AUD
reasonable possibility
"reasonably possible" or "probable"
valuation, allocation, and accuracy
1. compare total recorded payroll with payroll checks issued 2. test extensions and footings of payroll 3. verify pay rates and deductions
1. Identify Type A and type B programs 2. Identify Type A programs that are low risk 3. Identify type B programs that are high risk 4. At a minimum, include all type A programs not identified as low risk and all type B programs identified as high risk that meet the coverage requirements
Steps for risk based approach:
consistency
A change is estimate is not a _______ issue
misleading unmodified/unqualified
A departure from GAAP is permissible if FS would otherwise be _____ causing a ______ opinion.
cannot be in a false, misleading, or deceptive manner
Advertising and Other Forms of Solicitation Rule:
independent
Although internal auditors must obtain objectivity and integrity, they are not ______ and thus the external auditor cannot share with the internal auditor any of the responsibility for audit decisions, judgements, or assessments
a legal determination
An SSAE report does not provide a ______ of an entity's compliance with requirements.
- Examination - Review - AUP
Attestation report types:
AEIOU Audit knows External evidence Internal evidence Oral evidence U know it!
Audit evidence hierarchy:
procurement
Auditors must be selected using ______ standards established by the federal guidelines
- Tracing - Analytical review - Observation
Completeness procedures:
- risk assessment - evidence to be obtained - operating effectiveness of control
Determine the effect of any identified control deviation on:
- obtain knowledge of client business - develop the audit strategy - develop the audit plan - perform risk assessment procedures
During planning, the auditor is required to:
immediately after the opinion paragraph
Emphasis of the matter paragraph is placed:
substantive procedures
Even when the assessed risk of MM is low, ____________ will always be necessary for all relevant assertions
< $75 million outstanding CE held by nonaffiliates
Exempt issuers from an integrated audit:
a description of the special purpose framework is included
FS prepared in accordance with a special purpose framework are not considered appropriate in form, unless:
preliminary evaluations of materiality, audit risk, and internal control
Factors that determine the focus of the audit:
FINE - Financial difficulties - Internal matters - Negative trends - External matters
Factors that may indicate substantial doubt:
- the audit complies with professional standards - the auditor issues a report that is appropriate
For a nonissuer, the objective of the auditor is to implement quality control procedures at the engagement level to provide reasonable assurance that:
no assurance is provided
For a preparation, each page of the FS will include a statement indicating:
departure
For going concern, if the accountant determines the disclosure is inadequate, the accountant should treat the missing disclosure as a:
emphasis-of-matter
For going concern, if the matter is appropriately disclosed, the accountant may, but is not required to, add an _______ paragraph to refer to going concern disclosures
1. a FS audit only 2. an integrated audit (FS and internal controls)
If an audit is needed for a nonissuer, they have the choice of:
- notify client that report is no longer associated with FS - notify any regulatory agents - notify persons relying on FS
If client refuses to follow procedures, the accountant should"
those charged with governance
If management will not remove the limitation, the auditor should communicate with ________ and determine whether it is possible to perform alternative procedures
disclaim an opinion on such information
If management's report contains additional information beyond that noted above, the auditor should:
- discuss matter with management - determine whether FS need revision
If subsequent facts become known before release date:
- issue a disclaimer that no assurance is provided - perform a compilation
If the accountant is unable to include a statement on each page, the accountant should:
the Auditor's Responsibility paragraph
If the audit is in accordance with two sets of standards, additional language should be added to:
modify the audit opinion or withdraw from engagement
If the audited FS require revision and management refuses to make the revision, the auditor should:
stated in the auditor's report with a description of each material weakness not included in management's report
If the auditor determines that the required disclosures for one or more material weaknesses have not been included in management's report, this should be:
- modify report and restrict use - withdraw. If not possible, modify report and restrict use - modify the report
If the client is the responsible party and does not provide written assertion, in an: - engagement - review - AUP
FOB destination
If the client is the seller, _____ should be excluded from the client's inventory as soon as the item has reached the destination
FOB shipping point
If the client is the seller, _______ should be excluded from the client's inventory as soon as the item is with the carrier
disclose in an emphasis-of-matter paragraph the date of the previous report, a description of the revision, and the substantive reasons for the revision.
If the conclusion on the revised FS differs from the one on the originals:
emphasis-of-matter
If the criteria is met, an _______ paragraph should be included in the auditor's report
permitted required
If the entity is required by law or regulation to have an audit and a disclaimer of opinion is acceptable, the auditor is _____, but not ______, to accept the engagement when there is a management-imposed scope limitation
1. make reference to the report of predecessor accountant 2. perform that level of service themselves
If the predecessor report was not reissued, the successor accountant should:
disclose or withdraw DO NOT MODIFY REPORT TO SAY FS ARE NOT IN CONFORMITY
If there is a departure from the framework:
- FS present fairly, in all material respects - Identification of applicable financial reporting framework and its origin
In Auditor's Opinion paragraph:
- Management Responsibility (MR) - design, implementation, and maintenance of IC (DIM)
In Management's Responsibility paragraph:
express an opinion assurance
In a compilation, the auditor states that they will not ______ or provide any ______ on the FS
1. the purpose for preparation of FS 2. whether the framework is a fair presentation 3. intended users 4. steps taken by management to determine if framework is acceptable
In an audit of FS prepared in accordance with a financial reporting framework generally accepted in another country, the auditor should obtain an understanding of:
predecessor auditor
In an initial review of interim financial information, the auditor should make inquiries of:
- evaluate the design effectiveness - test and evaluate the operating effectiveness
In testing of controls, the auditor should:
- statement that Audit was conducted in Accordance with the PCAOB standards (AA) - statement that the audit was Planned and Performed to obtain reasonable assurance that the FS are free from Material Misstatements (PP MM) - statements that the audit included Examining Evidence on a test bases; Assessing the Accounting principles used and significant estimates Made by Managements (EE AA MM)
Included in Scope paragraph:
- FS are the Responsibility of managements and that the auditor's Responsibility is to express an opinion (RR)
Included in the introductory paragraph:
direct financial interest material indirect financial interest
Independence is impaired if a covered member has a ________ or a __________ in an attestation client
- purchasing - receiving - warehouse - shipping
Inventory duties that should be separated:
detection risk control testing
It issues: - IT system may make it impossible to resolve the _______ through substantive testing alone - must do ______ as well
1. Financial statements 2. Internal Controls 3. Providing the auditor with access to information and persons within the entity needed to complete the audit
Managements responsibilities include:
- GAAP consistency change (justified) - auditor disagrees - inadequate disclosures - Departure from GAAP (unjustified) - Unreasonable accounting estimate
Material and pervasive departures from GAAP:
intent ability
Mitigating factors must include both ____ and the ____ to carry out the planned procedures
- express an opinion on the effectiveness - plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist
Overall Objective of Audit of Internal Control Over Financial Reporting:
an other-matter or explanatory paragraph
The auditor may choose to include a disclaimer of opinion on other information in:
1. inquire of management 2. determine if information is consistent with management's responses 3. obtain written management representations
The auditor should perform the following procedures on required supplementary information:
1. identify threats to compliance with fundamental principles 2. evaluate significance of threat 3. apply safeguard to eliminate threats
The conceptual framework approach requires entities to:
1. Effectiveness, Economy, and Efficiency 2. Internal Control 3. Compliance 4. Prospective Analysis
Performance Audits:
1. CPA's independence 2. compliance with the SEC act (if audited)
Positive assurance is provided with respect to:
- use original report date - dual date
Predecessor reports should be dated as appropriate for: - unrevised: - revised:
- responsibilities - public interest - integrity - objectivity and independence - due care - scope and nature of services
Principles of the professional code of conduct:
- responsiveness - relevant experience - result of peer reviews
Proposals made by auditors must be evaluated for:
inverse
RMM and DR have a _____ relationship
1. the component auditor has performed an audit in accordance with relevant requirements of GAAS, or when required, the PCAOB 2. the component auditor's report is not restricted use
Reference to component auditor's report should not be made unless:
more testing at interim more testing at year-end
Regarding timing, if there are strong IC: Weak IC:
3 years
Registered public accounting firms that provide audit reports for 100 or fewer issuers must be inspected at least once every ______
5 years
SAS (nonissuer) document retention:
60 days
SAS (nonissuesr) require the final audit documentation file to be assembled within _______ following the report release date
tax services
SOX Title II states that _____ are permissible if preapproved by the audit committee
- no reference made to FS - no reference is made to GAAP
SSAE differ from GAAS because:
1. created by the profession, legislation, or regulation 2. implemented by the employing organization
Safeguards for members in business:
1. created by profession, legislation, or regulation 2. implemented by the client 3. implemented by the firm
Safeguards for members in public practice:
- cashier (prepares bank deposit) - AR Department (enters into AR subsidiary records) - Accounting Department (enters in AR control account)
The receipts from mail should be listed in detail and three copies given to:
final date of auditor's responsibility
The report date shows:
1. For members in public practice 2. For independence 3. For Members in Business
Three conceptual frameworks included in AICPA code of conduct:
"Independent" Auditors Report
Title must include:
1. Test of details 2. Substantive analytical procedures
Two types of substantive procedures:
- Inspection - Footing - Independent recalculation - Reconciliation
Valuation procedures:
likelihood and magnitude
When evaluating control deficiencies, auditors consider both:
other-matter
When the auditor's report alerts that restricts of use, such language is included in an _________ paragraph
- document use of programs - perform tests more often during the year
With IT risks, an auditor should:
objectivity independence
_____ applies to all services rendered while _____ applies to attestation services only
required
a client representation letter is:
SSARS
a compilation gives no assurance of any kind and follows the standards of:
failed GAAP or GAAS
a failed quality control does not mean:
narrative
a written version of a flowchart
- change in client requirements - misunderstanding of nature of the services to be rendered
acceptable reasons for change:
documentation completion date
after this date, existing documentation must not be deleted, and additions to the audit documentation must be documented as such
- compensating balance arrangements - loan guarantees - unusual, nonrecurring transactions at year end - nonmonetary exchanges
alerts for related party transactions:
audit evidence
all the information the auditor uses to arrive at the conclusions on which the audit opinion is based.
Generalized audit software packages (GASPs)
allow the auditor to perform tests of controls and substantive tests directly on the client's system. Requires little technical knowledge of the client's hardware & software features
derivatives
an entity may invest in ______ to hedge against risks, such as the risk associated with fluctuating prices
material misstatement
an omission or misstatement of accounting information that makes it probably that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement
SAS
applies to nonissuers review of interim financial information when annual financial statements are audited
operations
asset misappropriation = stealing
1. compliance with specified requirements 2. internal control over compliance
attestation standards address two types of compliance attestation:
1. if they contain material misstatements 2. whether accounting policies are consistently applied OR changed to reflect correctly
auditor's responsibility concerning opening balances:
1. plan and perform audit to achieve both objectives 2. use the same control criteria as management 3. test of controls designed to provide sufficient appropriate evidence
auditor's responsibility for issuer and nonissuer:
nonstatistical sampling
auditor's use their judgement in determining sample size, and sample results are evaluated using auditor judgement
5 or 10
auditor's usually accept a risk of __or ___ percent
accuracy and collectibility
auditors should review the AR schedule for:
fraud, noncompliance with laws and regulations, and abuse
audits in accordance with GAGAS require additional attention to:
integrated
audits of issuers are required to perform an _____ audit
Accounting and Review Services Committee
authoritative body designated to issue pronouncements(SSARS) in connection with the unaudited FS of nonissuers.
well-documented
authorization of transactions in a computerized environment are not _____
permanent audit file
carryforward from year to year
calling the sender
confirmation responses received electronically should be verified by:
current file
contains this year's "stuff"
compliance
corruption = cheating
specific audit procedures
engagement letters may include overall audit strategy, but typically would not include:
completeness
ensure all required disclosures related to AR and sales have been include in the notes.
cutoff
ensure that purchases, sales, and investment income were recorded in the proper period
documentation from the client
entity's procedure manual or organizational chart
variables sampling
estimating the $ value of the population
rights and obligations
examine invoices, deeds, and title documents to confirm ownership of fixed assets
reliability of financial reporting
financial statement fraud = lying
Statements on Standards for Attestation Engagements (SSAE)
guidelines for attestation engagements
PCAOB Auditing Standards
guidelines for issuers (public companies)
FOB shipping point
if the client is the buyer, ______ should be included in the client's inventory as soon as the item is with the carrier
other matters
if the report on compliance is included in the auditor's report, it is in an ________ paragraph
would not rely on the control.
if upper deviation rate exceeds the auditor's deviation rate, the auditor:
1. type of risk 2. significance of risk 3. likelihood of risk 4. pervasiveness of risk
in analyzing risks, 4 attributes should be considered:
gift
independence is impaired by acceptance of more than a token
immediate family member close relative's
independence is impaired by an ______ or ______ employment with a client in a key position
honorary trustee
independence is not impaired by being a member of or an ______ for a not-for-profit charitable, civic, or religious group if the position is purely honorary and the member does not participate in any management functions
- fully collateralized car loans - credit card not exceeding $10,000 - bank account that is fully insured (< $250,000) - passbook loan
independence is not impaired in a bank client by:
covered members
independence rule must be maintained by ______
valuation, accuracy, and allocation
independent calculations made to determine the validity of recorded gains or losses from security sales and of discount and premium amortization. Recalcluation should be made to determine the accuracy of recorded dividend and interest income.
"may", "might", and "could"
indicate explanatory material that does not impose a professional requirement for performance
inside the company
inquiries should be addressed to individuals:
- unsolicited gift or inheritance - financial interest in a new audit engagement - immediate family member or covered person has a financial interest
investments or other financial interests in an audit client will not impair independence if disposed of timely such as:
public company
issuer
explanatory paragraph
issuers use this when required by PCAOB or at their discretion. It does not affect the auditor's opinion
management's
it is ________ responsibility to identify and account for contingent liabilities
1. a high degree of management judgement and subjectivity 2. highly complex accounting principles
items are more susceptible to manipulation when they involve:
efficiency
lost with alpha risk (auditor does more work than necessary)
effectiveness
lost with beta risk (could lead to an inappropriate opinion)
risk based approach
major program determination uses:
1. establishing and maintaining adequate internal control structure 2. contains an assessment of the effectiveness of the internal control structure and procedures
management requirement for issuers:
classical variables sampling
measures sampling risk by using the variation of the underlying characteristics of interest
evaluation of deficiencies noted and corrective actions taken
monitoring procedures should be documented, including _________
- Completeness - Valuation - Existence - Rights
most relevant assertions when auditing account balances:
private company
nonissuers
disclose
nonissuers must _____ the date through which subsequent events have been evaluated
cost or difficulty in obtaining evidence
not a valid basis for omitting a procedure for which there is no appropriate alternative
completeness
obtain and foot the fixed asset schedule and agree the total to the GL, obtain and foot a schedule of additions and dispositions of fixed assets and agree amounts to the fixed asset schedule, and select a sample of actual fixed assets and trace to the fixed asset subsidiary ledger
deficiency in design
occurs when a necessary control is missing or when an existing control does not achieve the desired objective
- walkthroughs - inquiry - observation - inspection of documents
often used to evaluate design effectiveness:
walkthrough
one of the most effective ways to identify likely sources of potential misstatements
substantive approach
only substantive procedures will be performed when control risk is assessed at maximum because: - no strong controls to rely on - cost/benefit relationship
objectives
overall plans for an entity
close relative
parents, siblings, & adult kids (must invite to wedding)
quality control system
policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances.
- larger individual accounts - expected errors or items in dispute - internal control is weak
positive confirmations are used when:
- inquiry - observation - re-perform - inspect - corroborate
procedures performed during walk through:
understandability and classification
read all AR and sales related disclosures to ensure that they are understandable
external auditor
remains solely responsible for the report on the FS.
cutoff
review debt activity shortly before and after year-end to ensure that transactions were reported in the proper period
- inspection
rights and obligations procedures:
risk of assessing control risk too high
risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control
financial statement level risks
risks that relate pervasively to the FS as a whole and potentially impact many relevant assertions
combined. compensating controls
segregation of duties in a computerized IT environment are often _____ This risk can be mitigated by:
$750,000 in a fiscal year
single audit act is required for entities that expend total federal assistance equal to or in excess of
- complexity of entity - risk of MM - exceptions identified
some things the auditor should consider for audit documentation:
GAGAS
standard applied for audits of: - government organizations, programs, activities, and function. - government assistance received by contractors, no-for-profit organizations, and other nongovernmental organizations
SSAE
standard that applies to attest engagements:
disclaimer of opinion (GAAS)
states that the auditor does not express an opinion of the FS material and pervasive
information and communication systems
support the identification, capture, and exchange of information in a timely and useful manner
documentation (Working papers)
supports auditor's opinion, not client financial statements
limited use
the FS will only be used by the responsible party alone or by parties negotiating directly with the responsible party. Both forecasts and projections are appropriate for:
- planning - supervising - compliance
the engagement partner is responsible for:
experience and availability
the firm must have personnel with both______ to meet staffing and supervision requirements.
document
the firm should ______ its quality control policies and procedures
5
the lead audit or coordinating partner and the reviewing partner must rotate off the audit every ____ years.
tolerable misstatement
the maximum error in a population that the auditor is willing to accept. Application of performance materiality to a particular sampling procedure.
tolerable misstatement
the maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept
strategies
the means used to achieve objectives
no earlier than the date on which sufficient appropriate evidence has been obtained
the report date should be dated:
PCAOB
the standard setting body for issuers (public companies)
Cash
transaction cycle that includes cash receipts and cash disbursements
- inspection - review - inquiry
understandability procedures:
nonissuers
unmodified is used for:
larger sample size
variability = uncertainty, which means
understandability and classification
verify the account classification of a sample of purchases
design audit procedures to address each relevant assertion
response to risks of relevant assertion levels:
audit committee
responsible for the selection and appointment of the independent external auditor. Under SOX (generally issuers), auditor reports to and is overseen by ________.
withdrawal
restrictions on the scope of a review engagement that prevent necessary procedures from being performed results in:
qualified, disclaimer of opinion, or withdrawal
restrictions on the scope of an examination engagement may result in:
business risks
result from events or circumstances that could adversely affect the entity's ability to achieve its objectives and execute its strategies
review
results in a CONCLUSION which provides a moderate level (LIMITED) of assurance generally based on inquiry and analytical procedures
rights and obligations
review a sample of voucher packages for the presence of the purchase requisition, purchase order, receiving report, and vendor invoice to verify that the AP are owed by the entity
rights and obligations
review bank confirmations and debt agreements for liens on receivables. Also inquire of management and review debt agreements and board minutes for evidence that AR have been factored or sold
completeness
review board minutes for evidence of new debt agreements, and trace all new debt contracts to the FS. Obtain a listing of all debt and agree the total to the GL.
cutoff
review fixed asset purchases and dispositions from shortly before and after year-end for recording in the proper period
reissued
revised financial statements are considered ______
required
risk assessment procedures are ______ in all FS audits
- obtain understanding of entity environment - obtain understanding of internal control - inquire about risks of MM - perform analytical procedures
risk assessment procedures:
- current and prior audit experience - oversight by federal agencies - inherent risk
risk based approach uses consideration of:
control risk
risk that material misstatement that could occur in a relevant assertion will not be prevented or detected on a timely basis by the entity's internal control
senior management and those charged with governance
risks representing significant deficiencies or material weaknesses relating to internal controls should be communicated to:
assertion level risks
risks that relate to specific transactions, account balances, or disclosures at the relevant assertion level.
significant risks
risks that require special audit consideration and the auditor uses professional judgement to determine whether a given risk of MM is a _______.
recorded amount of the population / sampling interval
sample size for PPS =
tolerable misstatement / reliability factor(risk of incorrect acceptance)
sampling interval =
ratio estimation
sampling plan that uses the ratio of the audited values of items to their book values to project the true population value. (audit true value/audited BV) x total BV
1. risk of assessing control risk too low (beta risk) 2. risk of assessing control risk too high (alpha risk)
sampling risk in test of controls:
1. risk of incorrect acceptance (beta risk) 2. risk of incorrect rejection (alpha risk)
sampling risk in variable sampling:
completeness
search for unrecorded liabilities
embedded audit modules
sections of the application program code that collect transaction data for the auditor
stratified sampling
separated into relatively homogeneous groups that generally results in a reduced sample size. Commonly used when a population has highly variable recorded amounts
significant due to individual financial significance
should be audited by the group engagement team or the component auditor
materiality
should be determined separately for single financial statements or specific elements
random sample selection
should be used in statistical sampling. WIll give all items in the population an equal chance to be included in the sample to be audited
engagement partner
should review critical areas of judgement and significant risks (revenue recognition and management override)
immediate family
spouse & dependent (living under your roof)
SSARS
standard that applies to preparation, compilation, and review engagements:
qualified opinion (GAAS and GAAP)
states that except for the effects of the matters to which the qualification relates, the FS present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework material but no pervasive
adverse opinion (GAAP)
states that the FS do no present fairly the financial position, result of operations, or cash flows of the entity in conformity with the applicable financial reporting framework material and pervasive
unmodified opinion
states that the FS present fairly, in all material respects, that financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework.
recognized subsequent events
subsequent events that provide additional information about condition that existed at the balance sheet date.
nonrecognized subsequent events
subsequent events that provide information about conditions that occurred after the balance sheet date and did not exist at the balance sheet date
valuation, allocation, and accuracy
test a sample of debt receipts and payments and should compare interest expense to the debt balance for reasonableness
existence and occurrence
test a sample of vouchers to confirm proper authorization and the presence of the receiving report
integrated test facility
test data is commingled with live data. Test data must be separated from live data before reports are created. Client personnel are not informed.
information technology usage
test of controls are required for:
completeness
test the physical inventory report by tracing test counts to the report, thereby verifying its completeness. Also select from a sample of prenumbered inventory tags and trace to the physical inventory report sheets to test their completeness
over a longer period of time
tests performed _______ provide more evidence of effectiveness than tests performed over a shorter period
closer to the date of management's assertion
tests performed _______ provide more evidence than testing performed earlier in the year
manual (auditing around the computer)
tests the input date, processes the date independently, and then compares the independently determined results to the program results. Appropriate for simple batch systems
quality control
the AICPA requires firms providing auditing, attestation, and accounting and review services to adopt a system of:
- the details from bank deposit to details from remittance advices.
the AR department should match:
GAAP should be followed
the Accounting Principles Rule:
- size and complexity - auditor's existing knowledge - nature of controls - use of IT
the NET of understanding internal controls depends on:
more than 100
the PCAOB must conduct annual inspections of registered public accounting firms that regularly provide audit reports for ______ issuers.
extent
the ____ of an audit procedure refers to the quantity to be performed, such as the number of observations to be made or the sample size to be used
the original date of the auditor's report
the auditor has no active responsibility to make any inquiries or to perform any further auditing procedures to discover subsequent events after:
the effectiveness of the entity's internal control overall
the auditor is not responsible for obtaining sufficient evidence to support an opinion about the effectiveness of each individual control, but rather:
unconditional requirements
the auditor must comply
parallel simulation
the auditor reprocesses some or all of the client's live data and then compares the results with the client's files.
document
the auditor should _____ the key elements of the understanding obtained regarding the entity and its environment, the sources of information used to develop the understanding, and the risk assessment procedures performed
- preparation and fair presentation of financial statements - design, implementation, and maintenance of IC - provide auditor with access to info and persons
the auditor should obtain from management the agreement that it acknowledges its responsibility for:
there are incentives or pressures that exist that may exist to commit fraud
the auditor should obtain knowledge of management's measures and review of the entity's financial performance to evaluate whether business performance is meeting the desired objectives because:
- identify and assess the risk of MM - make informed judgement about other audit matters
the auditor should perform risk assessment procedures, which enable the auditor to:
projected misstatements
the auditor's best estimate of misstatements in populations, involving the projection of misstatements identified in audit samples to the entire population from which the samples were drawn
- the risk of MM - the quality of audit evidence
the auditor's decision regarding the sufficiency of evidence is influenced by:
1. the auditor concludes that the FS are materially misstated 2. the auditor is unable to obtain sufficient appropriate audit evidence to conclude the FS are free from MM
the auditor's report should be modified when:
the quality of performance
the compliance with standards rule measures:
nature, extent, and timing
the control environment has a pervasive effect on the auditor's risk assessment, and preliminary judgements about its effectiveness may influence ______ of further audit procedures
contractual basis
the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor
tax basis
the entity uses to file its income tax return for the period covered by the financial statements
leadership responsibilities
the firm's_______ bears ultimate responsibility for the firm's quality control system. The "tone at the top" influences attitudes throughout the firm.
significant due to significant risk of material misstatement
the group engagement team or component auditor should perform an audit of the financial information; and/or an audit of the account balances, transactions or disclosures related to the likely significant risk of material misstatement; and/or perform specified procedures related to the likely significant risks of material misstatement
the date of the auditor's report
the management representation letter is dated:
tolerable deviation rate
the maximum rate of deviation from a prescribed procedure the auditor will tolerate without modifying planned reliance on internal control. Best estimate of the deviation rate in the population from which it was selected
group engagement partner
the partner or other person in the firm who is responsible for the group audit engagement and for the auditor's report on the group financial statements
existing control activities
the policies and procedures that help ensure that management directives are carried out and that necessary steps to address risks are taken
independent reasons
the practitioner does not have to be ______ and is required to disclose and is permitted, but not required, to disclose the _____ for the lack of independence
monitoring
the process that assesses the quality of internal control performance over time, by assessing the design and operation of controls on a timely basis and taking the necessary corrective actions.
applicable financial reporting framework
the purpose of an audit is to provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the:
professional skepticism
the recognition that circumstances may exist that cause the financial statements to be materially misstated and should be assessed yourself each year
- the assertion itself - the subject matter to which the assertion relates
the report may be issued on:
AICPA
the standard setting body for unaudited financial statements or information for nonissuers
inherent risk
the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
estimation uncertainty
the susceptibility of an accounting estimate to an inherent lack of precision in its measurement
misappropriation of assets or defalcation (stealing)
theft of an entity's assets when the effect of the theft causes the FS not to be presented in conformity with GAAP.
1. improper revenue recognition 2. management override of controls
there is a presumption in every audit that which two risks exist:
completeness
trace a sample of fixed asset purchase requisitions to receiving reports and the fixed asset subsidiary ledger. Review the related repair and maintenance expense accounts to test for completeness of asset additions.
completeness:
trace a sample of shipping documents to the corresponding sales invoices, and to the sales journal and accounts receivable subsidiary ledger
completeness
trace a sample of time cards to the payroll register
completeness
trace a sample of vouchers to the purchase journal. Also account for the prenumbered sequencing of purchase orders, receiving reports, and vouchers
walk throughs
trace transactions relevant to financial reporting through the accounting system from inception through recording in the GL and presentation in the FS
understatement
tracing tests the risk of _____ in expenses or liabilities
Investments
transaction cycle that includes investments in debt and equity and the income received from investments
Inventory
transaction cycle that includes perpetual inventory, physical counts, and manufacturing costs
1. evaluate the presentation of the supplementary information 2. to report on whether supplementary information is fairly stated
two objectives of auditors for supplementary information:
- engagement would uncover fraud/error - client is attempting to create misleading or deceptive financial statements
unacceptable reasons for change:
- entity's operations - ownership - corporate governance - investments - financing methods - financial reporting practices
understanding of the nature of the entity includes:
Level 3
unobservable inputs using estimates and valuation methods, such as discounted cash flow, determined based on management judgement
issuers
unqualified is used for:
sample deviation rate + allowance for sampling risk
upper deviation rate =
top-down approach
used in selecting controls to test. The auditor evaluates overall risks at the FS level, considers controls at the entity level, and then focuses on accounts, disclosures, and assertions fro which there is a reasonable possibility of material misstatement
regulatory basis
used to comply with the requirements or financial reporting provisions of a regulatory agency having jurisdiction over the reporting entity
substantive procedures
used to detect material misstatements. Include tests of details of transaction classes, account balances, and disclosures and analytical procedures.
dual-purpose sample
using the same sample to perform both tests of controls and tests of details. Used when the auditor believes that there is an acceptably low risk that the deviation rate in the population exceeds the tolerable rate.
cutoff
verify the cutoff of CR and CD shortly before and after year-end for recording in the proper period. Compare the dates for recording a sample of CR with the dates the cash was deposited in the bank, and the dates for recording a sample of checks with the dates the checks cleared the bank, noting any significant delays
existence and occurrence
verify the existence of a sample of items in the physical inventory report by locating and performing test counts of the items. Also test the existence of the items on the client's inventory report sheets by vouching a sample of items from the inventory report sheet to the corresponding prenumbered inventory tags
existence and occurrence
verify the existence of new debt by reviewing the board minutes for evidence of new agreements and them inspecting the agreements
existence and occurrence
vouch a sample of purchases to the receiving report and vendor invoice and a sample of dispositions to the asset retirement form and other supporting documentation
existence and occurrence
vouch a sample of sales transactions from the sales journal to the sales invoice back to the customer order and shipping documents
existence
vouch additions to the fixed asset accounts by examining internal documents and by inspecting the actual asset.
existence
vouch amounts from the client's calculation of the payroll accrual to supporting documentation
should not
when an entity reissues its FS, the entity ________ recognize events that occurred between the date the original FS were issued or available to be issued and the date that the financial statements were reissued
audited negative assurance
when issuing a report on a client's compliance with contractual agreements in connection with a FS audit, the auditor must have _____ the client's FS and may only issue ______ on compliance
piecemeal opinion
when the auditor expresses an adverse opinion or a disclaimer of opinion on the complete set of FS, an unmodified opinion on a specific element in the same auditor's report would contradict the adverse opinion or disclaimer of opinion and would be the same as expressing a:
- obtain understanding of relevant controls - either obtain a service auditor's report OR performing tests of controls at the service organization
when using a service organization, the auditor should:
general response
- assigning personnel - appropriate level of supervision - evaluating management's selection of accounting principles - incorporation of levels of unpredictability
response to management override
- examine journal entries and other adjustments - review accounting estimates for biases - evaluate the business purpose for significant unusual transactions
completeness
1. agree the AP listing to GL 2. Obtain sample of vendor statements and agree to vendor accounts 3. perform a search for unrecorded liabilities
CRIME 1. Control Environment 2. Risk Assessment 3. Information and Communication Systems 4. Monitoring 5. Existing Control Activities
5 components of internal controls:
1. self-interest 2. self-review 3. bias threat 4. familiarity threat 5. undue influence threat 6. management participation threat 7. structural threat
7 Threats to independence:
1. adverse interest threat 2. advocacy threat 3. familiarity threat 4. management participation threat 5. self-interest threat 6. self-review threat 7. undue influence threat
7 types of threat:
single financial statement
A _______________ is considered a major portion of a complete set of FS
- failed to obtain sufficient evidence - inappropriate overall conclusion - report is not appropriate - firm is not independent
A significant deficient exists when:
I AM SURE - Independence - Agreement of the parties - Measurability and Consistency - Sufficiency of the Procedures - Use of Report is Restricted - Responsibility for the Subject Matter - Engagements on Propspective Financial Statements
AUP procedures may be performed provided that these conditions exist:
MR DIM REPPORTS CRIME
Acronym for Contents of the Audit Report for Nonissuer:
RAPMEAM RAPMEAM
Acronym for contents of the Audit Report for an Unqualified Opinion (issuer):
- failure to return records - discrimination or harassment - shall not take or retain original copies - disclosure of confidential information
Acts Discreditable Rules:
- notify the client that the auditor's report no longer be associated with the FS - notify any regulatory agencies - notify persons known to be relying on the FS
Additional steps to prevent further reliance:
1. the latest FS have been audited 2. the auditor has been engaged to audit the current year or audited the latest annual FS 3. same financial reporting framework is used
An auditor may conduct a review of the interim financial information of a nonissuer if:
AP (Audit Participants)
An issuer must file Form _____ with the PCAOB by the 35th day after the audit report is first filed with SEC or within 20 days in the audit report is included in a registration statement for each audit report issued
- comparing financial statements to budgeted or anticipated results - enhancing auditor's understanding - identifying unusual transactions and events
Analytical procedures during planning:
modified
As the audit progresses, the audit plan may need to be ______ in response to changing conditions or the results of other procedures
- AUP - prospective FS - pro forma FS - Compliance - MD&A - Service organizations
Attestation services:
7
Audit documentation must be maintained for ___ years
1. Attest function (opinion) 2. Maintaining skepticism 3. comply with ethical requirements 4. obtain sufficient appropriate audit evidence 5. comply with GAAS
Auditor's responsibilities:
"PRIME" - Post balance sheet transactions - Representation letter - Inquiry - Minutes - Examine
Auditor's responsibility for subsequent events:
1. evaluate degree of estimation uncertainty 2. assess written policies 3. verify all material estimates have been developed 4. determine that estimates are reasonable 5. estimates are properly presented and disclosed
Auditor's responsibility regarding accounting estimates:
1. Title 2. Addressee 3. Introductory Paragraph 4. Scope Paragraph 5. Opinion Paragraph 6. Firm Name, City, and State 7. Report Date
Basic Elements of the unqualified audit report for issuers:
1. Title 2. Addressee 3. Introductory Paragraph 4. Management's Responsibility 5. Auditor's Responsibility 6. Auditor's Opinion 7. Other Reporting Responsibilities 8. Signature of Auditor 9. Auditor's Address 10. Date of Auditor Report
Basic elements of unmodified audit opinion (nonissuer):
the financial reporting framework used by the client is acceptable
Before accepting an engagement, the auditor should determine whether:
expressed opinion
CPA documents evidence to support their:
- legal and regulatory requirements - successor auditor - funding agency - authorities
CPA must communicate with parties outside the entity including:
quarterly reports
Certain entities are required by the SEC to file:
- Modify auditor's responsibility - include basis for qualified opinion - qualified opinion paragraph
Changes to a nonissuer report with an unmodified prior year and a qualified current year opinion:
- Modify auditor's responsibility - basis for disclaimer of opinion on 20X1 operations and CF - disclaimer of opinion paragraph - opinion paragraph
Changes to a nonissuer report with unmodified current year and prior year disclaimer on IS, change in SE, and CF:
- modify scope paragraph - add explanatory paragraph - disclaimer opinion paragraph - regular opinion paragraph
Changes to an issuer report with a unqualified CY with disclaimer on PY:
- add explanatory paragraph - modify opinion paragraph
Changes to an issuer report with unqualified PY and current qualified:
impairs independence is recommends commission for a service if performing: - audit or review - compilation that does not disclose lack of independence - examination
Commission and Referral Fees Rules:
CAPE CORP - Compliance with all attestation standards relevant - Acceptance and continuance are performed - Preconditions are present - Engagement documentation standards apply - Acceptance of a change in the terms as reasonable - Using the work of an other practitioner - Responsibility for quality control - Professional skepticism and judgement are required
Common Concepts of all attestation engagements:
CRIME - Control environment - Risk assessment - Information and communication systems - Monitoring - Existing control activities
Components of ICFR:
unauthorized access security observation
Computerized Risks: the opportunity for remote access to data increases the likelihood of ________ ______ breach decreased opportunities for _____
- do not disclose any confidential client information without the specific consent of the client
Confidential Client Information Rule:
contingent fees not allowed unless fixed by court proceedings
Contingent Fees Rule:
PAID TIPS - Prenumbering of Documents - Authorization of Transactions - Independent Checks to Maintain Asset Accountability - Documentation - Timely and Appropriate Financial performance reviews - information processing controls - physical controls for safeguarding assets - segregation of duties
Control activities in a strong internal control environment:
1. Describe the purpose of FS if applicable 2. Do not use GAAP terms 3. make reference to management responsibility for determining reporting framework 4. Include emphasis-of-matter or other-matter paragraph if required 5. reword prescribed form if necessary
Differences from standard audit report for special purpose frameworks:
- entity's ability to continue as a going concern - to describe a justified change - subsequently discovered facts lead to a change in audit opinion - FS prepared with an applicable special purpose framework
Emphasis of the matter is required when:
- serving public interest - integrity - objectivity - proper use of government information, resources, and position - professional behavior
Ethical Principles of the GAO:
1. unmodified opinion with emphasis-of-matter paragraph 2. disclaimer of opinion
How to report a going concern in auditor's report:
- process large volumes of transactions - improved timeliness - enhanced segregation of duties
IT Benefits:
communicate this matter with those charged with governance and: - include and other-matter or explanatory paragraph - withhold the use of the report - withdraw from the engagement and consult with legal counsel
If the other information requires revision and management refuses, the auditor should:
1. whether sufficient appropriate audit evidence was obtained (as required by GAAS) 2. Whether the FS are prepared in accordance with requirements of applicable framework
In order to form an opinion, the auditor should take into account:
AR ledger
Incoming mail must be opened by a person who does not have access to the:
1. The nature of financial reporting 2. The nature of audit procedures 3. Timeliness of financial reporting and the balance between cost and benefit
Inherent limitations that restrict the auditor from obtaining absolute assurance:
1. Appropriateness of Accounting Policies 2. Application of Accounting Policies 3. Appropriateness of Financial Statement Presentation or Disclosures
Nature of Material Misstatements:
1. unaudited FS, unaudited interim FS
Negative assurance is provided with respect to:
- to obtain reasonable assurance that FS are free from material misstatement - to report on the FS as required by GAAS
Overall Objectives of FS Audit:
1. risk assessment 2. design responses 3. supplementary audit requirements exist? 4. obtain written representation 5. prepare reports 6. prepare required documentation
Overall requirements of compliance examination:
over 50% owned by CPAs
Ownership in CPA firms must be:
U LIAR CPA - understanding with the client - learn or obtain sufficient understanding of the entity - inquiries should be addressed - analytical procedures should be performed - review - other procedures performed - client representation letter obtained - professional judgement should be used - auditor should communicate results
Procedures for interim financial statements:
- guidance - boundaries - quality - objectives
SSAE standards: - provide ______ - set ________ - provide a measure of _______ - describe the _________
- going concern - important litigation - major catastrophe - related parties - subsequent events
Some emphasis-of-matter paragraphs that may be included:
- SAS; negative assurance - SSAE; no assurance - SSAE; reasonable assurance
Standard applied, and assurance provided: - Compliance report in connection with audited FS - AUP - Examination
read
The auditor is not responsible for determining whether other information in documents containing the audited FS and the auditor's report is properly stated. However, the auditor should ____ the other information.
management is aware of procedure and its performance
The auditor must obtain evidence that_______ to determine whether internal controls have been implemented
- significant deficiencies and material weaknesses in internal controls and significant instances of abuse related to major programs - material noncompliance with provisions - questioned costs of a given type of compliance requirement if they exceed $25,000
The auditor must report:
continuing accountant
The reporting accountant should request permission from management to consult with the ________, and should then consult with the continuing accounting to ascertain all the available facts relevant to forming a professional judgement
explain a modification of the user auditor's opinion
The user auditor is permitted to make reference to the work of a service auditor in the user auditor's report to:
qualified disclaimer of opinion
The user auditor should issue a _____ or _____ if the user auditor is unable to obtain sufficient appropriate audit evidence
- tour client facilities - review the financial history of the client - obtain understanding of client's accounting - inquire of client personnel
To obtain knowledge of client business, the auditor may:
1. Financial Audits 2. Attestation Engagements 3. Performance Audits
Types of Government audits:
1. Financial forecast 2. Financial projection
Types of prospective FS:
- an uncertainty - a major catastrophe - significant related party transactions - unusually important subsequent events
Use may be necessary (use professional judgement) when:
- the FS of the PP were auditor by a predecessor auditor - the type of opinion expressed by the predecessor and if it the reasons for modification if it was modified - nature of any emphasis-of-matter, other-matter, or explanatory paragraph - date of the predecessor auditor's report
When the successor auditor does not present the predecessor auditor's report, the successor auditor should express an opinion on the current period FS only and indicate in an other-matter paragraph (nonissuer) or introductory paragraph (issuer):
the information of the addressees
a comfort letter must include a statement that the letter is solely for:
significant component
a component that is of individual financial significance to the group or is likely to include significant risks of material misstatement of the group financial statements
special purpose framework
a financial reporting framework other than GAAP
reasonable assurance
a high, but not absolute, level of assurance. In order to obtain, the auditor must: - plan and properly supervise work - determine and apply appropriate materialitly levels - identify and assess risk of material misstatement - obtain sufficient appropriate audit evidence
comfort letter
a letter from the CPA to the named underwriter just before the registration of the client's securities. Negative assurance on unaudited interim FS.
specialist
a person or firm with special skills in a field other than accounting or auditing
Type 1 Report
a report on the design and implementation of a service organization's controls. Is restricted use to service organization and users. May aid the user auditor in obtaining an understanding of controls not necessarily decreasing control risk.
hypothetical transaction
a reporting accountant may not report on the application of accounting principles to a _________
negative confirmation
a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information in the request
expressing an opinion
a review does not provide a basis for:
inherent risk
a significant risk exists when ______ is exceptionally high
emphasis-of-matter and other-matter (nonissuers) and explanatory paragraphs (issuers)
additional communications to the auditor's report without modifying the auditor's opinion is done using:
reporting accountant
an accountant in public practice, other than the continuing accountant, who prepares a written report on the application of the requirements of an applicable financial reporting framework and the type of report that may be rendered on a specific entity's financial statements. Does not have to be independent.
noncompliance
an act of omission or commission by an entity, whether intentional or unintentional, which is contrary to prevailing laws and regulations. Can result in fines, litigation, or other consequences
integrated audit
an additional opinion is rendered on the operating effectiveness of internal control.
risk assessment
an entity's identification and analysis of risks to the achievement of its objectives. Concerns the assessment by management, not the auditor.
monitoring
an ongoing consideration and evaluation of the design and effectiveness of the quality control system - a partner should bear the responsibility for the _______ process
qualified opinion or disclaimer of opinion due to a scope limitation
an unresolved difference between the specialist's findings and the FS, or an unresolved disagreement between the auditor and the specialist, would lead to a:
planning final review
analytical procedures are performed during the _____ and _____ stage.
existence and occurrence
analytical procedures performed to tst the reasonableness of dividend and interest income provide evidence of the existence of investment income
those charged with governance
any fraud involving senior management regardless of effect on FS should be reported directly to:
general controls
apply to information processing throughout the company
cash
area with high fraud risk, especially when internal control is weak
Inherent risk x control risk x detection risk
attestation risk =
risk of material noncompliance x detection risk
attestation risk of noncompliance:
3 years
audit documentation must be maintained for ____ by the auditor and auditee
lacks integrity
audit firm should minimize the likelihood of association with a client whose management ______ by considering reputation, owners, key management, related parties, those charged with governance, the nature of operations, and client's overall attitude
will not be detected
audit is subject to inherent limitations/risks that errors and/or fraud:
(IR x CR) x DR
audit risk =
covered member
audit team and office/boss "chain of command", partner in the office, the firm
interim date period end
audit tests may be performed at for strong internal controls: weak internal controls:
reduced performing tests on a continuous basis
audit trails in a computerized IT environment are __. This risk can be mitigated by:
identify related parties and determine whether the transactions have been properly accounted for and disclosed
auditor's responsibility regarding related parties:
statistical sampling
auditor's specify the sampling risk they are willing to accept and then calculate the sample size that provides that degree of reliability. Results are evaluated quantitatively
financial projection
based on hypothetical assumptions. Reflects the financial position and results of operations based on a "what-if" type of scenario
audit plan
based on the audit strategy and outlines the NET of the procedures to be performed during the audit.
read
before issuing the report, accountants should ____ the compiled FS and consider whether they are appropriate in form and free from obvious error
lock box system
best method to guard against lapping:
qualitative and quantitative
both _________ factors must be considered when setting materiality for the FS as a whole
fair value
certain financial assets and liabilities, such as marketable securities and derivatives, are presented or disclosed at _______ in the FS
financial statements
claims and assertions, made implicitly or explicitly by management, about the recognition, measurement, presentation, and disclosure of information in the FS
- authorization - record keeping - custody of related assets
client's internal controls should separate the functions of:
1. members in public practice 2. members in business 3. other members
code is separated into three parts:
1. introduction 2. reference to auditor's report 3. refer to requesting party's representations 4. independence 5. positive assurance on compliance with SEC 6. negative assurance on procedures performed
comfort letter format:
existence and occurrence
confirm a sample of AR
existence
confirm notes or bonds directly with creditors
rights and obligations
confirmation of securities and the count of securities on hand provide evidence of the entity's ownership of investments. Examine broker's advices for a sample of securities purchased during the year to verify the entity's ownership
existence and rights and obligations
confirmations generally provide evidence regarding:
existence
confirmations of securities held by third parties and examination of securities on hand. Also analytical procedures over interest earned
objectivity
consider to whom the internal auditor's report. The higher the level, the more _____ can be assumed
-client refuses to allow correspondence with legal counsel - client refuses to sign representation letter
consider withdrawing from engagement when:
tests of details
consist of audit procedures used to gather evidence to support the account balances as reflected in the FS. Performed on ending balances, the details of transactions, or a combination of the two.
accounting records
consist of records of inital entries and any supporting records
internal control questionnaire
consists of a list of questions to be answered by "yes" or "no" responses.
information systems relevant to financial reporting objectives
consists of the procedures (both automated and manual) and records established to initiate, authorize, record, process, and report entity transactions, events, and conditions, and to maintain accountability for the related assets, liabilities, and equity.
- statements that the communication is intended solely for the information and use of the specified parties - identification of the specified parties - statements that it is not intended to be used by anyone else
content of the alert:
probable and can be reasonably estimated
contingent liabilities that are ________ must be accrued and disclosed
- significant or unusual transactions - period-end journal entries and adjustments - related party transactions - significant management estimates
controls that address management fraud or override:
the remaining period
controls that are tested only during an interim period should be supplemented by additional evidence for:
negative confirmation
customers are requested to respond to the auditor only if they disagree with the stated amount owed
positive confirmation
customers are requested to return a statement to the auditor indicating whether they agree with the amount and to provide information about any exceptions on the confirmation. Can also be "blank" having the recipient fill in the balance.
report release date
date on which the auditor grants the client permission to use the report
NET
depends on: - complexity of entity - nature of work - assessed risk of MM - qualifications of assistants
detective controls
designed to provide reasonable assurance that errors or irregularities are discovered and corrected on a timely basis.
preventive controls
designed to provide reasonable assurance that only valid transactions are recognized, approved, and submitted for processing.
rights and obligations, and occurrence
determine that inventory-related obligations have been properly disclosed by inquiring of management and reviewing loan agreements and minutes for evidence that inventory has been pledged or assigned. Also inquire about warranty obligations. Compare disclosures to other audit evidence to ensure that all disclosed information related to inventory has occurred.
understandability and classification
determine whether there are restrictions on RE resulting from loans, agreements, or state laws
judgemental misstatements
differences arising from the judgement of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate
tracing
directional testing that is looking for coverage starting with the source documents and traces forward to provide assurance that the event is being given proper recognition in the books and records (testing completeness)
1. qualified or disclaimer on the full set of FS 2. qualified or disclaimer on all but the BS
effect on the auditor's report for insufficient evidence regarding opening balances:
completeness
ensure that all required disclosures related to payroll have been included in the notes to the FS.
- control environment - management override - company's risk assessment process - centralized processing - monitoring results of operations - period-end financial reporting
entity level controls:
cash basis
entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets
1. reliability of financial reporting 2. effectiveness and efficiency of operations 3. compliance with applicable laws and regulations
entity's objectives:
independence in both fact and appearance
ethical requirements include:
- magnitude of the potential misstatement - whether there is reasonable possibility that the control will fail to prevent, or detect and correct, a material misstatement
evaluation of deficiencies being significant deficiencies or material weaknesses depends on:
understandability and classification
examine a sample of investment transactions to determine that the transactions were recorded in the proper accounts
understandability and classification
examine a sample of paychecks for classification into the proper expense accounts
understandability and classification
examine a sample of remittance advices and canceled checks for recording in the proper account
understandability and classification
examine a sample of sales invoices for proper classification into the appropriate revenue accounts
- settlement of litigation - loss on an uncollectible account
examples of recognized subsequent events:
RMM
exist independent of financial statement audit
review
express limited (negative) assurance that there are no material modifications that should be made to the FS in order for the statements to be in conformity with the reporting framework. Based on inquiry and analytical procedures. It is an assurance and attest engagement and independence is required.
- timing and complexity - availability of audit staff
firm's ability to meet reporting deadlines is affected by:
use the work of component auditors and whether the auditor's report will make reference to the component auditor
for a group audit plan, it should detail the extent to which the group engagement team will:
mandatory
for an initial audit, communication with the predecessor auditor, with permission from the client, is:
Existence
generally a more relevant assertion than completeness when auditing the revenue cycle
attribute sampling
generally deals with yes-or-no questions
may still accept the engagement
if a management-imposed scope limitation will result in a qualified opinion or it is beyond management's control, the auditor:
- to management within 60 days of report release date - to management and those charged with governance by the report release date - to management and those charged with governance by the report release date
in an audit of a nonissuer, what should be reported to management, those charged with governance, and when should the communication be made? - Control deficiency - Significant deficiency - Material weakness
- to management - to management and audit committee - to management and audit committee prior to the issuance of the auditor's report
in an audit of an issuer, what should be reported to management, the audit committee, and when should the communication be made? - Control deficiency - Significant deficiency - Material weakness
- communicate to audit team - assign experienced staff - increase supervision - incorporate a greater level of unpredictability - changing NET
in response to risk assessed at the FS level, the auditor may:
further audit procedures
include tests of the operating effectiveness of internal controls and substantive procedures
monitoring procedures
include the performance of engagement quality control reviews, post-issuance reviews, and inspections of a selection of completed engagements
nonsampling risk
includes all aspects of audit risk that are not due to sampling. Always present and cannot be measured. (use wrong audit procedure; improperly evaluate evidence/results)
Other Transaction Cycles
includes cycles for property, plan, and equipment; payroll and personnel; and financing
group engagement team
includes the group engagement partner, other partner, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements
covered member immediate family
independence is impaired if a _____ or ______ has a loan to or from a client
financial interest
independence is impaired if a close relative has a _________ in the attest client that the covered member knows or has reason to believe is material to the close relative or enabled the close relative to exercise significant influence over the attest client
key position
independence is impaired if a partner or professional employee leaves the firm and is employed by the client in a _______ unless the individual is no longer in a position to influence or participate in the firm's business decisions and the amounts due to the individual are immaterial to the firm
engagement team
independence is impaired if an individual who was formerly employed by the client participates on the ________ or is in a position to influence the engagement when the engagement covers any period of his or her former employment with the client
1. fraud perpetrated by senior management 2. restatement of previously issued FS to correct a MM 3. Identification by the auditor of a MM that would not have been detected by the entity's internal control 4. ineffective oversight by those charged with governance
indicator of material weakness in internal controls:
management's specialist
individual or organization whose work in a field other than accounting or auditing is used by the entity to assist the entity in preparing FS
- competitive environment - supplier and customer relationship - technological developments
industry factors (pressure):
supplementary information
information presented outside the basic financial statements that may be presented in a document containing the audited financial statements or separate from the financial statements
rights and obligations and occurrence
inquire about accruals for proper disclosure. Compare disclosures to other audit evidence to ensure that all disclosed information related to payroll has occurred.
rights and obligations, and occurrence
inquire of management and review loan agreements, minutes, and other documents to determine whether fixed assets have been pledged as collateral.
rights and obligations, and occurrence
inquire of management and review loan agreements, minutes, and other documents to determine whether investments have been pledged as collateral. Compare disclosures to other audit evidence to ensure that all disclosed information related to investments has occurred.
lawyer going concern
inquiry of the client's ______ or _______is not required, but may be appropriate
fraudulent financial reporting (lying)
intentional misstatements or omissions of amounts or disclosures in the FS that are designed to deceive FS users
- management override - human errors - collusion
internal controls only provide reasonable assurance because of:
manual controls
internal controls performed by people and are more suitable when judgement and discretion are required. Also used to monitor automated controls. However, can be more easily ignored or overridden.
automated controls
internal controls performed using IT and are more suitable for: - high volume or recurring transactions - control activities that can be adequately designed and automated
- collusion - management override
internal controls prevent and/or detect (and correct) material misstatements unless:
1. effectiveness of internal controls 2. supports assessment with appropriate evidence 3. provide a written assessment about effectiveness of internal control in a report
management requirement for nonissuers:
trade association
membership in the same ______ as a client does not impair independence
1. selecting all items 2. selecting specific items 3. audit sampling
methods for selecting items for testing:
corroborating evidence
minutes of meetings, confirmation, information obtained through observation, inquiry, ,and inspection that provides additional support and gives validity to the recorded accounting data
factual misstatements
misstatements about which there is no doubt
all other entities
must evaluate subsequent events through the date that the financial statements are available to be issued
public companies
must evaluate subsequent events through the date that the financial statements are issued
- no identified instances of noncompliance - unmodified opinion or qualified opinion on the FS - applicable covenants or requirements have been subjected to audit procedures as part of the FS audit
negative assurance can be given when:
- RMM is low - a large number of small account balances - no reason to expect that recipients will ignore them
negative confirmations used when:
negative assurance
nothing came to the auditor's attention that caused the auditor to believe that the entity failed to comply with the specified aspects of the contractual agreement or regulatory requirement
limited assurance
objective and scope of reviewing interim financial statements:
detect material misstatements
objective of detail substantive testing
completeness
obtain evidence of the investment balance by: 1. search for unrecorded purchases of securities by examining transactions for a few days after year-end 2. confirm securities held by a third-party custodian or count securities on hand to determine that all securities have been recorded, although these are primarily tests of existence 3. request information from the counterparty to the derivative or the holder of a security to determine whether any side agreements or agreements to repurchase securities exist. 4. determine differences between expectation of interest earned and actual interest earned
deficiency in operation
occurs when a properly designed control does not operate as designed, or is performed by an inappropriate person
- read minutes - obtain reports from component auditors - reconcile with accounting records - read interim FS - read other documents
other procedures the auditor may perform:
audit strategy
outlines the scope of the audit engagement, the reporting objectives, timing of the audit, required communications, and the factors that determine the focus of the audit. Also includes a preliminary assessment of materiality and tolerable misstatement
2
partnership names can continue to practice under name for up to ____ years after becoming a sole practitioner.
completeness
perform analytical procedures testing the reasonableness of dividend and interest income to determine that all investment income has been recorded
performance
policies and procedures established to: - achieve a consistently high level of performance - ensure engagement is properly supervised and reviewed - allow consultation with experts inside or outside the firm
engagement/client acceptance and continuation
policies and procedures for deciding whether to accept or continue a client relationship. - Minimize the likelihood of association with a client whose management lacks integrity - undertake engagements that firm can reasonably expect to complete with professional competence - comply with legal and ethical requirements - firm should obtain an understanding with the client regarding the nature, scope, and limitations of services - policies and procedures for withdrawal
- non-audit services that do not exceed 5% of total revenues
preapprovals that are not needed by the audit committee:
compilation
present in the form of FS information that is the representation of management without undertaking any assurance on the FS. Does not perform any audit or review procedures. Does not provide assurance, but because a report is required, it is an attest engagement. Independence is not required, but must add paragraph stating if not independent.
GAAP
private companies do not necessarily have to comply with _____
- inquiry - observation - inspection - tours - walk-throughs
procedures used to obtain evidence about design and implementation of controls:
internal control
process designed to provide reasonable assurance about the achievement of the entity's objectives
accounting information system
processes from initiation of a transaction to inclusion in the financial statements
improved systematic
processing consistency is _____ in a computerized environment however, there is increased potential for ____ errors
partially expired
prospective FS may cover a period that has:
summary of significant assumptions
prospective FS must include a:
examination
provides a positive OPINION, high level of REASONABLE assurance, generally based on a variety of procedures, including search, verification, inquiry, and analysis
Statements on Quality Control Standards (SQCS)
provides guidance to CPA firms about a quality control system that consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances.
AICPA Code of Professional Conduct
provides members with guidelines for behavior in the conduct of their professional affairs
compilation of prospective FS
purpose is the proper assembling of the financial data based on the responsible party's assumptions
1. confirm representations explicitly or implicitly given to the auditor 2. indicate and document the continuing appropriateness of such representations 3. reduce the possibility of misunderstanding concerning matters that are subject of the representations
purpose of the management representation letter:
- nature and cause of deviation - possible relationship of deviation to other phases of the audit
qualitative considerations of deviations:
understandability and classification
read all cash-related disclosures to ensure that they are understandable
valuation, allocation, and accuracy
read the footnotes and other information related to investments to determine whether the information is accurate and presented at the appropriate amounts
valuation, allocation, and accuracy
read the footnotes and other information related to payroll to determine whether the information is accurate and presented at the appropriate amounts
valuation and allocation
recalculate accumulated depreciation for reasonableness. Evaluate fixed assets for impairment by examining the entity's documented impairment analysis, identifying circumstances that could indicate that the book value of fixed assets is not recoverable, and reperforming the entity's impairment analysis to determine whether recorded impairment losses are reasonable.
valuation, allocation, and accuracy
recompute the mathematical accuracy of a sample of vendor invoices
other-matter paragraphs
refers to matters other than those presented or disclosed in the FS that are relevant to the users' understanding of the audit, the auditor's responsibilities, or the auditor's report
financial forecast
reflects, to the best of the responsible party's knowledge, the expected financial results of a future period. It is based on expected conditions and expected courses of action
- applicable financial reporting framework - legal and political environment
regulatory factors (pressure):
Type 2 Report
report on the design, implementation, and operating effectiveness of a service organization's controls. Provides the user auditor with assurance about the design, implementation, and operating effectiveness of the service organization's internal controls decreasing control risk.
positive confirmation
request that the confirming party respond directly to the auditor by providing the requested information by stating that the party agrees or disagrees with the information in the request
completeness, valuation and allocation, existence
- bank confirmation (year-end balances, actual loans, contingent liabilities, discounted notes, pledged collateral, and guarantee or security agreements) - bank reconciliation
Examples of scope limitations
- inability to observe inventory - inability to confirm receivables - inability to obtain audited FS of a consolidated investee - restrictions on the use of auditing procedures - inadequacy of accounting records
review considerations
- performed in accordance with professional standards - issue need further consideration - consultations have taken place - nature, extent, and timing of the work performed is appropriate - work performed supports the conclusions - evidence obtained is sufficient and appropriate
rights and obligations
ascertain that consigned inventory on hand is excluded from the physical inventory count, whereas consigned goods in the hands of consignees are included in inventory balances
rights and obligations, and occurrence
compare disclosures with other audit evidence to ensure that all disclosed information related to debt has occurred
rights and obligations, and occurrence
compare disclosurse to other audit evidence to ensure that all disclosed information related to cash has occurred
valuation, allocation, and accuracy
compare prices and terms on a sample of sales invoices with authorized price lists and terms of trade to determine whether sales are recorded at the appropriate amount
significant deficiency
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
abuse
deficient or improper behavior, including the misuse of authority or position for gain. Auditors not required to detect because it is subjective.
valuation, allocation, and accuracy
depreciation expense recalculated for reasonableness and conformity with GAAP. Gains and losses and the removal of AD for fixed assets sold or retired should be tested for reasonableness
stop-or-go sampling
designed to avoid oversampling for attributes by allowing the auditor to stop an audit test before completing all steps. Used when few errors are expected in the population
understandability and classification
examine a sample of significant charges to repairs and maintenance expense for items that should have been capitalized and should review lease transactions for proper classification as operating or capital
cutoff
examine a sample of time cards from before and after year-end and compare with the payroll report to determine whether the transactions were recorded in the proper period
completeness
examine new debt agreements and the board minutes for evidence of new agreements. Review interest expense for payments to debt holders not included in the debt listing
valuation and allocation
examine new debt agreements to determine whether they were recorded at the proper amount. Recompute any interest payable and recompute the amortization of premiums or discounts
rights and obligations
examine note and bond agreements to verify that they are the obligations of the entity
rights and obligations
examine supporting documentation to verify that the payroll accrual is an obligation of the entity
unerstandability and classification
examine the due dates of notes and bonds to determine whether the debt should be classified as short term or long term
valuation, allocation, and accuracy
examine the results of confirmations and test the adequacy of the allowance for doubtful accounts.
- confirmation - observation, inspection, examination of assets - vouching
existence procedures:
control deficiency
exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis
separately
materiality for single audits are considered _______ in relation to each major program
the needs of FS users
materiality is influenced by the auditor's perception of:
compensating controls
may limit the severity of an identified deficiency and prevent it from being a material weakness
significant deficiencies in internal control
may make it impracticable for the auditor to perform a review
adverse interest
member will not act with objectivity
- inquiry - inspection of documents - observation, recalculation, reperformance
often used to evaluate operating effectiveness:
general use
prospective FS will be used by parties not negotiating directly with the responsible party. Only a financial forecast is appropriate for:
AUP
provide NO assurance, but procedures and findings are LISTED
- Completeness - Valuation - Rights - Understandability
most relevant assertions when auditing presentation and disclosure:
- Completeness - Cutoff - Valuation - Existence - Understandability
most relevant assertions when auditing transactions:
to express an opinion on the effectiveness of the entity's internal control over financial reporting
objective of the engagement:
1. reporting on a separate schedule of expenditures of federal awards 2. compliance audit of federal awards
objectives of single audit:
Level 2
observable inputs other than quoted market prices for identical assets or liabilities
Level 1
observable quoted prices in actives markets for identical assets or liabilities
completeness
obtain an aged trial balance of AR and trace the total to the GL control account
1. $750,000+ in assistance 2. classified as "high risk"
Major programs are either:
- current and net income - current/LT and OCI - current/LT, no G/L
Marketable securities: Trading: (Class and unrealized G/L) AFS: (Class and unrealized G/L) HTM: (Class and unrealized G/L)
- unable to obtain sufficient evidence - going concern - no independent
Material and pervasive departures from GAAS:
- practitioner must be independent - responsible party takes responsibility - subject matter and criteria applied is appropriate - expect to obtain evidence needed - opinion, conclusion, and findings issued in a written report
Preconditions for an attestation engagement:
- Preparation of sales order - Credit approval - Shipment - Billing & Accounting
Segregation of duties in the sales transaction:
risk of assessing control risk too low
risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control (auditor's fear/concern)
risk of incorrect rejection
risk that the sample supports the conclusion that the recorded account balance is materially misstated when in fact it is not materially misstated
risk of incorrect acceptance
risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated (auditor's fear/concern)
system flowcharts
shows the origin of each document in the system, its subsequent processing, and its final disposition.
- relate to application of accounting principles - significant risks - relate to possible MM - cause significant difficulty - may result in modifying auditor's report
significant audit findings include matters that:
- SAS (nonissuers) - PCAOB (issuers)
standard that applies to audit engagements:
- engagement partner's full name - statement that the auditor is responsible for the audits or audit procedures performed by other firms and has supervised their work
The auditor of an issuer MAY elect to include information in the audit report about other accounting firms participating in the audit. If so, they must include:
professional judgement
The auditor should accumulate misstatements identified during the review, and should use _____ to evaluate the misstatements to determine whether material modification should be made to the financial information
management bias
The auditor should also evaluate whether the difference between the reported estimate and the nest estimate supported by the audit evidence indicates possible:
- the opinion on the specific element is not published with and does not accompany the auditor's report on the complete set of FS - the specific elements does not constitute a major portion of a complete set of FS
The auditor should only express an unmodified opinion on the specific element only if:
other-matter paragraph separate report
The auditor's report on the supplementary information for a nonissuer may either be presented as an ______ in the auditor's report on the FS OR in a _____
opinion
the practitioner issues an ______ that the prospective FS are presented in conformity with AICPA guidelines and that the underlying assumptions provide a reasonable basis for the forecast or the projection given the hypothetical assumptions
obtaining knowledge regarding compliance
the report should contain a statement that the audit was not directed primarily toward:
- separate paragraph to report restricted use to specified parties
the reporting accountant's report should include:
audit risk
the risk that the auditor may unknowingly fail to appropriately modify the opinion on FS that are materially misstated. Arises bc the auditor obtains only reasonable assurance. Should be reduced to an appropriately low level before an opinion on the FS is expressed
detection risk
the risk that the auditor will not detect a material misstatement that exists in a relevant assertion and the auditor gives the wrong opinion
attestation risk
the risk that the practitioner expresses an inappropriate opinion or conclusion when the subject matter or assertion is materially misstated. Does not apply to AUP engagements
sampling risk
the sample is not representative of the population and that the auditor's conclusion will be different from the conclusion had the auditor examined 100% of the population
PPS Sampling
the sampling unit is defined as an individual dollar in a population. Automatically emphasizes larger items.
- within 30 calendar days of receipt - within 9 months after the end of the audit period
the single audit report must be submitted:
judgement
the specific quantity, type, and content of audit documentation are based on the auditor's:
AICPA
the standard setting body for attestation engagements (examination, review, AUP procedures)
Governmental Accountability Office
the standard setting body for government organizations
AICPA
the standard setting body for nonissuers (private companies)
- description of special purpose framework - disclosures that are omitted - accountant is not independent - known departures - supplementary information
things in compilation report that require an additional paragraph:
completeness
third-party confirmation or stock certificate book
attestation engagements
those in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter that is the responsibility of another party (usually management)
those charged with governance
those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity
existence and occurrence
vouch time on payroll summaries by selecting a sample of payroll register entries and comparing with time cards and approved time reports.
overstatement
vouching tests the risk of ______ in revenues or assets
existence and occurrence
vouching transactions recorded during the current period to board minutes.
- LT liabilities and interest expense - additions and R&M expense - Investments and dividend and interest income
what accounts can be audited simultaneously?
1. firm's size 2. organizational structure 3. the nature and complexity of its practice 4. the degree of operating autonomy allowed 5. cost-benefit considerations
The nature and extent of a firm's quality control policies and procedures depends on:
- read statement for current period - compare statements with current period statements - obtain a letter of representation from the successor auditor - inquire of and obtain a letter of representation from management
When deciding to reissue their report, predecessor auditors should:
- new principle is in accordance with applicable financial reporting framework - method of accounting for the change is acceptable - disclosures are appropriate and adequate - the change is justified
When evaluating the acceptability of an accounting change, the auditor should consider:
include an other-matter paragraph that includes a statement that service was less in scope than an audit and does not provide the basis for an opinion
When current period is audited and PP is unaudited, the accountant should:
issue the current period compilation or review report, and add an other-matter paragraph indicating no auditing procedures have been performed
When current period is unaudited and PP audited, the account should:
- AICPA presentation guidelines are not followed (Q/A) - Significant assumptions are not disclosed (A) - Basis not reasonable (A) - Scope limitation (D)
Would require the practitioner to modify the opinion:
work papers
______ belong to auditors and may not disclose without client's permission or court order
actual or threatened litigation
______ may impair independence regardless of who the plaintiff and defendant is. Independence is not impaired by a suit for an immaterial dollar amount for work unrelated to an attestation service.
- subpoenaed - part of a quality review (peer review) - inquiry made by ethics division or the trial board of AICPA - your legal defense team (when client is suing you)
a member is obligated to disclose confidential information when:
advocacy threat
a member will promote a client's interests or position to the point that his or her objectivity and independence is compromised
undue influence threat
a member will subordinate his or her judgement to an individual associated with a client or any relevant third party due to the individual's reputation or expertise
one year
a member's independence is impaired with respect to a client who is more than ______ overdue in the payment of professional fees
partial presentation
a presentation of prospective financial information that excludes certain essential elements is considered to be a _____ that is generally not acceptable for general use.
difference estimation
a sampling plan that uses the average difference between the audited values of items and their book values to project the actual population value. [(audited BV - audited true value)/items tested] x population
mean-per-unit estimation
a sampling plan that uses the average value of the items in the sample to estimate the true population value (avg. sample value x # of items in population)
dual-purpose test
a test of controls that is performed concurrently with a test of details on the same transaction.
hypothetical transaction
a transaction not involving facts or circumstances of a specific entity
required
a written audit plan is:
- NET of audit procedures - results of procedures - findings or issues - conclusions reached - who performed/reviewed the work and date
audit documentation should be prepared in enough detail so that an "experienced auditor who has no previous connection with the audit can understand:
- who performed the work and date - who reviewed the work and date
audit documentation should include:
- basis for the auditor's report and conclusion - evidence audit was conducted with GAAS
audit documentation should provide:
show that accounting records reconcile with the financial statements
audit documentation should:
revenue
auditor is specifically required to perform analytical procedures relating to:
- response to predecessor auditor - response to court order - government agency giving federal financing
auditor may disclose noncompliance to:
- predecessor auditor - court order - government agencies giving federal financial assistance
auditor's have a duty to disclose to:
the FS are free of MM due to noncompliance with laws and regulations. Not responsible for preventing or detecting noncompliance
auditor's responsibility concerning compliance:
- SAS - PCAOB
auditor's responsibility is to conduct review in accordance with appropriate standards. - private company: - public company:
rights and obligations, and occurrence
compare disclosures to other audit evidence to ensure that all disclosed information related to AP and purchases has occurred
independence
required for examination engagements
several
With information technology, auditors should consider performing tests _____ times during the year
discovery sampling
appropriate when the auditor believes that the population deviation rate is zero or near zero.
cutoff
compare dates on a sample of vouchers with the dates the transactions were recorded in the purchase journal
existence and occurrence
vouch selected amounts from the AP listing to the voucher packages
to understand each element of "CRIME" as it pertains to financial reporting
CPA's responsibility for evaluating the design of internal controls:
valuation, allocation, and accuracy
1. obtain the AP listing, foot the listing, and agree the listing to the GL 2. obtain a sample of vendor statements and agree the amounts to the vendor accounts 3. review the results of AP confirmations
control environment
- tone at the top - provides discipline and structure - communication and enforcement of integrity and ethical values - commitment to competence - participation of those charged with governance - management's philosophy and operating style - organizational structure - assignment of authority, responsibility, and accountability - HR policies
valuation and allocation
1. obtain and foot a listing of investments by category and agree to GL 2. review the schedule of investment activity and obtain evidence of any additions and subtractions that occurred 3. obtain evidence corroborating the quoted year-end fair value 4. recalculate the ending values of investments not reported at fair value 5. determine whether there has been any permanent impairment in the value of individual securities 6. assess the reasonableness and appropriateness of assumptions, market variables, and valuation models
valuation, allocation, and accuracy
1. test the mathematical accuracy of the inventory report and reconcile to the GL 2. inquire about obsolete or damaged goods, scan the perpetual records for slow-moving items, and be alert during the inventory observation for damaged goods or signs of obsolescence 3. examine vendor invoices, review direct labor rates, test the computation of standard overhead rates, and examine standard cost variance analyses
- title - addressee - management responsibility - reference to management responsibility for acceptable framework - purpose of FS - auditor's responsibility - an opinion, if applicable - emphasis-of-matter - other-matter
A report on special purpose FS should include:
engagement letter
All SSARS engagements require an:
nonissuers
An other-matter paragraph and emphasis of matter paragraph is used for:
after the emphasis of matter paragraph
An other-matter paragraph is included:
1. consents to the use of his/her name 2. has prepared the FS even if name not used
Association with FS occurs when an accountant either:
- use the report required by the PCAOB - Amend the PCAOB report to state the audit was also conducted in accordance with GAAS
Audits in accordance with GAAS and PCAOB (nonissuer):
GAAS, GAGAS, and single audit standard (2 CFR 200)
Audits of recipients of federal financial assistance should be conducted in accordance with:
NET
CPA tests internal controls in order to adequately plan the _____ audit procedures
due diligence defense
Comfort letters help underwriters exercise their ________ when they could be held liable for material omissions or misstatements in a registration statements
- fraud and noncompliance - significant deficiencies or material weaknesses
Communications are required with respect to:
- Sales - Collection of Cash Receipts - Uncollectible Receivables - Sales Returns - Sales Discounts
Segregation of duties in the AR transaction:
- auditor read the FS for obvious errors - "unaudited" marked on each page
Disclaimer on unaudited FS should include:
- Criteria - Conditions - Cause - Potential Effect
Elements of a finding:
adverse opinion
Exam trick: Weak internal control does NOT create an:
the auditor's opinion - FS are prepared in accordance with a special purpose framework - the PY audit opinion is updated or FS are prepared in accordance with a special purpose framework
Explanatory paragraph will follow _______ except when:
1. Financial Statement Report (GAAS) 2. SEFA Report 3. GAGAS (Yellow Book) 4. Single Audit Report 5. Schedule of Findings and Questioned Costs
Five reports issued for a single audit:
valuation, allocation, and accuracy
For CR, from a sample of daily deposits, the auditor should foot the remittance advices and entries on the deposit slip and agree to the CR journal and bank statement. For CD, from a sample of voucher packages, the auditor should agree the purchase order, receiving report, invoice, cancelled check, and disbursement journal.
completeness
For CR, trace a sample of remittance advices to the cash receipts journal and deposit slips. For CD, trace a sample of conceled checks to the CD journal
existence and occurrence
For CR, vouch a sample of entries in the CR journal to remittance advices, deposit slips, and the bank statement. For CD, vouch a sample of entries from the CD journal to canceled checks, the voucher package, and the bank statement.
required by the firm's policies and procedures
For a nonissuer, an engagement quality control review is performed only when:
deficiencies and omissions
For a nonissuer, the audit report should include an other-matter paragraph with language to report:
emphasis-of-matter
For a review, at the accountant's discretion, an ____ paragraph may be added to the report to discuss uncertainties or inconsistencies, or to emphasize matters already disclosed in the FS
- completeness - allocation and valuation - rights and obligations - existence
For account balances, relevant assertions include:
concurring approval of issuance
For an issuer, the engagement report cannot be used until the engagement quality reviewer provides:
eliminate direct testing by the CPA
For assertions related to material FS amounts with as high risk of MM or high degree of subjectivity, the internal auditor's work alone cannot:
direct
For attribute sampling, expected deviation rate and sample size have a ______ relationship
inverse
For attribute sampling, risk of assessing control risk too low and sample size have an ____ relationship
inverse
For attribute sampling, tolerable deviation rate and sample size have an ______ relationship
1. report of the other country or the report set out in the ISAs 2. A U.S. form of report
For distribution only outside the U.S., the auditor may use two options:
before the engagement partner releases the audit report
For nonissuers, the engagement quality control review should be completed:
- completeness - understandability and classification - rights and obligations - valuation and accuracy
For presentation and disclosure, relevant assertions include:
- the period - the degree - the amount
For specific litigation or claims, the auditor should obtain evidence related to:
no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor's opinion on the FS
For the date of the report:
- completeness - cutoff -accuracy -classification -occurrence
For transactions and events, relevant assertions include:
Beg. Inventory + purchases = COGAFS - End. Inventory = COGS
Formula to calculate COGS in periodic inventory system:
1. Professional competence 2. due professional care 3. planning and supervising 4. sufficient relevant data
General Standards Rule: a member must comply with these standards in all engagements:
withdraw from engagement
If FS are inaccurate or incomplete and client refuses to provide revised information, the accountant should:
there are identified instances of noncompliance
If an adverse or disclaimer of opinion is expressed on the FS, a report on compliance can only be issued when:
DORCS - Date of previous report - Opinion type previously issued - Reason for the prior opinion - Changes that have occurred - Statements that the "opinion...is different"
If an updated opinion differs from the previous opinion, the auditor should disclose in a emphasis-of-matter, other-matter, or explanatory paragraph and it should discuss:
qualified or adverse opinion
If going concern is inadequately disclosed, issue a:
- advising the client to issue revised FS - advising the client to make the necessary disclosures - providing notification that the FS and auditor's report should not relied upon
If information that materially affects the report and other persons' reliance after issuance of the report, the auditor should advise the client to immediately disclose the new information by:
analytical procedures and the recalculation of payroll accruals
If internal controls are effective, auditor's focus on:
tests related to completeness, existence, and rights and obligations
If internal controls are ineffective, auditor's focus on:
modify the review report
If management does not revise the FS and the accountant believes they need to be, the accountant should:
- date the accountant's report as of a later date - dual date the review report
If management updates the FS, the accountant should:
state this, and describe the omitted weaknesses. The auditor should also communicate this situation to those charged with governance
If management's report fails to include one or more material weaknesses identified by the auditor, the auditor's report should:
indicate this situation and should fairly describe the material weakness
If management's report includes a material weakness but does not fairly present the weakness, the auditor's report should:
modify his or her own report to discuss the situation. IF management refuses to supply a report, the auditor should withdraw from the engagement
If management's report is incomplete or improperly presented, the auditor should:
1. reissue the PP report 2. include an other-matter paragraph in the current report
If reporting when one period is audited, the accountant should:
- disclose such omissions - the omission is not intended to mislead
If requested by the client, the accountant may prepare statements that omit substantially all disclosures required by the reporting framework provided:
a paragraph should be after the conclusion paragraph with a reference to it in the conclusion paragraph
If the accountant modifies the report:
disclose the MM in the FS (consider withdrawing)
If the accountant prepares FS that contain a known departure from reporting framework, the accountant should:
modify the opinion OR withhold the report
If the auditor concludes that the supplementary information is materially misstated and management refuses to revise the information, the auditor should:
- express an adverse opinion if GAAP issue - express a disclaimer of opinion if GAAS issue
If the auditor's modified opinion on the complete set of FS is relevant to the audit of a specific element of the FS, the auditor should either:
the single FS or specific element
If the auditor's report has an emphasis-of-matter, other-matter, or explanatory paragraph on the complete set of financial statements, a similar paragraph should be included in the FS of:
sufficient evidence restrict the use
If the client is not the responsible party, a report may be issued as long as appropriate procedures are performed and ______ is obtained. Also:
U.S. form report with an emphasis-of-matter paragraph
If the financial statements are also intended for use in the U.S., the auditor should report using a:
1. decide if the report is still appropriate 2. read the statements 3. compare the PP statements with the current 4. obtain a letter from successor auditor stating whether they believe the PP statements are materially affected
If the predecessor accountant decides to reissue their PP report, they should:
rationale
If the reporting accountant determines it is not necessary to consult, they should document the _____ for not consulting
modify the report or withdraw
If there is a departure from the reporting framework, the accountant should:
- ask client to arrange a meeting to resolve the matter. If management refuses, or auditor is not satisfied with resolution, the auditor should consider the implications on the current audit
If there is a misstatement in the opening balance, the auditor should:
add an other-matter paragraph that states: - date of original report - statements of the PP have been changed - reason for change
If there is a subsequent event in the current year that affects PP, the accountant should:
documenting their disagreement
If there is disagreement among auditors, dissenting staff members should be allowed to disassociate themselves from the resolution by:
refer to the specialist - reduce the auditor's responsibility for the audit opinion
If, as a result of the specialist's work, the auditor decides to express a modified opinion, the auditor may ________ in the report and should indicate that the reference to the specialist does not:
a qualified or adverse opinion should be expressed
If: 1. opening balances contain a misstatement that materially affects the current period FS, and the effect of the misstatement is not appropriately accounted for or adequately presented or disclosed 2. the current period's accounting policies are not consistently applied regarding opening balances 3. a change in accounting policy is not properly accounted for or adequately presented or disclosed
- Auditor's responsibility (R) - auditor is to Express an opinion (E) - audit was conducted in accordance with GAAS - require that the auditor Plan and perform audit (P) - audit involves Performing procedures to Obtain audit evidence (PO) - assessment of the Risk of material misstatement (R) - considers IC "Tests) relevant to the financial Statements (TS) - not expressing an opinion on effectiveness of internal Controls (C) - evaluating Reasonableness of significant Accounting estimates made by Management and Evaluating the overall presentation of FS (RIME)
In Auditor's Responsibility paragraph:
- FS are prepared in accordance with special framework - refer to not to the FS that describes framework - states that framework is a basis other than GAAP
In emphasis-of-matter paragraph, include that:
- management integrity - disagreements with management - reasons for change in auditors - communication to client regarding fraud, noncompliance, and matters related to IC
Inquiries of the predecessor auditor include:
- Audit TOC --> IC opinion - IC testing --> IC reliance - IC deficiency --> substantive testing - Audit issues --> IC issues
Interrelationships between the two engagements:
- authorization of purchase or sale of investments - custody of investments - record keeping - fair value measurement
Investment Segregation of Duties:
not
It is okay to rely on PY test results if it is _____ a significant risk (controls can be tested every 3 years)
operating effectiveness
It is required for an auditor to obtain an understanding of internal controls. However, they are not required to evaluate _______ as part of the understanding.
- circumstances - management-imposed scope limitation
Limitations on the scope of the audit may be imposed by either:
- plans to borrow money or restructure debt - plans to sell assets - plans to delay or reduce expenditures - plans to increase ownership equity
Mitigating factors for going concern:
1. an audit of the annual FS 2. a review of the interim FS
Negative assurance on pro forma financial information may be provided if the auditor has an appropriate level of knowledge of the accounting and financial reporting practices of the entity and has performed:
45 days
PCAOB (issuers) defines the documentation completion date as _______ following the report release date
7 years
PCAOB (issuers) document retention:
- materiality - audit risk - nature, extent, and timing of audit procedures (NET) - whether sufficient, appropriate evidence is obtained - evaluating management's judgement - drawing conclusions based on audit evidence
Professional judgement is necessary when auditing when making decisions about:
- authorization to employ and pay - Supervision - timekeeping and cost accounting - payroll check preparation - check distribution
Segregation of Duties for Payroll:
- Purchase Requisition - Purchase Order - Receipt of Goods or Services
Segregation of Duties in the Purchase transaction:
- preparing few adjusting entries - consulting - tax returns - bookkeeping - data processing services
SSARS does not apply to:
- recording the payable - approving invoice for payment and recording payment
Segregation of duties in AP:
COVER U - Completeness - Cutoff - Valuation, Allocation, and Accuracy - Existence and Occurrence - Rights and Obligations - Understandability and Classification
Six assertions:
"HELP ME" - Human resources - Engagement/client acceptance and continuance - Leadership responsibilities - Performance of the engagement - Monitoring - Ethical requirements
Six interrelated elements of quality control:
C the FIVE CARROT WARS - Confirmation - Footing, Cross-Footing, Recalculation - Inquiry - Vouching - Examination/Inspection - Cutoff - Analytical Procedures - Reperformance - Reconciliation - Observations - Tracing - Walk-through - Auditing related accounts simultaneously - Representation letter - Subsequent events review
Standard audit procedures:
1. determine audit risk 2. assess inherent risk 3. assess control risk 4. determine detection risk
Steps required in assessing audit risk:
- the date of the auditor's report on the FS from which the supplementary information was derived - the date on which the auditor obtained sufficient appropriate audit evidence to support the auditor's opinion on the supplementary information in relation to the FS
The date of the auditor's report on the supplementary information in relation to the FS as a whole should not be earlier than:
restrict the use
The other-matter paragraph is included that:
- explanatory paragraph - separate report
The supplementary information for an issuer may be presented as an __________ in the auditor's report on the FS or issue a ________
inverse
There is an ______ relationship between audit risk and materiality
revenue recognition
There should be a presumption in every audit that there is the risk of material misstatement due to __________ fraud
STAFF - staff qualifications - transaction types and frequency - accounting basis used to prepare the FS - form of the accounting records - financial statements' form and content
Things to know to understand a client's business for a compilation:
- preparation - compilation - review
Three levels of service with respect to unaudited FS:
1. General response 2. Response encompassing specific audit procedures 3. response addressing risks related to management override
Three responses to the results of the fraud risk:
- Management - accountant - intended users
Three-party relationship of preparations, compilations, and reviews:
Recommended: by release Required: no later than 60 days after release
Timing of communication of control deficiencies:
ADMITS - Analytical procedures - Debt compliance - Minutes - Inquiry - Third parties - Subsequent events
To evaluating going concern, the auditor should examine:
- not independent and therefore, no judgement as to final determination
Treat management specialist like one of your staff except:
FIND - Flowchart - Internal control questionnaire - Narrative - Documentation from the client
Ways to document understanding:
current period
When all periods presented are complied or reviewed, update all periods to:
- reason for request - effort required to complete engagement - estimated additional cost
When asked to change engagement from audit/review/compilation, the accountant should consider:
smallest
When assessing materiality, the auditor should use the ______ level of misstatement that could be material to any one of the FS
incremental risk
When audit procedures are performed before year-end, the auditor must assess the ______ involved and determine whether sufficient alternative procedures exist the extend the interim conclusions to year-end
- purpose for the financial statement or element - intended users - steps taken by management
When auditing a single financial statement or a specific element of a financial statement, the auditor should obtain an understanding of:
integrated audit
When auditing issuers, the auditor must perform an ________
- adequate disclosures included - consistent accounting policies - accounting estimates are reasonable - information is relevant, reliable, comparable, and understandable - terminology is appropriate - FS are fairly presented - FS represent the underlying transactions
When forming an opinion, the auditor should evaluate whether:
- opinion is updated - FS prepared in accordance with special purpose framework - substantial doubt about ability to continue as a going concern - material change - corrected material misstatement - other information is materially inconsistent - supplementary data has been omitted
When is an explanatory paragraph required?
1. Introductory paragraph: "auditor was engaged" 2. Auditor's Responsibility: Because of the...we were not able to obtain sufficient appropriate evidence 3. Basis for Disclaimer BEFORE opinion paragraph 4. Disclaimer of Opinion: "Because of...does not express an opinion"
When issuing a disclaimer of opinion for a nonissuer, what changes in the audit report?
1. Introductory: "We were engaged to audit" & deletion of reference to auditor's responsibility 2. omit scope paragraph 3. Explanatory paragraph BEFORE opinion paragraph 4. Disclaimer of opinion: "Do not express an opinion"
When issuing a disclaimer of opinion for an issuer, what changes in the audit report?
1. Change auditor responsibility to "qualified" audit opinion 2. Basis for Qualified Opinion BEFORE Opinion paragraph 3. Qualified Opinion paragraph ("except for")
When issuing a qualified opinion for a nonissuer, what changes in the audit report?
1. Middle Paragraph is added BEFORE opinion paragraph 2. Qualified Opinion paragraph ("except for")
When issuing a qualified opinion for an issuer, what changes in the audit report?
1. Change auditor responsibility to "adverse" audit opinion 2. Basis for Adverse Opinion BEFORE Opinion paragraph 3. Adverse Opinion paragraph ("because of...do not present fairly")
When issuing an adverse opinion for a nonissuer, what changes in the audit report?
1. Middle Paragraph is added BEFORE opinion paragraph 2. Adverse Opinion paragraph ("because of...do not present fairly")
When issuing an adverse opinion for an issuer, what changes in the audit report?
- was audited by the component auditor - magnitude of the portion - the framework used - the component was performed in accordance with GAAS
When making reference to a component auditor, the auditor's report should clearly indicate:
- modify auditor's responsibility - modify opinion paragraph
When making reference to component auditor for a nonissuer, changes to be made in the auditor's report:
- issue a separate auditor's report - indicate the date of the auditor's report on the complete set of FS
When reporting on a complete set of FS and a single FS or a specific element, the auditor should:
- False - Fraudulent - Deceptive - Misleading Financial Statements
When should a CPA withdraw from the engagement?
- states the purpose - indicates that the presentation is not intended to be a complete presentation of the entity's assets, liabilities, revenues, and expenses
When the auditor reports on an incomplete presentation, the auditor should include an emphasis-of-matter or explanatory paragraph that:
the entire audit report
When the auditor's report on compliance is included in the auditor's report on the FS, the restriction on the use of the report applies to:
- the service performed in the PP - the date of the PP report - a description of any material modifications - a statement that the service was less in scope than an audit
When the current period FS are audited and presented in comparative form with PP FS that were reviewed or complied, the auditor should include an other-matter paragraph (nonissuer) or explanatory paragraph (issuer) that includes:
updated and issued as the last paragraph
When the current period is a review and PP is compiled, the PP should be:
1. issue a compilation report and add a paragraph to the report on the current period statements. 2. Reissue the PP review report and - combine with current period compilations - present separately from current period compilation
When the current period is compiled and PP is review:
no requirement to reference PP
When the current period is prepared and PP is compiled or reviewed:
should be expressed directly on the subject matter
When there are MM or deviations from the criteria, the report should be modified and the conclusion:
1. whole FS 2. adjustment only
When there are restated PP FS, the predecessor or successor accountant may report on:
basis for adverse opinion preceding
When there is a material weakness, the report should include a ________ paragraph _______ the opinion paragraph
interim date
When there is a strong control environment, the auditor may perform tests at an _______ rather than at the balance sheet date
substantive balance sheet
When there is a weak control environment, the auditor may perform more ______ procedures as of the _____ date.
- the purpose for which FS are prepared - the intended users - steps taken by management to determine that framework is acceptable - any significant interpretations of the contract
When using a special purpose framework, the auditor should obtain an understanding of:
written representation
While performing an integrated audit, the auditor should obtain additional _________ from management about its responsibility for internal control over financial reporting
2 CPAs 3 non CPAs
Who makes up the PCAOB?
- lack of consistency - going concern - uncertainty - other auditor - emphasis of matter
Why would an auditor need to reword the prescribed form?
- supervise - review - evaluate - test the work performed
With direct assistance provided by the internal auditor, the CPA should:
3 years
a CPA firm must have a peer review every ______
kiting
a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank until after year-end. Used to cover a cash shortage or to pad a company's cash position. Results in an intentional overstatement of cash in the FS as the cash is simultaneously reflected in two different bank accounts
disclaimer of opinion or withdrawal from engagement
a client's refusal to permit inquiry of the attorneys generally will result in:
material weakness
a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis
IT Application controls
apply to the processing of individual transactions and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and reported
manual computer assisted audit techniques (CAATs)
an auditor can use ____ audit procedures or ______
benchmarking strategy
an auditor may not need to repeat specific testing performed in the previous year if the control has not changed, it is automated, and has low risk
component auditor
an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. May be part of the group engagement partner's firm, a network firm, or another firm
auditor's specialist
an auditor's specialist whose work in a field other than accounting or auditing is used by the auditor to assist in obtaining sufficient appropriate audit evidence. May be an internal specialist employed by auditor's firm or a network firm or an external specialist
lapping
an employee withholds funds received by a customer for personal use and fails to apply these receipts of cash or checks to the customer's receivable balance. The unrecorded receipt is covered by applying a subsequent receipt to the previously unrecorded account
component
an entity of business activity that prepares financial information that is included in the group financial statements
required
an understanding of internal controls is _____ even when the audit strategy is to only perform substantive procedures
- planning stage - final review stage
analytical procedures are required during:
application control
apply to the processing of individual transactions
cutoff
compare a sample of sales invoices from shortly before and after year-end with the shipment dates and with the dates the sales were recorded in the sales journal. Also analyze the record of sales returns following year-end.
program flowchart
created to document the logic and existing flow of a computer program.
consistency
deals with the comparability of the financial statements from year to year. Auditor report implies that the financial statements are comparable between periods
rights and obligations, and occurrence
determine whether any receivables have been pledged, assigned, or discounted and, if so, whether disclosure is required
vouching
directional testing in which the auditor examines support for what has been recorded in the records and statements, going from the FS back to the supporting documents (testing existence)
transaction tagging
electronically mark specific transaction and follow them through the client's system
CAATs (auditing through the computer)
emphasis is on the input and processing stages of transaction processing
human resources
encompasses criteria for recruitment and hiring, determining capabilities and competencies, assigning personnel to engagements, professional development, and performance evaluation, compensation, and advancement.
completeness
ensure that all required disclosures related to cash have been included in the notes to the FS
completeness
ensure that all required disclosures related to debt have been included in the notes to the FS
completeness
ensure that all required disclosures related to dixed assets have been included in the notes the the FS
completeness
ensure that all required disclosures related to inventory have been included in the notes to the FS.
completeness
ensure that all required disclosures related to investments have been included in the notes to the FS.
completeness
ensure that all required disclosurs related to AP and purchases have been included in the notes to the FS.
group financial statements
financial statements that include the financial information of more than one component
20% 40%
for low risk auditees, the auditor must test _____ of the total federal awards expended. For other auditees, the auditor must test _____ of the total federal awards expended.
1. nature of the assertion 2. predictability of the data relationship 3. availability and reliability of the data 4. precision of the expectation
four factors to determine the efficiency and effectiveness of analytical procedures:
- incentive/pressures - opportunity - rationalization/attitude
fraud risk factors:
those charged with governance
fraud that causes a material misstatement should be discussed with senior management and reported directly to:
- reputation - independence - professional competency - program steps
group engagement team must oversee:
Generally Accepted Government Auditing Standards (GAGAS)
guidelines for government organizations
Statements on Auditing Standards (SAS)
guidelines for nonissuers (private companies)
Statements on Standards for Accounting and Review Services (SSARS)
guidelines for unaudited FS or information
revision
if a change is immaterial, no ______ to the report is necessary
emphasis-of-matter
if a change is material, an _______ paragraph should be added for all periods in which the change is presented
reference
if a separate report is issued, each report should contain an explanatory paragraph making ______ to the other report and indicating the nature of the opinion expressed
dual date
if adjustments or disclosures are made after the original date of the auditor's report, the auditor may ______ the report to extend responsibility only for the particular subsequent event
- notify users - issue revised FS - issue subsequent period's FS with appropriate disclosure
if an accountant becomes aware of material information that existed as of the date of his or her report that would have affected the report and that persons are currently relying or are likely to rely on the FS covered by the report, management should:
- advise client to immediately disclose - discuss the matter with management
if an accountant becomes aware of material information that existed as of the date of his or her report that would have affected the report and that persons are currently relying or are likely to rely on the FS covered by the report, the accountant should:
1. the reason the review cannot be completed 2. auditor is precluded from issuing a report 3. any material modification that the auditor has become aware
if an auditor cannot complete the review, the auditor should communicate to the appropriate level of management and those charged with governance:
discuss with management and those charged with governance.
if auditor suspects that noncompliance exists, the auditor should:
consignor
if client is the _____, this inventory should be included in the client's FS
consignee
if client is the ________, this inventory should be excluded from the client's FS
withdraw from engagement
if client refuses to accept modified disclaimer:
add a paragraph modifying the disclaimer to describe the nature and effect of the departure from GAAP
if client refuses to correct obvious error:
notify each member of the board that the auditor will take further steps to prevent reliance on the statements
if client refuses to proceed with advice, the auditor should:
update the opinion in the CY's report
if during the current year the auditor becomes aware of evidence that affects the prior statements and opinion, the auditor should:
- observe - confirmation
if inventory is held offsite and is material: immaterial:
next higher level of authority. If non, obtain legal advice.
if management or those charged with governance are involved in noncompliance, the auditor should communicate the matter to:
NET
if materiality is revised, the auditor should consider whether the audit plan and ______ of audit procedures need to be modified in response to any change in the assessments of materiality
qualified adverse opinion
if noncompliance has a material effect on the FS and has not been adequately reflected in the FS, a _____ or _____ should be issued
other matter
if the accountant considers it necessary to communicate a matter other than those that are presented or disclosed in the FS, then the accountant should include a paragraph with the heading _______
qualified or disclaimer of opinion
if the auditor is unable to obtain sufficient appropriate audit evidence about the noncompliance or suspected noncompliance, a ______ or _____ should be expressed
review report
if the auditor is unable to perform necessary procedures or management does not provide appropriate representations, no ______ should be issued
assessed
if the auditor plans to use the internal auditors to provide direct assistance, the internal auditor's competence and objectivity must be:
FOB destination
if the client is the buyer, ______ should be included in the client's inventory as soon as the item has reached the destination
may rely on the control
if upper deviation rate is </= the auditor's tolerable deviation rate, the auditor:
prevented detected
in a well-designed internal control environment, errors should be _____ and/or _____ by employees in the ordinary course of their job/business
potential employment
independence is impaired id an individual who is a member of the engagement team or is in a position to influence the engagement is seeking or discussing ______ with the client or has been offered employment by the client unless the individual notifies the firm and is removed from the engagement
"Should"
indicates a presumptively mandatory requirement, which must be followed in all cases in which the requirement is relevant, except in rare circumstances when departure from the requirement is permitted if there is appropriate justification, performance of sufficient alternative procedures, and thorough documentation
"Must" or "is required"
indicates an unconditional requirement, which must be followed in all cases in which the requirement is relevant
GAAS
related to the conduct of each individual audit engagement
- lying - cheating - stealing
management's risk assessment concerns likely areas for:
independence
required for all engagements
audit procedures
performed to obtain evidence on which to base the audit opinion. May be categorized as wither risk assessment procedures or further audit procedures
IT General controls
policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system
preparation
prepare FS in accordance with a specified financial reporting framework. No audit or review procedures performed. Provides no assurance and considered a non-attest service and therefore does not require independence.
communication system
providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting
peer review
purpose is to determine and report whether the CPA firm being reviewed has developed adequate policies and procedures for the elements of quality control and is following them in practice
examination of prospective FS
purpose is to express the statements are presented in conformity eith AICPA guidelines and the underlying assumptions provide a reasonable basis for the prospective statements
understandability and classification
read all inventory-related disclosures to ensure that they are understandable. Review inventory records for proper classification between raw materials, work in process, and finished goods.
understandability and classification
read all of the AP and purchase related disclosures to ensure that they are understandable
understanadability and classification
read required disclosures for understandability
understandability and classification
read required disclosures for understandability
understnadability and classification
read required disclosures for understandability
understandability and classification
read required disclosures for understandability, and review and evaluation the methods used to account for, classify, and value securities
valuation, allocation, and accuracy
read the footnotes and other information related to AP and purchases to determine whether the information is accurate and presented at the appropriate amounts
valuation, allocation, and accuracy
read the footnotes and other information related to AR and sales to determine whether the information is accurate and presented at the appropriate amounts
valuation, accuracy, and allocation
read the footnotes and other information related to cash to determine whether the information is accurate and presented at the appropriate amounts
valuation, allocation, and accuracy
read the footnotes and other information related to debt to determine whether the information is accurate and presented at the appropriate amounts
valuation, allocation, and accuracy
read the footnotes and other information related to fixed assets to determine whether the information is accurate and presented at the appropriate amounts
valuation, allocation, and accuracy
read the footnotes and other information related to inventory to determine whether the information is accurate and presented at the appropriate amounts
valuation and allocation
recalculate any year-end payroll accrual and compare the calculated amounts to the reported accrual
valuation
recompute the value assigned to stock transactions during the period. Analyze RE account from inception and should review the propriety of any direct entries to RE.
quality control
relate to the conduct of all professional activities of the firm's practice as a whole
flow chart
symbolic diagram representing the sequential flow of authority, processes, and documents.
attribute sampling
testing for specific characteristics (seeking IC errors)
client third party
the _____ is responsible for the subject matter or is able to provide evidence that a ________ is responsible
group engagement partner
the _____ should evaluate whether the group engagement team will be able to obtain sufficient appropriate audit evidence through the group engagement team's work or the work of component auditors to act as the auditor of the group financial statements
nature
the ______ of an audit procedure includes both its purpose and its type
specified parties
the ______ take responsibility for the sufficiency of the procedures for their purposes, not the practitioner
engagement letter
the agreement to the terms of the engagement with management should be documented in an:
fair value
the amount at which an asset could be sold in a current transaction between willing parties at the measurement date
performance materiality
the amount or amounts set by the auditor at less than materiality for the FS as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the FS as a whole (SOAP)
one year
the audit firm cannot have employed the issuer's CEO, CFO, chief accounting officer, or any person serving in an equivalent position for a ____ period preceding the audit
presumptively mandatory requirements
the auditor "should" comply
should not
the auditor _______ make reference to the predecessor auditor's work
NET
the auditor controls DR and changes the _____ in response to assessed level of RMM
the fair presentation of the FS and related schedules. Additionally, the auditor should consider internal control, compliance, and previous audit findings.
the auditor should express an opinion regarding:
management's estimates and assumptions
the auditor should obtain an understanding of the accounts or disclosures for which judgement is used in the application of significant accounting principles, especially determining:
bank transfer schedule precede
to detect kiting effectively, a _______ should be prepared. For any bank-to-bank transfers that occur near year-end, the disbursement date on the check and in the ledger for the disbursing account should ______ the receipt date noted by the bank and in the ledger for the receiving account
1. information was derived from the information used to prepare the FS 2. information relates to the same period 3. the FS were audited and the auditor issued an auditor's report 4. neither and adverse opinion nor a disclaimer was issued 5. the supplementary information will accompany the audited FS
to determine if supplementary information is fairly stated, five conditions must be met:
- review the minutes - review invoices from lawyers - review correspondence from taxing authorities - review bank confirms for hidden loans - obtain management rep letter - send inquiry to attorneys
to identify contingent liabilities, the auditor should:
ethical requirements
to maintain public confidence in the professional - independence encompasses impartiality - all firm personnel subject to confirm independence in writing at least annually
attorney's opinion or a representation letter
to obtain a comfort letter, the requesting party must provide the auditor with:
sufficient appropriate audit evidence
to obtain reasonable assurance, the auditor should obtain _________ to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion
1. read the most recent FS 2. request authorization to review predecessor's audit documentation 3. perform audit procedures on opening balances
to obtain sufficient appropriate evidence regarding opening balances, the auditor should:
auditor's responsibility
to plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatement, whether caused by error or fraud
Expenditure
transaction cycle that includes purchases, payables, and cash disbursements
Revenue
transaction cycle that includes sales revenue, receivables, and cash receipts
pro forma FS
used to demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical FS if it has occurred during the period covered by those FS
tests of controls
used to evaluate the operating effectiveness of internal controls in preventing or detecting material misstatements
Emphasis of the matter paragraph
used when referring to a matter that is appropriately presented or disclosed in the FS. Does not affect the auditor's opinion.
other basis
uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements
combined approach
uses both tests of the operating effectiveness of controls and substantive procedures.
- something only suitable for limited number of users - something only available to specified parties - matters that are not the primary objective of the audit engagement
uses of the alert:
test data
uses the application program to process a set of test data, the results of which are already known. The client's system is used to process the auditor's data offline.
