Auditing Final Study Guide Ch. 7, 8, 16, 17 and 19

g. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: (1) Consider the organizational level to which the internal auditors report the results of their work. (2) Review the internal auditors' work. (3) Consider the qualifications of the internal audit staff

(1) Consider the organizational level to which the internal auditors report the results of their work.

For which expense accounts should the auditors obtain or prepare analyses to be used in preparation of the client's income tax returns?

.Because they will be closely scrutinized by state or federal revenue agents Officers salaries Directors fees Taxes Travel & entertainment Contributions Casualty Losses..

Describe how the auditors use analytical procedures in the examination of selling, general, and administrative expenses.

1 change in $ value and change in % "I would add two more columns if I were looking at this"

Can the client change a set of financial statements to receive unmodified opinion instead of an opinion qualified as to the adequacy of disclosure? Explain.

Yes, client can avoid an opinion qualified because of inadequate disclosure merely by making the appropriate disclosure in the financial statements.

Assume the CPAs are attesting to comparative financial statements. Can the CPAs change their report on the prior year's statements?

Yes. When reporting on comparative statements, CPAs should update their report on the prior year's statements to determine whether it is still the proper type of report to accompany those statements.

Discuss how generalized audit software can be used to aid the auditors in examining accounts receivable in a fully IT-based system. The following examples of using audit software to help examining A/R:

a) Examining records for quality, completeness, and valid conditions. For instance, customer accounts might be scanned for account balances in excess of credit limits. (b)Rearranging data and performing analyses useful to the auditors. The audit software might be used to arrange the accounts receivable file in the form of an aged trial balance to assist in the evaluation of the allowance for doubtful accounts. (c)Selecting and printing confirmation requests. The program can include instructions to select a sample of accounts receivable using any quantifiable selection criteria including a statistical sample. Also, considerable time can be saved by having the computer print the confirmation requests. (d)Comparing duplicate data maintained in separate files. For example, the changes in accounts receivable during a given time period can be compared with the detail of credit sales and cash receipts transactions files. e) Comparing confirmation information with company records. For example, the computer can be used to compare payment dates indicated on customer confirmations with client cash

Why are adverse opinions rare?

the client usually will make whatever changes in the financial statements that the auditors require in order to avoid receiving an adverse opinion. In fact, in the few cases in which the client and its auditors cannot agree, the client would probably discharge the auditors instead of having them complete an audit that culminates in an adverse opinion. 675 "adverse opinions are worthless"

Explain how a loss contingency exists with respect to an unasserted claim. Should unasserted claims be disclosed in the financial statements?

1) reasonably possible that the loss as required 2) Probable that claim will be asserted

A prospective client informs you that all officers and employees of the company are bonded, and he requests that under these circumstances you forgo a consideration of internal control in order to reduce the cost of an audit. Construct a logical reply to this request.

Bonding is a way to reimburse a company for losses attributable to theft or embezzlement by bonded employees. Fraud is not the reason for the auditing of the F.S.

A material departure from GAAP will result in auditor consideration of: Whether to issue an adverse opinion rather than a qualified opinion.

Whether to issue an adverse opinion rather than a qualified opinion.

Assume the CPAs are attesting to comparative financial statements. Can the CPAs express differing opinions on the sets of financial statements of two successive years?

Yes. Each year's financial statements "stand alone, and together". Thus, the CPAs may issue different types of opinions on the financial statements of successive years when reporting on comparative statements. 679

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? (1) A consistency modification. (2) An adverse opinion. (3) A qualified opinion. (4) Part of the audit has been performed by component auditors.

(1) A consistency modification.

k. To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: (1) Establish internal control with no material weakness. (2) Accept responsibility for the effectiveness of internal control. (3) Evaluate the effectiveness of internal control using suitable control criteria. (4) Support the evaluation with sufficient evidence.

(1) Establish internal control with no material weakness.

The auditors' report should be dated as of the date the: (1) Report is delivered to the client. (2) Auditors have accumulated sufficient evidence. (3) Fiscal period under audit ends. (4) Peer review of the working papers is completed.

(2) Auditors have accumulated sufficient evidence.

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? (1) The company is a component of a larger business enterprise. (2) An unusually important significant event. (3) A decision not to confirm accounts receivable. (4) A risk or uncertaintly

(3) A decision not to confirm accounts receivable.

i. Which of the following is not an advantage of establishing an enterprise risk managementsystem within an organization? (1) Reduces operational surprises. (2) Provides integrated responses to multiple risks. (3) Eliminates all risks. (4) Identifies opportunities.

(3) Eliminates all risks

An entity's ongoing monitoring activities often include: (1) Periodic audits by internal auditors. (2) The audit of the annual financial statements. (3) Approval of cash disbursements. (4) Management review of weekly performance reports.

(4) Management review of weekly performance reports.

Adherence to generally accepted auditing standards requires, among other things, a proper understanding of the existing internal control. The most common approaches to documenting the understanding of internal control include the use of a questionnaire, preparation of a written narrative, preparation of a flowchart, or a combination of these methods. a. Discuss the advantages to CPAs of documenting internal control by using: (1) An internal control questionnaire. (2) A written narrative. (3) A flowchart. b. If they are satisfied that no material weaknesses in internal control exist after completing their description of internal control, is it necessary for the CPAs to conduct tests of controls? Explain.

1. Internal control questionnaire Pg. 268 Easy to complete and simple •Made to show where no answers lead to weaknesses • Prepared list • Help control weaknesses 2. written narrative *Made for each engagement • Written Memos • Details internal control • Analysis of weaknesses • Requires detailed analysis 3. A flowchart Pg. 270 (from left to right and from top to bottom) • Graph makes it easier to understand • Usually unlikely areas will be overlooked • Uses symbols to explain procedures • Each section has different symbols b. If no material weaknesses in internal controls exists CPAs should • Test of controls is used to verify that the control is operating effectively • Even when controls are strong it does not guarantee employees are doing their assigned job or performing properly • When doing a test of controls it shows if the organization controls that are in place are working properly and if they will detect material errors If you are going to rely on IC, test them

Which of the following would be least likely to be considered an objective of internal control? (1) Checking the accuracy and reliability of accounting data. (2) Detecting management fraud. (3) Encouraging adherence to managerial policies. (4) Safeguarding assets.

2 - Detecting management fraud.

h. Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: (1) Employment of temporary personnel to aid in the separation of duties. (2) Direct participation by the owner in key record keeping and control activities of the business. (3) Engaging a CPA to perform monthly write-up work. (4) Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee

2) Direct participation by the owner in key record keeping and control activities of the business

When the matter is properly disclosed in the financial statements, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Unmodified with Qualified Emphasis-of-Matter (1) Yes Yes (2) Yes No (3) No Yes (4) No No

3. N/Y

. Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is: (1) An unmodified opinion. (2) A disclaimer of opinion. (3) An "except for" opinion. (4) An improper type of reporting.

4. An improper type of reporting

What is a management letter? What is the letter's significance?

A report to management contains the auditors' recommendations for correcting any deficiencies disclosed by the auditors' consideration of internal control. In addition to providing management with useful information, a management letter may also help limit the auditors' liability in the event a control weakness subsequently results in a loss by the client. Management is required to communicate all significant deficiencies and material weaknesses to management and those charged with governance. Material weakness (page 281) Looking at impact, pervasive Measured using 2 criteria - likelihood and magnitude of something going wrong Material weakness and significant deficiency must be conveyed in writing to audit committee

How does a review of the financial statements of a nonpublic company differ from an audit?

Consideration of internal controls Review does not deliver A review does not involve a consideration of internal control, tests of the accounting records, or obtaining corroborating evidence, which are performed in an audit. Pg. 747 A review is an attest service in which the accountants (1) perform analytical procedures, (2) make inquiries of management and others within the organization, (3) perform other procedures considered necessary, and (4) obtain representations from management relating to the financial statements. The review report provides limited (negative) assurance. SSARS reviews of nonpublic companies are ordinarily performed on annual information.

Explain briefly what is meant by electronic data interchange (EDI). How does EDI affect a company's audit trail?

EDI systems enable a company and its customers or suppliers to use telecommunication links to exchange business data electronically over a private line of communication, as contrasted to the Internet. Due to the lack of hard copy records it makes performance of a primarily substantive audit for certain assertions difficult or impossible. Accordingly, for those assertions, the auditors may switch to a systems approach that includes tests of controls performed throughout the period to reflect the client's record retention policies. It best, during the design of an IT-based system, for client management to consult with both its internal and its external auditors to ensure than an adequate audit trail is built into the system and retained. Dedicated line, not the internet Challenges - co. don't keep data live all year long, 3-4 months and archive the rest. Periodic monitoring as opposed to coming in once at the end of the year

What are general risk contingencies? Do such items require disclosure in the financial statements?

General risk contingencies: represent risk that may occur in the future (boycott, natural disasters, etc pg 643) do not need to be disclosed, hasn't occurred yet

. When the auditors have audited the financial statements, what is their responsibility with respect to other information (not including required supplemental information) included in an annual report to shareholders?

Inconsistencies, client should provide and corrected information if not add a paragraph.

Identify the sections of the standard audit report for a nonpublic company.

Introductory paragraph of the auditor's report identifies the financial statements that have been audited. ..Management's Responsibility for the Financial Statement Auditors Responsibility .....indicate that it is the auditor's responsibility to express an opinion on the financial statements based on an audit conducted in accordance with GAAS .....outline the nature of an audit .....conclude that the auditors believe that sufficient appropriate audit evidence has been obtained to provide a basis for the audit opinion. ..... Scope Opinion

One basic concept of internal control is that no one employee should handle all aspects of a transaction. Assuming that a general category of transactions has been authorized by top management, how many employees (or departments) should participate in each transaction, as a minimum, to achieve strong internal control? Explain in general terms the function of each of these employees.

It would take three parties to achieve strong internal control but they don't have to be all employees. A party can be an outside party or an electronic device. One party should have custody of assets, another party can maintain records of the asset and the third party can reconcile the assets

An integrated test facility (ITF) is a method used by both internal and external auditors for testing IT-based system controls. Discuss the advantages and disadvantages of implementing an ITF.

Like a system within a system Disadvantages: possibility that personnel may manipulate real data using the test system, risk that the client's real financial records may be contaminated with the test data Advantages: allows continuous testing of the system, test data processed with actual data ensuring that the programs tested are the same as those actually used to process transactions

What factors determine whether a misstatement is considered pervasive? 691

Reasonably possible misstatement, not confined to 1 account, When the financial statements are not presented fairly in conformity with GAAP. Scope limitation Is the information fundamental to users understanding of financial statements? Does it represent a substantial proportion of the financial statements?

Describe briefly the controls that should be established over the operation of a workstation to prevent use by unauthorized personnel.

Require user to enter authorization code. ...Installation hardware controls such as a locking on/off switch ... keeping critical programs on removable hard drives than can be locked up when not in use.

The auditor's opinion on the fairness of financial statements may be affected by subsequent events. a. Define what is commonly referred to in auditing as a subsequent event, and describe the two general types of subsequent events. b. Identify those auditing procedures that the auditor should apply at or near the completion of fieldwork to disclose significant subsequent events.

Subsequent events: event occurring after BS date but before issuance of auditor's report. 2 types - type 1 and type 2. Type 1 - things existed on the BS (adjusting journal entry)and type 2 things come into existence after BS date (disclosure - 1 - footnote or 2 - Pro Forma F/S - more significant). b. Auditor should review latest f/s, attend (pg. 646)

Define and give the purpose of each of the following controls: a. Record counts b. Limit test c. Validity test d. Hash totals

The following are input validation checks that are performed on the data being entered in a computer program. Limit tests - A test of the reasonableness of a field of data, using a predetermined upper and/or lower limit. Validity tests - A comparison of data (for example, employee, vendor and other codes) against a master file or table for accuracy. Hash total - The following controls help ensure the accuracy and completeness of batch processing - which is used to determine that no data are lost or added to a batch.

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. For each of the below situations, state whether the audit report should include an emphasis-of matter paragraph on consistency.

(1) A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. An accounting change from on one Generally Accepted Accounting Principle to another Generally Accepted Accounting Principle. The auditor's report should also be modified. Yes (2) A change in the estimated service lives of previously recorded plant assets based on newly acquired information. No. An accounting change involving a change in an accounting estimate (3) Correction of a mathematical error in inventory pricing made in a prior period. Yes (4) A change from direct costing to full absorption costing for inventory valuation. Yes, an accounting change involving both an accounting principle and a change in accounting estimate. Although the effect of the change in each may be inseparable and the accounting for such a change is the same as that for a change in estimate only, an accounting principle is involved (5) A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. Yes, (if material) an accounting change involving both an accounting principle and a change in accounting estimate. Although the effect of the change in each may be inseparable and the accounting for such a change is the same as that for a change in estimate only, an accounting principle is involved (6) A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." No, immaterial. Not an accounting change but rather a change in classification. (7) A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. Yes, an accounting change from one Generally Accepted Accounting Principle to another Generally Accepted Accounting Principle.

c. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: (1) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. (2) Audit evidence to use in reducing detection risk. (3) A basis for modifying tests of controls. (4) An evaluation of the consistency of application of management policies.

(1) Knowledge necessary to determine the nature, timing, and extent of further audit procedures

Smith, Inc. Rachel Robertson wishes to use mean-per-unit sampling to evaluate the reasonableness of the book value of the accounts receivable of Smith, Inc. Smith has 10,000 receivable accounts with a total book value of $1,500,000. Robertson estimates the population's standard deviation to be equal to $25. After examining the overall audit plan, the auditors believe that the account's tolerable misstatement is $60,000, and that a risk of incorrect rejection of 5 percent and a risk of incorrect acceptance of 10 percent are appropriate. a. Calculate the required sample size. b. Assuming the following results: Book value of items in sample = $149 Average audited value of items in sample = $146 Standard deviation of sample = $ 28

Continue from hand written notes: 1460000 +/- 36,296 = 1496,000 1423, 000 (1500,000 - reject) 1,460,000 + 33506 = 1493506 1,460,000 - 33503 = 1426497 (1500000 - reject)

You are the audit manager in the audit of the financial statements of Midwest Grain Storage, Inc., a new client. The company's records show that, as of the balance sheet date, approximately 15 million bushels of various grains are in storage for the Commodity Credit Corporation, an agency of the U.S. government. In your review of the audit senior's working papers, you ascertain the following facts: a. All grain is stored under a Uniform Grain Storage Agreement, which holds Midwest responsible for the quantity and quality of the grain. b. Losses due to shrinkage, spoilage, and so forth are inherent in the storage of grain. Midwest's losses, however, have been negligible due to the excellence of its storage facilities. c. Midwest carries a warehouseman's bond covering approximately 20 percent of the value of the stored grain. In the loss contingencies section of the working papers, the senior auditor has made the following notation: "I propose recommending to Midwest's controller that the contingent liability for grain spoilage and shrinkage be disclosed in a note to the financial statements." Do you concur with the senior's proposal? Explain.

No senior proposal not right as it hasn't occurred (general risk contingency) - no need to disclose.

Wade Corporation has been your audit client for several years. At the beginning of the current year, the company changed its method of inventory valuation from average cost to LIFO. The change, which had been under consideration for some time, was in your opinion a logical and proper step for the company to take. What effect, if any, will the situation have on your audit report for the current year?

What would need to happen is that the audit report would now need to include another paragraph giving details on what the change was. There will also need to be a reference to the financial statement note explaining the nature of and justification for the change in the method of valuing the inventories and the effect of such change upon the financial statements. After the opinion, consistency problem with which we agree

Are engagement letters needed for accounting and review services?

Yes, engagement letters are needed Pg 747 Reviews and compilations are quite different from audits. The need to establish a clear understanding with the client concerning the nature of such services was dramatically illustrated in the 1136 Tenants' Corporation case discussed in Chapter 4. CPAs must avoid the implication that they are performing audits when they are engaged to perform other services. Accordingly, the professional standards require that CPAs prepare an engagement letter (or other suitable form of written communication) clearly specifying the objectives of the engagement, management's responsibilities, the accountant's responsibilities, and limitations of the engagement.

Use the following to provide the type of audit report the auditors generally should issue in the situations presented below: 1. Unmodified—standard. (b) 2. Unmodified—with an emphasis-of-matter paragraph. (d) 3. Qualified. (e) 4. Adverse. (c) 5. Disclaimer (a)

a. Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. b. The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements. c. The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements. d. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets. e. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.

Island Trading Co., a client of your CPA firm, has requested your advice on the following problem. It has three clerical employees who must perform the following functions: (1) Maintain general ledger. (2) Maintain accounts payable ledger. (3) Maintain accounts receivable ledger. (4) Maintain cash disbursements journal and prepare checks for signature. (5) Issue credit memos on sales returns and allowances. (6) Reconcile the bank account. (7) Handle and deposit cash receipts. Assuming that there is no problem as to the ability of any of the employees, the company requests your advice on assigning the above functions to the three employees in such a manner as to achieve the highest degree of internal control. It may be assumed that these employees will perform no other accounting functions than the ones listed and that any accounting functions not listed will be performed by persons other than these three employees.

a. List four possible unsatisfactory combinations of the above-listed functions. General ledger - cash receipts. With custody to cash, this person could steal cash receipts and conceal the theft by recording a fictitious entry in the General Ledger to credit (reduce) the balance of the cash account by the amount stolen.2.Accounts receivable ledger - cash receipts. With custody to cash, this person could steal cash receipts and conceal the theft by recording a fictitious entry in the Accounts Receivable Subsidiary Ledger to reduce a customer's accountsreceivable balance by the amount stolen.3.Bank reconciliation - cash receipts.With custodyto cash, this person couldsteal cash receipts and conceal the theft by falsifying (recording) the bankreconciliation.4.Credits on returns and allowances - cash receipts.This person couldauthorize (authorization) or record false credit memos (recording)to customerswho are making a payment and steal the customer payments (custody).5.Accounts payable ledger - prepare checks for signature.A person with bothof these responsibilities could create fictitious payables (recording) and thenwrite and cash checks to pay them (custody).6.Maintain accounts receivable - issue credit memos- this combinesauthorization and recording.A person with both of these responsibilities couldwrite off accounts for friends b. State how you would recommend distributing the above functions among the three employees. Assume that, with the exception of the nominal jobs of the bank reconciliation and the issuance of credits on returns and allowances, all functions require an equal amount of time. Any distribution that avoids all of the above unsatisfactory combinations and spreads the workload evenly is acceptable. The key is not to have anyone with both custody and a recording function that could be used to conceal a theft. One such combination is: First employee accounts payable ledger, accounts receivable ledger, bank reconciliations Second employee general ledger, disbursements journal, credits on returns and allowances Third employee prepare checks for signature, cash receipts 1st employee - G/L, reconcile, sales return and allowance (control) 2nd employee: Cash receipts journal, cash disbursement (assets) 3rd employee - A/R and A/p ledger (books)

Many companies have part or all of their IT processing done by computer service centers. a. What controls should the company maintain to ensure the accuracy of processing done by a service center? b. How do auditors assess internal control over applications processed for an audit client by a service center? c. What is a service auditors' report on the processing of transactions by a service organization? d. What two types of reports are provided by service auditors? e. How do user auditors use each type of report?

a. The service center processes the company's files and records after which it becomes crucial for the company to establish controls to test the accuracy of the service center. Control totals needs to be developed for entering input transactions and later reconciling it with the center's output. In addition, they should also test the computation performed at the service center. Input -> processing -> output Co. Senior bureau co b. Rearrange data visit the center to consider the center's internal control, what system's used, service center audit reports (if unsatisfactory, go see them) c. service centers engage their own auditors to review their processing controls and provide a report for the users of a center and users' auditors. these reports are known as service auditors' reports d. may provide a report on management's description and design of its controls (Type 1) or that plus operating effectiveness (Type 2) Pg 280 Type 1 - notice no testing • Type 1 report—A report on a management's description of a service organization's system and the suitability of the design of controls. • Type 2 report—A report on a management's description of a service organization's system and the suitability of the design and operating effectiveness of controls (throughout the period covered by the service auditor's report). In determining the sufficiency and appropriateness of the audit evidence provided by the service auditors' report, the user auditors should consider the professional competence of the service auditors and their independence with respect to the service organization. When the user auditors' risk assessment includes an expectation that controls at the service organization operate effectively, the user auditors should obtain a Type 2 report (if available), or perform appropriate tests of controls. If the service auditors' report provides an adequate basis for the user auditors' assessment, usually there is no need for the user auditors to perform their own tests at the service organization. Pany, Ray Whittington; Kurt. Principles of Auditing & Other Assurance Services (Irwin Accounting) (Page 280). McGraw-Hill Higher Education. Kindle Edition. Pg. 777 Should records, personal info be on the cloud??? As CPA offer different services SOC 1 (type 1, above) SOC 2 SOC 3 (sys trust - systems trust report) e. Type 1 proves an understanding of the prescribed controls at the service center, provides no basis for reliance on service center controls. type 2 provide basis to reduce assessments of control risk

Auditors encounter the use of user operated computers on almost every audit engagement. a. How do user operated computers differ from large computers? b. When are the auditors concerned with internal control over the use of user operated computers?

a. user operated computer are termed as micro computers which are less flexible and easy to operate. Microcomputers are small, slower in processing data and have small capacity as compared to large computers Not centralized systems b. when the information processed by them may affect the reliability of the information in the client's financial statements. Pg. 317 High-volume disks are used as backup for the hard disks. Internal control over user operated computers is enhanced when computer processing procedures are documented and users are well trained. To ensure that the client can reconstruct financial records, backup disks or tapes of files should be made frequently and stored away from the originals in a secure location. Since the computers are located in user departments, there is a greater risk of use by unauthorized personnel. Authorization code, logging on and off, locking up when not in use

d. An auditor may compensate for a weakness in internal control by increasing the extent of: (1) Tests of controls. (2) Detection risk. (3) Substantive tests of details. (4) Inherent risk.

(3) Substantive tests of details.

j. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? (1) Checklist. (2) Confirmation. (3) Flowchart. (4) Questionnaire.

(4) Questionnaire.

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: (1) An emphasis-of-matter paragraph to the auditors' report. (2) A footnote to the financial statements. (3) The body of the financial statements. (4) The "summary of significant accounting policies" section of the financial statements.

1. An emphasis-of-matter paragraph to the auditors' report

What are loss contingencies? How are such items presented in the financial statements? Explain.

• Reasonably possible that the loss as • Probable that claim will be asserted

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: (1) Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. (2) Not in accordance with generally accepted auditing standards. (3) A qualification that lessens the collective responsibility of both CPA firms. (4) An example of a dual opinion requiring the signatures of both auditors.

1. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms

Describe the reports containing audited financial statements that are customarily filed by a company subject to the reporting requirements of the SEC. pg 689

1. form s-1 through s-11: these forms include registration certifications for the company that issues securities to the public and are accompanied with comparative statements 2. form sb-1 and sb-2: these forms are simplified registration forms for small businesses 3. form 8-k: an 8-k report is used to report a change in auditors, cpa firms 4. form 10-q: these forms include quarterly audited financial statements 5. form 10-k: this report is filed yearly by publicly owned companies and reports on internal control and other financial statements

An audit report for a public client indicates that the audit was performed in accordance with: (1) Generally accepted auditing standards (United States). (2) Standards of the Public Company Accounting Oversight Board (United States). (3) Generally accepted accounting principles (United States). (4) Generally accepted accounting principles (Public Company Accounting Oversight Board).

2. Standards of the Public Company Accounting Oversight Board (United States).

A change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Unmodified with Qualified Emphasis-of-Matter (1) Yes Yes (2) Yes No (3) No Yes (4) No No

2. Y/N

e. Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? (1) Segregation of duties over cash disbursements. (2) Requiring approval of purchase transactions. (3) Preparing bank reconciliations. (4) Maintaining backup copies of key transactions.

3) Preparing bank reconciliations

l. When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: (1) Modify their report for any significant deficiencies identified. (2) Use a "bottom-up" approach to identify controls to test. (3) Test controls for all significant accounts. (4) Perform a separate assessment of controls over operations.

3) Test controls for all significant account

An audit report for a public client indicates that the financial statements were prepared in conformity with: (1) Generally accepted auditing standards (United States). (2) Standards of the Public Company Accounting Oversight Board (United States). (3) Generally accepted accounting principles (United States). (4) Generally accepted accounting principles (Public Company Accounting Oversight Board).

3. GAAP

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? misstated? Qualified Adverse (1) Yes Yes (2) Yes No (3) No Yes (4) No No

3. N/Y

What is the meaning of the term commitment? Give examples. Do commitments appear in financial statements? Explain.

Contractual obligations to enter into the future 1) Inventory purchase commitments 2) Pension or profit sharing plans

Under what circumstances are tests of controls efficient audit procedures?

Efficient if lower control risk and reduce To obtain evidence about the operating effectiveness of controls

Internal Control

Internal control is a process, effected by the entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the categories of (a) operations, (b) reporting, and (c) compliance with applicable laws and regulations.

. Linda Reeves, CPA, receives a telephone call from her client, Lane Company. The company's controller states that the board of directors of Lane has entered into two contractual arrangements with Ted Forbes, the company's former president, who has recently retired. Under one agreement, Lane Company will pay the ex-president $7,000 per month for five years if he does not compete with the company during that time in a rival business. Under the other agreement, the company will pay the ex-president $5,000 per month for five years for such advisory services as the company may request from the ex-president. Lane's controller asks Reeves whether the balance sheet as of the date the two agreements were signed should show $144,000 in current liabilities and $576,000 in long-term liabilities, or whether the two agreements should be disclosed in a contingencies note to the financial statements. How should Linda Reeves reply to the controller's questions? Explain.

Linda Reeves should reply to the Controller's question by saying this is a commitment (forward looking contract, violated or fullfilled by either party). Does not have to be put in the notes...

Describe the audit technique known as tagging and tracing. What is the purpose of the technique?

Tagging and Tracing transactions are one of several techniques used to generate computer-made flowcharts of other programs. Tagging and tracing is used to produce a printout that can be examined for evidence of unauthorized program steps. This technique involves Tagging transactions with an indicator with an indicator when they are entered into the system

5 components of an organization's internal control

The five components of internal control include the control environment, risk assessment, control activities, the accounting information and communication system, and monitoring. The portion of internal control relevant to auditors is that which pertains to the entity's ability to prepare reliable financial statements.

The number of personnel in an information systems department may limit the extent to which segregation of duties is feasible. What is the minimum amount of segregation of duties that will permit satisfactory internal control?

There needs to be a minimum of 3 personnel in an information systems department to feasibly segregate duties. Programming, operating, techical services