Auditing Test 1

What is information risk?

The risk that information upon which a business decision is made is inaccurate

What is the objective of the audit of the financial statements?

The​ auditor's objective of the audit of the financial statements is the expression of an opinion on the fairness of the financial​ position, results of​ operations, and cash flows in conformity with applicable accounting standards. The auditor meets that objective by accumulating sufficient appropriate evidence to determine whether​ management's assertions regarding the financial statements are fairly stated.

An auditor reviews aged accounts receivable to assess likelihood of collection to support​ management's assertion about account balances of

Valuation and allocation

SEC Special Interest to Auditors Form S-1

When compaines plan to issue new securities to the public

Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide

a measure of management performance in meeting organizational goals

Contingent Fees Rule

a member in public practice shall not 1. perform for a contingent fee any professional services, for or member's firm performs audit 2. prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client

One of a CPA​ firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this objective is provided through

a system of quality control

Securities and Exchange commission (SEC)

an agency of federal government ASSISTS in providing investors with reliable INFORMATION upon which to make investments DECISIONS. The securities acts of 1933 and 1934 require financial statements accompanied by the opinion of an independent public accountant, as part of registration statements.

CPA Firms Provide

audit services, as well as accounting & bookkeeping, tax, and management consulting and risk advisory services

Rationalization Methods

commonly employed that can easily result in UNETHICAL CONDUCT: everybody does it; it its legal, Its ethical; Likelihood of discovery and consequences

Quality control

comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others Elements: leadership responsibilities, relevant ethical requirements, client relationships, and human resources

The concept of materiality would be least important to an auditor when considering the

effects of a direct financial interest in the client on the CPA's independence

CPA Public Confidence

essential that the client and external financial statements users have CONFIDENCE in the quality of audits and other services

Joint Trial Board

has authority to suspend or expel members from the AICPA, can result in the loss of the CPA certificate and the license to practice

New audit Client

have to contact previous auditor as to see why they left

Independence in appearance

is the result of others interpretations of this independence

An auditor strives to achieve independence in appearance to

maintain an unbiased mental attitude

Immediate Family

member has key financial role with client Ex: spouse, dependent same rules apply as to auditor

Performance of an audit

obtain reasonable assurance about whether financial statements are free of material misstatement, plan work and supervise assistants, Determine and apply materiality level or levels, Identify and assess risks of material misstatements based on understanding of entity and its environment, including internal controls. OBTAIN SUFFICIENT APPROPRIATE AUDIT EVIDENCE

The Responsibilities principle underlying AICPA auditing standards includes a requirement that

professional judgment be exercised by the auditor

Purpose of an audit

provide an opinion about the financial statements

Public Company Accounting Oversight Board (PCAOB)

provides oversight for auditors of public companies, establishes auditing, attestation, and quality control standards for public company audits, and performs inspections of audit engagements as well as the quality controls at audit firms performing those audits

A CPA Professional

recognizes the responsibility to the public, to the client, and to fellow practitioners, including honorable behavior, even if that means personal sacrifice

Independence of mind

reflects the auditors state of mind that permits the audit to be performed with an unbiased attitude. Often refereed to as being independent in fact

Auditing​ standards

represent the combination of the four principles and all the Statements on Auditing Standards​ (SASs) that are codified in the​ AU-C sections Ex: SAS No. 124 and SAS No. 125

Generally accepted accounting principles​ are:

specific rules for accounting for transactions occurring in a business enterprise established by FASB. Ex: accounting for leases and accounting for fair value assets

US Generally Accepted Accounting Standards (GAAS)

the AICPA auditing Standards

What are the 5 PCAOB assertions?

-Existence or Occurrence -Completeness -Valuation or Allocation -Rights and Obligations -Presentation and Disclosure

Principles underlying an Audit

-Framework: don't carry authority, general, minimum needed to meet -provide framework to help auditors fulfill: 1.Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error, there by enabling the auditor to express on opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework 2. Report on the financial statements, and communicate as required by GAAS, in accordance with the auditors findings - PURPOSE of an audit, personal RESPONSIBILITIES, of the auditor, auditor actions in PERFORMING the audit, REPORTING

Describe the relations among international auditing​ standards, AICPA auditing​ standards, and PCAOB auditing standards.

-International Standards on Auditing​ (ISAs) are issued by the International Auditing and Assurance Standards Board and are designed to improve the uniformity of auditing practices and related services throughout the world. -AICPA Statements on Auditing Standards​ (SASs) are established by the Auditing Standards Board of the AICPA, and are applicable to private entities within the United States. As a result of efforts by the Auditing Standards Board of the AICPA to converge U.S. standards with international​ standards, AICPA auditing standards and International Standards on Auditing are similar in most respects. - PCAOB Auditing Standards apply only to U.S. publicly traded companies and other SEC registrants, including broker-dealers. However, given that the PCAOB initially adopted existing standards established by the Auditing Standards Board of the AICPA as interim auditing​ standards, standards for audits of U.S. public and private companies are mostly similar.

Under what circumstances under which a CPA can disclose confidential information without client permission?

-Obligations related to technical standards -Participation in peer review -Subpoena or summons or compliance with laws and regulations -Response to AICPA Ethics Division

What is NOT a violation of AICPA rules or SEC rules including Sarbanes-Oxley requirements on independence?

-Providing advice to a private company client on accounting for a merger with another private company -Providing bookkeeping services to a private company. The source documents were prepared and authorized by the client -Providing internal audit services to a public company that is not an audit client. -Implementing a financial information system designed by management for a private company -Recommending a tax shelter to a client that is publicly held. The services were preapproved by the audit committee

What is a violation of AICPA rules or SEC rules including Sarbanes-Oxley requirements on independence?

-Providing bookkeeping services to a public company. The services were preapproved by the audit committee of the company -Providing internal audit services to a public company audit client with the preapproval of the audit committee.

Close relative

-Sibling, Parent, non dependent children 1.financial interests 2.restricted entities 3.employment relationships 4.scope of audit services 5. fee arrangements ex: tax returns fee -Independence rules apply to "covered members" 1.an attest engagement 2.position to influence the attest engagement 3.partner or manager with more than 10 non attest hours for client 4.partner -Employment for close relatives: no key financial positions, joint closely held investments with client

Audit Committee

-an audit committee is a special committee formed by the board of directors and are made up of board members. The Sarbanes-Oxley Act requires that all the members of the audit committee be independent directors, and the committee should include at least one member who is a financial expert. The audit committee serves as a liaison between the independent auditor and the board of directors.

What does it mean for the audit committee members to be "independent"?

-an audit committee member is considered independent if they are not affiliated with the company or any subsidiaries in a capacity other than as a member of the board. For example, they cannot be an executive officer of the company. In addition, audit committee members, in order to be independent, are barred from accepting any consulting, advisory or other compensatory fee, excluding board member capacity.

Not Independent

-cannot perform management duties -can do bookkeeping for private -litigation: both being sued by same entity, both independent can be defendants only -tax okay for both -unpaid fees exception: bankruptcy

Concurring Partner

-comes in at end reviews documents and then agrees -rotate every 7 years -2 year time out

Quality Control Standards

-firms rules -client evaluation form determination on whether to accept or reject a new client -personnel participate in continuing professional education, answering an independence questionnaire, audit staff work papers reviewed by audit seniors, then managers

What is state in charge of?

-in charge of licenses -only state can take away -SEC can say you cant have key financial position/suspend

Code of Professional Conduct

-meant to provide a standard of conduct for all members of the AICPA -the code consists of principles and rules, in addition to interpretations. The principles provide a framework for the rules that govern the CPA's performance of professional responsibilities. -PART 1: rules for members in public practice -PART 2: rules for members in business -PART 3: rules for all other members.

The functions of an audit committee may include

-participating in the selection and establishment of accounting policies, review the accounting for specific items or transactions as well as alternative treatments and their effects -Review the reports of internal audit staff -Review independent auditor's observations of financial, and operating controls -Review the independent auditor's evaluation of the company's internal controls

SEC Rules on Relationships

-prohibit any ownership by covered persons and their immediate family including: a) members of the team b) those in a position to influence the audit engagement in the firm chain of command C) partners and managers who provide more than 10 hours of nonaudit services to the client D) partners in the office of the partner primarily responsible for the audit engagement

The SEC independence rules

-require the lead and concurring audit partner to rotate off the audit engagement after five years -need a five year time out from that client before returning -can't work for company audited until 1 year

AICPA Ethics Division

-the ethics division is responsible for investigating violations of the code and deciding disciplinary action LEVEL 1 - requirement of remedial or corrective action LEVEL 2 - action before joint trial board

Value of Auditing

-the value of auditing is dependent on the public's perception of the independence of auditors

Audit Standards

1. Audit Evidence - what constitutes audit evidence and establishes requirements regarding designing and performing audit procedures to OBTIAN SUFFICIENT APPROPRIATE AUDIT EVIDENCE -conducting the audit professional skepticism, determine and apply meteriality levels, plan work and supervise assistants

AICPA Standards

1. Auditing standards has board (ASB) of the AICPA responsible for issuing pronouncements on auditing matters in the US for ALL ENTITIES OTHER THAN publicly traded companies. 2. Compilation and review standards has committee responsible when a CPA is associated with financial statements of privately owned companies that are not audited. Provide guidance for performing, compilation, and review services. 3. Other attestation Standards: used to provide assurance on nonfinancial information. 4. Code of professional Conduct ethics committee sets rules of conduct that CPA's are required to meet 5. Also write and grade CPA exam

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the Code​? 1. disclosing confidential information to another accountant interested in purchasing the CPA's practice 2. Disclosing confidential information in compliance with a subpoena issued by a court. 3. Disclosing confidential information in order to properly discharge the​ CPA's responsibilities in accordance with the​ profession's standards 4.Disclosing confidential information during an​ AICPA-authorized peer review

1. Disclosing confidential information to another accountant interested in purchasing the CPA's practice

Covered Members

1. Individual on the attest engagement team 2. an individual in a position to influence the attest engagement 3. A partner OR manager who provides more than 10 hours of nonattest services to the client in a fiscal year 4. a partner in the OFFICE of the partner responsible for the attest engagement 5. the firm and its employee benefit plan 6. An entity that can be controlled by any of the covered members listed above or by two or more of the covered individuals or entities operating together

The Six principles

1. Responsibilities 2. The public interest 3. Integrity 4. Objectivity and Independence 5. Due Care 6. Scope and Nature of Services

Which of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the audit fee? 1. a fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan 2. a fee based on the outcome of a bankruptcy proceeding 3. a fee based on the nature of the service rendered and the CPA's expertise instead of the actual time spent on the engagement 4. a fee based on the fee charged by the prior auditor

1. a fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan

The four major types of services CPAs perform​ are

1. audit and assurance services 2. accounting and bookkeeping services 3. Tax services 4. management consulting services

What are the three categories of members under the AICPA Code of Professional Conduct?

1.Members in public practice 2.Members in business 3.Other members

Which of the following is not a provision of the Sarbanes-Oxley Act of​ 2002? 1.The auditor of an issuer may not provide internal audit outsourcing services for the issuer. 2.Audit documentation must be maintained for five years. 3.The lead and reviewing partners must rotate off the audit after five years. 4.Tax services must be preapproved by the audit committee.

2. Audit documentation must be maintained for five years

According to the​ profession's ethical​ standards, which of the following events may justify a departure from​ GAAP? I.New legislation. II.Conflicting industry practices. III.Evolution of a new form of business transaction.

3. I and III

Which of the following best describes the operational​ audit? 1.It focuses on verifying the fair presentation of a​ company's results of operations. 2.It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company. 3.It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls. 4.It concentrates on implementing financial and accounting control in a newly organized company.

3. It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls

Which of the following professional services is an attestation engagement? 1.A consulting service engagement to provide​ computer-processing advice to a client. 2.The preparation of financial statements from a​ client's financial records. 3.An income tax engagement to prepare federal and state tax returns. 4.An engagement to report on compliance with statutory requirements.

4. An engagement to report on compliance with statutory requirements

Which of the following is considered an assurance​ engagement? 1.Preparation 2.Compilation 3.Bookkeeping 4.Audit

4. Audit

Which of the following engagements is most likely to be considered an operational​ audit? 1.The auditor determines whether the organization is following provisions of laws and regulations. 2.The auditor examines information presented in an​ entity's financial statements to determine whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. 3.The auditor assists the client in preparation of financial statements. 4.The auditor evaluates the​ organizations efficiency in processing payments.

4. The auditor evaluates the organization's efficiency in processing payments

Independence rule

A member in public practice must be independent in the performance of professional services as required by standards promulgated by bodies designed by council

Why is the contingent fees rule is necessary?

A member is prohibited from performing a service for a contingent fee if the member of the member's firm performs: a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence. As well as an audit or review of a financial statement and an examination of prospective financial information -The prohibition is necessary to help maintain the objectivity of the CPA in performing audits and other attest services.

the Responsibilities principle requires that auditors be responsible for having appropriate competence and capabilities to perform the audit. What are the various ways in which auditors can fulfill this​ principle?

A.Auditors develop their competency and capabilities for performing an audit through formal education in auditing and​ accounting, adequate practical​ experience, and continuing professional education. B.Auditors can demonstrate their proficiency by becoming licensed to practice as​ CPAs, which requires successful completion of the Uniform CPA Examination. Auditors have to follow specific requirements for licensure vary from state to state

What roles are played by the American Institute of Certified Public Accountants for its​ members?

A.The AICPA is the organization that sets professional requirements for CPAs. B.The AICPA conducts research and publishes materials on many different subjects related to​ accounting, auditing, management advisory​ services, and taxes. C.The AICPA prepares and grades the CPA examinations and provides continuing education to its members.

Accounting and Bookkeeping Services

Accounting services involve preparing the​ client's financial statements from the​ client's records. Bookkeeping services include the preparation of the​ client's journals and ledgers as well as the financial statements

Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of​ efficiency, economy,​ effectiveness, as well as

Adherence to specific rules or procedures

Explain the role of the audit committee in enhancing auditor independence

All members of the audit committee are required to be independent. Several audit committee activities help maintain auditor independence. The audit committee is responsible for the appointment, compensation, and oversight of the work of the auditor. The audit committee must preapprove all audit and nonaudit services, and is responsible for oversight of the work of the auditor, including resolution of disagreements involving resolution of disagreements involving financial reporting between management and the auditor.

Distinguish between the terms errors and fraud. What is the auditor's responsibility for finding each?

An error is an unintentional misstatement of the financial statements. Fraud represents an intentional misstatement. The auditor is responsible for obtaining reasonable assurance that material misstatements in the financial statements are detected, whether those misstatements are due to errors or fraud.

Who should perform an audit?

An individual who is independent and competent

What is the relationship between International Standards on Auditing and U.S. auditing​ standards?

As a result of efforts by the ASB to converge U.S. GAAS with international​ standards, AICPA auditing standards and International Standards on Auditing are similar in most respects.

Audit and Assurance Services

Audit and assurance services are independent professional services that improve the quality of information for decision makers. Assurance services include attestation services, which are any services in which the CPA firm issues a report that expresses a conclusion about the reliability of an assertion that is the responsibility of another party.

What is the purpose of the Principles of Professional Conduct?

the principles of professional conduct describe characteristics required of a CPA. The principles indicate the profession's responsibilities to the public, clients, and professional colleagues. The principles are designed to guide members in the performance of their professional responsibilities and meet the basic requirements of ethical and professional conduct

The CPA Firm Categories

Big Four International Firms National/Regional Local Firms

An auditor will most likely review an​ entity's periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support​ management's assertion about classes of transactions of

Completeness

In the audit of accounts​ payable, an​ auditor's procedures will most likely focus primarily on​ management's assertion about account balances of

Completeness

Is an auditor more concerned with existence or completeness for a liability?

Completeness

The Public Company Accounting Oversight Board​ (PCAOB) has the duty to

Conduct investigations concerning registered public accounting firms

Who is responsible for establishing auditing standards for audits of U.S. public​ companies? Who is responsible for establishing auditing standards for U.S. private​ companies? Explain.

Currently, the PCAOB has responsibility for establishing auditing standards for U.S. public​ companies, while the ASB of the AICPA establishes auditing standards for U.S. private companies. Prior to the creation of the​ PCAOB, the ASB had responsibility for establishing auditing standards for both public and private companies.

What is an activity that may not affect independence of mind but is likely to affect independence in appearance

Dependence upon a client for a large percentage of audit fees

Is an auditor more concerned with existence or completeness for an asset?

Existence

Form 10-K

Filed ANNUALLY within 60 to 90 days after the close of fiscal year, includes audited financial statements K= year

Form 10-Q

Filed QUARTERLY for all publicly held companies, requires auditor review Q= quarter

Form 8-K

Filed to report SIGNIFICANT EVENTS that are of interest to public investors Ex: acquisition or sale of subsidiary, change in officers of directors, new product line)

What is an attribute that is unique to the audit work of CPA's as compared to the work performed by practitioners of other professions?

Independence

Why is an auditor's independence so essential?

Independence in auditing means taking an unbiased viewpoint. Users of financial statements would be unlikely to rely on the statements if they believed auditors were biased in issuing audit opinions

Distinguish between independence of mind and independence in appearance

Independence of mind exists when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is dependent on others' interpretation of this independence and hence their faith in the auditor

What risk does an effective audit help to reduce?

Information Risk

Describe the role of International Standards on Auditing.

International Standards on Auditing​ (ISAs) are issued by the International Auditing and Assurance Standards Board and are designed to improve the uniformity of auditing practices and related services throughout the world.

International Standards on Auditing (ISA)

Issued by international auditing and assurance standards board, works to improve the uniformity of auditing practices. US standards coverage with international standards.

Management Consulting Services

Management consulting services enable clients to operate their businesses more effectively. Management consulting services range from suggestions to improve the​ client's accounting system to computer installations.

Explain how an audit committee can help an auditor be more independent

Management is frequently under considerable pressure form stockholders and the board of directors to maintain high earnings for the company. In some cases this may in turn motivate management to put pressure on auditors to permit a violation of accounting principles. However, this could affect the reported earnings and disclosures in the financial statements. The board of directors has a greater responsibility to the stockholders for fairness in reported earnings. Outside directors have less responsibility for high reported earnings. Directors are therefore less likely to put pressure on auditors to deviate form high professional standards. The audit committee; therefore, can work with the auditor in a less biased manner than management.

Which of the following best describes what is meant by U.S. auditing​ standards?

Measures of the quality of the​ auditor's performance

In a financial statement​ audit, the auditor obtains a reasonable level of assurance about whether the financial statements are free of material misstatement in order to express an opinion. In order to obtain reasonable​ assurance, the auditor must

Obtain sufficient audit evidence

An auditor of an entity subject to the rules of the SEC must conduct the financial statement audit in accordance with

PCAOB standards

State what is meant by the term peer review. What are the implications of peer review for the​ profession?

Peer review is a​ review, by​ CPAs, of a CPA​ firm's compliance with its quality control system. implications: ​A(n) mandatory peer review means that such a review is required periodically. AICPA member firms are required to have a peer review every three years. Peer reviews can be beneficial and costly to the profession and to individual firms. By helping firms meet quality control standards, the profession gains if reviews result in practitioners doing higher quality audits. A firm having a peer review can also gain if it improves the​ firm's practices and thereby enhances its reputation and effectiveness. The​ trade-off is that peer reviews can be expensive.

Principles underlying an audit Responsibilities

Possess appropriate competence and capabilities, comply with ethical requirements, maintain professional judgement

A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is

Prohibited under the AICPA rules of conduct

What is meant by the term quality control as it relates to a CPA​ firm?

Quality controls are the procedures used by a CPA firm that help it meet its professional responsibilities to clients. Quality controls are therefore established for the entire CPA firm as opposed to individual engagements.

Principles of Professional Conduct

Responsibilities, the public interest, Integrity, objectivity and independence, Due care, and scope and nature of services

American Institute of Certified Public Accountants (AICPA)

Sets professional requirements for CPA's, conducts research, and publishes material on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes

ASB Pronouncements

Statements on Auditing Standards

What provides authoritative guidance for the auditor of a nonpublic company?

Statements on Auditing Standards

What are the purposes of the AICPA Statements on Standards for Attestation Engagements​?

Statements on Standards for Attestation Engagements provide a framework for attest​ engagements, including detailed standards for specific types of attestation engagements.

What services can be offered to public company audit clients under SEC requirements and the Sarbanes-Oxley Act?

Tax planning not involving tax shelters

Tax Services

Tax services include preparation of corporate, individual, and estate returns as well as tax planning assistance.

What is the role of the Public Company Accounting Oversight Board​ (PCAOB)?

The PCAOB provides oversight for auditors of public​ companies, including establishing auditing and quality control standards for public company​ audits, and performing inspections of the quality controls at audit firms performing those audits.

What events led to the creation of the Public Company Accounting Oversight Board and what is their role in the oversight of audit​ firms?

The Public Company Accounting Oversight Board​ (PCAOB) was established by the​ Sarbanes-Oxley Act of 2002 in the wake of multiple accounting scandals and alleged audit failures. The PCAOB provides oversight for auditors of public​ companies, including establishing auditing and quality control standards for public company​ audits, and performing inspections of the quality controls at audit firms performing those audits.

What is the financial statement audit?

The accumulation and evaluation of evidence about financial statements to determine and report on the degree of correspondence between the financial statements and the AFRF (applicable financial reporting framework). US GAAP, for example.

What is the meaning of the rule that requires the auditor be independent?

The auditor must be without bias with respect to the client under audit

Explain the conceptual framework for the rules of conduct and how it should be applied

The conceptual framework for the rules of conduct is designed to assist members in situations where the interpretations of the rules do not address a threat to compliance with the rules. Using the conceptual framework, the member identifies threats, evaluates the significance of the threat, and identities and applies safeguards to eliminate the threat or reduce it to an acceptable level

What is the general character of the responsibilities characterized by the Performance​ principles?

The criteria of audit planning and evidence gathering

Why is an independent auditor is asked an opinion on the fair presentation of financial statements?

The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements