise from unethical, opportunistic behavior within a firm. Auditors monitor employees and report contract breaches in order to reduce that behavior and ultimately preserve a firm's value. As corroborated by both works, optional audits are still appealing to companies for the sake of order & honesty within a firm, and for financial benefits from external parties.

Factors that may lead to a conclusion that a quantitatively immaterial misstatement is material from a qualitative perspective*

FIX****

Memo 3 - Ethical Decision making

In "Ethics as an Imperative," James Copeland claims that in order for the audit and accounting profession to reclaim its esteemed reputation, it must restore the foundation of integrity and ethics. Copeland suggests that loss of integrity, competence, and ethics would be devastating to firms and the entire profession. With the frameworks proposed by Bonde and Firenze, the motive behind Copeland's call-to-action can be further examined. According to Bonde and Firenze, ethical decision-making can be separated into three broad frameworks. A "consequentialist" mind chooses the course of action that will yield the best consequences for everyone. A "duty" framework makes decisions in alignment with one's obligations and responsibilities. Lastly, the "virtue" framework selects an outcome as a result of one's character. Notably, the authors state that the reasoning with each framework is not mutually exclusive, and that it is important to know where they relate and overlap. Copeland's work blends aspects of each framework proposed by Bonde and Firenze. He proposes that a loss of ethics could be consequential: that ethical decisions come at a price, but that the alternative is more costly. Additionally, the conclusion includes rhetorical questions, in which the author reflects on the virtues of the profession and the examples of ethical behavior that start at the top (2005). However, this work largely emphasizes the duty framework. Copeland gives prominence to the responsibilities of different roles in the accounting and audit community. He says that it is the duty of the profession and those within it to do their part in restoring the reputation of ethics and integrity. He even uses obligatory phrases, such as "do not have any choice" and "like it or not." While we may not want to do, it is a responsibility that we take on when we assume roles as accounting professionals (2005). Accordingly, ethical decision-making not only means doing what is correct, but also following our duties.

Which of the following would NOT be a typical supervisory activity for an audit? Perform detailed testing of the accounts payable account. Inform engagement team of the nature, timing, and extent of audit procedures. Review the work of other engagement team members. Evaluate the results of the work and whether it supports the conclusions reached.

Perform detailed testing of the accounts payable account.

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the least reliable type of evidence? Vendor confirmations of accounts payable balances. Copies of bank statements obtained from the entity under audit. Pre-numbered sales invoices. The opinion of an outside specialist regarding inventory valuation.

Pre-numbered sales invoices

Which of the following types of audit evidence is the least reliable? Correspondence from the entity's attorney about litigation. Prenumbered purchase order forms prepared by the entity. Test counts of inventory performed by the auditor. Bank statements obtained from the entity.

Prenumbered purchase order forms prepared by the entity. most reliable would be developed by the auditor

Which of the following agencies/organizations govern the independence rules for audits of public companies? AICPA. Public Company Accounting Oversight Board. FASB. Auditing Standards Board [ASB].

Public Company Accounting Oversight Board.

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor's opinion. Which kind of audit report would an auditor most likely issue under these circumstances? Standard unqualified opinion. Qualified opinion due to departure from GAAP. Adverse opinion. No opinion at all.

Qualified opinion due to departure from GAAP.

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is: Scanning. Recalculation. Observation. Confirmation.

Recalculation

What is the essential meaning of the auditor being independent in fact? The auditor must be objective. The auditor must adopt a critical attitude during the audit. The auditor's sole obligation is to third parties. The auditor may have a direct ownership interest in his auditee's business if it is not material.

The auditor must be objective.

Monetary-unit-sampling [MUS] is less efficient and generally not used if

The auditor's objective is oriented towards understatements.

All of the following factors should be considered by the auditor when deciding on the extent of controls testing except: The nature of the control to be tested. The time the auditor has to test controls before a report must be issued. The frequency with which the control is applied. The importance of the control.

The time the auditor has to test controls before a report must be issued

Sample size in statistical sampling in tests of controls?

There is an inverse relationship between the sample size and the tolerable deviation rate.

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff?

Unrecorded sales for the year.

One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify: Transactions that have not been properly authorized. Illegal acts undetected as a result of poor internal controls. Inefficient operations. Unusual changes that may signal possible account misstatements.

Unusual changes that may signal possible account misstatements.

NFMs in audits - Memo 5

While fraud is typically concealed in financial data, nonfinancial measures (NFMs) are difficult to manipulate. The PCAOB concluded that APs, when applied with NFMs, are more effective in detecting fraud. When compared with financial measures, NFMs may reflect patterns of normality, which can help an auditor assess the risk of revenue fraud. From examinations of financial data alone, revenue growth may appear to be reasonable. However, disproportional growth between financial data and NFMs can indicate irregularities. When revenue growth is significantly greater than other NFMs, the risk of revenue fraud is very high. For example, Anicom Inc., a fraudulent company, reported revenue growth of 93 percent, while the number of employees and square footage increased by only 46 & 29 percent, respectively. NFMs can improve the effectiveness of analytical procedures during audit planning & substantive testing, which can ultimately improve an auditor's assessment of revenue fraud risk. Suitable NFMs may vary based on an entity's industry or operations. For Brewing Company (M5BC), appropriate NFMs may be the number of customer accounts, or square footage of beer inventory. Other key performance indicators in the brewing industry, such as the average value of a purchase order, would also be acceptable. As long as they are relevant, countless NFMs could be used to improve the assessment of fraud risk.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

accuracy, valuation, and allocation.

Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following? Goodwill. Deferred Taxes. Machinery and Equipment. Accounts Receivable.

Accounts Receivable.

Which of the following legal situations would be considered to impair the auditor's independence? Actual litigation by the auditor against the present management, alleging management fraud or deceit. An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services.

Actual litigation by the auditor against the present management, alleging management fraud or deceit.

If the auditor determines that a material misstatement may be due to fraud, the auditor should do all of the following except: Attempt to obtain evidence to determine whether the misstatement was, in fact, due to fraud. Discuss the findings with an appropriate level of management. Alert the authorities. Suggest that management consult with legal counsel.

Alert the authorities.

Which of the following organizations affect the environment that CPAs work in? The American Institute of Certified Public Accountants [AICPA]. The Securities and Exchange Commission [SEC]. The Public Company Accounting Oversight Board [PCAOB]. All of the above.

All of the above.

The engagement partner and manager review the work of engagement team members to evaluate which of the following? The work was performed and documented. The objectives of the procedures were achieved. The results of the work support the conclusions reached. All of these are correct.

All of these are correct.

MW in ICFR - Memo 6

Audits of ICFR provide reasonable assurance that such controls are effective. This assurance, in turn, provides reasonable assurance about the reliability of financial reporting. When a MW is present in ICFR, it's reasonably possible to result in a MMS of the FSs. For financial statement users, the presence of a MW in ICFR may suggest an increased RMM in the respective financial statements. After identifying a MW in ICFR, auditors should increase their risk assessment and planned testing to minimize the RMM corrected the FSs, but, prior research shows that while audit fees are higher in the presence of a MW, the quality of the FR is actually lower. They argue that the increased aggression in reporting with a MW may be attributed to psychological factors of the auditors. In accordance w/ the psychological licensing theory, Bauersuggest that after an auditor detects a MMS, they may feel they've fulfilled their initial duty. Following this initial dutiful action, people may subconsciously grant themselves a mental release, or a license to be less dutiful- explanation for why auditors may detect a material weakness, without having them successfully corrected. One experiment by Bauer et al. served as support for their predictions. In the 1st experiment, auditors that had clients w/ MWs in ICFR were willing to accept a higher inventory value, and thus, more aggressive reporting, than they were when no MW was reported. These results were consistent with the claim that auditors accept more aggressive reporting when MW in ICFR are present.

To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the

Bill of lading (shipping report) file.

A reliance strategy is chosen when the auditor: Plans on conducting tests of controls. Has set the control risk at a high level. Has set the control risk at a lower level. Both a and c.

Both a and c.

When likely misstatements are greater than overall materiality, the auditor should Request that the auditee adjust the financial statements. Issue an unqualified opinion. Modify the opinion if the auditee will not adjust the financial statements. Both a and c.

Both a and c.

Suppose as a result of sample testing of controls, an auditor assesses control risk higher than necessary given the actual (but unknown) population deviation rate and thereby increases substantive testing. This is illustrated by what?

CUDR is less than Tolerable DR Actual Population DR is less than Tolerable DR

Memo 4 - Materiality for normalized earnings

Due to a large nonrecurring charge, Ken-Ron's 2018 income before taxes is inconsistent with its historical trends. This benchmark would yield a significantly low overall materiality, and require a much more extensive audit. Thus, the CY's IBT would not be an appropriate benchmark. In establishing overall materiality, audit standards allow the use of prior period amounts and adjustments for significant changes in an entity's circumstances. Accordingly, many firms use "normalized" earnings to provide a more accurate calculation of materiality. Normalized earnings can be determined by adjusting income for significant nonrecurring items, or by using an average of historical income trends. Ken-Ron's normalized income before taxes for 2018 is the average of income before taxes in the 3 prior years, which is a more appropriate benchmark. Assuming 5%, which is typical, of the normalized income before taxes, Ken-Ron's overall materiality is calculated as follows: Normalized IBT (2015-2017avg) = (584+520+452)/3yrs = $519m Overall Materiality = 519 x 5% = $25.95m To be conservative, the amount of TM should be 50% of its overall materiality. Therefore, Ken-Ron's tolerable misstatement is be calculated as follows:

Which of the following steps or procedures is least likely to be performed as part of management's assessment of the effectiveness of internal controls? Engaging the external auditors to conduct cutoff tests. Determining the locations or business units to be evaluated. Evaluating the design effectiveness and operating effectiveness of selected controls. Communication of its findings to the external auditors.

Engaging the external auditors to conduct cutoff tests.

In order to maintain independence from a public company audit client, the partner on the engagement must rotate off from the client Every year. Every 5 years. Every 7 years. There is no requirement for the partner to be reassigned from any public company audit client after any specified period of time.

Every 5 years.

Which of the following is not a requirement for management under Section 404 of the Sarbanes-Oxley Act of 2002? Guarantee effectiveness of the entity's ICFR. Accept responsibility for the effectiveness of the entity's ICFR. Support the evaluation of the entity's ICFR with sufficient evidence, including documentation. Present a written assessment regarding the effectiveness of the entity's ICFR as of the end of the most recent fiscal year.

Guarantee effectiveness of the entity's ICFR.

One of your clients recently upgraded its accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system. This installation took place over the last nine months of the entity's fiscal year and is nearly 100% complete by the balance sheet date. Which of the following best describes the main affect of this event on the audit risk model for the current year? It will likely increase the risk of material misstatement. It will likely decrease the risk of material misstatement. It will likely decrease the audit risk. It will likely increase the detection risk.

It will likely increase the risk of material misstatement.

If acceptable audit risk is set at low and the assessed risk of material misstatement is high, then detection risk must be:

Low

The negative request form of accounts receivable confirmation is useful particularly when: 1) The Assessed Level of Control Risk Relating to Receivables Is __ 2) The Number of Small Balances Is ___ 3) Consideration by the Recipient Is ___

Low, High, Likely

A CPA, while performing an audit, strives to achieve independence in appearance in order to Reduce risk and liability. Comply with the generally accepted standards of fieldwork. Become independent in fact. Maintain public confidence in the profession.

Maintain public confidence in the profession.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? Management places substantial emphasis on meeting earnings projections. The rate of change in the entity's industry is slow. Turnover of senior accounting personnel is low. Insiders recently purchased additional shares of the entity's stock.

Management places substantial emphasis on meeting earnings projections.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Which of the following would an auditor most likely use in determining overall materiality when planning the audit? The anticipated sample size of the planned substantive tests. The entity's income before taxes for the period-to-date (e.g., 6 months). The results of tests of controls. The contents of the engagement letter.

The entity's income before taxes for the period-to-date (e.g., 6 months)

When determining the sample size for MUS application, the auditor must determine all of the following except: The desired confidence level. The tolerable misstatement. The expected population misstatement. The estimated standard deviation.

The estimated standard deviation.

Memo 2 - NAS & auditor independence - both sides of argument

The relationship b/w NAS fees & audit independence has been in question ever since the early 2000s' accounting scandals. The profession faced public skepticism about ethics, especially audit independence. After recognizing similar trends in financial restatements and NAS fees over 1990 to 2005, the SEC speculated that NAS fees may impair audit independence. Additionally, legislators and regulators suspected that this relationship correlated with lower quality audits and reviews, and increased misstatements. In response to SEC concerns, new guidance on audit independence banned firms from providing certain NASs to audit clients, & it now required SEC registrants to publicly disclose their service fees. Though these mandates made data publicly available for examination, few studies have been able to obtained empirical evidence to either confirm or deny the theory that NAS fees impair audit independence. According to study evidence, there's a significant positive association b/w restatements & audit fees, audit-related fees, and unspecified NAS. In an extension of that study, examined the relationship b/w restatements & auditor-provided nonrecurring tax services. The conclusions of this study are consistent with speculations, as they concluded that a positive correlation exists. While not all NAS fees necessarily impair audit independence, the examinations are support that certain non-audit service fees do result in more financial restatements. Specifically, it is likely that increasing fees for nonrecurring tax services and other unspecified NAS s puts an entity at a higher risk for financial restatement when they are performed by an auditor.

According to the text, each of the following is a main purpose for performing audit procedures except: To obtain an understanding of the entity and its environment. To test the operating effectiveness of controls. To develop recommendations for the control system. To detect material misstatements in the financial statements.

To develop recommendations for the control system.

Voluntary VS mandatory audits

mandatory audit to voluntary = higher credit ratings - sends positive signal (low risk type of borrower) Mandatory to no audit = decreased credit ratings - sends negative signal (high risk type of borrower) and removes audit's assurance value