AUD

The written communication regarding significant deficiencies and material weaknesses identified during a financial statement audit should include sufficient information to enable those charged with governance and management to understand the context of the communication. The communication should:

(1) include a statement that indicates that the purpose of the audit was for the auditor to express an opinion on the financial statements; (2) state that the audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control; (3) state that the auditor is not expressing an opinion on the effectiveness of internal control; (4) state that the auditor's consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified; (5) include the definition of the term material weakness and, when relevant, the definition of the term significant deficiency; (6) include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects; and (7) include an appropriate alert that restricts its use. (If an entity is required to furnish the auditor's written communication to a governmental authority, a specific reference to the governmental authority may be included in the paragraph that restricts its use.)

All of the following statements regarding the Public Company Accounting Oversight Board's (PCAOB) adopted interim auditing standards are true

-The PCAOB adopted GAAS that were in existence on April 16, 2003 as its interim standards. -Each of the interim standards remains in effect to the extent not amended or superseded by PCAOB action. -The interim standards had been previously issued by the AICPA.

Which one will impair independence for registered public accounting firm.

A Drafting documents that form the basis of financial statements filed with the SEC. B Originating source data underlying the balance sheet. C Maintaining accounting records.

Exists when 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

A deficiency in internal control

dual-purpose test

A dual-purpose test is designed and evaluated by considering each purpose of the test separately. For example, the auditor may design and evaluate the results of a test to examine an invoice to determine whether it has been approved and to provide substantive audit evidence of a transaction.

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report

AICPA standards and GAGAS require auditors to address the effect fraud or illegal acts may have on the audit report and to determine that the audit committee or others with equivalent authority and responsibility are adequately informed about the fraud or illegal acts. GAGAS further require that this information be in writing and also include reporting on significant violations of provisions of contracts or grant agreements and significant abuse. Therefore, when auditors conclude, on the basis of evidence obtained, that fraud, an illegal act, a significant violation of a contract or grant agreement, or significant abuse either has occurred or is likely to have occurred, they should include in their audit report the relevant information. GAGAS require auditors to place their findings in proper perspective and identify the condition, criteria, cause, and effect of noncompliance. There is no requirement that all controls be tested. There also is no requirement for an opinion on whether compliance with laws and regulations affected the entity's goals and objectives in a financial statement audit.

Which of the following characteristics distinguishes computer processing from manual processing?

An advantage of computer processing is that it virtually eliminates computational errors. Errors or fraud are not detected more quickly when computer processing is used. The potential for systematic errors is greater in computer processing than in manual processing. Transaction trails useful for audit purposes are created but the data may be available for only a short period of time.

In performing interviews and examining documents related to preliminary work in a financial statement audit of a non-issuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

Country club dues

As long as membership in a club is essentially a social matter, independence of the member's firm would not be considered to be impaired because such equity or debt ownership is not considered to be a direct financial interest. ET 191-91 states that independence is considered impaired if a lease meets the criteria of a capital lease as defined by GAAP and independence is not considered impaired if a lease meets the criteria of an operating lease as long as the terms and conditions are comparable with other leases of a similar nature and all amounts are paid in accordance with the terms of the lease. The independence of the member would be considered impaired whether or not the direct financial interest is placed in a blind trust. The client's guarantee of the CPA's loan creates a material indirect financial relationship between the CPA and the client.

Under the AICPA Code of Professional Conduct, which of the following tax compliance services performed for an attest client relating to the preparation of a tax return would impair a CPA's independence?

As per the AICPA Code of Professional Conduct, accepting responsibility to sign or cosign client checks, even if only in emergency situations, would impair a CPA's independence. As such, if the CPA is making tax payments from a client's restricted account over which the CPA has signing authority and control, it would impair a CPA's independence.

Completeness

Assertions about completeness deal with whether all transactions, accounts, and disclosures that should be presented in the financial statements are included. Periodically accounting for the numerical sequence of documents and invoices helps ensure that all entries affecting those accounts have been recognized and posted.

Which of the following internal control procedures most likely would be used to maintain accurate inventory records?

Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period. Periodically comparing goods on hand with perpetual inventory records would assist in identifying potential errors.

Detection Risk (DR)

Audit risk is the product of the risk that a material misstatement (RMM) will occur and the risk that it will not be detected by the auditor (DR). RMM comprises (i) Inherent Risk (IR), which depends on the nature of the client's business and (ii) Control Risk (CR), which is the risk that a client's internal control structure will fail to prevent or detect a misstatement on a timely basis. In the event of an increase in RMM, the auditor should decrease the acceptable level of detection risk. Detection risk can be altered by the auditor by varying the nature, extent, and timing of substantive procedures. In order to decrease detection risk, the auditor has to increase the extent of substantive procedures, possibly by using larger sample sizes.

According to US GAAS, interpretive publications include all of the following except

Auditing guidance included in AICPA Audit Risk Alerts

Independent internal verification of inventory occurs when employees who

Compare records of goods on hand with physical quantities, do not maintain the records or have custody of the inventory

Sales assertions

Completeness - All Sales transactions have been completed. Occurrence - All Sales transactions that have been recorded have actually occurred. Accuracy - All Sales transactions have been recorded with correct information. Cutoff - The Sales transactions have been recorded in the correct period.

An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is

Consistency is generally a desirable quality in financial information but may be inappropriate if circumstances change. Introduction of an active market for a particular class of asset or liability may indicate that the use of discounted cash flows to estimate the fair value of such asset or liability is no longer appropriate. Thus, consistency of valuation model for the debt securities for which active trading market was introduced in the current year will not be relevant for the auditor to consider the appropriateness of the valuation model. The auditor should validate criteria to see whether the valuation model is: Appropriate for the environment in which the entity operates. Evaluated and appropriately applied based on generally accepted accounting principles. Appropriate for the debt security being valued. It is unnecessary to check whether the new valuation model has been consistently applied from prior periods. This is a go-forward strategy.

The primary reason an auditor requests a letter of inquiry be sent to an entity's legal counsel is to provide the auditor with

Corroboration of the information furnished by management about litigation, claims, and assessments

Critical audit matters are:

Critical Audit Matters are Matters communicated or required to be communicated to the audit committee and that: Relate to accounts or disclosures that are material to Financial Statements Involved especially challenging, subjective, or complex auditor judgment The nature of these matters is such that specifying them as per a specific industry or entity is not possible. They depend entirely on an individual's judgment and perception and their relevance in the given financial statements. A matter which is critical for one entity might not be critical for another entity within the same industry.

An auditor most likely would limit substantive audit tests of sales transaction when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

Examination of accounts receivable and cash receipts provides the auditor with evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the need to test sales transactions.

Complilation of projected FS - Report should include

For a projection, a practitioner's compilation report must include a separate paragraph that describes the limitations on the usefulness of the presentation. A report for an engagement to compile a projection would be unlikely to reference historical financial statements. A compilation engagement involves assisting the client in presenting financial information in the form of financial statements without undertaking to provide any assurance. An evaluation of the assumptions used to prepare a projection is a form of assurance.

FS Level vs Assertion level

I guess you address the audit risk problem - it can be found at "FS level" and at "assertions level".Assertions level imply accounts level - you have the risk of undiscovered material misstatement of a single account or group of accounts.When yu speak about audit risk at FS level - you mean that all accounts separately show "true and fair view" but still the overall FS are "misleading". For example, you might have liquidity issues, but any account in the BS or P&L would still be correct. It's kinda subtle stuff, but it still is. Covering FS level risks would be planning, understanding the business, risk assessment, Overall Analytical Review of FS. Assertion level - test of controls and substantive audit.

Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker became aware of a departure from the applicable financial reporting framework that was material to the financial statements and the financial statements were not revised. If Baker believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements as a whole, Baker should

If the accountant believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements as a whole, the accountant should withdraw from the review engagement.

In the audit report on a public company's financial statements, the principal auditor decides not to make reference to another auditor who audited a client's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor

If the principal auditor is satisfied as to the independence and professional reputation of the other auditor and the audit performed by the other auditor, the auditor may be able to express an opinion on the financial statements taken as a whole without making reference. In this case, the principal auditor should not state in the audit report that part of the audit was performed by another auditor because to do so may cause a reader to misinterpret the degree of responsibility being assumed. (Editor note: Whether or not the principal auditor decides to make reference, the principal auditor should make inquiries concerning the professional reputation and independence of the other auditor. The principal auditor also should adopt appropriate measures to assure the coordination of activities in order to achieve a proper review of matters affecting the consolidating or combining of accounts in the financial statements.)

PPS sample size

In PPS sampling, because the sample is selected proportional to size, larger dollar amounts have a higher probability of being selected, thus overstatements (errors) are more likely to be selected than understatements. An auditor will normally use PPS sampling when testing for material overstatements. For the reason just stated, PPS sampling is unlikely to select smaller-value items and these amounts may be significantly understated in the sample, not increased. PPS sampling is a form of variables sampling which is normally used in substantive testing where the auditor is usually interested in the selection of dollar amounts, not attributes as is usually the case in tests of controls. Additionally, samples taken to test the operating effectiveness of controls (to provide a basis for the auditor to conclude whether the controls are being properly applied) should be selected in a manner such that the sample is representative of the population, thus all items in the population should have an opportunity to be selected which is not the case with PPS sampling. Zero balances are not subject to PPS selection and negative balances would have to be segregated into a separate population for testing.

According to US GAAS, all of the following statements about other auditing publications are true, except

In determining whether another auditing publication is appropriate to the circumstances of the audit, the auditor should first consider the degree to which the issuer or author is recognized as an authority on auditing matters.

Evaluating reasonableness of accounting estimate

In evaluating the reasonableness of an estimate, an auditor would normally concentrate on key factors and assumptions that are (1) significant to the accounting estimate, (2) sensitive to variations, (3) deviations from historical patterns, or (4) subjective and susceptible to misstatements and bias.

FEES Independence Impairment greater than 1 year

Independence is considered to be impaired if, when the report on the client's current year is issued, fees remain unpaid for professional services provided more than one year prior to the date of the report

Control inherent limitations

Internal control only provides reasonable assurance that entity-specific objectives will be achieved. Inherent limitations that can result in the breakdown of internal control include: Competence - Human errors like mistakes or misjudgments by the company personnel. Obsolescence - Change in the operating environment may result in existing internal control becoming obsolete, requiring a modification in internal control to suit the new operating environment. Collusion - Though there may be segregation of duties, collusion between personnel may circumvent internal control. Override by management - Management has the ability to override internal control. Cost constraints: The cost of internal control should not exceed the benefits expected to be derived.

Inventory Tags Completeness and Existence

Inventory Tags to Inventory Listing Schedule = Tracing = Completeness Inventory Listing Schedule to Inventory Tags = Vouching = Existence (Validity)

The standard report issued by a CPA after reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA

Is not aware of any material modifications that should be made to the financial statements.

Regarding the auditor's consideration of compliance with laws and regulations, the auditor

Is required to obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry in which the entity operates and how the entity is complying with that framework

Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material non-compliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to

Issue a qualified compliance report describing the subsequent noncompliance

Which of the following statements is correct with respect to the auditor's consideration of an entity's ability to continue as a going concern?

It is not necessary for the auditor to design audit procedures solely to identify conditions and events that, when considered in the aggregate, indicate there could be substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services. The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions?

Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?

New convertible bonds are issued to expand the company's product line.

A registered public accounting firm is conducting an audit of an issuer. Which of the following services may the auditor provide to the client while maintaining independence?

Preparing an organizational chart of the accounting department.

promulgate

Promote

f a service auditor is unable to obtain a written assertion from the service organization's management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to

Service organization's management should provide a written assertion regarding its system and the suitability of the design and operating effectiveness of controls. However, if management subsequently refuses to provide a written assertion, it is a scope limitation and consequently, the service auditor should withdraw from the engagement. If law or regulation does not allow the service auditor to withdraw from the engagement, the service auditor should disclaim an opinion.

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Testing the computation of standard overhead rates would not help identify any slow-moving, defective, or obsolete inventory. While touring the plant or production facility, the auditor may actually see these types of items. In comparing inventory balances to anticipated sales volume and reviewing inventory experience and trends, the auditor may become aware of an excessive inventory balance that may indicate that these types of items have not been properly accounted for.

Which of the following boards is responsible for promulgating International Standards on Auditing?

The International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants issues International Standards on Auditing (ISA).

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

The Statements on Standards for Attestation Engagements are applicable to engagements to issue an assertion about subject matter that is the responsibility of another party. In an attest service, the practitioner is engaged to issue a report on subject matter or on an assertion about the subject matter which in this case is the square footage of the warehouse, that is the responsibility of another party, in this case, the management.

When performing an engagement in accordance with SSARS to review general-purpose financial statements, an accountant most likely would

The accountant should inquire of members of management who have responsibility for financial and accounting matters concerning the financial statements about actions taken at meetings of stockholders, the board of directors, committees of the board of directors, or comparable meetings that may affect the financial statements. A review does not contemplate obtaining an understanding of the entity's internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit. Thus, it is unlikely the accountant would obtain an understanding of the entity's internal control or confirm a sample of significant accounts receivable balances. And, although nothing in SSARS precludes an accountant from including an alert in any review report that restricts [limits] its use [distribution], review reports on financial statements prepared in accordance with a general-purpose framework ordinarily do not include such an alert.

For effective internal control, the Accounts Payable Department generally should

The agreement of the documents will verify that the goods were ordered (purchase order), received (receiving report), and the company has been billed (vendor's invoice). The individual signing the checks, not accounts payable, should stamp, perforate, or otherwise cancel the supporting documentation. The purchasing department, not accounting, is involved with the approval of purchase requisitions and blanking out the quantity ordered on the receiving department copy of the purchase order.

When an auditor reports on financial statements prepared on the tax basis of accounting, the audit report should

The audit report should state that the special-purpose framework is a basis of accounting other than GAAP. Except for general use regulatory basis financial statements, the audit report on special-purpose financial statements should include an emphasis-of-matter paragraph that (1) indicates that the financial statements are prepared in accordance with the applicable financial reporting framework; (2) refers to the note to the financial statements that describes that framework; and (3) states that the special-purpose framework is a basis of accounting other than GAAP.

Which of the following would an auditor least likely consider with respect to fair values?

The auditor would consider subsequent events and transactions occurring before the completion of the audit, not after. The auditor is not responsible for predicting the future, and would not be expected to evaluate the effect of conditions arising subsequent to the audit, that, if known at the time of the audit, might have affected fair value measurements and disclosures. Answer: The effect on fair value measurement and disclosures of information available subsequent to the audit.

When an entity is required or permitted to disclose segment information in the financial statements

The auditor's responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements as a whole. Accordingly(

Auditor Responsibilities

The auditor's responsibility section of the audit report should explain that US GAAS requires that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

he overall objectives of the auditor, in conducting an audit of financial statements in accordance with US GAAS, include

The overall objectives of the auditor, in conducting an audit of financial statements, are to (1) obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and (2) report on the financial statements, and communicate as required by US GAAS, in accordance with the auditor's findings.

Which of the following is most likely to be a response to the assessed risk of material misstatement at the assertion level?

The physical observation and/or inspection of assets are examples of procedures performed in response to the assessed risk of material misstatement at the assertion level, i.e., the assertion of existence. The other answer alternatives are overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level rather than the assertion level (the assertion level is at a more specific level of testing than the financial statement level and hence a more thorough procedure is required)

Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population is

The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. All things being equal, a sample taken from a smaller population will be more representative of the population than a sample of the same size taken from a larger population. Thus, the risk that the sample taken from the smaller population will yield a result different from the result obtained had the entire population been examined, is lower than such a risk inherent in sampling from a larger population.

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

The treasury department is independent of record keeping and custodial functions for accounts receivable. Incompatible functions are those that place any person in a position to both perpetrate and conceal errors or fraud in the normal course of their duties. Therefore, a well-designed plan of organization separates the duties of authorization, record keeping, and custody of assets.

An accountant's compilation report on a financial projection that does not contain a range should include a statement that

There will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected.

An overall response to address a high assessed risk of material misstatement at the financial statement level of a non-issuer may include

To obtain reasonable assurance to provide audit opinion, the auditor should obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. If the assessed risk of material misstatement is high, the auditor would have to reduce the acceptable level of Detection Risk such as keeping audit risk to a low level. To reduce detection risk, the auditor would increase the extent of substantive testing, i.e. alter the Nature, Extent, and Timing of audit procedures such as reducing the audit risk to an acceptably low level by doing the following: Nature: Alter the type of Audit Evidence required, change the audit staff to have a more experienced team, enhance the type and level of review, and supervision of the audit team. Extent: Increase the number of samples. Timing: Incorporate a level of surprise in the timing of the audit procedure and perform more testing after year-end than in the interim.

System of Quality Control (of a CPA firm)

Tone at the top (leadership responsibilities for quality within the firm) Ethical Requirements (independence) Acceptance & continuance of client relationships & specific engagements Human Resources Monitoring Engagement performance

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.

Consulting services

Understanding of the scope can be oral or written.

The primary responsibility of a bank acting as registrar of capital stock is to

Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

Going concern Substantial doubt still there.

When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and that doubt remains (is not alleviated by management's plans) and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. A separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern," rather than an emphasis-of-matter paragraph, should be added to the auditor's report. This paragraph should include the phrases "substantial doubt" and "going concern."

Comfort Letter

When commenting in a comfort letter on information other than audited financial statements, the auditor should describe the criteria specified by the underwriter or other requesting party. The auditor should not make the statements or use the terms (which are of uncertain meaning; they are not universally understood) described in the other answer alternatives.

Materiality Level

When determining materiality, one factor that may affect the identification of an appropriate benchmark is its relative volatility. When establishing the overall audit strategy, the auditor should determine materiality for the financial statements as a whole. Only if, in the specific circumstances of the entity, one or more particular classes of transactions, account balances, or disclosures exist for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users, then, taken on the basis of the financial statements, the auditor also should determine the materiality level or levels to be applied to those particular classes of transactions, account balances, or disclosures.

Statistical sampling Deviation rate + Sampling risk > Tolerable Rate

When the sample rate of deviation plus the allowance for sampling risk, which is the upper deviation limit, exceeds the tolerable rate, the sample results do not support the assessed level of control risk, and the auditor should reduce the planned reliance on a prescribed control

When an accountant is engaged to prepare financial statements, each of the following requirements applies, except: a. The accountant should verify the completeness of information provided by management for the financial statements. b. The engagement documentation should include the engagement letter and a copy of the prepared financial statements. c. The agreed-upon terms of the engagement should include identification of the applicable financial framework to be used. d. The accountant should include a statement on each page of the financial statements indicating that no assurance is provided.

a. The accountant should verify the completeness of information provided by management for the financial statements.

Entity-level controls include:

controls related to the control environment; controls over management override of other controls; the company's risk assessment processes; centralized processing and controls, including shared service environments; controls to monitor results of operations; controls to monitor other controls, including activities of the internal audit function, the audit committee, and self-assessment programs; controls over the period-end financial reporting process; and policies that address significant business control and risk management practices.

A group engagement team of a nonissuer should ask a component auditor to communicate whether it complied with

regardless of whether reference will be made in the auditor's report on the group financial statements to the audit of a component auditor, the group engagement team should obtain an understanding of whether a component auditor understands and will comply with the ethical requirements that are relevant to the group audit and, in particular, is independent. Hence, the group engagement team should request a component auditor to communicate matters such as: Whether the component auditor has complied with ethical requirements relevant to the group audit, including independence and professional competence Identification of the financial information of the component on which the component auditor is reporting The component auditor's overall findings, conclusions, or opinion