AUD Questions / concepts to reinforce

The primary reason an auditor requests that letters of inquiry be sent to a client's attorney is to provide auditor with:

Corroboration of info furnished by mgmt about litigation, claims, and assessments.

As the acceptable level of detection risk decreases, an auditor may change the

nature of substantive tests from a less effective to a more effective procedure. **needs better evidence

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is NOT required to:

obtain a letter of representation from mgmt

contractual basis report must include...

other-matter paragraph to restrict the use.

Under U.S. GAAS, the group engagement partner makes reference in the audit report to the work of the component auditor when...

the group engagement partner is unable to review the component auditor's audit documentation. This is because the group engagement partner will be unable to be satisfied concerning the work performed by the component auditor. Even though the component auditor has an excellent reputation, the group engagement partner must see the work to be able to assume responsibility for it.

Can only issue a piecemeal opinion if... (adverse/disclaimer on FSs; unmodified on specific element)

the opinion on the specific element is not published with and does not accompany the auditor's report on the complete set of FS **element must not be a major portion of entity's FSs (can't be based on SE or NI)

When an accountant determines that a change in the scope of an engagement from an audit to a review is appropriate, the accountant would issue a review report, but would not refer to...

the original engagement, any procedures performed as part of the engagement, or any scope limitation.

For nonissuers, communication of significant deficiencies and material weaknesses should be made by?

the report release date

In planning the audit, the auditor should consider materiality for the FSs as a whole in terms of:

the smallest aggregate level of misstatement that could be considered material to any one of the FSs --> since the FSs are interrelated

If an auditor has issued an adverse opinion on a complete set of financial statements, the auditor is precluded from expressing which of the following in an audit report on a single financial statement of the nonissuer entity?

unmodified

For nonissuers, communication of control deficiencies should be made by?

within 60 days of report release date

"We disclosed to you all known instances of non-compliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a (an): A. Client engagement letter. B. Attestation report on internal control. C. Report on compliance with laws and regulations. D. Management representation letter.

D. Management representation letter.

A justified change in accounting estimate ______ require an emphasis of matter paragraph?

DOES NOT

Audit report for cash basis FSs _________ include an emphasis-of-matter paragraph including a brief description of the cash basis of accounting.

DOES NOT --> it includes an emphasis-of-matter paragraph referencing the note in the FS that discusses the cash basis.

Different auditor last year and this year. Client wants to issue comparative FSs. What should the predecessor auditor do?

May reissue their report on the previous FSs ONLY AFTER performing limited procedures (reading + compare current with prior) to evaluate continuing the continuing appropriateness of the report. **must also obtain representation letters from Client and from successor auditor.

______ is provided in reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements

Negative assurance

where does "Definitions and Inherent Limitations of Internal Control Over Financial Reporting" paragraph go? (combined report)

Nonisser: between AR and Opinions Issuer: between Basis and CAMS

entity-level controls identified in the professional standards as a control of importance that should be evaluated?

Period-end financial reporting process controls are specifically identified within the professional standards as items of importance that should be evaluated

______ is provided in OCBOA reports, reports on specified elements, accounts, or items, and reports on special-purpose financial presentations to comply with contractual agreements or regulatory provisions. (emphasis-of-matter paragraph)

Positive assurance

An auditor concerned w/ the completeness of dividend income would most likely:

Review dividend record books produced by outside service companies. --> we are looking for unrecorded dividends, so choose a sample of companies in which the client owns stock, and determine if they declared dividends during the year.

Substantive procedure to test completeness assertion for fixed assets?

Review of large items charged to repairs and maintenance

Review of MD&A follows what standards?

SSAE (statements on standards for attestation services)

T/F: auditor is NOT required to search for control deficiencies or significant deficiencies in a FS audit, but those identified should be communicated

TRUE

An auditor is engaged to report on compliance with aspects of a loan agreement in connection with the audit of the financial statements. When an auditor expresses an adverse or disclaimer of opinion on the financial statements, the auditor should issue a report on compliance only if:

The auditor identifies instances of noncompliance.

Is it possible for a company to have a material weakness in internal control but still receive an unmodified opinion on the fairness of the financial statements?

YES

T/F: (nonissuer) the Auditor'e Responsibility paragraph should include a reference to "evaluating the overall presentation" of the financial statements

YES

Can an independent auditor express an opinion on one or more specified elements, accounts, or items of a financial statement as a special engagement that is not in conjunction with an audit?

YES --> examples: employee bonuses or externally managed assets and income of a private benefit plan

T/F: if report uses other framework, do FSs have to use different titles??

YES, non-GAAP

Form AP must be filed...

by the 35th day after the audit report is first filed in a document with the SEC or within 10 days if the audit report is included in a registration statement

If the auditor issues a modified opinion on the complete set of FSs that is relevant to the audit of a specific element, the auditor should: (due to scope limitation)

express a disclaimer of opinion on the specific element

If the auditor issues a modified opinion on the complete set of FSs that is relevant to the audit of a specific element, the auditor should: (due to material misstatement)

express an adverse opinion on the specific element

Reasons to withdraw:

false, fraud, deceptive, misleading

What to do with RSI?

perform limited procedures on RSI, including evaluating whether the information is consistent with the audited FSs

An auditor may express an opinion on an entity's A/R balance even if the auditor has disclaimed an opinion on the FSs taken as a whole provided the:

report on A/R is presented separately from the disclaimer of opinion on the FSs

top-down approach for test of controls

risk at FS level --> entity level --> account balances, disclosures, assertions

Control deficiency wording for nonissuer

"to prevent, or detect and correct"

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:

- read the FSs and the report of current period - Compare prior period FSs with those issued previously and currently - Obtain a letter from the successor accountants

Opinion options on internal control

-Umodified/Unqualified - disclaim - adverse -withdraw

3 types of possible compliance audit reports:

1. Opinion on compliance 2. Report on internal control over compliance 3. Combined report on compliance and internal control over compliance

Which of the following would an auditor most likely use in determining the auditor's preliminary judgement about materiality? 1. the anticipated sample size of the planned substantive tests 2. the contents of the mgmt representation letter 3. results of internal control questionairre 4. entity's annualized interim FSs

4. entity's annualized interim FSs

With respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should...

apply limited procedures to the information (to determine that it is consistent with the basic audited financial statements) and add an other-matter paragraph to the FS audit report.

Purchasing department responsibilities

approve + prepare purchase order

For issuers, material weaknesses should be communicated to mgmt and audit committee when?

before the issuance of the auditor's report on internal control

significant deficiency

A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance.

Adam, CPA, is a staff accountant assigned to audit both the cash account and the fixed asset account for one of his clients. The cash account had many transactions that occurred during the year, while the fixed asset account had very few transactions during the year. Both accounts were audited by Adam's firm last year, and were found to be fairly stated. Which of the following accurately describes the strategies that would likely be applied to these accounts? A. Adam would likely focus on the ending balance for both the cash account and the fixed asset account, since it is the ending balance that is included in the financial statements. B. Adam would likely focus on the ending balance for cash, but would focus more on the transactions that occurred during the year for fixed assets.

B. Adam would likely focus on the ending balance for cash, but would focus more on the transactions that occurred during the year for fixed assets.

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when: A. The internal audit function reports directly to management. B. Management is dominated by one individual. C. Accurate management job descriptions delineate specific duties. D. The audit committee actively oversees the financial reporting process

B. Management is dominated by one individual. Management philosophy and operating style encompass a broad range of characteristics. Such characteristics may include the following: management's approach to taking and monitoring business risks, management's attitudes and actions toward financial reporting, and management's attitudes toward information processing and accounting functions and personnel. These characteristics are more likely to have a significant influence on the control environment when management is dominated by one individual, since there will be few alternative viewpoints presented.

Where is a "restriction of use" language located in an auditor's report?

In other-matter paragraph

A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Example includes:

Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as "held for sale" would be reported separately in the income statement under "discontinued operations."

Which is a weakness in control related to the revenue cycle?

The cash receipts clerk prepares a credit memo --> clerk can misappropriate cash and cover the theft by issuing a credit memo.

a GAGAS requirement in addition to GAAS

a description of the scope of the auditor's testing of compliance and of internal control. This is not required under generally accepted auditing standards.

In order to validate the legitimacy of a faxed confirmation, the auditor is likely to...

call the senders to verify the sources and contents.

Audit objectives should be developed based on...

financial statement assertions.

______ should be corroborated with other audit procedures when testing the operating effectiveness of controls. Inquiry alone is not sufficient to support a conclusion on the operating effectiveness of controls.

inquiry

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the check also:

stamps, perforates, or cancels supporting documents. Signer should mail. **do NOT return checks to A/P because that gives A/P clerks record keeping and custody

When a CPA examines a client's projected FSs, the CPA's report should:

state that the CPA performed procedures to evaluate mgmt's assumptions

DO you have to be independent for agreed-upon procedures?

yes (all attest engagements)

Material weakness wording for issuer

"of the company's annual or interim financial statements will not be prevented or detected"

Material weakness wording for nonissuer

"of the entity's financial statements will not be prevented, or detected and corrected,"

Significant Deficiency wording for nonissuer

"those charged w/ governance"

Significant Deficiency wording for issuer

"those responsible for oversight of the company's financial reporting."

Control deficiency wording for issuer

"to prevent and detect"

Integrated Audit: mgmt's written rep letter should provide

- statement that mgmt has performed an evaluation on the effectiveness of IC - description of key employee fraud - affirmation that mgmt did not rely on the auditor's procedures as the basis for its assessment

overdue audit fees from client (AR) only impair independence if they are overdue for more than...

1 year

In what ways may an internal auditor help?

1. Obtaining an understanding of IC 2. Performing tests of controls 3. Performing substantive tests

3 overall entity objectives

1. reliable financial reporting 2. effective/efficient operations 3. compliance

Material Weakness

A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.

An auditor decides not to perform tests of the operating effectiveness of controls surrounding receivables. Which one of the following is not likely to be a reason for this decision? A. A very material error is noted in the accounts receivable account. B. It would be faster to do extensive substantive testing of the year-end receivables balance than it would be to test the related controls.

A. A very material error is noted in the accounts receivable account. --> An error in the receivables balance is not definitive evidence that controls are not working. The auditor would need to evaluate the situation surrounding the error to determine its cause.

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations? A. Fraud involving employees with significant roles in the internal control structure. B. Disclosure of compensating balance arrangements involving restrictions on cash balances.

A. Fraud involving employees with significant roles in the internal control structure. --> even fraud that causes an immaterial effect on the FSs may have serious implications with respect to the integrity of the employees involved.

Cash receipts: One copy is sent to the cashier along with the actual cash receipts, one is sent to the accounts receivable department along with the remittance advices, and one is sent to the accounting department. Which of the following is true about this distribution of information? A. It is appropriate because it allows several levels of comparison and reconciliation, and there is no need for additional copies to be sent elsewhere. B. A fourth copy should also be made and sent to the treasurer's department, for use when the bank deposit is prepared.

A. It is appropriate because it allows several levels of comparison and reconciliation, and there is no need for additional copies to be sent elsewhere.

Which of the following is true about appointing the external auditor after year-end? A. It is permitted as long as the auditor has considered and discussed with the client any limitations that may be caused by the late appointment. B. It is only permitted with the express agreement of management, the audit committee, and external auditor.

A. It is permitted as long as the auditor has considered and discussed with the client any limitations that may be caused by the late appointment.

Which of the following would least likely be part of an auditor's procedures with respect to fair values? A. Review subsequent events occurring after completion of the audit for evidence regarding fair value measurements as of the balance sheet date. B. Evaluate the appropriateness of the valuation model used by management. C. Obtain management representations relating to intent and ability to carry out planned courses of action. D. Develop an independent fair value estimate.

A. Review subsequent events occurring after completion of the audit for evidence regarding fair value measurements as of the balance sheet date. --> Events occurring after the balance-sheet date may provide audit evidence regarding year-end fair value measurements, but the auditor is only responsible for evaluating such events if they occur prior to the date of the auditor's report. The auditor would not continue to review subsequent events once the audit has been completed.

Which of the following procedures would the auditor most likely perform to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet? A. Testing the data used to arrive at the fair value of the interest rate swap contract. C. Comparing the contract amount with the fair value of the contract and calculating the unrealized gain or loss.

A. Testing the data used to arrive at the fair value of the interest rate swap contract.

Which situation would constitute an improper segregation of duties related to payroll? A. The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department. B. The treasurer signs paychecks, distributes them, and holds any unclaimed checks. C. The payroll department, which computes and records payroll information, also prepares the paychecks. D. The personnel department, which authorizes new hires, is also responsible for approving annual pay rate increases.

A. The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department. --> approving timesheets is an authorization function, which should be separated from custody of assets.

Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of a publicly held entity prepared on the basis of generally accepted accounting principles? A. An accounting change, lack of adequate disclosure, and lack of adherence to generally accepted accounting principles. B. Lack of adherence to generally accepted accounting principles and lack of adequate disclosure.

B. Lack of adherence to generally accepted accounting principles and lack of adequate disclosure.

A CPA is considering whether to accept an engagement to prepare financial statements for a new client. Which of the following statements is correct regarding the independence of the CPA? B. The CPA is not required to make a determination of whether the CPA is independent of the client. C. The CPA is required to disclose in the engagement report any relationships with the client's personnel.

B. The CPA is not required to make a determination of whether the CPA is independent of the client.

When an auditor qualifies an opinion for a nonissuer due to a scope limitation, the auditor should describe the nature of the scope limitation in a separate paragraph and modify the:

Basis for Qualified Opinion Paragraph & Opinion Paragraph **DO NOT modify Intro paragraph

An auditor performs a search for unrecorded liabilities to ascertain that all payables have been recorded in the proper period. The search may be performed in each of the following areas EXCEPT: A. Significant payments subsequent to the end of the period. B. Unbilled professional fees at the end of the period. C. Significant payments prior to the end of the period. D. Unmatched invoices and unbilled receiving reports.

C. Significant payments prior to the end of the period. --> The search for unrecorded liabilities focuses on identifying items that should have been but were not included in the year-end payable balance. Payments made prior to year-end reflect items that are no longer liabilities.

An auditor withdrew from further association with a nonissuer entity after issuing an audit report on it. Subsequently, the auditor discovered facts that, if known to the auditor at the date of the auditor's report, could have caused the auditor to revise the report. Which of the following statements about this circumstance is correct? A. The auditor should talk with the successor auditor about the circumstances of the subsequently discovered information and advise whether the financial statements should be revised. B. The auditor should extend audit procedures with regard to management's revised financial statements with the objective of expressing a dual-dated qualified opinion. C. The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.

C. The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.

Mgmt letter should be signed by

CEO and CFO, dated as of date or auditor's report

Under government auditing standards, when control risk has been assessed at the maximum level for assertions related to computerized information systems that materially impact the financial statements, the auditor should document: I. The basis for assessing control risk at the maximum. II. The planned audit procedures designed to reduce audit risk. III. Management's acknowledgment of the assessed level of risk.

I & II only

Davis, CPA compiled financial statements for XYZ Co. as of and for the year ended December 31, Year 7 that omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Davis was asked to compile the financial statements again for the year ended December 31, Year 8 and to include all necessary disclosures. XYZ Co. plans to prepare the Year 8 financial statements in comparative form. In this situation, Davis may:

Compiled financial statements that omit substantially all GAAP disclosures are not comparable to financial statements including such disclosures. The accountant should not issue a report in this situation.

If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first: C. Withdraw from the engagement when permissible under law or regulation. D. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.

D. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.

If, while performing a review engagement, an accountant has reason to believe that a material misappropriation of assets might have occurred, what should the accountant do? B. Require an investigation to determine whether the misappropriation actually occurred. D. Document communications with senior management about the matter.

D. Document communications with senior management about the matter.

Receiving department

receive goods, match purchase order (blind), and prepare receiving reports

In which situations should disagreements with mgmt and significant audit adjustments be communicated to those charged w/ governance?

Disagreements with mgmt: Communicate even if issue has been satisfactorily resolved Significant audit adjustments: Communicate regardless of whether the adjustment has been booked

Form AP

Filed by issuer with the PCAOB for each audit report issued.

Financial Forecast = ____ use Financial Projection = ____ use

Financial Forecast = GENERAL OR LIMITED use Financial Projection = LIMITED use

Payroll: Authorization

HR: hire new employees + maintain personnel records (hire date, salary, position) Supervisor: pay base data (hours, absences, time off)

Which of the following procedures would NOT be performed in a review of an issuer's interim FSs?

Inquire of client's attorney

Which of the following is a complete and accurate list of the walkthrough procedures usually performed in an issuer's integrated audit?

Inquiry Observation Inspection of relevant Documentation Reperformance of controls.

An auditor should restrict the use of the auditor's communication related to the audit of a nonissuer's financial statements by including an alert when the written communication:

Is based on measurement or disclosure criteria that the auditor determined to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria. (material weaknesses in internal control are included in this)

Julio, CPA, is auditing the financial statements of Megastar Multimedia. Megastar has included the audited financial statements (and Julio's audit report) in its annual report to shareholders. Julio reads the annual report and discovers both a material inconsistency and a material misstatement of fact. The material misstatement of fact is unrelated to financial statement data. Julio believes both the financial statements and the audit report are correct. What should the auditor do first to respond to this situation?

Julio should request that the annual report be revised to eliminate both the material inconsistency and the material misstatement of fact.

What kind of assurance? A report on compliance w/ contractual and regulatory requirements related to audited FSs

NEGATIVE

Nonissuer: control deficiencies communicated in prior audit not corrected. How should you communicate these control deficiencies during the current audit?

Nonissuer: If control deficiency and not corrected, no communication is required

During the compilation of a client's financial statements, an accountant comes to believe that the financial statements are materially misstated. The accountant should:

Obtain the additional or revised information needed to correct the financial statements.

The ______ is subject to oversight by the ______, and only accounting firms registered with the PCAOB may prepare reports for SEC issuers

PCAOB is overseen by SEC

What kind of assurance? A report on OCBOA financial statements

POSITIVE

What kind of assurance? A report on a financial presentation to comply with contractual agreements or regulatory requirements

POSITIVE

What kind of assurance? A report on a specified account in a FS?

POSITIVE

What documents should be sent to A/P department?

Purchase order, receiving report, and vendor invoice, to assure that the goods received agree with what was ordered, and that the company is being billed only for what was received. Sales orders relate to the revenue cycle, and accounts payable would have no use for them. The treasurer should mail the signed check after it is signed; to send it to accounts payable (a recordkeeping department) would be an inappropriate segregation of duties.

An auditor notes that retained earnings includes an amount appropriated in accordance with a loan covenant. Which procedures would the auditor use to audit retained earnings? I. Trace dividend declarations to appropriate authorization by management. II. Analyze the retained earnings account since the last audit. III. Use a standard bank confirmation to confirm the amount appropriated.

Statement II only. --> The auditor should analyze the retained earnings account since the last audit. Generally this is fairly easy to do, since there are not very many direct entries to retained earnings. Statement I is false because dividends should be approved by the board of directors, not by management. Statement III is false because appropriations represent restrictions on the amount that can be paid as dividends, not a segregation of actual cash funds, so the bank would be unable to confirm appropriation amounts.

Unreturned negative confirmation requests rarely provide...

significant explicit evidence

Payroll: Record Keeping

Supervisor: Hourly employees use time clocks. Supervisor compare job time tickets to signed employee clock cards Payroll: computes salary. Issues unsigned payroll checks

T/F: (nonissuer) the component auditor can only be named with their express permission and if their report is being presented together with that of the Charles, CPA

TRUE

Which of the following is a requirement for an audit of both an issuer's and a nonissuer's financial statements?

The auditor is required to assess the risk of fraud.

In obtaining an understanding of an issuer's information and communication component of IC, which should the auditor assess?

The classes of transactions in the issuer's operations that are significant to the issuer's FS

Payroll: Custody of Assets

Treasurer: signs payroll checks Paymaster: distribute payroll checks. Employees req to show ID

LEAST likely to be used as a substantive test relating to cash balances?

Verify that cash disbursements have been properly approved. --> test of controls

Can an auditor disclaim an opinion on the IS and on the statement of cash flows, but give an unmodified opinion on BS?

YES

T/F: are CAMs required to be communicated to the audit committee?

YES

Disclosure of fraud to parties other than a client's senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist? I. To the SEC when the client reports an auditor change II. To a successor auditor when the successor makes appropriate inquiries III. To a government funding agency from which the client receives financial assistance

Yes all 3

Can auditor use the work of a specialist if the specialist is related to the client?

Yes, their work may be acceptable in some circumstances. But the auditor may choose to perform additional procedures in those cases. The auditor may still use the specialist's findings in such situations.

remittance advice

a copy of the sales invoice returned with a customer's payment that indicates the invoices, statements, or other items being paid An optional attachment to a check that tells the business the reason for the payment.

control deficiency

a deficiency in the design or operation of controls that does not permit company personnel to prevent or detect and correct misstatements on a timely basis

What must be done before a comfort letter may be issued?

a review of interim financial information

AR confirmations may be based on

a single transactions rather than an entire customer balance

Management's written representation to the auditor in connection with a governmental audit would most likely include:

a statement that mgmt has disclosed any communications from grantors concerning possible noncompliance

Integrated Audit: mgmt's written rep letter should NOT provide

a statement that there were no significant channges to internal control before the as-of date of the report

Where is the explanatory paragraph located?

after opinion, before basis for opinion

Dual dating would occur if an event recognized happened when?

after the OG date of the auditor's report

Treasury department

review documents, prepare check & remittance advice, sign checks, cancel voucher package

NOT included in auditor's responsibility regarding estimates?

establish a process for preparing estimates --> this is mgmt's job

With respect to an auditor's consideration of fraud risk, which of the following is NOT required?

implementation of controls to detect fraud --> mgmt's responsibility

Where to update prior opinion on comparative FS

in an emphasis-of-matter, other matter, or explanatory paragraph on this year's audit report

Acknowledgement about mgmt's responsibility for DIM of IC should be included

in mgmt representation letter AND MR paragraph of auditor's report

if RSI is not fairly stated...

issue an unmodified opinion and add an other-matter paragaph to describe the auditor's position on RSI

the conflict of interest provisions of SOX Title II apply to...

issuer's CEO, CFO, Controller, CAO --> not an internal auditor.

how should inventory be stated according to GAAP?

lower of cost or market

Vouchers Payable department

match documents: purchase order, receiving reports, invoice; prepare and approve voucher, verify accuracy

Confirmations of A/R that have been categorized initially by an auditor as "exceptions" most likely could be due to:

payments mailed to the client that have not been recorded

Procedure for testing the completeness assertion as it applies to inventory

performing cutoff procedures for shipping and receiving --> see if inventory is correctly included/excluded