Audit CPA Prep
Review
.Limited assurance. A review provides limited assurance but offers no opinion.
Emma, who leads a team auditing a nonissuer, has received a request from a third party for specific information considered confidential by the client. She knows that under certain circumstances a release of this information is allowed without the client's consent. Which section of the AICPA Code of Professional Conduct best describes the circumstances that allow for the release of confidential client information without the client's consent?
1.700.001 Confidential Client Information Rule .02 This rule shall not be construed (1) to relieve a member of his or her professional obligations of the "Compliance With Standards Rule" [1.310.001] or the "Accounting Principles Rule" [1.320.001], (2) to affect in any way the member's obligation to comply with a validly issued and enforceable subpoena or summons, or to prohibit a member's compliance with applicable laws and government regulations, (3) to prohibit review of a member's professional practice under AICPA or state CPA society or Board of Accountancy authorization, or (4) to preclude a member from initiating a complaint with, or responding to any inquiry made by, the professional ethics division or trial board of the Institute or a duly constituted investigative or disciplinary body of a state CPA society or Board of Accountancy. Members of any of the bodies identified in (4) above and members involved with professional practice reviews identified in (3) above shall not use to their own advantage or disclose any member's confidential client information that comes to their attention in carrying out those activities. This prohibition shall not restrict members' exchange of information in connection with the investigative or disciplinary proceedings described in (4) above or the professional practice reviews described in (3) above. [Prior reference: paragraph .01 of ET section 301]
4. Quality control policies and procedures applicable to a CPA firm should encompass the element(s) of ________________.
A) and B). The quality control policies and procedures applicable to a firm's accounting and auditing practice encompass the following elements: •Independence, integrity, and objectivity •Personnel management •Acceptance and continuance of clients and engagements •Engagement performance •Monitoring
2. An audit firm has a responsibility to _______________ in accordance with the applicable legal and regulatory requirements.
A), B), and C). A firm of independent auditors has a responsibility to adopt a system of quality control in conducting an audit practice. Thus, a firm should establish quality control procedures to provide it with reasonable assurance that its personnel comply with generally accepted auditing standards in its audit engagements. AU-C 250 states that "the auditor should remain alert to the possibility that other audit procedures applied may bring instances of noncompliance or suspected noncompliance with laws and regulations to the auditor's attention." Also, AU-C 220 states that, "within the context of the firm's system of quality control, engagement teams have a responsibility to implement quality control procedures that are applicable to the audit engagement."
10. The timing of periodic inspections to evaluate quality control over the audits of public companies by a CPA firm is dependent upon factors such as ___________________.
A), B), and C). According to QC 10, •The need for, and extent of, inspection procedures depends, in part, on the existence and effectiveness of other monitoring procedures. The nature of inspection procedures varies based on the firm's quality control policies and procedures and the effectiveness and results of other monitoring procedures. •The inspection of a selection of completed engagements may be performed on a cyclical basis. For example, engagements selected for inspection may include at least one engagement for each engagement partner over an inspection cycle that spans 3 years. The manner in which the inspection cycle is organized, including the timing of selection of individual engagements, depends on many factors, such as the following:◾The size of the firm ◾The number and geographical location of offices ◾The results of previous monitoring procedures ◾The degree of authority of both personnel and office ◾The nature and complexity of the firm's practice and organization ◾The risk associated with the firm's clients and specific engagements
8. An effective system of quality control provides reasonable assurance that the firm and personnel follow policies and procedures pertaining to _________________.
A), B), and C). QC 10 indicates that the firm must establish and maintain a system of quality control, which should include policies and procedures addressing each of the following elements:a.Leadership responsibilities for quality within the firm (the tone at the top) b.Relevant ethical requirements c.Acceptance and continuance of client relationships and specific engagements d.Human resources e.Engagement performance f.Monitoring
6. The form and content of documentation evidencing the operation of each of the elements of the system of quality control depend on factors such as __________________.
A), B), and C). QC 10 states, "The form and content of documentation evidencing the operation of each of the elements of the system of quality control is a matter of judgment and depends on a number of factors, including the following: •The size of the firm and the number of offices •The nature and complexity of the firm's practices and organization."
5. A CPA firm must appropriately document _______ to properly administer a quality control system.
A), C), and D). QC 10 states that the firm should establish policies and procedures requiring (a) appropriate documentation to provide evidence of the operation of each element of its system of quality control, (b) retention of documentation for a period of time sufficient to permit those performing monitoring procedures and peer review of the firm to evaluate the firm's compliance with its system of quality control or for a longer period if required by law or regulation, and (c) documentation of complaints and allegations and responses to them.
9. An effective system of quality control provides reasonable assurance that the firm and personnel comply with the AICPA Code of Professional Conduct's fundamental principles of professional ethics. These principles include _________________.
A), D), and E). QC 10 states, "The AICPA Code of Professional Conduct establishes the fundamental principles of professional ethics, which include the following:•Responsibilities •The public interest •Integrity •Objectivity and independence •Due care •Scope and nature of services."
1. Each time Jim accesses and changes a file, his time of access and ID number are recorded.
Access logs. Access logs are maintained that automatically record each transaction, the time of the transaction, and the identification of the person who entered the transaction.
3. Examines vendor invoice for errors
Accounts Payable. Accounts Payable should compare the vendor invoice with the purchase order to determine that the terms and prices are correct.
5. Compares vendor invoice with the receiving reports
Accounts Payable. Accounts Payable should compare the vendor invoice with the receiving report to determine that the quantity received was the quantity ordered.
2. Amounts and other data were recorded appropriately.
Accuracy. Accuracy relates to the representation that amounts and other data were recorded appropriately.
Judy Davis, CPA, is considering an auditing standard stating a presumptively mandatory requirement in an audit of a nonissuer. However, she has determined that it is impracticable to follow this guidance. Which section of the generally accepted auditing standards best outlines the auditor's responsibility? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.
Answer: AU-C 200.26 AU-C Section 200 -- Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards Defining Professional Responsibilities in GAAS .26 In rare circumstances, the auditor may judge it necessary to depart from a relevant presumptively mandatory requirement. In such circumstances, the auditor should perform alternative audit procedures to achieve the intent of that requirement. The need for the auditor to depart from a relevant presumptively mandatory requirement is expected to arise only when the requirement is for a specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be ineffective in achieving the intent of the requirement.
An auditor has not been able to form a conclusion about the fairness of inventory of a nonissuer. Which section of the generally accepted auditing standards best outlines the auditor's response to the failure to achieve an objective stated in a relevant auditing standard? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.
Answer: AU-C 200.29 AU-C Section 200 -- Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards Failure to Achieve an Objective .29 If an objective in a relevant AU-C section cannot be achieved, the auditor should evaluate whether this prevents the auditor from achieving the overall objectives of the auditor and thereby requires the auditor, in accordance with GAAS, to modify the auditor's opinion or withdraw from the engagement (when withdrawal is possible under applicable law or regulation). Failure to achieve an objective represents a significant finding or issue requiring documentation in accordance with section 230, Audit Documentation.
During the audit of a nonissuer, the engagement team discovers that the accounts payable clerk was writing checks to fictitious vendors. Which paragraph in the professional standards establishes the requirement(s) the auditor should follow when considering whether to continue the engagement? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.
Answer: AU-C 240.38 AU-C Section 240 -- Consideration of Fraud in a Financial Statement Audit Auditor Unable to Continue the Engagement .38 If, as a result of identified fraud or suspected fraud, the auditor encounters circumstances that bring into question the auditor's ability to continue performing the audit, the auditor should a.determine the professional and legal responsibilities applicable in the circumstances, including whether a requirement exists for the auditor to report to the person or persons who engaged the auditor or, in some cases, to regulatory authorities; b.consider whether it is appropriate to withdraw from the engagement, when withdrawal is possible under applicable law or regulation; and c.if the auditor withdrawsi.discuss with the appropriate level of management and those charged with governance the auditor's withdrawal from the engagement and the reasons for the withdrawal, and ii.determine whether a professional or legal requirement exists to report to the person or persons who engaged the auditor or, in some cases, to regulatory authorities, the auditor's withdrawal from the engagement and the reasons for the withdrawal (Ref: par. .A63-.A66).
A client has asked the CPA to provide examples of control activities. Which section of the AICPA's generally accepted auditing standards provides these examples?
Answer: AU-C 315.A99 AU-C Section 315 -- Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement Components of Internal Control—Control Activities .A99 Control activities are the policies and procedures that help ensure that management directives are carried out. Control activities, whether within IT or manual systems, have various objectives and are applied at various organizational and functional levels. Examples of specific control activities include those relating to the following: Authorization Performance reviews Information processing Physical controls Segregation of duties
Blake, CPA, is a partner-in-charge and is assembling information for his audit team about quality control. He wanted to start with the basics related to the elements of a quality control system. Which section of the AICPA professional standards defines the elements of a system of quality control? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.
Answer: QC 10.17 QC Section 10 -- A Firm's System of Quality Control Elements of a System of Quality Control .17 The firm must establish and maintain a system of quality control. The system of quality control should include policies and procedures addressing each of the following elements: a.Leadership responsibilities for quality within the firm (the tone at the top) b.Relevant ethical requirements c.Acceptance and continuance of client relationships and specific engagements d.Human resources e.Engagement performance f.Monitoring Policies and procedures established by the firm related to each element are designed to achieve reasonable assurance with respect to the purpose of that element. Deficiencies in policies and procedures for an element may result in not achieving reasonable assurance with respect to the purpose of that element; however, the system of quality control as a whole may still be effective in achieving the objective described in paragraph .12.
3. The CPA is independent and the level of assurance can be explicit or implicit.
Assurance and advisory services. The definition of assurance and advisory services includes a provision that the CPA be independent of the client. Also, assurance services provide flexible levels of assurance.
4. Obtained by the client for the purposes of making better decisions.
Assurance and advisory services. The objective of assurance and advisory services is better decision making.
3. This service improves the quality of information, or its context, for decision makers.
Assurance and advisory. Assurance and advisory services provide better information for decision makers, which leads to better decision making.
2. Results in a written conclusion about subject matter or a written assertion of another party.
Attestation services. The result of an attestation engagement is a written conclusion about subject matter or a written assertion of another party.
2. This service results in a written conclusion about subject matter.
Attestation. Attestation results in a written conclusion about subject matter or a written assertion of another party. Its objective is to provide reliable information.
5. This service provides for a level of assurance based on an examination.
Attestation. Attestation services can provide assurance based on an examination, a review, or the results of agreed-upon procedures.
1. This type of engagement requires an accountant to obtain a sufficient understanding of a company's internal control.
Audit. An auditor should obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels.
4. Expressing an opinion on whether a client's financial statements are presented fairly, in all material respects, in accordance with GAAP, constitutes this type of engagement.
Audit. An auditor should obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. The auditor thereby is enabled to express an opinion on whether the statements are fairly presented, in all material respects, in accordance with GAAP. Accordingly, the auditor should design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.
6. During this type of engagement, an accountant must obtain sufficient evidence from testing management's assertions to express an opinion.
Audit. An auditor should obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. The auditor thereby is enabled to express an opinion on whether the statements are fairly presented, in all material respects, in accordance with GAAP. Accordingly, the auditor should design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.
7. Public accounting firms establish a monitoring process involving _____________ to provide reasonable assurance that policies relating to the system of quality control are relevant, adequate, and operating effectively.
B) and C). QC 10 indicates that the firm should establish a monitoring process to provide reasonable assurance that policies relating to the system of quality control are relevant, adequate, and operating effectively. This process should include an ongoing consideration and evaluation of the firm's system of quality control, including inspection or a periodic review of engagement documentation, reports, and clients' financial statements for a selection of completed engagements.
1. An audit firm has a responsibility to adopt a system of quality control and establish policies and procedures to provide reasonable assurance that personnel comply with ______________.
B). A firm of independent auditors has a responsibility to adopt a system of quality control in conducting an audit practice. Thus, a firm should establish quality control procedures to provide it with reasonable assurance that its personnel comply with generally accepted auditing standards (GAAS) in its audit engagements.
a. The auditor should consider the Department of Labor guidelines for determining independence. b. The auditor should consider the AICPA Code of Professional Conduct for determining independence.
Both statements a. and b. are true. The auditor should consider guidance from the AICPA Code as well as the Department of Labor.
3. Quality control for a CPA firm applies to all ____________ services.
C) and D). Quality control for a CPA firm does not explicitly apply to consulting and tax services, but quality control does apply to all review and compilation services.
6. Cancels payment documents
Cash Disbursements. After signing the check, Cash Disbursements should cancel the voucher and documentation so that they cannot be used to support another payment.
7. Mails check to avoid improper access
Cash Disbursements. After signing the check, Cash Disbursements should maintain control of the payments until they are placed in the mail.
2. Determines that documents support the voucher and check
Cash Disbursements. The Cash Disbursements department should determine that the documentation and voucher support the check before signing and mailing it.
4. Financial information is appropriately presented and described, and disclosures are clearly expressed.
Classification and understandability. Classification and understandability relates to the representation that items have been properly described and disclosed in the financial statements.
Compilation
Column A: Independence not required; Column B: No assurance provided. The accountant provides no assurance and is not required to be independent. But the accountant must (a) determine whether (s)he is independent and (b) issue a report.
Preparation
Column A: Independence not required; Column B: No assurance provided. The accountant provides no assurance. Moreover, the accountant is not required to (a) be independent, (b) determine whether (s)he is independent, or (c) issue a report.
Review
Column A: Independence required; Column B: Limited assurance provided. The accountant provides limited assurance and is required to be independent.
Agreed-upon procedures
Column A: Independence required; Column B: Neither positive nor limited assurance provided but results of procedures provided. The accountant (a) provides neither positive nor limited assurance, (b) is required to be independent, and (c) issues a report.
Audit
Column A: Independence required; Column B: Positive assurance provided. The accountant (a) provides positive assurance, (b) is required to be independent, and (c) issues a report.
2. This type of engagement consists of an accountant presenting management's information in statement form, including a disclaimer expressing no assurance.
Compilation. A compilation is a presentation in statement form of information that is the representation of management. This report includes a disclaimer and provides no assurance to external users of the financial statements.
5. This type of engagement occurs when the accountant serves on the client's board of directors and prepares financial statements and a report with a statement that (s)he is not independent.
Compilation. An accountant does not need to be independent to perform compilation services but should indicate the lack of independence in the compilation report.
3. All assets, liabilities, and equity interests that should have been recorded were recorded.
Completeness. Completeness relates to the representation that all valid transactions were recorded.
1. Typically involves only two parties.
Consulting services. Consulting services generally only involve the user and the CPA, whom the user pays.
5. The CPA makes recommendations based on management's objectives.
Consulting services. In a consulting engagement, the CPA recommends actions to management based on their objectives in order to achieve better outcomes.
4. This service provides recommendations based on the objectives of the engagement.
Consulting. Consulting services provide recommendations based on the objectives of the engagement. The goal is to provide better outcomes.
1. Independence is not required for this service.
Consulting. Independence is not required to provide consulting services. Independence is required by attestation standards and is included in the definition of assurance services.
5. Transactions and events were recorded in the proper period.
Cutoff. Cutoff relates to the representation that transactions and events were recorded in the proper period.
2. Actual hours spent on Job A201 from the Employee Daily Job Report for Corey Andrew for July 12, 20X3, is compared to the
Daily Production Schedule, Compare actual time to budgeted time, Total hours on Document #1 are more than total hours on Document #2. The Shop Supervisor compares actual time spent for Job A201 (2.75 hours) on the Employee Daily Job Report for Corey Andrew for July 12, 20X3, to budgeted time for Job A201 (2.0 hours) on the Daily Production Schedule for the same day. Therefore, the Employee Daily Job Report (Document #1) total hours (2.75 hours) are more than the Daily Production Schedule (Document #2) total hours (2.0 hours).
1. Shop Supervisor's reconciliation of total hours on the Employee Daily Job Report for Corey Andrew for July 12, 20X3, is compared to the
Daily Production Schedule, To account for all time worked, Total hours on Document #1 are the same as total hours on Document #2. The Shop Supervisor assigns employees production-order tasks to be performed on the Daily Production Schedule. At the end of the shift, the Shop Supervisor determines that employees have submitted Employee Daily Job Reports (also called job time tickets) to account for all time worked. The Employee Daily Job Report for Corey Andrew on July 12, 20X3, has time worked as 9 hours, from 7:30 a.m. to 5:30 p.m. with an hour for lunch. The Daily Production Schedule has time scheduled as 9 hours, from 7:30 a.m. to 5:30 p.m. with an hour for lunch. Therefore, the Employee Daily Job Report (Document #1) total hours are the same as the Daily Production Schedule (Document #2) total hours.
3. Timekeeper's reconciliation of the hours on the Time Card for Corey Andrew for July 12, 20X3, is compared to the
Employee Daily Job Report, Ensure employee present and working, Total hours on Document #1 are less than total hours on Document #2. The Shop Supervisor forwards the Employee Daily Job Report for Corey Andrew for July 12, 20X3, to Timekeeping. Timekeeping reconciles the Time Card to the Employee Daily Job Report (also called job time tickets, flag sheets, time and material logs) to ensure the employee was present and working. According to his Time Card, Corey Andrew worked 8 hours, from 8:30 a.m. to 5:30 p.m. (rounded), with an hour for lunch, on July 12, 20X3. The Employee Daily Job Report for Corey Andrew on July 12, 20X3, has Corey working 9 hours, from 7:30 a.m. to 5:30 p.m., with an hour for lunch. Therefore, the Time Card (Document #1) total hours (8 hours) are less than the Employee Daily Job Report (Document #2) total hours (9 hours).
8. Assets, liabilities, and equity interests are bona fide.
Existence. Existence relates to the representation that balance sheet items are real.
2. Lenny is new on the job and attempted to insert his name under the field where he was supposed to put his hours worked; however, the screen kept returning an error message.
Field checks. Field checks are used to test the characters in certain fields to verify that they are of an appropriate type for that field (e.g., the hours-worked field should contain numbers only).
Establishment of adoption of ethics standards
Function provided by the PCAOB. The PCAOB establishes or adopts standards on auditing, quality control, ethics, and independence.
10. The subject of the AICPA's clarity project for audits
GAAS. A new Codification of Statements on Auditing Standards was adopted to clarify GAAS.
4. Defines the process of undertaking an audit engagement for nonissuers
GAAS. GAAS (SASs) are issued by the ASB, the senior technical committee of the AICPA designated to issue standards on auditing matters for nonissuers. The Compliance with Standards Rule of the Code of Professional Conduct requires an AICPA member who audits a nonissuer to comply with GAAS.
4. Cost accounting receives the Employee Daily Job Report for Corey Andrew for July 12, 20X3, and posts Job A201 to the
Job Order Cost Sheet, Determine the costs of production, Total hours on Document #1 are the same as total hours on Document #2. Timekeeping forwards the Employee Daily Job Report for Corey Andrew for July 12, 20X3, to Cost Accounting. Cost Accounting posts the direct labor and materials from the Employee Daily Job Report for Corey Andrew to a Job Order Cost Sheet for Job A201. Cost Accounting accumulates direct materials, direct labor, and overhead costs on the Job Order Cost Sheet to determine the costs of production. The Employee Daily Job Report for Corey Andrew on July 12, 20X3, (Document #1) total hours for Job A201 is 2.75 hours, which is the same as the total hours for Corey Andrew on the Job Order Cost Sheet (Document #2) for July 12, 20X3 (2.75 hours).
5. Human Resources provides Payroll with IRS Form W-4, Employee's Withholding Allowance Certificate, detailing federal withholding deductions and the
New Hire Authorization, Employee is authorized to work, Document #1 is not provided and Document #2 has an unauthorized or missing signature. Human Resources provides the list of employees and associated pay rates, deductions, and exemptions to Payroll prior to calculation of the payroll, confirming the employee is authorized to work. Federal withholding deductions are provided by the employee using IRS Form W-4, Employee's Withholding Allowance Certificate. Form W-4 (Document #1) was not provided, and the New Hire Authorization (Document #2) provided for Corey Andrew is missing an authorizing signature from Human Resources.
Agreed-upon procedures
No assurance. Agreed-upon procedures engagements provide the results of the procedures but offer no assurance.
Preparation
No assurance. No assurance is provided, and no report is presented.
Compilation
No assurance. No assurance is provided. A compilation report contains a disclaimer of opinion.
Establishment of generally accepted accounting principles
Not addressed by the PCAOB. The FASB (not the PCAOB) establishes generally accepted accounting principles.
External approval of audit report before issuance
Not addressed by the PCAOB. The audit report need not be approved by an external party before issuance.
1. Recorded transactions and events actually took place.
Occurrence. Occurrence relates to the representation that transactions and events actually took place.
6. The hours on the approved Time Card for Corey Andrew are used to prepare the
Payroll Register, Authorization of hours worked, Document #1 has an authorized signature but Document #2 is not provided. Timekeeping approves the Time Card for Corey Andrew and forwards it to Payroll as authorization of hours worked. Payroll uses the list of authorized employees and associated pay rates, deductions, and exemptions from Human Resources and the authorized hours from Timekeeping to calculate the payroll for the period. A Payroll Register is prepared listing each employee, his or her gross pay, all deductions, and net pay. The Payroll Register is then sent to Accounts Payable where it is used as authorization to prepare a Payment Voucher and check equal to the total of the net pay for the employee. The Time Card for Corey Andrew (Document #1) has an authorizing signature from Timekeeping, and the Payroll Register (Document #2) was not provided.
Provision of internal auditing services
Performance by audit firms prohibited by the PCAOB. Audit firms are prohibited from providing certain internal audit services to their audit clients.
Examination
Positive assurance. An examination, like an audit, provides positive assurance expressed as an opinion.
Audit
Positive assurance. Positive assurance is provided by the opinion in an audit.
3. When filling out a purchase order for widgets, Mikey forgot to fill out the quantity of widgets he was ordering and the screen kept returning an error message.
Preformatted screen. Preformatted data entry screens are used to ensure proper input. The transaction will not be approved unless the quantity field is completed (along with other data).
7. The accountant need not be independent and does not present a report for this type of engagement.
Preparation. An accountant may prepare financial statements without presenting a report. Independence is not required.
1. The auditor should document the evidence obtained in the audit.
Presumptively mandatory requirement. The auditor must comply with a presumptively mandatory requirement whenever it is relevant, except in rare circumstances. The word "should" indicates a presumptively mandatory requirement.
3. The auditor should test management's assertions relating to the financial statements.
Presumptively mandatory requirement. The auditor must comply with a presumptively mandatory requirement whenever it is relevant, except in rare circumstances. The word "should" indicates a presumptively mandatory requirement.
7. The auditor should obtain sufficient appropriate evidence to support the opinion.
Presumptively mandatory requirement. The auditor must comply with a presumptively mandatory requirement whenever it is relevant, except in rare circumstances. The word "should" indicates a presumptively mandatory requirement.
5. When filling out her time card, Sarah entered that she worked 400 hours during one week, but her input was not accepted.
Reasonableness test. Reasonableness tests are used to test quantities to determine that they are within reasonable limits. It is not possible to work 400 hours in one week.
4. Copy of purchase order omits the quantity
Receiving. The Receiving department's copy of the purchase order should omit the quantities ordered to ensure that the Receiving department counts the goods when received.
Communication of accounting policies to audit committees
Required of audit firms by the PCAOB. The PCAOB requires audit firms to communicate to the audit committee all critical accounting policies and practices used by the client.
Rotation of lead audit partner
Required of audit firms by the PCAOB. The PCAOB requires that the lead audit partner be rotated every 5 years.
4. The auditor may make suggestions about the form or content of the financial statements.
Requirement to consider. The words "may," "might," "could," or similar terms and phrases describe actions and procedures that the auditor is presumptively required to consider. Whether the action or procedure is performed is a matter of professional judgment.
5. In some cases, the auditor could apply one audit procedure to test more than one assertion.
Requirement to consider. The words "may," "might," "could," or similar terms and phrases describe actions and procedures that the auditor is presumptively required to consider. Whether the action or procedure is performed is a matter of professional judgment.
3. This type of engagement requires an accountant to make inquiries and apply analytical procedures but does not provide positive assurance.
Review. A review requires the use of analytical procedures, but only provides limited assurance to external users of the financial statements.
7. The entity owns the assets, and liabilities are its obligations.
Rights and obligations. The rights and obligations assertion relates to the representation that assets are owned and liabilities are owed.
7. Defines audit requirements for issuers
SOX. Sarbanes-Oxley is federal legislation that requires issuers to be audited by registered public accountants.
3. Mandates that a second partner review and approve audit reports
SOX. Sarbanes-Oxley was created, in part, to improve the quality control of audits. One of its provisions is to require a second review and approval by another partner in the auditing firm.
6. Describes six elements the CPA firms must consider
SQCSs. Statements on Quality Control Standards list six elements of a quality control system.
1. Requires accounting firms to appropriately consider the risk of providing services
SQCSs. Statements on Quality Control Standards list six elements of a quality control system. The third element, acceptance and continuance of client relationships and specific engagements, requires firms to appropriately consider the risk of performing services.
5. Requires the accountant to have reason to believe that the assertion is measurable in terms that are suitable to the users of the assertion
SSAEs. A practitioner must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.
2. Issued by the AICPA to set guidelines for performing a compilation
SSARS. Statements on Standards for Accounting and Review Services apply to compilations.
9. Issued by the AICPA to set guidelines to offer limited assurance on historical financial statements
SSARS. Statements on Standards for Accounting and Review Services apply to reviews of historical financial statements. Reviews offer limited assurance.
8. The accountant makes recommendations based on the objectives of the engagement
SSCSs. Statements on Standards for Consulting Services describe responsibilities of a practitioner who develops findings, conclusions, and recommendations based solely on the agreement with the client. The work ordinarily is only for the use and benefit of the client.
The AICPA Code of Professional Conduct defines a covered member as any individual participating in the attest engagement or able to influence it
TRUE. A covered member is (1) an individual on the attest engagement team or who is able to influence the engagement, (2) a partner or manager who provides nonattest services to a client, (3) a partner in the office where the lead engagement partner primarily practices in relation to the engagement, (4) the firm (including its benefit plans), and (5) an entity whose policies can be controlled by the foregoing parties.
1. Permits timely payments to realize discounts
Tickler file. Vouchers can be filed in a tickler file by due date based on the vendor's terms and pulled from the file for payment on the due date.
2. The auditor must be independent.
Unconditional requirement. The auditor must comply with an unconditional requirement whenever it is relevant. The word "must" indicates an unconditional requirement.
6. The auditor must follow GAAS in an audit of a nonissuer.
Unconditional requirement. The auditor must comply with an unconditional requirement whenever it is relevant. The word "must" indicates an unconditional requirement.
4. Ronel needed to order part #6785J but he kept inserting #6785H. There is no part #6785H, and the screen kept returning an error message.
Validity test. Validity tests are used to ensure that only proper transaction data will be accepted. Since there is no part #6785H, the input will be rejected.
6. Assets, liabilities, and equity interest are included at appropriate amounts and adjustments are appropriately recorded.
Valuation and allocation. Valuation and allocation relates to the representation that balance sheet items are recorded at the properly valued amounts and adjustments to the balances are appropriately determined and recorded.
As you requested, I traced purchase order 25419 through the purchases-payables cycle. Penguin's JIT (Just-in-Time) inventory management system uses predetermined reorder levels as a basis for automatically generating purchase requisitions. I have listed matters that may require further attention to determine whether this matter is an isolated incident or systemic issues exist.
✓ Correct: Because Joseph Marks is in the receiving department, he should not be allowed to approve purchase requisitions and purchase orders. The functions of requisitioning purchases (inventory control), ordering (purchasing department), and receiving goods ordered (receiving department) should be segregated. Authorization of transactions and custody of assets are incompatible.
The purchase order and the invoice are inconsistent.
✓ Correct: If Penguin's supplier could provide only 45 Macaroni Wrenches instead of 50, the reduced shipment nevertheless is a common commercial practice. If the supplier could not provide the quantity ordered (50), but shipped a lesser amount (45) as an accommodation, the actual shipment was not a breach of contract but a counteroffer. In commerce, such accommodations are routine. Furthermore, if the number shipped equals the number received, no internal control issue is raised. But if 50 were shipped and only 45 were received, a possibility exists that 5 were stolen. ✓ Correct: [Delete Text] The discrepancies between (1) the quantities and unit prices in the buyer's offer and (2) those in the seller's counteroffer do not indicate ineffective internal control. (1) Regarding the price of the Pachydyptes Tiles, the difference between the unit price charged ($22.69) and the unit price offered ($22.68) is immaterial. (2) The unit price ($12) offered by the buyer for Chatham Ball Bearings was higher than the unit price charged by the seller, a favorable difference. (3) The buyer may have chosen to accept the 60 Chatham Ball Bearings offered instead of the 50 ordered because of the favorable price. (4) The seller may have shipped fewer Macaroni Wrenches than ordered because of a lack of inventory. The buyer may accept the good units shipped as an accommodation and reject the nonconforming units. These actions are consistent with normal commercial practice.
Internal control over check payment should be investigated further.
✓ Correct: Penguin paid for 45 Macaroni Wrenches, but it received only 35 that were salable. Penguin paid the seller's invoice price ($5,224.00) for the following: (1) 45 Macaroni Wrenches, (2) 60 Chatham Ball Bearings, (3) 100 Pachydyptes Tiles, and (4) 100 units of Dege Bonding Agent. Penguin received the invoiced numbers of Chatham Ball Bearings and units of Dege Bonding Agent. But 10 of the 45 Macaroni Wrenches were damaged and not salable. Accordingly, 10 of the Macaroni Wrenches should have been rejected, and Penguin was liable for only 35. Also, only 80 of the Pachydyptes Tiles were received. Thus, Penguin should have paid for only 80 Pachydyptes Tiles. Penguin's payment therefore should have been $4,500.20 {5,224 - [(10 × $27) + (20 × $22.69)]}. The probable failure of internal control was that the receiving report was not compared with the seller's invoice before accounts payable prepared the voucher and check.
On the date of the purchase order, I reviewed the daily inventory report.
✓ Correct: [Original Text] No evidence exists that the JIT system is not working properly. The reorder point for each item should be known to evaluate the system. Thus, no evidence is available to judge that the system is not working properly.
Finally, I reviewed the payment of the invoice. Penguin chooses not to use an accounts payable system. It pays all invoices immediately upon receipt.
✓ Correct: [Original Text] This accounting method is acceptable. But at year end, Penguin needs to capture all unpaid invoices and make an adjusting entry for accounts payable. The entity's payment of invoices on receipt is a simplified accounting method that is used by many small entities. Larger entities prefer the cash flow advantages of paying invoices when due. They prepare payment vouchers and checks (unsigned) when all supporting documents are received (purchase requisition, purchase order, receiving report, and approved invoice). Vouchers then are filed by due date.
