ACC 553 Exam 4

what is the title of a standard unqualified audit report?

"Report of Independent Registered Public Accounting Firm

when principal auditors share responsibility w/ other CPA firm, they have the option to disclose:

- a statement that the auditors are responsible for the audits -the names of the firms contributing > 5% - the # of firms and hours contributed by firms contributing <5%

what are mgt's responsibilities under Section 404?

-must assess how effective their ICFR are as of the end of the year under audit -may have the chance to remediate control before year end

PCAOB's definition of ICFR designates the primary responsibility of the design and implementation of ICFR to _______

CEO and CFO of company

the auditor (CAN/CANNOT) choose to issue separate reports on the entity's financial statement and ICFR the auditor (CAN/CANNOT) choose to issue a combined report

MAY CHOOSE CAN

How do you handle the following situation: 1. discovered after audit report is issued 2. cause of event occurred before end of field work and before b/s date

Revise and reissue the f/s with an adjustment of f/s

in what section of a standard unqualified report, would you find the following?: conducted our audit in accordance with PCAOB"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "in all material respects"

opinion

what is the purpose of a legal letter?

to corroborate info provided by mgt regarding litigation, claims, and assessments

what is the purpose of a representation letter?

to document significant oral representation made to auditor by mgt; reduces possibility of misunderstanding

what is the purpose of analytical procedures in final review stage?

to help auditor assess the conclusions reached on f/s components and evaluate overall f/s presentation

what are auditors' responsibilities under Section 404?

-must performthe audit of ICFR and f/s audit in an integrated way -must obtain reasonable assurance about whether the client has any material weaknesses in their controls as of the end of the year

what are some examples of matters auditors might emphasize in a separate paragraph of an audit report

-significant transactions -unusually important subsequent events -accting matters affecting comparability -uncertainty relating to future outcome of significant litigation -that the entity i a component of a larger business enterprise

how do you test existence, accuracy, and cutoff for deposits in transit?

1. Obtain a cutoff bank statement from client's bank (get permission from client first) 2. For each deposit in transit on the bank rec, compare to what is shown on the cutoff bank statement 3. compare dates on the bank rec to dates on the cutoff bank statement - should only be a few days after year end if actually deposited before year end

what are some disclosure issues related to cash?

1. accounting policy for defining cash and cash equivalents 2. any restrictions on cash 3. contractual obligations to maintain compensating balances 4. cash balance restricted by foreign exchange controls 5. letters of credit

In what order do you test the items on the bank rec?

1. adjusted balance per books 2. unadjusted balance per bank 3. deposits in transit 4. outstanding checks 5. other rec items

what are audit procedures to test for subsequent events?

1. ask mgt about substantial contingent liabilities, significant changes in capital stock or LT debt, the current status of items in f/s based on inconclusive data, unusual adjustments made during period 2. read interim f/s and compare to prior period f/s 3. examine books of original entry for the period and investigate unusual transactions 4. read minutes of meetings 5. ask legal counsel of any litigations 6. evaluate policies to identify subsequent events

Responsibility of auditor in the following : 1. B/w the b/s date and last day of field work 2. b/w the date of auditor's report and f/s are issued

1. auditor is responsible for any event that occurs between the b/s date and end of field work 2. auditor is not responsible for any events that occur after audit report is issued

what are the three corrections of material misstatements described in the textbook?

1. change from inappropriate use of accounting principle to an acceptable accounting principle 2. change from an incorrect to correct classification of transactions or balances 3. an adjustment to account balances to correct a material error in previously issued f/s

in the second procedure of testing outstanding checks, how do you test accuracy?

1. compare the checks listed as outstanding checks on the bank rec to the checks that come back with the cutoff bank statement -if any checks are listed as outstanding on the rec but do not clear the bank, ask for supporting documentation from the client

how do you test cutoff of outstanding checks in the first procedure?

1. compare the dates on the cancelled check, the cutoff bank statement, and bank rec - should only be a few days after year end

how do you test existence and accuracy of the unadjusted balance per bank?

1. compare unadjusted balance per bank to balance shown on cutoff bank statement and/or standard bank confirmation

what are the steps to evaluate a client's going concern?

1. evaluate results of procedures performed and indicate if there is substantial doubt to continue 2. if there is substantial doubt, obtain info from mt about their plans to mitigate the problem 3. conclude whether it is probable that the entity will be able to continue

segregation of duties: 1. initiation function is separate from ______. 2. valuation-monitoring function is separate from ________. 3. maintain securities ledger is separate from ________. 4. custody of securities is separate from _______.

1. final approval function 2. acquisition function 3. general ledger function 4. accounting for securities function

how do you test detail tie-in of the adjusted balance per book?

1. foot balance per books and banks columns of the reconciliation 2. compare the adjusted balance per books to client's year end G/L balance of cash

what are indicators of material weaknesses?

1. identification of fraud committed by senior mgt 2. restatement of previously issued f/s to reflect correction of a material misstatement 3. identification of a material misstatement of f/s in current period 4. ineffective oversight by audit committee

what must the auditor communicate about each critical audit matter?

1. identify the critical audit matter 2. describe the principal considerations causing it to be a critical audit matter 3. describe how the critical audit matter was addressed in the audit 4. refer to the relevant f/s accounts or disclosures that relate to the critical audit matter

what are the risk factors that affect the likelihood that a control deficiency will result in a misstatement of an account balance or disclosure?

1. nature of the f/s accounts, disclosures, and assertions 2. susceptibility of related asset or liability to loss or fraud 3. the subjectivity, complexity, or extent of judgment used 4. interaction of relationship of control with other controls 5. interaction of the deficiencies 6. possible future consequences of the deficiency

how can you effectively test existence of investment securities?

1. physical examination - note the name, class and description, serial number, maturity date, registration in entity's name, interest rates 2. confirmation with issuer 3. confirmation with custodian 4. confirmation with broker 5. confirmation with counterpart 6. read partnership or other agreements

how do you test for kiting?

1. prepare a schedule of interbank transfers 2. Determine if the BANK date of DEPOSIT is before FYE 3. Determine if the BANK and BOOK date of DISBURSEMENT is after FYE if so, this is kiting

what are the three categories of contingent liabilities?

1. probable 2. reasonable possible 3. remote

how do you account for 1. probable 2. reasonably possible 3. remote contingent liabilities

1. probable - needs to be recorded if loss can be reasonably estimated 2. reasonably possible - disclosed in f/s footnotes 3. remote - ignore

what are audit procedures to test for contingent liabilities?

1. read minutes of meetings 2. review contracts, loans, leases 3. review tax return and IRS reports 4. confirm guarantees and letters of credit 5. inquiry mgt regarding policies and procedures used to identify contingent liabilities 6. examine docs in records like invoices from attorneys for pending lawsuits 7. obtain legal letter 8. obtain rep letter

what are audit procedures used to discover disclosure issues for cash?

1. review minutes of board of directors' meetings 2. line of credit arrangements 3. loan agreements

how do you test occurrence and accuracy for other rec items?

1. start with the bank rec and compare to the regular bank statement for the month

how do you test completeness of outstanding checks in the first procedure?

1. take a random sample of cancelled checks that come back in January with the cutoff bank statement dated 12/31 or earlier 2. Compare to bank rec and evaluate if they are included as outstanding checks

how do you test accuracy of outstanding checks in the first procedure?

1. take a random sample of cancelled checks that come bank in January with the cutoff bank statement dated 12/31 or earlier. 2. compare the $ amount on the checks to the bank rec

what are factors that affect whether the magnitude of the misstatement might result in a material weakness?

1. the f/s amounts or total transactions exposed to the deficiency 2. the volume of activity in the acct. bal. or class of transactions exposed to the deficiency

What are the elements of a standard unqualified audit report?

1. title 2. addressee 2. opinion paragraph 4. basis for opinion paragraph 5. critical audit matters 6. CPA firm name and signature 7. CPA tenure 8. city 9. date of audit report

how can you test valuation and allocation of investment securities?

1. verify purchase price by examining broker's invoice 2. determine interest income with effective interest rate 3. Determine FMV on SEC or wall street journal 4. determine any permanent changes to the FMV 5. examine sale of securities for proper values recorded and realized

it (IS/IS NOT) possible for the auditor to issue an adverse opinion on ICFR while issuing an unqualified opinion on the f/s audit.

IS

the bank (IS/IS NOT) required to conduct a comprehensive, detailed search of the bank's record beyond the account info requested on the confirmation.

IS NOT

what are actions mgt could take to reduce likelihood of not meeting going concern assumption?

Plans to: dispose assets borrow money or restructure debt reduce/ delay expenditures increase ownership equity

In a bank reconciliation, you ________ deposits in transit and _________ outstanding checks to get the adjusted balance per ________.

add; subtract; bank

in a bank reconciliation, you _______ unrecorded deposits and _________ unrecorded checks to get the adjusted balance per ________.

add; subtract; book

How do you handle the following situation: 1. discovered before audit report is issued 2. cause of event occurred before b/s date

adjustment of f/s

material weakness would result in what audit opinion?

adverse opinion

What audit report would result from the following situation and explain it: Highly material GAAP violation

adverse opinion opinion - "b/c of the effects of the matters discussed the following paragraph, the f/s referred to above do not present fairly, in conformity w/ GAAP & refers to explanatory paragraph that describes the violation

what are the criteria for a critical audit matter

any matter arising from the audit that was communicated or required to be communicated to the audit committee that: 1. relates to accounts or disclosures that are material to the f/s AND 2. involves especially challenging, subjective, or complex auditor judgment

how are equity securities reported?

at FMV with changes in FMV recognized in NI

how are trading securities reported?

at FMV with unrealized gains and losses included in earnings

how are available for sale securities reported?

at FMV with unrealized gains and losses reported in other comprehensive income until realized

how are held to maturity securities reported?

at amortized cost

what is included in a legal letter?

attorney's description and evaluation of pending or threatened litigation, identification of pending litigation claims not included in mgt's list, comment on unasserted claims

significant deficiencies must be reported to:

audit committee and mgt

representation letter is addressed to ___________ and signed by ____________

auditors; CEO and CFO

what information does the standard bank confirmation provide?

bank account balances, loans, lines of credit, security arrangements, or complex relationships

in what section of a standard unqualified report, would you find the following?: "are required to be independent"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "evaluating overall presentation of f/s"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "evaluating the accting principles" and "significant estimates made by mgt"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "examining, on a test basis, evidence"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "free of material misstatement"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "our responsibility is to express an opinion"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "plan and perform the audit"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "public accounting firm registered with the PCAOB"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "regarding the amounts and disclosures in the f/s"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "rules and regulations of SEC and PCAOB"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "these f/s are the responsibility of the company's mgt"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "to obtain reasonable assurance"

basis for opinion

in what section of a standard unqualified report, would you find the following?: "we believe that our audits provide reasonable basis for our opinion"

basis for opinion

in what section of a standard unqualified report, would you find the following?: performing procedures to assess the risks of material misstatement"

basis for opinion

what cash account allows each branch to pay local expenses and to maintain a banking relationship in local community?

branch cash account

who prepares the bank reconciliation?

client

with regards to outstanding checks, are you more concerned with completeness or occurrence?

completeness because cash would be overstated

what assertions are tested for outstanding checks?

completeness, accuracy, cutoff

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 misstatements on a timely basis

control deficiency

not material or significant magnitude results in __________

control deficiency

if likelihood is assessed as more than remote, the control issue will be considered a ___________, _______________, and or a ______________ depending on the _________________ of the deficiency

control deficiency; significant deficiency; material weakness; magnitude

what are possible classifications for investment securities?

debt securities - HTM, trading securities, AFS equity securities

what assertion is tested for adjusted balance per books on the bank rec?

detail tie-in

What audit report would result from the following situation: lack of independence

disclaimer of opinion

What audit report would result from the following situation and explain it: highly material scope limitation

disclaimer of opinion opinion - "we were engaged to audit" and "we do not express an opinion"

How do you handle the following situation: 1. discovered before audit report is issued 2. cause of event occurred after b/s date

disclose in footnotes

Unsettled lawsuits as of audit report date should be ____________

disclosed only

what assertions are tested for deposits in transit?

existence, accuracy, cutoff

material weaknesses must be reported to:

external reports, to audit committe, and to mgt

regarding deposits in transit, which are we more concerned with: fictitious deposits or unrecorded deposits?

fictitious deposits because the client never actually deposited the money so cash will be overstated

what is the main cash account called?

general cash account

how to identify kiting to window dress

if BOOK date of deposit is before year end, it is kiting to window dress.

how to identify kiting to cover up pre-existing shortage of cash

if BOOK date of deposit is never recorded or after year end, it is kiting to cover up pre-existing shortage of cash

when is a standard unqualified audit report appropriate?

if all conditions present are immaterial to the f/s

What audit report would result from the following situation and explain it: change in accounting principle or method of applying principles that materially affects the comparability and consistency of f/s

if determined acceptable, issue an unqualified opinion w/ explanatory paragraph if determine not acceptable, it is a GAAP violation, and auditor will issue either a qualified or adverse opinion

what cash account contains a stipulated amount of money to be used for a specific purpose?

imprest cash account

what is included in the cutoff bank statement?

includes the first 10 days of the following year and shows any deposits in transit and outstanding checks that were initiated before year end

What audit report would result from the following situation and explain it: correction of material misstatement in previously issued f/s

issue unqualified opinion w/ explanatory paragraph explanatory paragraph should indicate that previously issued f/s are restated for the correction and a reference to the f/s disclosure that describes the correction

the difference between a control deficiency and a significant deficiency, and between a significant deficiency and a material weakness is determined solely by _____________

magnitude

the two main factors affecting deficiencies include:

magnitude and likelihood

a deficiency serious enough that there is a reasonable possibility that a material misstatement of f/s could result

material weakness

material magnitude results in _______________

material weakness

the main focus in an ICFR audit

material weakness

control deficiencies must be reported to:

mgt

what is kiting?

money is moved from one account to the other but in different time periods to inflate the amount being reported

what are key indicators that company likely does not meet the going concern assumption?

negative financial trends, financial difficulties, internal problems, external matters

when lawsuits are settled after the audit report is issued, ________________________ is required when the cause of the event occurred before or after end of field work

no action is required

How do you handle the following situation: 1. discovered after audit report is issued 2. cause of event occurred after end of field work

no action required

what is the length of a reasonable period of time for going concern

one year after issuance of f/s

in what section of a standard unqualified report, would you find the following?: "In our opinion"

opinion

in what section of a standard unqualified report, would you find the following?: "in conformity with GAAP"

opinion

in what section of a standard unqualified report, would you find the following?: "present fairly"

opinion

in what section of a standard unqualified report, would you find the following?: "we have audited"

opinion

what are some examples that an imprest cash account would be used?

payroll expenses, dividend checks

what are the proper controls over cash?

preparation of a monthly bank reconciliation by an entity personnel whose duties do not include handling and recording of cash receipts or disbursements

what assertions are tested for other rec items?

primarily occurrence and accuracy but also cutoff

What audit report would result from the following situation and explain it: moderately material scope limitation

qualified opinion with explanatory paragraph opinion - "Except for" basis - "except as discussed above"

What audit report would result from the following situation and explain it: Moderately material GAAP violation

qualified opinion with explanatory paragraph opinion paragraph - "except for" and refers to explanatory paragraph

how do you test disclosure for cash on deposit?

read and study the compensating balances that the client must keep from the standard bank confirmation -must disclose

what do auditing standards require regarding analytical procedures?

required in planning and final review stage

How do you handle the following situation: 1. discovered after audit report is issued 2. cause of event occurred before end of field work and after b/s date

revise and reissue the f/s with a disclose in footnotes

refusal by attorney to provide info in the legal letter could result in:

scope limitation that prevents an unqualified opinion

refusal to provide representation letter can result in:

scope limitation that prevents an unqualified opinion (disclaimer)

less severe than a material weakness but important enough to tell the client's audit committee

significant deficiency

not material but significant magnitude results in _______________

significant deficiency

What audit report would result from the following situation and explain it: use of other CPAs, but principal auditor takes responsibility

standard unqualified opinion

what type of event is discovered before the audit report is issued?

subsequent event

how do you dial date an audit report?

the 1st date = the last day of field work the 2nd date = the day subsequent event is discovered

what is the proper date on an audit report when dual dating is not possible?

the last day of field work

who is an audit report addressed to?

the shareholder and board of directors

control deficiency would result in what audit opinion?

unqualified opinion

significant deficiency would result in what audit opinion?

unqualified opinion

What audit report would result from the following situation and explain it: uncertainty about going concern assumption

unqualified opinion w/ explanatory paragraph title of expl. para. = "substantial doubt about going concern assumption" OR Disclaimer of opinion opinion - "we do not express an opinion" basis for disclaimer - briefly discuss the going concern issue

What audit report would result from the following situation and explain it: use of other CPAs, principal auditor shares responsibility

unqualified opinion w/ modified wording -reference other CPA and clearly indicate division of responsibility in OPINION and BASIS paragraph -must disclose the magnitude of portion audited by other CPA by stating amounts or %

What audit report would result from the following situation and explain it: changes in accounting estimates

unqualified opinion w/o explanatory paragraph

What audit report would result from the following situation and explain it: reclassification from an acceptable classification to another

unqualified opinion w/o explanatory paragraph

when is it possible to dual date an audit report?

when a subsequent event occurs after end of field work but before audit report and f/s are issued