Final Exam Review Updated Version
True
If financial statements contain a pervasively material departure from generally accepted accounting principles, the auditors usually should issue an adverse opinion True False
True
If management's report on internal control discloses a material weakness, the auditors (who agree that it is a material weakness) will issue a report that includes a qualified opinion. True False
True
If oversight of financial reporting and internal control is ineffective
Sales and Bad Debt Expense
In auditing the balance sheet. most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing account receivable? a. Sales and Cost of Goods Sold. b. Interest and Bad Debt Expense. c. Sales and Bad Debt Expense. d. Interest and Cost of Goods Sold.
projection of sampling results to the entire population
Projected misstatements
Obtaining a management representation letter
Which of the following auditing procedures is ordinarily performed last? a. Reading of the minutes of the directors' meetings. b. Confirming accounts payable. c. Obtaining a management representation letter. d. Testing of the purchasing function.
True
The Sarbanes Oxley Act shifted a majority of the responsibility for maintaining internal control from management to the auditors True False
Obtain a lawyer's letter
Which of the following is a procedure normally performed awhile completing the audit of a public company? a. Obtain a lawyer's letter. b. Send out accounts receivable confirmations. c. Observe the count of year-end inventory. d. Fill out the internal control questionnaire.
Obtain a management representation letter Yes Yes No No Apply analytical procedures Yes No Yes No The answer is No, No
Which of the following is a required compilation procedures?
No accountant's report ordinarily accompanies the financial statements
Which of the following is correct concerning a CPA firm's engagement to prepare financial statements? a. The statements must only be used by management and not third parties. b. A written engagement letter or oral agreement is required. c. No accountant's report ordinarily accompanies the financial statements. d. At a minimum, the accountant preparing the financial statements must comply with the compilation standards.
It follows the Opinion on the Financial Statement Section
Which of the following is correct regarding a Basis for Opinion section in a standard unqualified public company audit report? a. It is omitted. b. It precedes the opinion section. c. It is included within the Opinion on the Financial Statements section. d. It follows the Opinion on the Financial Statements section.
A statement that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error
Which of the following is not explicitly included in an audit report for a nonpublic company? a. A statement that the auditor believes that all key audit matters have been properly disclosed in the audit report. b. A statement that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error. c. A statement that the auditors maintained professional skepticism. d. A title with the word "independent."
Compere the latest available interim financial statements with the statements being audited
Which of the following procedures would an auditor generally perform regarding subsequent events? a. Inspect inventory items that were ordered before the year end but arrived after the year end. b. Test internal control activities that were previously reported to management as inadequate. c. Review the client's cutoff bank statements for several months after the year end. d. Compare the latest available interim financial statements with the statements being audited.
Compere the latest available interim financial statements with the statements being audited
Which of the following procedures would an auditor generally perform regarding subsequent events? a. Inspect inventory items that were ordered before the year end but arrived after the year end. b. Test internal control activities that were previously reported to management as inadequate. c. Review the client's cutoff bank statements for several months after the year end. d. Compare the latest available interim financial statements with the statements being audited.
Inquiries of significant subsequent events
Which of the following procedures would be most likely to be used on a review engagement? a. Examination of board minutes. b. Confirmation of cash and accounts receivable. c. Inquiries about significant subsequent events. d. Recalculation of depreciation expense.
An unqualified financial statement audit report and an adverse internal control audit report
Which of the following would most likely be included in a SEC 10K filing in which a material weakness in internal control exists? a. An unqualified financial statement audit report and an adverse internal control audit report. b. An unqualified financial statement audit report and a qualified internal control audit report. c. A qualified financial statement audit report and a qualified internal control audit report. d. An adverse financial statement audit report and an unqualified internal control audit report.
a report issued when the auditor believes that the overall financial statements are fairly stated but that either the scope of the audit was limited or the financial data indicated a failure to follow GAAP
What is a qualified opinion?
limited in scope, provides a moderate level of assurance and is generally limited to inquiry and analytical procedures
What is a review?
start at the top with entity-level controls which are those in the control environment of monitoring components of internal control, and then ends with walkthroughs?
What is a top down approach?
An event that provides additional evidence as to conditions that existed at the date of the financial statements
What is a type 1 subsequent event?
An event that has conditions that arose after the date of the financial statements
What is a type 2 subsequent event?
a report issued when the auditor believes the financial statements are so materially misstated or misleading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP
What is an adverse opinion?
An audit of both financial statements and internal control over financial reporting
What is an integrated audit?
report depends on where the financial statements will be used
What is another country's framwework?
Material weaknesses, significant deficiencies and that all other deficiencies that have been communicated to management
What is the audit committee required to report?
If oversight of financial reporting and internal control is ineffective
What is the board of directors required to report?
Tracing a transaction from its origination through the company's information system until it is reflected in the company's financial reports
What is the definition provided for a walk-through?
The format is Opinion Basis for opinion KAMS Management responsibilities Auditor responsibilities
What is the format of the nonpublic company audit report?
The iron curtain approach considers the balance sheet effect of correcting the total misstatement
What is the iron curtain approach?
Requires to audit the internal controls of companies with either a market cap of 75 million or revenues of 100 million or more
What is the management's responsibility?
accept responsibility for effectiveness evaluate the effectiveness using suitable criteria support the evaluation with sufficient evidence Provide a report on internal control over financial reporting
What is the management's responsibility?
Audit is the most frequent attest service
What is the most frequent attest service?
Choose the higher amount for liabilities and choose the lower amount for assets
What is the philosophy of conservatism?
The purpose of them are to communicate to those charged with governance
What is the purpose of KAMs or CAMs
The purpose to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements
What is the purpose of obtaining a representation letter?
The measurement of income
What is the single most important function of accounting?
The group auditor must obtain an understanding of ethics, involvement in the overall audit, and the regulatory environment
What must group auditors obtain an understanding of?
The loss contingencies that are at least reasonably possible should be disclosed to the notes in the financial statements
What should we do for loss contingencies that are at least reasonably possible?
We don't have to disclose those
What should we do for loss contingencies that are remote?
We should assess the importance of omitted procedures to the opinion that was issued If the omission impairs the ability to support the issued opinion , then we must perform the omitted procedure or perform an alternative procedure that is appropriate
What should we do in relation to subsequent discovery of omitted audit procedures?
We should reflect the amount in the financial statements
What should we do when a loss is probable and has been sustained before the balance sheet date and the amount of loss can be reasonably estimated?
We should advise the client to make appropriate disclosure of the facts to anyone relying upon the audit report and the financial statements
What should we do when we figure out events that were Type 1 events or that existed at the date of the report?
Dependent upon the nature of the service provided Review - limited assurance Financial statement preparation and compilation - no assurance Agreed upon procedures - just provides a summary of findings
What type of assurance is provided on financial statement prepared following a special purpose basis of accounting other than GAAP?
False
When evaluating the results of audit tests, materiality depends solely upon the dollar amount of the item True False
All control deficiencies regardless of severity
When is management required to report?
On the date that they have obtained sufficient, appropriate evidence, often the last day
When is the audit report dated?
The letter is dated as of the date of the audit report
When is the representation letter dated?
We should communicate misstatements to those in charge of governance
Where should we communicate misstatements to?
A change from LIFO to FIFO for inventory valuation purposes
Which of the following accounting changes requires an Emphasis of Matter section regarding consistency in a nonpublic company auditor's report? a. A change in the estimated salvage values of a class of fixed assets. b. A write-off of a piece of equipment because future benefits do not appear to exist. c. A change from LIFO to FIFO for inventory valuation purposes. d. A change in calculating bad debt expense from one percent of total sales to two percent of credit sales.
False, a compilation provides no assurance
A compilation of financial statements provides limited assurance
Critical audit matters
A nonpublic company audit report is least likely to include a section on a. Critical audit matters. b. Key audit matters. c. Auditor responsibilities. d. Basis for opinion.
a compilation provides no form of assurance on the financial statements
An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that a. The accountant is not aware of any material modifications that should be made to the accompanying financial statements. b. A compilation consists principally of inquiries of company personnel and analytical procedures. c. A compilation provides no form of assurance on the financial statements. d. A compilation is greater in scope than a financial statement preparation form of association, but lesser than an audit.
has not audited or reviewed the financial statements
An accountant's standard report on a compilation should state that the accountant a. Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP. b. Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP and has obtained an understanding of the accounting practices in the client's industry. c. Has obtained an understanding of the accounting practices in the client's industry. d. Has not audited or reviewed the accompanying financial statements.
Disclaimer of opinion
An audit client has refused to allow the auditors to perform a presumptively mandatory auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: A. A disclaimer of opinion. B. An adverse opinion. C. A standard unmodified opinion with a qualified scope paragraph. D. An unmodified report with an emphasis-of-matter paragraph.
True
An audit opinion on tax basis financial statement is an example of an opinion on financial statements that follow a special purpose financial reporting framework
Reduce expenditures
An auditor has concluded that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the client's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the client's plans to: a. Repurchase the entity's stock at a price well above its book value. b. Issue loans to key executives. c. Reduce expenditures. d. Accelerate the due date of an existing mortgage.
Adverse
An auditor identified a material weakness in internal control in December. The client was informed and the client corrected the material weakness shortly after year-end (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: A. Adverse. B. Unqualified. C. Unqualified with explanatory language relating to the material weakness. D. Qualified.
Read latest financial statements Inquire of management Review lawyer's letter Review representation letter Review meeting minutes
How do we search for subsequent events?
Other, non-litigation loss contingencies include taxes. guarantees, environmental
Assess if the contingency is reasonably possible or remote Letters to legal counsel
True
Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected. True False
Through the date of the audit report
Auditors should perform audit procedures relating to subsequent events a. Through year-end. b. Through issuance of the audit report. c. Through the date of the audit report. d. For a reasonable period after year-end.
Look at the NET Nature - how you'll test it Extent - how much you'll test it Timing - when you'll test it
How do we test the operating effectiveness of controls?
Assess inherent and control risk Assess risk of material misstatement Plan substantive testing
Choose the higher amount for liabilities and choose the lower amount for assets
Environment Risk assessment Control activities Information system Monitoring
Components of ICFR
We look at the design effectiveness of controls and the operating effectiveness of controls
How to provide a reasonable basis for the annual assessment?
Differences arising from judgments of management that the auditor consider incorrect
Define Judgmental misstatements
specific misstatements identified during the audit for which there is no doubt
Define a Factual misstatement
an event that occurs after the balance sheet date but prior to the date of the auditor's report
Define subsequent event
No
Do less than significant deficiencies require disclosure?
Yes
Do material weaknesses require disclosure?
No, but they provide moderate assurance
Do reviews provide reasonable assurance?
Yep
Does management uses management review controls to help detect and correct misstatements that are not prevented or detected by controls?
Less in scope than a review Compiling financial statements Independence not required Report provided to the client
Give me the key factors of what compilation entails
Similar to compilation, but no report issues Each page of statement, but "no assurance provided" Independence not required
Give me the traits of preparation
Our financial statement assertions
In the testing process what should we relate our ROMMs to?
Preparation and issuance of a comfort letter
In which of the following engagements is independence required? a. Financial statement preparation. b. Preparation and issuance of a comfort letter. c. Financial statement compilation. d. Consulting relating to executive compensation.
Of course not
Is the representation letter a substitute for necessary audit procedures?
Unmodified Opinion Qualified Opinion Yes Yes Yes No No Yes No No No, No is the right answer
Key audit matters are required in all nonpublic company audit reports with
Complementary Control - a control that functions with another to achieve the same objective Control deficiency - a weakness in the design or operation of a control Detective control - a control that is designed to identify errors or fraud after they have occurred Material Weakness - a control deficiency that allows more than a reasonable possibility for misstatement Preventive control - designed to stop a misstatement from occurring Section 404 of the Sarbanes Oxley Act - Section of the Sarbanes Oxley Act that requires the audit of internal control over financial reporting Significant deficiency - a weakness important enough to merit attention, but less severe than a material misstatement
Match the terms as they relate to internal control and/or auditor reporting on internal control with the best description Complementary Control Control deficiency Detective control Material weakness Preventive control Section 404 of the Sarbanes Oxley Act Significant Deficiency
Assess the importance of the omitted procedures to Brown's present ability to support the opinion
On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Company. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first: a. Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion. b. Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements. c. Take no additional action because subsequent events have no effect on the financial statements that were reported on. d. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.
Examinations - reasonable assurance Audits - reasonable assurance Review - limited assurance Agreed-upon procedures - summary of findings Compilations - No assurance Financial statement preparation - No assurance
One may envision a continuum of assurance ranging from absolute assurance to no assurance. In between may be reasonable assurance, limited assurance, and a summary of findings with no other assurance. a. What level of assurance is provided in the CPA's report by each of the following types of engagements? Examinations Audits Review Agreed-upon procedures Compilations and financial statement preparation
Assess if the contingency is reasonably possible or remote Letters to legal counsel
Our financial statement assertions
Projected Misstatement
The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a: Factual misstatement. Judgmental misstatement. Relevance misstatement. Projected misstatement.
The notes
The company itself
True
The income statement for an individual may be titles a Statement of Changes in Net Worth
Assist the auditor when forming overall conclusions about the financial statements
The primary objective of analytical procedures used near the end of an audit is to a. Obtain evidence from details tested to corroborate particular assertions. b. Identify areas that represent specific risks relevant to the audit. c. Assist the auditor when forming overall conclusions about the financial statements. d. Satisfy doubts when questions arise about a client's ability to continue in existence.
Near the completion of the audit
The review of audit working papery by the audit partner is normally completed a. Prior to year-end. b. Immediately as each working paper is completed. c. Near the completion of the audit. d. After issuance of the audit report, but prior to required subsequent event review procedures.
Confirm their understanding of effectiveness of controls only
Walk-throughs provide the auditors with evidence to: a. Confirm their understanding of effectiveness of controls and substantiate account balances. b. Confirm their understanding of effectiveness of controls only. c. Substantiate account balances only. d. Neither confirm their understanding of effectiveness of controls nor substantiate account balances.
Assurance on additional information; typically completed by auditors who also completed the financial statement audit
What are audit-based services?
investment bankers are the underwriters
What are letters for underwriters?
Audits of politicians or large loan application and it has to be related to government entities or personnel
What are personal GAAS audits?
Inquiry and analytical procedures
What are reviews limited to?
Single financial statements and specified elements use lower materiality in which they report on revenue and balance sheet only
What are single financial statement GAAS audits?
condensed, less than complete statements
What are summary financial statements?
Plan and perform audit to obtain reasonable assurance over ICFR Coordinate ICFR testing with the financial statement audit Consider client industry, regulatory matters, business, etc Express an opinion on company's ICFR
What are the CPA requirements?
The readers should be informed about material departures from GAAP, and they should be informed about if the auditor is unable to obtain sufficient appropriate audit evidence, and scope limitations
What are the conditions that arise that readers of the financial statements should be informed about?
Involves a consideration of account size, composition, susceptibility of loss and volume of activity Nature of account also, like, non-routine, routine, and estimation transactions
What are the factors of a significant account?
Review
What are the other types of financial statement services?
Search for unrecorded liabilities Review meeting minutes Perform final analytics Identify any loss contingencies, surtout litigation
What are the procedures done at the end of fieldwork?
Single and personal
What are the two types of GAAS audits?
Less than significant Significant Material Weakness
What are the types of control deficiencies?
Cash basis Tax basis Regulatory basis Contractual basis
What auditing financial statements use a framework other than GAAP?
report provides negative assurance on compliance
What does reporting on compliance do?
It mentions the PCAOB standards, CAMS, discloses the auditor's office location, length of time, dated when sufficient, appropriate audit evidence was obtained
What does the public company audit report mention?
It references the registered and independent accounting firm
What does the title of the public company audit report reference?
May result in unqualified ICFR opinion
What happens if remediation of controls is created too early in the year?
Requires annual report filed with SEC to include an internal control report by management
What is Sarbanes Oxley 404a?
Requires to audit the internal controls of companies with either a market cap of 75 million or revenues of 100 million or more
What is Sarbanes Oxley 404b?
service in which accountants assist in the preparation of financial statements without providing any assurance on them
What is a compilation?
An auditor performing work on the financial information of a component that will be used as audit evidence for the group audit
What is a component auditor?
Report on financial statements issued when the auditor is unable to obtain enough information to determine if the statements conform to GAAP; is neither positive nor negative.
What is a disclaimer of Opinion?
The firm that performs the majority of the work
What is a group auditor?
Public companies with a market capitalization in excess of 75,000,000
Which public companies does Section 404(b) of the Sarbanes-Oxley Act of 2002 require to obtain an audit of their internal control over financial reporting? a. Only public companies controlled by foreign investors. b. Public companies with a market capitalization in excess of $75,000,000. c. All public nonfinancial companies. d. All public companies.
The quality review partners
Who considers documentation prior to issuance?
It is required for large public companies with a market cap off 75M or 100M in revenue
Who is an integrated audit required for?
The company itself
Who is the nonpublic company audit report addressed to?
The report is addressed to the shareholders and the board of directors
Who is the public company audit reports addressed to?
The auditors provide comfort letters to the underwriters to provide then insurance that the FS is in compliance with laws and regulations
Who provides the comfort letters to the underwriters?
The senior associates
Who reviews the engagement?
The partners and managers
Who reviews the higher risk areas?
a. If William & Plaud make reference in their report to reliance on the report of other auditors are they qualifying their opinion? Explain. No, the auditors are indicating a division of responsibility between them and the component auditors b. Regardless of whether William & Plaud make reference to reliance on the report of the other auditors, they should perform certain procedures with respect to Lyle and Adams' audit. What are these procedures? 1.) The group auditor should determine whether appropriate audit evidence can be reasonably expected to be obtained regarding overall group controls, the consolidation process, and the financial information on the components 2.) The group engagement team must obtain understanding on the competency of the component auditor and whether or not they understand the ethical requirements regarding independence.
William & Plaud are principle auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams.
Auditors are concerned with the existence of loss contingencies that may affect the client's financial statements. One way that the auditors obtain evidence about existing loss contingencies is through the lawyer's letter
a.) Describe the information that the auditors wish to obtain about the litigation being handled by the lawyer b.) Describe three other procedures that are used by auditors to discover existing loss contigencies
