Concept that you don't fully understand Audit

substantive test of details sample considerations

1. Tolerable misstatement 2. Allowable risk of incorrect acceptance. 3. Characteristics of the population. Not acceptable: Deviation rate, this is for attribute sampling, which is appropriate for tests of controls, not substantive tests.

Prior audit year adjustments

A financial statement audit for one year presumes that the beginning balances in the balance sheet are correct. Because the Year 1 financial statements were revised after the Year 1 audit, the Year 2 auditor must audit the Year 1 adjustments to ensure that the beginning balance sheet balances, including retained earnings, are correct. The predecessor auditor is not obliged to restate the Year 1 financial statements because management is responsible for the financial statements, not either the predecessor or the successor auditor

Restating previous financial statements

A financial statement audit for one year presumes that the beginning balances in the balance sheet are correct. Because the Year 1 financial statements were revised after the Year 1 audit, the Year 2 auditor must audit the Year 1 adjustments to ensure that the beginning balance sheet balances, including retained earnings, are correct. The predecessor auditor is not obliged to restate the Year 1 financial statements because management is responsible for the financial statements, not either the predecessor or the successor auditor. The Year 2 audit is for Year 2 only. The comparative information in this case is not audited by the Year 2 auditor; thus, the Year 2 auditor expresses no opinion on the comparative information. Only if the year 1 audit is completed by the current auditor, only then will the current auditor express an opinion.

Kiting

A fraudulent cash scheme to overstate cash assets at year end by showing the same cash in two different bank accounts using an interbank transfer. Kiting, also called check kiting, is a fraudulent scheme that uses checks to embezzle money from a business. Kiting is usually committed by a bookkeeper or someone else with access to company checks and the ability to forge checks, but it can also be used by the company. Kiting occurs when transfers are made from one bank account to another, but the disbursing and receiving transactions are not recorded in the same time period. Check numbers 202 and 404 indicate kiting because both show a deposit recorded in a period different from the disbursement.

Reliance Strategy

A reliance strategy means that the auditor intends to rely on Internal Audit, or others, rather than performing more "hands on" audit procedures in order to obtain audit evidence for themselves. ... transactions or other factors, can be audited more efficiently through substantive tests rather than reliance. Usually used for computer transactions that are a large amount with a large dollar amount. But is not used if there is a small amount of transactions with a large dollar amount, would create a higher level of control risk. More of an audit trail compared to many transactions.

AICPA's Code of Professional Conduct

A. Overview 1. The code is divided into three main parts: a. Part 1 applies to members in public practice. b. Part 2 applies to members in business. c. Part 3 applies to other members. 2. Members serving in multiple roles should choose the most restrictive applicable provisions. B. Principles and rules of conduct contained in the code are supplemented by: 1. Interpretations 2. Definitions 3. Applications 4. Where applicable, standards promulgated by other bodies such as a. State certified public accounting (CPA) societies b. Securities and Exchange Commission c. Public Company Accounting Oversight Board d. Government Accountability Office e. Department of Labor f. Various taxing authorities C. Principles of Professional Conduct 1. By voluntarily joining the AICPA, members assume an obligation of self-discipline above and beyond legal requirements. 2. The six major principles call for "an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage": a. "Responsibilities principle. In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities." i. This principle imposes a continuing responsibility on members to "cooperate with each other to: 1. "improve the art of accounting, 2. "maintain the public's confidence, and 3. "carry out the profession's special responsibilities for self-governance." b. "Public Interest principle. Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism." c. "Integrity principle. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity." i. "Integrity is measured in terms of what is right and just"; members should always ask "Am I doing what a person of integrity would do?" Note "A distinguishing mark of a profession is acceptance of its responsibility to the public." d. "Objectivity and Independence principle. A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services." i. "Objectivity is a state of mind" that requires: 1. impartiality, 2. intellectual honesty, and 3. freedom from conflicts of interest. ii. Only members in public practice must act with independence, but all members performing all services must act with objectivity and integrity. e. "Due care principle. A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability." i. Perfection is not required. ii. Competence requires a commitment to continued learning—hence, continuing professional education. iii. Members may derive competence from research or consultation with experts. iv. Due care entails 1. Adequate planning of engagements 2. Supervision of professional activities for which members are responsible f. "Scope and nature of services principle. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided." g. At a minimum, members should: i. Practice in firms that have good internal quality control procedures, ii. Use their individual judgments to determine whether the scope and nature of services provided to an audit client would create a conflict of interest, and iii. Individually assess whether a contemplated activity is consistent with their role as professionals. Audit Compilation Tax Consulting Integrity Yes Yes Yes Yes Objectivity Yes Yes Yes Yes Independence in Fact Yes No No No Independence in Appearance Yes No No No

Assurance Services

AICPA Assurance Services A. Trust Services—The AICPA and Canadian Institute of Chartered Accountants developed SysTrust (to provide assurance on systems generating information and representations generally) and WebTrust (to provide assurance specifically related to e-commerce activities). 1. Five principles and criteria associated with Trust Services (these are organized in four broad areas: policies, communications, procedures, and monitoring): a. Security—The system is protected from unauthorized access. b. Availability—The system is available for operation and use as committed or agreed. c. Processing integrity—System processing is complete, accurate, timely, and authorized. d. Confidentiality—Information designated as confidential is protected as committed or agreed. e. Privacy—Personal information is collected, used, retained, and disclosed in conformity with the commitments in the entity's privacy notice and with criteria set forth in generally accepted privacy principles issued by the AICPA/CICA. 2. WebTrust—To earn the WebTrust seal (which provides assurance to participants about transaction integrity and information security in e-commerce transactions with an entity's Web site), the entity must comply with all five of the principles above and engage a CPA-licensed professional to provide WebTrust-related services; the seal displays a digital certificate and can be displayed until the designated expiration date (the WebTrust seal is managed by a third-party seal manager ). 3. SysTrust—To earn the CPA's unqualified opinion for a SysTrust engagement, an entity's system would also have to meet the above Trust Services principles; the SysTrust engagement would evaluate management's written assertions about the effectiveness of controls over the entity's system relative to applicable attestation standards. B. PrimePlus (formerly known as ElderCare) Services—PrimePlus has a connotation primarily involving financial/lifestyle planning issues, whereas ElderCare has a connotation primarily involving healthcare (the AICPA says it will continue to support both brands). PrimePlus/ElderCare Services: "A unique and customizable package of professional services—both financial and nonfinancial—intended to help older adults maintain, for as long as possible, their desired lifestyle and financial independence." 1. Financial services include the following: receiving, disposing, and accounting for client receipts; making bill payments and handling banking services; submitting claims to insurance companies; estate planning; providing tax planning and tax return preparation; evaluating investments and trust activity; managing portfolios; protecting elderly from predators; etc. 2. Nonfinancial services include the following: coordinating support and healthcare services; communicating family expectations to care providers; managing real estate and other assets; establishing performance monitoring systems; managing real estate and other assets; coordinating services involving healthcare, legal, and other professionals; etc. 3. Markets for PrimePlus/ElderCare services—There are three primary markets: (a) older clients themselves; (b) children of older adults; and (c) other professionals who deal with those older adults (such as lawyers and healthcare professionals). C. The AICPA has established a senior committee known as the Assurance Services Executive Committee (ASEC) to oversee the ongoing development of assurance services. 1. ASEC's role—To identify trends and assurance opportunities; to develop assurance guidance (including applicable criteria); to communicate those opportunities and guidance to AICPA members; and to create alliance with industry, government, or others to facilitate those assurance opportunities. 2. ASEC has appointed several task forces to focus on developing assurance opportunities: (a) XBRL Assurance Task Force (regarding the development of guidance on the assurance of XBRL-related documents); (b) Trust/Data Integrity Task Force (regarding the development of principles/criteria for assurance on the security, availability, process integrity of systems and the confidentiality and privacy of information); and (c) Risk Assurance Task Force (regarding enterprise risk management issues).

Members in Business

Accountants in private sector

Reissuing and revising audit reports

After performing all necessary procedures a predecessor auditor reissues a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditor should Use the date of the previous report.

Single Audit Act

Amendments of 1996 (Single Audit Act) were enacted to streamline and improve the effectiveness of audits of federal awards expended by states, local governments, and not-for-profit entities (referred to as non-federal entities), as well as to reduce audit burden.

Unasserted and Asserted claims

Asserted Claims—With respect to asserted claims and active litigation "asserted" means that someone has already filed a claim or has at least announced the intention to make such a claim, which is synonymous with the AICPA's term "pending or threatened litigation." According to the American Bar Association, the lawyer should inform the auditor directly about any omissions of asserted claims in the lawyer's letter responding to the letter of inquiry. Should be mentioned in the auditors report Unasserted Claims—With respect to unasserted claims and potential litigation, "unasserted" means that the entity has exposure to litigation, but no one has yet announced an intention to sue. A. The lawyer cannot (according to the American Bar Association's Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information ) inform the auditor directly about any omission of unasserted claims as identified in the letter of inquiry. B. However, lawyers must tell their client about any such omissions and request that client management then inform the auditors. C. Note that this issue (whether the entity's lawyer has informed management of any omission of an unasserted claim that management should discuss with their auditors) is implicitly addressed in the management representations letter. D. An unasserted claim must be disclosed according to GAAP if the following two conditions exist:It is probable that a claim will be asserted, andIt is at least reasonably possible that a material unfavorable outcome will occur. Shouldn't be mentioned in the auditors report, unless it is probable that the claim will be asserted and it is least reasonably possible that a material unfavorable outcome will occur.

Introduction to Auditing Individual Areas-Assertions

Audit Procedures Generally Applicable to the Four Assertions for Account Balances—Note that these assertions represent broad audit objectives for which the auditor must gather evidence to determine whether the financial statement elements are fairly presented in accordance with the applicable accounting framework (e.g., GAAP). A. Existence—Related to the validity of recorded items. 1. Confirmation—(Especially when concerned about overstatements.) For example, cash, accounts receivable, inventory held by others, and investments held by others. 2. Observation—Especially for inventory or investment securities held by the entity. 3. Agree (vouch) to underlying documents—Agree items from the accounting records to the supporting source documents to evaluate the appropriateness of recorded items: for example, as an alternate procedure for accounts receivable; to verify additions to property, plant, and equipment accounts; and for various liabilities, such as notes payable. B. Completeness—Related to omissions of amounts that should have been recorded. 1. Cutoff tests—Trace from supporting source documents back to the accounting records looking for omissions. For example, trace from shipping documents to cost of goods sold or to the sales journal, or perform a "search for unrecorded liabilities." 2. Analytical procedures—These are applicable to every audit area, but be specific: calculate a particular ratio or compare something specific to another specific thing! C. Rights and Obligations—Related to any restrictions to the entity's rights to their assets or to the obligations for their liabilities. 1. Inquire of applicable client personnel—Inquire about compensating balances with banks, the use of specific assets as collateral for debts, review debt agreements for collateral, etc.; the management representation letter should document these inquiries regarding important matters. 2. Examine authorization of transactions—to ascertain whether any unusual conditions apply. D. Valuation and Allocation—Related to the appropriateness of dollar measurements. 1. Recalculate account balances—(Verify the client's calculations), for example, for depreciation expense and prepaid insurance. 2. Trace to subsequent cash receipts or disbursements—Includes tracing to cash receipts or cash disbursements journal and to the applicable bank statement. 3. Analytical procedures—review the aged trial balance for accounts receivable to evaluate the apparent reasonableness of the allowance for uncollectibles. (In connection with such analytical procedures, the auditor may also inspect underlying sales invoices or shipping documents to test the accuracy of the entity's data underlying the analytical procedures.) 4. Examine published price quotations for fair value measurements, when applicable—Verify mathematical accuracy. Verify that the supporting ledgers or other accounting records agree to the reported balance per the general ledger before performing other audit procedures on those supporting accounting records for purposes of reaching a conclusion about the fairness of the general ledger account balance involved. Foot and cross-foot the underlying records to verify that they, in fact, add up. Substantive Procedures usually Performed in Every Individual Audit Area 1. Agree the financial statement elements (or the trial balance from which the financial statement elements are derived) to the underlying accounting records (i.e., to the general ledger). 2. Scan the entity's journals and ledgers for any unusual items. 3. Make appropriate inquiries of management and other personnel (and document those important inquiries and management's responses in the management representations letter). 4. Perform specific analytical procedures—consider historical trends and events within the industry.

Variables Sampling

Basic Steps—The eight basic steps in a variables sampling plan are practically the same as in the attributes sampling case: A. Identify the Sampling Objective—The purpose of "variables sampling" is to determine the inferred audit value of a population of interest (e.g., for accounts receivable or inventory). B. Identify the Relevant Population: 1. Specify what constitutes the sampling unit. 2. Be careful to assure that conclusions are properly extended to the appropriate population (i.e., completeness of the population). C. Select the Specific Sampling Technique—The choices are difference estimation, ratio estimation, mean-per-unit estimation, or probability-proportionate-to-size sampling. D. Calculate the Sample Size—Since tables do not exist for this in variables sampling. Recall the five factors and relationships to sample size identified for attributes sampling applications—these factors are still applicable to variables sampling. E. Determine theMethod of Selection—Random (the preferred approach) or systematic. F. Conduct the Sample G. Evaluate the Sample and project to population: 1. Calculate a point estimate (the implied audit value) for the population based on the sample's audited values. 2. Construct a confidence interval to determine whether to accept or reject the client's recorded balance as consistent with the audit evidence. H. Document the Auditor's Sampling Procedures and Judgments. Stratification: The auditor may reduce the overall variability within a population by classifying similar items into sub-populations (within each group, the variability may be much smaller); the resulting aggregate sample size may be smaller as a result of reducing the combined effects of variability. Variables Sampling—Specific Sampling Techniques—Note that the CPA Exam has rarely emphasized calculations related to statistical sampling; however, the exam has historically tested the concepts related to sampling. A. Difference Estimation—This approach involves identifying the dollar differences between the sample's audit values and applicable book values. 1. Sample size—As previously described. Note that we usually need at least 30 differences between audit and book values in our sample when using "difference estimation." 2. Estimate the population's implied audit value. B. Calculate the average difference between the audit value (av) and book value (bv) for items in the sample: d = (av - bv)/n C. Extend that average difference to the population by multiplying it by the number of items in the population: D = d * N D. Calculate the implied population audit value (the "point estimate") by adding the calculated difference for the population to the population's book value: AV = BV + D, where D can be either positive or negative 1. Construct a confidence (precision) interval around the population's audit value to compare to the client's recorded balance—This is beyond the scope of the CPA Examination. E. Ratio Estimation—This approach involves identifying the ratio of the audit values and book values for the sampled items. 1. Note that this approach is useful when the dollar amount of the differences between the audit and the book values is expected to be proportional to the book values. 2. Sample size—as previously described. 3. Estimate the population's implied audit value: F. Calculate the ratio for the sample, where the ratio has the sample's audit value in the numerator and the sample's book value in the denominator: R = av/bv G. Estimate the population's audit value (a point estimate) by multiplying the population's book value by that "ratio:" AV = R * BV 1. Construct a confidence (precision) interval around the population's audit value to compare to the client's recorded balance—this is beyond the scope of the CPA Examination. H. Mean-per-Unit Estimation (MPU) 1. Useful when difference or ratio estimation cannot be used—for example, for inventory when perpetual records do not exist (i.e., there is no "book" value for each individual sample item). 2. Sample size—as previously described. 3. Estimate the population's implied audit value. a. Calculate the average audit value for items in the sample: MPU = av/n b. Multiply that average (MPU) times the number of items in the population: AV = MPU * N 4. Construct a confidence (precision) interval around the population's audit value to compare to the client's recorded balance—this is beyond the scope of CPA Exam! AICPA Professional Standards have described "projected misstatement" as the amount of known misstatements identified in a sample that is projected to the population from which the sample was drawn.

Acronyms for different officers

Chief Executive Officer (CEO) Chief Operating Officer (COO) Chief Financial Officer (CFO) or Controller Chief Marketing Officer (CMO) Chief Technology Officer (CTO) Chief Administrative Officer (CAO) President Vice President Executive Assistant

Compilation, Review, Audit

Compilation: Read the financials and consider obvious material misstatements A compilation report should include the following statement: "I (We) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management." Review: Inquiry and analytical procedures, don't need to extend to outside of the organization. The statement that the engagement is substantially less in scope than an audit in accordance with generally accepted auditing standards appears in a review report, not in a compilation report. Audit: Inquiry, observation, analytical procedures, substantive testing, risk assessment There are several key differences between an audit, a review, and compilation. Essentially, a compilation requires the auditor to simply present financial statements based on the representations made by management, with no effort to verify this information. In a review engagement, the auditor conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is correct. The result is a limited level of assurance that the financial statements being presented do not require any material modifications. In an audit engagement, the auditor must corroborate the ending balances in the client's accounts and disclosures. This calls for the examination of source documents, third party confirmations, physical inspections, tests of internal controls, and other procedures as needed. Thus, the differences between an audit, a review, and a compilation are as follows: 1. Level of assurance. The level of assurance that the financial statements of a client are fairly presented is at its highest for an audit and at its lowest (none at all) for a compilation, with a review somewhere in between. 2. Reliance on management. In all three cases, the auditor begins with the account balances provided by management, but an audit requires in a significant amount of corroboration of this information. A review requires some testing of the information, while a compilation almost entirely relies on the presented information. 3. Understanding of internal control. The auditor only tests the internal controls of the client in an audit; no testing is conducted for a review or a compilation. 4. Work performed. An audit requires a significant number of hours to complete, since there are many audit procedures to be performed. A review requires substantially fewer hours, while the effort associated with a compilation is relatively minor. 5. Price. It requires vastly more effort for an auditor to complete an audit, so audits are much more expensive than a review, which in turn is more expensive than a compilation.

Materiality

If a fact is immaterial, there is no need to report it on the financial statements

Bank Reconciliation

Issue #1: Reconciliation was not reviewed in a timely manner. The bank reconciliation was prepared by Joe Smith on 1/10/X3, but was not reviewed by Evan Monroe until 3/2/X3, nearly 2 months later. Issue #2: Reconciliation was not agreed to bank statement balance at the appropriate date. The bank reconciliation was said to be applicable to December 31, year 2; however, "Note A" indicates that the balance per the bank was verified effective as of January 3, year 3. The balance per the bank should be verified as of 12/31/X2. Issue #3: Reconciliation contains stale checks. The listing of outstanding checks included check #8200, dated 3/29/X2 for $11,000. That item is approximately 9 months outstanding and would be viewed as a "stale" item that would warrant further investigation. Issue #4: Reconciliation has unsubstantiated unrecorded items. The next-to-last line of the reconciliation identifies "Adjustments: bank fee and unrecorded items," which description is too vague. Additional clarification should be provided so that the specific matters involved will be clearly identifiable. Issue #5: Reconciliation contains aged items that should have been added to the bank balance. The two "deposits in transit" include one item from 10/25/X2, which should have been reflected in the balance per bank as of 12/31/X2. It should not take 2 months for a "deposit in transit" to show up in the balance per the bank! Issue #6: Reconciliation balance was not properly agreed to the December 31 general ledger balance. Again, the bank reconciliation was said to be applicable to December 31, year2. "Note B" indicates that the "balance per the books, adjusted" was agreed to the general ledger on January 1, year 3, which should have been 12/31/X2. 1. Make sure to look at check dates so they are not stale or too old not more than 2 months old 2. Reconciliation dates 3. Timely Review dates 4. Proper date of matching the reconciliation and bank balance to the general ledger 5. Make sure the adjustments are clear for the reader 6. Deposits in transit should be deposited in a timely manner, should not take more than 2 months 7. Make sure balance per books and balance per bank are agreed to the proper date.

fraud risk factor

It has been observed in circumstances where frauds have occurred. This answer is correct because while fraud risk factors do not necessarily indicate the existence of fraud, they often have been observed in circumstances where frauds have occurred.

Third Party Service Provider

Outsourcing work to TSPs can threaten objectivity and integrity. Generally there are no objectivity or integrity problems if outsourcing is limited to administrative support like record storage, software application hosting, and authorized e-file transmittal services.

During the audit process

Planning only involves preliminary measures such as reviewing the financials and preparing to receive documents, but the auditor wouldn't receive documents for testing during the planning stage.

Segregation of Duties

Proper segregation of functional responsibilities calls for separation of the functions of Authorization, recording, and custody. Authorizing transactions, recording transactions, and maintaining custody of assets should be segregated.

Review Engagement

Review—When the CPA is engaged to provide a lower level of assurance (relative to that of an audit) on financial statements of a private company by performing limited procedures, including performing analytical procedures, and making appropriate inquiries of client personnel. The conclusion is known as "negative assurance" that the practitioner is unaware of a need for material modification.

Attributes Sampling

Statistical sampling for the purpose of identifying the percentage frequency of a characteristic in a population of interest to the auditor; this term is usually used to refer to audit sampling to ascertain the operating effectiveness of internal control (where, for each transaction in the sample, the control procedure of interest was either performed or not performed—there are only two outcomes, similar to '"hit or miss" or "heads or tails") Eight Steps Comprise an Attributes Sampling A. Identify the Sampling Objective—That is, the purpose of the test. B. Define What Constitutes an Occurrence—Sometimes called a deviation or error when a control procedure of interest was not properly performed. C. Identify the Relevant PopulationSpecify the relevant time period.Specify the sampling unit—what it is that the auditor is selecting (e.g., sales transactions). D. Determine the Sampling Method—How the specific items (or transactions) are to be selected for the sample. 1. Statistical sampling approaches a. Random number—Each transaction has the same probability of being selected (the best approach). b. Systematic—For example, selecting every 100th item 2. Judgmental sampling approaches—not appropriate for attributes sampling! a. Block—A group of contiguous items (e.g., the sales transactions for the entire month of June) b. Haphazard—Arbitrary selection, with no conscious biases. Subconscious biases may exist without the auditor's awareness, however. E. Determine the Sample Size—Based on AICPA tables. F. Select the Sample—Identify the occurrences associated with all the items in the sample. G. Evaluate the Sample Results—This means make a decision as to whether the auditor can rely on the effectiveness of the internal control procedure under consideration. 1. Calculate the observed deviation rate = (# errors)/n. 2. Determine the point estimate, the best single indicator of the percentage of times that the control procedure was performed as designed in the population (ignoring, for the moment, the uncertainty surrounding whether the sample is truly representative of the population). 3. Calculate a confidence interval for the achieved upper precision limit (in view of the actual errors observed). There are AICPA tables to determine the achieved upper precision limit. (The topic determination of confidence intervals is not likely to be tested on the CPA Exam!) 4. Compare the achieved upper precision limit to the stated tolerable rate; the auditor can only rely on the internal control procedure if the error rate, based on the upper bound of the confidence interval (the achieved upper precision limit from the tables) is less than or equal to the stated tolerable rate. 5. Consider the qualitative characteristics of the internal control deviations for any implication to the rest of the audit. 6. Make the appropriate decision—Should the auditor rely on the specific control procedure (i.e., assess control risk at less than the maximum) or not? H. Document the Auditor's Sampling Procedures In a test of controls, the auditor compares the tolerable rate (the maximum rate of deviations that the auditor would be willing to accept without altering the planned assessment of control risk) to the achieved upper precision limit (the maximum deviation rate per the sample).If the achieved upper precision limit is greater than the tolerable rate, the control cannot be relied upon and the control risk assessment will be increased. The allowance for sampling risk is the margin added to the actual sample error rate to obtain the achieved upper precision limit. Thus, the allowance for sampling risk will be equal to the achieved upper precision limit (8%) less the sample error rate (3.5%) or 4.5%. The sample size of a test of controls varies inversely with the tolerable deviation rate. It varies directly with the expected population rate.

Tests of details

Tests for errors or fraud in individual transactions, account balances, and disclosures AU-C 330 states that the objective of tests of details of transactions performed as substantive procedures is to detect material misstatements in the financial statements.

Incompatible operations for cashiers(Example)

The cashier posts the receipts to the accounts receivable subsidiary ledger cards. This answer is correct because posting the receipts to the accounts receivable subsidiary ledger cards provides the cashier with both recordkeeping and custodial responsibilities. You want to segregate duties

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that

The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate. If the auditor has incorrectly assessed control risk lower than appropriate, the sample deviation rate must have been less than the actual rate and the actual population rate exceeds the tolerable rate. This would cause the auditor to accept the control as effective when it really was not and, thus, to assess control risk lower than appropriate.

Assessing Control Risk Under AICPA Standards

The relevant AICPA guidance is provided by AU 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. This pronouncement states that the auditor's objective is to "identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including its internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement." The AU section focuses on the auditor's requirements related to 1. Risk assessment procedures 2. Understanding the entity and its environment, including its internal control 3. Assessing the risks of material misstatement 4. Documentation Risk Assessment Procedures—The auditor should perform risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control (the nature, timing, and extent of the risk assessment procedures vary with the engagement's circumstances, such as the entity's size and complexity and the auditor's experience with it). A. Inquiries of Management and Others—The auditor should obtain information from inquiries made of management and others, including internal auditors, production and marketing personnel, those charged with governance, and outsiders (such as external legal counsel or valuation experts used by the entity). B. Observation and Inspection—The auditor's risk assessment procedures should include observation of entity operations, inspection of documents (e.g., internal control manuals), reading reports prepared by management and those charged with governance (e.g., minutes of meetings), and visits to the entity's facilities. C. Analytical Procedures—The auditor's analytical procedures performed in planning may assist the auditor in understanding the entity and its environment and identify specific risks relevant to the audit. D. Review Information—The auditor should review information about the entity and its environment obtained in prior periods. The auditor should consider whether changes may have affected the relevance of that information (perhaps by making inquiries or performing a walkthrough of transactions through the entity's systems). E. Discussion among Audit Team Members—The audit team should discuss the susceptibility of the entity's financial statements to material misstatements. 1. Key members should be involved in the discussion—But professional judgment is required to determine who should be included in that discussion. (For a multilocation audit, there may be multiple discussions for key members at each major location.) 2. Objective of this discussion—The purpose of the discussion is for members of the audit team to understand the potential for material misstatements of the financial statements (due to error or fraud) in specific areas assigned to them and how their work may affect other parts of the audit. 3. The discussion should include critical issues—Such matters include the areas of significant audit risk, the potential for management override of controls; important controls; materiality at the financial statement level and the relevant assertion level; etc. The auditor's understanding of the entity and its environment consists of understanding the following: (1) industry, regulatory, and other external factors; (2) nature of the entity; (3) objectives and strategies and related business risks that may cause material misstatement of the financial statements; (4) measurement and review of the entity's financial performance; and (5) internal control. Internal Control: A process—effected by those charged with governance, management, and other personnel—that is designed to provide reasonable assurance about the achievement of the entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Internal control consists of five interrelated components: 1. Control environment—The policies and procedures that determine the overall control consciousness of the entity, sometimes called "the tone at the top." The auditor should evaluate the following elements that comprise the entity's control environment: -Communication and enforcement of integrity and ethical values -Commitment to competence -Participation of those charged with governance (including their interaction with internal and external auditors) -Management's philosophy and operating style -The entity's organizational structure -The entity's assignment of authority and responsibility (including internal reporting relationships) -Human resource policies and practices 2. Risk assessment—The policies and procedures involving the identification, prioritization, and analysis of relevant risks as a basis for managing those risks. The auditor's responsibilities include: -Inquiring about business risks that management has identified relevant to financial reporting and considering their implications to the financial statements -Considering how management identified (and decided how to manage) business risks relevant to financial reporting -Considering the implications to the risk assessment process when the auditor identifies business risks that management failed to identify 3. Information and communication systems—The policies and procedures related to the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities. The auditor's responsibilities include obtaining the following: -Sufficient knowledge to understand the classes of transactions that are significant to the financial statements and the procedures and relevant documents related to financial reporting -An understanding of how incorrect processing of transactions is resolved -An understanding of the automated (IT) and manual procedures used to prepare the financial statements and how misstatements may occur -An understanding of how transactions originate with the entity's business processes -Sufficient knowledge to understand how the entity communicates financial reporting roles and responsibilities 4. Control activities—The policies and procedures that help ensure that management directives are carried out, especially those related to a. Authorization, b. Segregation of duties, c. Performance reviews, d. Information processing, and e. Physical controls. The auditor's responsibilities include: -Obtaining an understanding of how IT affects control activities relevant to planning the audit (especially with respect to application controls and general controls); and -Considering whether the entity has established effective controls related to IT (especially with respect to maintaining the integrity of information and the security of data). 5. Monitoring—The policies and procedures involving the ongoing assessment of the quality of internal control effectiveness over time. The auditor should obtain an understanding of the sources of the information related to the entity's monitoring activities and the basis upon which management considers the information to be reliable. Inherent Limitations of Internal Control—Internal control provides reasonable, not absolute, assurance about achieving the entity's objectives. Internal control may be ineffective owing to human failures (mistakes and misunderstandings) and controls may be circumvented by collusion or management override of controls. The cost of an internal control procedure should not exceed the benefit expected to be derived from it. COSO's Internal Control Integrated Framework identifies five components of an internal control system: (1) control environment; (2) risk assessment; (3) control activities; (4) information and communication system; and (5) monitoring. Accordingly, inherent risk is not one of those components. The auditor is not required to search for significant deficiencies in the design or operation of internal control. The auditor is required to communicate any significant deficiencies noted to the audit committee (or those in governance). Accounting estimates are an area of concern to the auditors because of the amount of judgment and discretion they entail. The internal control structure may reduce the likelihood of material errors occurring related to the preparation of accounting estimates. As a result, the auditor should understand the internal control structure related to preparing accounting estimates. Internal control can provide only reasonable assurance as a limiting factor is the cost/benefit ratio. The cost of an entity's internal control should not exceed the benefits derived therefrom.

Using the Work of a Specialist

The relevant AICPA guidance is provided by AU 620, Using the Work of an Auditor's Specialist. This pronouncement states that the auditor's objectives are to determine: (1) whether to use the work of an auditor's specialist; and (2) whether the work of the auditor's specialist is adequate for the auditor's purposes. Auditor's Specialist: An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. Management's Specialist: An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements. A. Determining the Need—The auditor should determine whether an auditor's specialist is needed to obtain sufficient appropriate audit evidence, taking into consideration the following: 1. The nature of the matter involved; 2. The risks of material misstatement involved; 3. The significance of the matter to the audit; 4. The auditor's experience with any previous work of the auditor's specialist; and 5. Whether the auditor's specialist is subject to the audit firm's quality controls (which would apply to an internal specialist, but not to an external one). B. Competence, Capabilities, and Objectivity of the Specialist—The auditor should evaluate the competence, capabilities, and objectivity of the auditor's specialist for the auditor's purposes. 1. The auditor should consider information about the competence, capabilities, and objectivity of an auditor's specialist, which might be obtained from the following: a. Personal experience with the specialist's previous work b. Discussions with the specialist or with other auditors familiar with the specialist c. Knowledge of the specialist's credentials or professional/industry affiliations, including whether the work is subject to any particular technical performance standards or industry requirements d. Any journal articles or books written by the specialist 2. For an external auditor's specialist, the auditor should inquire about any relationships that might threaten the specialist's objectivity. The auditor should consider any threats to the specialist's objectivity, along with any safeguards that might reduce such threats to an acceptable level. C. Obtaining an Understanding of the Field of Expertise—The auditor should obtain a sufficient understanding of the field of expertise of the auditor's specialist so that the auditor can 1. Determine the nature, scope, and objectives of the work; and 2. Evaluate the adequacy of that work for the auditor's purposes. This understanding may be obtained from having experience with other entities requiring that same field of expertise, through specific education in that field, or through discussion with the auditor's specialist. D. Agreement with the Auditor's Specialist—The auditor and the auditor's specialist should agree (in writing when appropriate) about the following: 1. The nature, scope, and objectives of the work involved; 2. Their respective roles and responsibilities; 3. The nature, timing, and extent of communications between the auditor and the auditor's specialist, including any reports to be delivered; and 4. The requirements for the auditor's specialist to adhere to confidentiality considerations applicable to an audit engagement. The agreement between the auditor and the external specialist is usually in the form of an engagement letter. E. Evaluating the Adequacy of the Work 1. The auditor should evaluate the adequacy of the work performed by the auditor's specialist, including the following matters: a. The relevance and reasonableness of the conclusions; b. The relevance and reasonableness of any underlying assumptions and the methods used; and c. The relevance, completeness, and accuracy of any source data used by the auditor's specialist. 2. The auditor may perform specific procedures to evaluate such work, including: a. Making inquiries of the specialist; b. Reviewing the specialist's working papers; and c. Performing certain corroborative procedures, such as performing analytical procedures, examining published data, or confirming some matters with third parties, among other possibilities. F. If the Work is not Adequate—The auditor and the auditor's specialist should agree on any further work to be performed, or the auditor should perform additional audit procedures that are appropriate to the circumstances (which could include engaging another auditor's specialist). If the auditor is unable to resolve the matter, it could constitute a scope limitation that would result in a modified opinion. G. Reference to the Auditor's Specialist in the Auditor's Report 1. If the auditor's report contains an unmodified opinion, the auditor should not refer to the work of an auditor's specialist. 2. If the auditor's report contains a modified opinion and the auditor believes that it would help readers understand the reason for the modification, the auditor may reference the work of an external auditor's specialist. Normally, such a reference would first require the permission of the auditor's specialist. The auditor should also point out, in the auditor's report, that such a reference does not reduce the auditor's responsibility for the expressed opinion. Specialist: Similar to the AICPA, the PCAOB defines a specialist as follows: "... a person (or firm) possessing special skill or knowledge in a particular field other than accounting or auditing." The PCAOB classifies "specialists" into the following three categories: 1. Company's specialist—A specialist employed or engaged by the company 2. Auditor-employed specialist—A specialist employed by the auditor's firm 3. Auditor-engaged specialist—A specialist engaged by the auditor's firm

Sec Auditor rotation

The rules state that a "lead" or "concurring" partner cannot serve for more than five consecutive years and that other "audit partners" cannot serve for more than seven consecutive years.

attorney's legal letter requires further investigation

"It is our opinion that the company will be able to assert meritorious defenses to this action." AICPA Professional Standards (AU 501.65) specifically state that the auditor would need to seek clarification of such a statement regarding "meritorious defenses," since this statement does not necessarily mean that the entity will prevail.

Literature for the Auditor

1. A CPA wishes to determine how various publicly held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for information AICPA Accounting Trends and Techniques. AICPA Accounting Trends and Techniques, which is issued annually, summarizes such disclosures of 600 industrial and merchandising corporations. 2. AICPA Codification of Statements on Auditing Standards. The AICPA Codification of Statements on Auditing Standards codifies the various Statements on Auditing Standards and does not include information on individual company compliance with disclosure requirements.

AICPA Assertions

1. Assertions about classes of transactions and events for the period under audit, such as the following: 1. Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity. 2. Completeness. All transactions and events that should have been recorded have been recorded. 3. Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately. 4. Cutoff. Transactions and events have been recorded in the correct accounting period. 5. Classification. Transactions and events have been recorded in the proper accounts. 2. Assertions about account balances at the period-end, such as the following: 1. Existence. Assets, liabilities, and equity interests exist. 2. Rights and obligations. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. 3. Completeness. All assets, liabilities, and equity interests that should have been recorded have been recorded. 4. Valuation and allocation. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. 3. Assertions about presentation and disclosure, such as the following: 1. Occurrence and rights and obligations. Disclosed events, transactions, and other matters have occurred and pertain to the entity. 2. Completeness. All disclosures that should have been included in the financial statements have been included. 3. Classification and understandability. Financial information is appropriately presented and described, and disclosures are clearly expressed. 4. Accuracy and valuation. Financial and other information is disclosed fairly and in appropriate amounts.

Overview of Audit Process

1. Engagement Planning A. Decide whether to accept (or continue) the engagement—Recall the quality control standards regarding client acceptance/continuation issues. B. Perform risk assessment procedures to address the risks of material misstatement, whether due to error or fraud. C. Evaluate requirements for staffing and supervision. D. Prepare the required written audit plan (sometimes called the audit program) that specifies the nature, timing, and extent of auditing procedures for every audit area (which is usually prepared after control risk has been assessed, so that detection risk can be appropriately set in each audit area). 2. Internal Control Considerations A. Obtain an understanding of internal control for planning purposes as required, emphasizing the assessment of the risk of material misstatement in individual audit areas and document the understanding of internal control. B. If contemplating reliance on certain identified internal control strengths as a basis for reducing substantive testing, the auditor must then perform appropriate tests of control to determine that those specific controls are operating effectively, that is, working as intended. 3. Substantive Audit Procedures (Evidence-Gathering Procedures Whose Purpose is to Detect Material Misstatements, if There Are Any)—Note that the word substantive is derived from substantiate, which means to verify. These are evidence-gathering procedures designed to verify the financial statement elements and to detect any material misstatements. A. Analytical Procedures—Those evidence-gathering procedures that suggest reasonableness (or unreasonableness) based upon a comparison to appropriate expectations or benchmarks, such as prior year's financial statements, comparability to industry data (including ratios) or other interrelationships involving financial and/or nonfinancial data. B. Tests of Details—Those evidence-gathering procedures consisting of either of two types: 1. Tests of ending balances—Where the final balance is assessed by testing the composition of the year-end balance (e.g., testing a sample of individual customers' account balances that make up the general ledger accounts receivable control account balance). 2. Tests of transactions—Where the final balance is assessed by examining those debits and credits that caused the balance to change from last year's audited balance to the current year's balance. 4. Reporting—Conclusions are expressed in writing using standardized language to avoid miscommunication.

Conflict of Interest

1. Simultaneously advising two clients trying to acquire the same company 2. Preparing valuation of assets to two clients who are simultaneously the potential seller and the potential buyer of the same assets 3. Representing both a husband and a wife in a divorce proceeding 4. Advising a client to invest in a business owned by a member or member's relatives 5. Advising a client on acquisition of assets that the firm also seeks to acquire 6. Providing forensic accounting services to one client to assist it in deciding whether to sue another client 7. Providing personal financial planning services to several members of a family or group known to have conflicting interests Disclosure—Conflicts should be disclosed to clients and affected third parties, even if threats to compliance are at an acceptable level.General disclosure (e.g., "We audit several firms in your industry sector") may suffice.Specific disclosure (e.g., "We advise your closest competitor who would love to have access to your confidential information that we possess") may be needed, however. Documenting the threat-reducing process is wise. Gifts and Entertainment A. Objectivity and integrity are threatened if the client (including its officers, directors, and 10% shareholders) give gifts or entertainment to the firm or its members (or vice versa). B. A violation is presumed if: 1. The member receives gifts or entertainment from a client that violate the member's or client's policies or applicable laws and regulations and 2. The member knows or is reckless in not knowing of the violation. C. If no rules are violated, then there is no problem if the gifts or entertainment are "reasonable in the circumstances." D. Factors in determining reasonableness include: 1. The nature of the gift or entertainment 2. The occasion giving rise to the gift 3. The cost or value of the gift or entertainment 4. The nature, frequency, and value of other gifts 5. Whether the entertainment was associated with active conduct of the business

Introduction to MIPPs Independence Rules

1. The threats to independence detailed in the code are very much the same as the threats to integrity and objectivity discussed elsewhere in these materials: adverse interest threats, advocacy threats, familiarity threats, management participation threats, self-interest threats, self-review threats, and undue influence threats. 2. The safeguards that may be applied to reduce the threats to independence come from the same three sources as those relevant to integrity and objectivity: a. The profession, legislation, or regulation b. The attest client c. The firm If a covered member has or is committed to acquire any direct (whether material or not) or any material indirect financial interest in an attest client, independence is impaired. Only if interests are both indirect and immaterial is independence not impaired.

Limitation of scope audit

A scope limitation is a restriction on an audit that is caused by the client, issues beyond the control of the client, or other events that do not allow the auditor to complete all aspects of his or her audit procedures.

Accounts Receivable

A. Related to the Existence/Occurrence Assertion—Confirm selected individual customers' accounts. B. Verify that the subsidiary A/R ledger agrees or reconciles with the A/R general ledger balance: 1. Recall that the accounting records constitute one category of evidence. The second category is other information according to AICPA Professional Standards and is covered in the review module on Audit Evidence. 2. It is important to establish the logical connection between the detailed accounting records being used for the audit procedure (in this case, the subsidiary ledger of individual customer accounts) and that which is the object of the auditor's intended conclusions (specifically, the general ledger balance for A/R). C. Confirm all accounts that are determined to be individually material and confirm selected other accounts on a test basis. 1. Positive confirmations—Request a response whether the individual customer agrees or disagrees with the stated balance. A nonresponse indicates a situation that should be followed up by the auditor. 2. Negative confirmations—Request a response only if the individual customer disagrees with the stated balance. a. A nonresponse is taken as evidence supporting the client's representation. b. The risk is that the recipient of the request might have thrown it away without even verifying the balance owed. c. Accordingly, negative confirmations are usually used only for rather small balances under conditions of effective internal control (i.e., low control risk). D. Investigate All Exceptions (Disagreements) Received—Determine whether the client's records are accurate and, if not, whether the financial statements are materially misstated. E. If no response is received to a positive confirmation request, the auditor should send a second confirmation request, and perform alternate procedures if still no response is received. 1. Subsequent cash receipts (the preferred alternate procedure)—Trace collections on the account subsequent to the date of the confirmation to the cash receipts journal and to the bank statement (suggests the balance was valid if it was subsequently collected). 2. Vouch to (inspect) the underlying documents (the last resort if the account has not been collected)—Examine the documents (customer's purchase order, client's sales invoice, and shipping documents) supporting the validity (occurrence) of the transactions comprising the account balance. Related to the Valuation Assertion—Evaluate the reasonableness of management's estimates of allowance for uncollectibles and the allowance for sales returns. A. Note that confirmations may contribute, in part, to the auditor's conclusions about the fairness of the dollar valuation; however, that contribution relates to establishing the reasonableness of the gross A/R and additional procedures are required to assess the net realizable value of the A/R. B. Review the Client's Aged Trial Balance of Accounts Receivable 1. Inquire about any large, delinquent items. 2. Estimate the percentage of uncollectible accounts within each category of age (based on prior year's working papers tempered by current economic conditions). C. Review receivers (documents used by the entity's receiving department to capture deliveries) after year-end for sales returns; consider prior years' returns in view of current economic conditions. D. Review adjusting journal entries (e.g. write-offs) for appropriate authorization. Related to the Completeness Assertion A. Perform a cutoff test of sales. Examine the shipping documents for the last few shipments before year-end and the first few shipments after year-end; compare these shipping documents with the related sales invoices to assess whether the sales were recorded in the appropriate period. B. Compare these shipping documents around the end of the period with the related sales invoices (related to the sales journal) to assess whether the sales were recorded in the appropriate period. C. Proper cutoff involves two assertions (existence/occurrence and completeness). Usually the auditor performs certain specific audit procedures directed at testing the validity of recorded transactions (i.e., existence/occurrence) but completeness is primarily addressed by these cutoff procedures (along with applicable analytical procedures). Related to the Rights and Obligations Assertion—Inquire of management: A. About receivables pledged as collateral for debts (and review loan agreements to identify such collateral) B. About shipments on consignment that are not actual sales C. About any receivables due from employees or management that should be classified separately from ordinary trade receivables D. Document such inquiries (and management's response) in the management representations letter. Note Lapping is an attempt to cover up a theft of receipts, where a clerk might try to apply a later receipt to the prior customer's account (and so on) until the scam ends by writing off someone's account as uncollectible. Lapping is a type of fraud (specifically, misappropriation of assets) that is associated with an improper segregation of duties whereby someone with access to the customer's payment also has the authority to make entries in the accounting records to cover up the theft. The negative form of confirmation can only be used when four conditions are met: (1) the risk of material misstatement (i.e., the combined assessed level of inherent and control risk) is low; (2) a large number of small balances is involved; (3) a very low exception rate is expected; AND (4) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. Thus, this is the correct answer. Examples: If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the Shipping documents to the sales invoices. This answer is correct because tracing from shipping documents to sales invoices will reveal whether the items shipped (and presumably sold) have been recorded, as evidenced by the existence of sales invoices.

KEEP GOING YOU GOT THIS!

ALSO REMEMBER TO USE THE AUTHORITATIVE LITERATURE IN THE TBS to answer questions.

Discreditable Acts

Acts Discreditable—Members shall not commit discreditable acts, including: A. Discrimination and harassment in employment practices B. Solicitation or disclosure of CPA Exam questions and answers C. Failure to file a tax return (including one's own personal return or his or her firm's) or failure to pay a tax liability D. Negligence in the preparation of financial statements or records E. Material departure from the audit standards of government bodies, commissions, or other regulatory agencies F. Failure to follow additional government standards over and above generally accepted auditing standards where applicable G. Improper use of indemnification and limitation of liability provisions in violation of regulatory requirements H. Confidential information obtained from employment or volunteer activities (more detail in the "Advertising and Confidentiality" lesson) I. False, misleading, or deceptive acts in promoting or marketing professional services J. Use of the CPA credential in violation of rules and regulations K. Records requests (more detail below) L. Removing client files or proprietary information from a firm after termination M. Use of confidential information obtained from a prospective client or nonclient without consent

New issue arising

Before reissuing a company's prior-year review report, an accountant becomes aware of information that may have a material effect on the prior year's financial statements. Which of the following actions would be most appropriate for the accountant to take? Make inquiries to determine how the information will affect the prior-year financial statements. Mere inquiries to determine how this new information will affect the previously issued financial statement are OK. The best place to begin the inquiry is likely with the successor auditor.

SSARS Compilation report completion date

Completion of the required compilation procedures. This answer is correct because the SSARS require that the date of completion of compilation procedures be used as the appropriate date for an auditor's compilation report. When an accountant is engaged to report on a nonpublic entity's compiled financial statements that omit substantially all disclosures required by generally accepted accounting principles, the accountant should indicate in the compilation report that the financial statements are Not designed for those who are uninformed about the omitted disclosures. This answer is correct because SSARS require that the report indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures.

Assertions examples

Confirm a sample of accounts receivable: EXISTENCE Inquire about accounts receivables that have been sold or factored: RIGHTS AND OBLIGATIONS Compare accounts receivable write-offs with doubtful accounts estimates: ANALYTICAL PROCEDURE: VALUATION AND ALLOCATION Perform a search for unrecorded liabilities: COMPLETENESSS Vouch recorded payables to invoices, purchase orders, and receiving reports: EXISTENCE Inquire whether any inventory is out on consignment at year-end: RIGHTS AND OBLIGATIONS Trace inventory test counts to inventory subsidiary accounts: COMPLETENESSS Inquire about possible obsolete inventory at year-end: VALUATION AND ALLOCATION Recalculate current year depreciation expense: VALUATION AND ALLOCATION Obtain and inspect the title documents to such fixed assets: RIGHTS AND OBLIGATIONS Examine debt instrument agreements and characteristics for proper classification: PRESENTATION AND DISCLOSURE Review board of director meeting minutes for proper authorization of all current-year debt and equity transactions: EXISTENCE, OCCURRENCE, OR COMPLETENESS

Independence issues

Depends on your intention and materiality. For example if you join a bank or country club, but don't try to get an advantage over other members, you are simply there to be sociable and have a secure way to maintain your money. Same as if you bought a condominium, depends on your intentions, if you bought a condominium just to live in it, then you don't have to worry, but if you bought a condominium to buy the whole entire complex and you are receiving money from the condo, then you might have an independence issue. During litigation, once the litigation is settled, then any independence threat is reduced to an acceptable level. Example: Sampson is an audit partner at the QRS Accounting Firm. There is a lot of tax work to be done in her city, so she wishes to invest in R&H Square, a local accounting firm that specializes in tax preparation. Its other owners and employees are not CPAs. Which of the following is not true regarding this investment opportunity? If Sampson is a minority owner of R&H, other employees of R&H must follow Code provisions on collection of commissions and referral fees through R&H. This statement is not true because when a member owns only a noncontrolling interest in a separate business, she must follow the Code provisions herself, but the business's non-member employees need not.

Adverse Opinion

Effect of an Adverse Opinion on the Auditor's Report A. No effect on the introductory paragraph or management's responsibility section. B. Auditor's responsibility section—modify the last sentence to state, "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion." C. Add a "Basis for Adverse Opinion" paragraph (with such a label) before the opinion paragraph. The auditor should include a description and quantification of the financial effects of the misstatement (when practicable); likewise, the auditor should include the omitted information (when practicable). D. Express the adverse opinion using appropriate language such as: "In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements referred to above do not present fairly . . ." and label the opinion paragraph "Adverse Opinion."

Look at examples of audit reports, management rep letters, and engagement letters

GOOGLE IT and 1. Engagement Letter is signed First 2. Management Representation Letter is Second 3. Audit report is given out, Third KEEP GOING YOU GOT THIS, YOU BADASS MOFO. ILOVEYOU The PCAOB's audit reporting model requires the opinion to be expressed at the beginning of the audit report. An adverse opinion states that the financial statements are not presented in conformity with U.S. GAAP. A qualified opinion states that, except for one or more specific matters, the financial statements taken as a whole are fairly stated. The opinion paragraph is followed by a section labeled "Basis for Opinion," which identifies management's responsibility, the auditor's responsibility, and a description of activities that comprise the audit and the auditor's basis for conclusions. This includes a required statement about the auditor's independence. The third section of the audit report, labeled "Critical Audit Matters," communicates matters that were required to be communicated to the audit committee (or that were communicated, even if not required). Among other matters, the auditor would comment on related party issues and transactions in this section of the audit report.

Government Accountability Office (GAO)(need to understand this)

Government Accountability Office's Government Auditing Standards—Ethical Principles A. The GAO's guidelines apply to those who conduct audits of: 1. Government entities (e.g., federal, state and local) 2. Entities that receive government awards (e.g., colleges, trade schools, charities, local governments) in compliance with generally accepted government auditing standards (GAGAS) 3. Independence and ethical principles—Those who audit pursuant to GAGAS are expected to audit: a. Independently; and b. In accordance with these key ethical principles: i. The public interest ii. Integrity iii. Objectivity iv. Proper use of government information, resources, and positions—these are to be used for official purposes and not for an auditor's personal gain v. Professional behavior—Includes compliance with all relevant legal, regulatory, and professional obligations, avoidance of conflicts of interest, sensitivity to appearance of impropriety, and putting forth an honest effort to meet technical and professional standards. Professional Judgment—This includes exercising reasonable care and professional skepticism. It represents the application of knowledge, skills, and experience. A Professional judgment is used: 1. In applying the conceptual framework to determine independence in a specific situation 2. To assign competent staff to the audit 3. To define the scope of the audit 4. To determine risk in the audit 5. To determine sufficient and appropriate audit evidence to support findings 6. To report results 7. To maintain appropriate quality control over the audit process Competence—The audit staff must possess professional competence adequate to address the audit objectives and perform the work in accordance with GAGAS. A. Competence derives from education and experience. B. Audit firms should have a process for recruiting, hiring, continuously developing, assigning, and evaluating staff in order to maintain a competent workforce. C. Competence provides the basis for sound professional judgments. Technical Knowledge—The staff assigned to perform a GAGAS audit should collectively possess the necessary technical knowledge, skill, and experience. Continuing Professional Education (CPE) A. Auditors who plan, direct, perform engagement procedures for, or report on an engagement conducted in accordance with GAGAS should complete at least 80 hours of CPE in every two-year period: 1. 24 hours of subject matter directly related to the government environment, government auditing, or the unique environment in which the audited entity operates; and 2. 56 hours of subject matter that directly enhances auditors' professional expertise to conduct engagements. B. Examples of programs and activities that do not qualify as CPE, include: 1. On-the-job training 2. Basic or elementary courses in subjects or topics that auditors already know 3. Programs designed for personal development, such as resume writing or money management 4. Programs that demonstrate office equipment or software not used in conducting engagements 5. Programs that provide training on the audit organization's administrative operations 6. Business sessions at professional conferences that do not have a structured educational program with learning objectives 7. Conducting external quality control reviews 8. Sitting for professional certification examinations

Fixed asset

Historical cost is of interest to the auditor, and they don't care for the FMV of the asset unless it is being sold. Are unable to be confirmed.

Independence issues

If there is a material effect on somebody's financial situation, then it impairs independence.

SSARSs—Preparation of Financial Statements

In the past, the SSARSs dealt with only two types of engagements: (1) reviews; and (2) compilations. The clarified SSARSs have added a third type of engagement: engagements to prepare financial statements for a client without issuing an accompanying report, which is the focus of AR-C 70, Preparation of Financial Statements. When engaged to prepare financial statements, the accountant is also required to comply with the requirements of AR-C 60, General Principles, including meeting the preconditions for accepting the engagement. The accountant is not required to be independent for a preparation engagement. Prepare the Financial Statements A. Each page of the financial statements should include a statement that "no assurance is provided" (or other words to that effect). The accountant's name (or firm) need not be identified. If that statement cannot be added to each page, the accountant should issue a disclaimer as to any assurance or perform a compilation engagement in accordance with AR-C 80. B. The accountant is required to obtain an appropriate understanding of the financial reporting framework to be used and the significant accounting policies applicable to the financial statements. C. If the financial statements use a special purpose framework, the accountant should include a description of the financial reporting framework on the face of the financial statements or in a footnote. D. When assisting management with significant judgments, the accountant should discuss those judgments with management so that management understands those judgments and can take responsibility for them. E. When records, documents, or other information used in preparing the financial statements are viewed as incomplete or inaccurate, the accountant should request additional or corrected information. F. When financial statements contain known departures from the applicable financial reporting framework (including omission of some or all required disclosures), the accountant should discuss the matter with management and disclose those departures in the financial statements. If the omission appears intended to mislead users of the financial statements, the accountant should not prepare the financial statements. Documenting a Preparation Engagement A. The accountant should document the preparation engagement in enough detail to clearly show the work performed and should include (1) the engagement letter (or other written documentation); and (2) a copy of the financial statements prepared. B. Noncompliance with a presumptively mandatory requirement —In rare circumstances, the accountant may depart from a relevant presumptively mandatory requirement; however, the accountant must document the reason(s) for the departure and how alternative procedures satisfied the intent of that presumptively mandatory requirement. Clarified AICPA Professional Standards state that the accountant should not prepare financial statements that omit substantially all disclosures if such omission was intended to mislead users of the financial statements (AR 70.21). AR-C 70 does, in fact, apply to engagements to prepare financial statements to be presented alongside a personal financial plan. However, AR-C 70 does not apply to an engagement to prepare financial statements as part of a written personal financial plan prepared by the accountant. The key word here is "alongside" a personal financial plan.

Difference between increases and decreases in risks(look up)

Inherent- 1. One of the key factors that bring about inherent risk is the way a company conducts its day-to-day operations. A company that can't cope with a rapidly changing business environment and indicates that it's not able to adapt could increase the level of inherent risk. 2. Another issue that could increase the level of inherent risk is the way a company records complex transactions and activities. A company collecting data from several subsidiaries with the intention of combining that information later is considered to be engaging in complex work, which could comprise material misstatements and give rise to inherent risk. Detection-The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. -The makeup of the engagement team, e.g., the competence and skill of the auditors and the size of the engagement team -The types of audit procedures, e.g., the degree of substantive procedures compared to the tests of internal controls, the evidence collection procedures, including if the evidence is internally or externally generated -The rigorousness of the audit procedures, e.g., the sample sizes and the length of the audit engagement -Quality control, e.g., the CPA firm's system of quality control and reviews by qualified personnel outside the audit engagement team Control-The following elements increase control risk: -There's no segregation of duties. -Documents are approved without management review. -Transactions aren't verified. -The supplier selection process isn't transparent. If the risk level is too high, the auditor conducts additional procedures to reduce the risk to an acceptable level. When the level of control risk and inherent risk is high, the auditor can increase the sample size for audit testing, thereby reducing detection risk. Example: If inherent risk and control risk are assumed to be 60% each, detection risk has to be set at 27.8% in order to prevent the overall audit risk from exceeding 10%. Working Audit Risk = Inherent Risk x Control Risk x Detection Risk 0.10 = 0.60 x 0.60 x Detection Risk 0.10 = Detection Risk = 0.278 = 27.8% 0.36 Acceptable audit risk is the auditor's level of risk that they are willing to accept to release an unqualified opinion on financial statements that can be materially misstated. Unqualified audit opinions state that financial statements are presumed to be free from material misstatements. As acceptable audit risk increases, the auditor is willing to collect less evidence (inverse) and therefore accept a higher detection risk (direct). Acceptable audit risk is a measure of how willing the auditor is to accept that the inancial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. When auditors decide on a lower acceptable audit risk, they want to be more certain that the financial statements are not materially misstated. Zero risk is certainty, and a 100 percent risk is complete uncertainty. Complete assurance (zero risk) of the accuracy of the financial statements is not economically practical. Moreover, as we discussed in Chapter 6, the auditor cannot guarantee the complete absence of material misstatements.Often, auditors refer to the term audit assurance (also called overall assurance or level of assurance) instead of acceptable audit risk. Audit assurance or any of the equiva - lent terms is the complement of acceptable audit risk, that is, one minus acceptable audit risk. In other words, acceptable audit risk of 2 percent is the same as audit assurance of 98 percent.. When employing the audit risk model, there is a direct relationship between acceptable audit risk and planned detection risk, and an inverse relationship between acceptable audit risk and planned evidence. If the auditor decides to reduce acceptable audit risk, planned detection risk is thereby reduced, and planned evidence must beincreased. For a client with lower acceptable audit risk, auditors also often assign more experienced staff or review the audit files more extensively.There are important distinctions in how the auditor assesses the four risk factors in the audit risk model. For acceptable audit risk, the auditor decides the risk the CPA firm is willing to take that the financial statements aremisstated after the audit is completed, based on certain client related factors. An example of a client where the auditor will accept very little risk (low acceptable audit risk) is for an initial public offering. We will discuss factors affecting acceptable audit risk shortly. Inherent risk and control risk are based on auditors' expectations or predictions of client conditions. An example of a high inherent risk is inventory that has not been sold for two years. An example of a Low control risk is adequate separation of duties between asset custody and accounting. Look at this: https://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-00312.pdf This answer is correct because an increase in the extent of tests of details (a type of substantive test) will decrease detection risk, which is appropriate because of the increase in control risk.

Look at journal for ratios

KEEP GOING YOU GOT THIS DERRICK, YOU'RE AMAZING

Look at flashcard deck for assertions

Keep going and check the assertions deck Look at notebook for different ratios and review the TBS's that you wrote down in the book

Acronyms

MIPP: Members in Public Practice MIB: Members in Business OM: Other Members IFM: Immediate Family Member CR: Close Relatives PCAOB: Public Company Accounting Oversight Board GAO: Governmental Accountability Office Yellow Book: Government Accounting AICPA: American Institute of Certified Public Accountants

Due Care

Members must follow rules set by appropriate bodies, meaning in part: 1. Take on jobs only if you can reasonably expect to complete them with professional competence. 2. You need not be perfect but should always exercise due professional care when providing all professional services 3. Always adequately plan and supervise your provision of professional services. 4. Never render conclusions or recommendations without sufficient relevant data to support them.

Contingent Fees

Members shall not receive contingent fees for any service performed for a client for whom he or she performs any of the following attest services: 1. A financial statement audit or review, 2. A financial statement compilation reasonably expected to be used by a third party that does not disclose a lack of independence, or 3. An examination of prospective financial information. Commissions and Referral Fees 1.Referral fees and commissions are prohibited for attest clients. 2.For nonattest clients, they are permitted, but must be disclosed in writing. 3.A member's spouse may receive a commission from the member's attest client, so long as the spouse's activities are separate from the member's practice and the member is not significantly involved in the spouse's activities. 4.Members taking title to a product and assuming risks of ownership may resell the product to a client at a profit without disclosure. 5. Similarly, members may subcontract services to third parties and mark up the cost of the services to the client without this being considered a commission.

Disclaimer of Opinion

Modified Opinion: A qualified opinion, an adverse opinion, or a disclaimer of opinion. Pervasive: (a) Effects that are not confined to specific elements, accounts, or items of the financial statements; (b) effects that, if so confined, represent or could represent a substantial proportion of the financial statements; or (c) regarding disclosures, are fundamental to users' understanding of the financial statements. Disclaimer of Opinion—The auditor should express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material and pervasive. Effect of a Disclaimer of Opinion on the Auditor's Report A. Minor effect on the introductory paragraph ("We were engaged to audit ...") and no effect on the management's responsibility section. B. Auditor's responsibility section—Revise this section to consist of the following two sentences: "Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion." C. Add a "Basis for Disclaimer of Opinion" paragraph (with such a label) before the opinion paragraph. D. Disclaim an opinion using appropriate language such as: "Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements." Add an appropriate title preceding the paragraph, such as "Disclaimer of Opinion."

Qualified for Scope Limitation

Modified opinion: A qualified opinion, an adverse opinion, or a disclaimer of opinion. Pervasive: (a) Effects that are not confined to specific elements, accounts or items of the financial statements; (b) effects that, if so confined, represent or could represent a substantial proportion of the financial statements; or (c) regarding disclosures, are fundamental to users' understanding of the financial statements. Qualified Opinion—The auditor should express a qualified opinion when the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material, but not pervasive. (This lesson focuses on the qualified opinion in connection with a scope limitation.) Disclaimer of Opinion—The auditor should express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material and pervasive. (A separate lesson focuses on the disclaimer of opinion.) Effect of a Qualification for a Scope Limitation on the Auditor's Report A. No effect on the introductory paragraph or management's responsibility section. B. Auditor's responsibility section—Modify the last sentence to state, "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion." C. Add a "Basis for Qualified Opinion" paragraph (with such a label) before the opinion paragraph. D. Qualify the opinion using appropriate language such as: "In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly . . ." and label the opinion paragraph "Qualified Opinion."

Qualified for Misstatement

Opinion Choice for a Misstatement (Including Inadequate Disclosure) Involves Judgment A. Qualified Opinion—The auditor should express a qualified opinion when the auditor concludes that misstatements are material, but not pervasive to the financial statements. B. Adverse Opinion—The auditor should express an adverse opinion when the auditor concludes that misstatements are material, and pervasive to the financial statements. (A separate lesson focuses on the adverse opinion.) Effect of a Qualification for a Misstatement on the Auditor's Report A. No effect on the introductory paragraph or management's responsibility section B. Auditor's Responsibility Section—Modify the last sentence to state, "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. C. "Add a "Basis for Qualified Opinion" paragraph (with such a label) before the opinion paragraph. The auditor should include a description and quantification of the financial effects of the misstatement (when practicable); likewise, the auditor should include the omitted information (when practicable). D. Qualify the opinion using appropriate language such as: "In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly . . ." and label the opinion paragraph "Qualified Opinion."

Probability-Proportional-to-Size (PPS) Sampling

PPS sampling defines the "sampling unit" to be an individual dollar associated with the financial statement element involved. (Variations of this approach are referred to as dollar-unit sampling or monetary-unit sampling.) For example, suppose accounts receivable consists of 7500 customer accounts having a total balance of $3,000,000. The population is viewed as consisting of 3,000,000 individual items (dollars) rather than 7500 accounts. However, when an individual dollar is selected as part of the sample, it attaches to the related account or logical record, which is then examined in its entirety. Accordingly, the probability that an individual account will be selected is "proportional" to that individual account's balance relative to the total for all accounts. Primary Advantage of PPS Sampling—The main advantage of PPS sampling is efficiency. If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than the other sampling methods. If there are many differences, however, PPS sample sizes can become too large to be practical. Primary Disadvantage of PPS Sampling—The main disadvantage of PPS sampling is that it does not work very well in auditing negative balances (understatements) or zero (unrecorded) balances. It applies best to audit circumstances involving concerns about overstatements, such as for accounts receivable or inventory; and, then, only when few misstatements are expected. Basic Steps in a PPS Sampling Application A. Determine the Sample Size—based on three considerations: 1. The "reliability factor" (from an AICPA table based on the risk of incorrect acceptance and the number of overstatements permitted—see the table below); 2. The population book value; and 3. The tolerable misstatement (net of any expected misstatements). B. Select the Sample—PPS samples are usually selected using "systematic selection" with a random starting point and a specified "sample interval." C. Evaluate the Recorded Book Value—To "evaluate" the entity's recorded balance relative to the implied audit value for the population, the auditor should calculate the "upper limit on misstatement," which corresponds to the upper limit of a confidence interval. Such computations are beyond the scope of CPA Exam, but a few concepts (especially "projected misstatement") may be worth remembering. Projected misstatement: For accounts having a book value greater than or equal to the sample interval, the actual misstatement should be used to determine the "projected misstatement." For accounts having book values less than the sample interval, the auditor would have to apply the "tainting percentage" to the sample interval from which that account was selected. Suppose that the sample interval is $2,000 and that an account having a book value of $250 has an audit value of $200. The "tainting" is $50/$250 = .20; and, since the account's book value is less than the sample interval, the projected misstatement for this account would be .20 × $2,000 = $400. When there are no misstatements in the sample, the projected misstatement is zero. Incremental allowance: The incremental allowance is zero if there are no misstatements of accounts having book values less than the sample interval. The concept is only relevant when there are misstatements of accounts having book values less than the sample interval, but the calculation itself is a technical issue that is beyond the scope of the CPA Exam. In a probability-proportional-to-size application, the projected error of the sample is the amount of the difference between the book value and the audit value when the amount of the account examined is greater than the sampling interval. PPS sampling enables the auditor to directly control for the risk of incorrect acceptance by requiring the auditor to specify the desired level of that risk. When the recorded balance of the account involved is less than the sampling interval, the auditor must determine the "tainting" percentage and apply that percentage to the sampling interval. In this case the tainting percentage = [($5,000 − $1,000)/$5,000] = 80%. Accordingly, the projected misstatement is $6,000 × 80% = $4,800.

Sarbanes oxley auditor rotation

Partner Rotation Lead and Concurring Partners As mandated by Section 203 of the Sarbanes-Oxley Act, the new rules provide that an accounting firm will not be independent if either the lead audit partner or the concurring partner perform audit services for more than five consecutive fiscal years of an audit client. Extending beyond the mandate of Section 203, the final rules also require a five-year "time-out" period before a partner may return to a particular audit engagement. Other Audit Partners The new rules also require partner rotation for "audit partners," which is a new defined term. Audit partners, other than the lead and concurring partners, must rotate off an audit engagement after seven years and are subject to a two-year time-out period. As defined by the rules, an "audit partner" is any partner on the audit engagement team with responsibility for decision-making on any significant audit, accounting or reporting matters affecting the company's financial statements or who maintains regular contact with management and the audit committee of the audit client. Audit partners also include all partners who provide more than 10 hours of audit services during a fiscal year to the parent public company, or lead partners on the audit of the company's subsidiaries whose assets or revenues account for 20% or more of the company's consolidated assets or revenues. The definition of audit partner excludes "specialty" partners who consult on technical or industry-specific issues, the lead partners on subsidiaries below the 20% threshold and partners assigned to "national office" duties who may be consulted on specific accounting issues related to an audit client. Small Firm Exemption The final rules contain an exception to partner rotation for firms with no more than five public company audit clients and fewer than ten partners.

Exercising Due Care

Per the Code of Professional Conduct, due care requires a member to discharge professional responsibilities with competence and diligence. Yet, the competence requirement accepts that there are limitations to a member's capabilities—in such cases consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a members firm. Accordingly it may be required to consult with experts in exercising due care. Obtaining a specialty credential is not required under the due diligence principle.

Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs

Pictured is an unmodified opinion Emphasis-of-Matter Paragraph: A paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements. Other-Matter Paragraph: A paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report. Emphasis-of-Matter Paragraph Matters for which an emphasis-of-matter paragraph is required: 1. When the auditor has substantial doubt about the entity's ability to continue as a going concern 2. When there is an inconsistency in accounting principles used 3. When the financial statements are prepared in accordance with special purpose frameworks. (This topic will be discussed in another lesson.) Presentation of the emphasis-of-matter paragraph: 1. Presented immediately after the opinion paragraph 2. Should have an appropriate heading, such as "Emphasis of Matter" 3. Should reference the specific matter being emphasized and identify where relevant disclosures can be found in the financial statements 4. State that the auditor's opinion is not modified with respect to the matter emphasized. Other-Matter Paragraph Circumstances for which an Auditor May Consider it Necessary to Add an Other-Matter Paragraph: 1. Relevant to users' understanding of the audit—In rare situations, the auditor may add an other-matter paragraph to explain why it was not possible for the auditor to withdraw from an engagement in which a scope limitation that was pervasive resulted in a disclaimer of opinion. 2. Relevant to users' understanding of the auditor's responsibilities or the auditor's report—For example, when the opinion expressed on the prior year's financial statements is different than the opinion previously expressed (as a result of management's correction of a material departure from the applicable financial reporting framework). Presentation of the Other-Matter Paragraph 1. When the other-matter paragraph is intended to draw users' attention to a matter relevant to their understanding of the audit of the financial statements—The other-matter paragraph should be presented immediately after the opinion paragraph and after any emphasis-of-matter paragraph(s). a. When the other-matter paragraph is intended to draw users' attention to a matter relating to other reporting responsibilities addressed in the auditor's report—The paragraph may be included in the section of the report labeled "Report on Other Legal and Regulatory Requirements." b. When relevant to all the auditor's responsibilities or users' understanding of the auditor's report—The other-matter paragraph may also be included as a separate section following the "Report on the Financial Statements" and the "Report on Other Legal and Regulatory Requirements." 2. Should have an appropriate heading, such as "Other Matter." The schedule of operating expenses is reviewed for consistency and by reference to the underlying accounting information but is not separately audited. The correct language is to refer to this information as "fairly stated," which distinguishes the issue from "fairly presented," as would be used if the schedule was part of the audit. This is not an emphasis-of-matter but rather an other-matter paragraph issue.

Current Liabilities

Related to the Completeness Assertion (for liabilities, the auditor's primary concern involves completeness not existence!)—Perform a search for unrecorded liabilities. This is done toward the end of fieldwork to provide the best chance of detecting any significant unrecorded liabilities. 1. Review cash disbursements subsequent to year-end and, for all disbursements over some specified dollar amount (>$X), examine the related vendors' invoices and the entity's related receiving documents to identify transactions that should have been reported as liabilities as of year-end; compare those apparent liabilities to the details comprising the recorded payables to identify apparent liabilities that are unrecorded. 2. Examine any unpaid invoices on hand at the date of the "search" along with the entity's related receiving documents to identify any transactions that should have been reported as a liability as of year-end. 3. Inquire of management about their knowledge of any unrecorded liabilities and whether all invoices have been made available to the auditor. Document such inquiries and management's response in the management representations letter. Related to the Existence and Valuation Assertions 1. Verify the mathematical accuracy of payables by comparing the general ledger balance to the supporting detailed listing of payables. 2. Vouch selected items to the underlying vendor's invoices. 3. Could confirm selected payables, but usually do not—Confirmation primarily establishes the validity (existence) of the recorded items, but there is a relatively low risk that the company would overstate its true liabilities; the far bigger risk is that material liabilities may have been omitted (i.e., completeness). 4. Usually valuation is not a significant audit issue, since there is a presumption that the client will pay 100% of what is owed; the auditor should look to see that the client takes advantage of any available cash discounts for prompt payment. Related to the rights and obligations assertion—Inspect the specific terms of the payables and inquire about any related party transactions. Separately classify notes payable for borrowings from accounts payable for ordinary operating activities. A note payable that is renewed after the balance sheet date would be examined by the auditor in order to ensure that it was properly presented at the balance sheet date and that related disclosures were adequate. This would provide the auditor with evidence for the presentation and disclosure assertions.

Consistency of Financial Statements

Relevant AICPA Guidance—The relevant AICPA guidance is provided by AU 708, Consistency of Financial Statements. The standard states that the auditor's objectives are to (1) evaluate the consistency of the financial statements for the periods presented; and (2) communicate appropriately in the auditor's report when comparability has been materially affected (a) by a change in accounting principle or (b) by adjustments to correct a material misstatement in previously issued financial statements. Evaluating Consistency A. The auditor should evaluate whether the comparability between periods has been affected by either a material change in accounting principle or a material restatement of financial statements. B. When the Auditor's Opinion Covers Two (or More) Periods—The auditor should evaluate the consistency between such periods, as well as the consistency of the earliest period covered by the auditor's opinion with the prior period. C. Change in Accounting Principle D. The auditor should evaluate a change in accounting principles about four matters: 1. Whether the adopted principle is in accordance with the applicable financial reporting framework; 2. Whether the method of accounting for the effect of the change is in accordance with the applicable financial reporting framework; 3. Whether the disclosures about the change are adequate; and 4. Whether the entity has justified that the alternative adopted is preferable. (The issuance of an accounting pronouncement that requires or expresses a preference for an accounting principle is considered sufficient justification for a change in principle.) E. When Those Four Criteria are Met (and the Change has a Material Effect on the Financial Statements)—The auditor should include an emphasis-of-matter paragraph in the auditor's report to describe the change and reference the footnote disclosure applicable to the change. The auditor should state that the auditor's opinion is not modified regarding the matter. 1. Include the emphasis-of-matter paragraph in subsequent periods until the new principle is applied in all periods presented. 2. If the change is accounted for by retrospective application to the financial statements, the emphasis-of-matter paragraph is only needed in the period of the change. F. When Those Four Criteria Have not all been Met (and the Change has a Material Effect on the Financial Statements)—The auditor should evaluate whether the change results in a material misstatement and consider whether the auditor's report should be modified. G. When a Change in the Reporting Entity Results in Financial Statements that are Essentially Those of a Different Reporting Entity—The auditor should include an emphasis-of-matter paragraph in the auditor's report describing the change in the entity and referencing the entity's disclosure. However, that is unnecessary when the change in entity results from a transaction or event, such as the purchase or disposition of a subsidiary. H. Correction of a Material Misstatement in Previously Issued Financial Statements 1. When the financial statements are restated to correct a prior material misstatement—The auditor should include an emphasis-of-matter paragraph in the auditor's report. (That paragraph need not be included in subsequent periods.) The auditor should state that the auditor's opinion is not modified regarding the matter. 2. If the financial statement disclosures relating to the restatement are not adequate—The auditor should evaluate the inadequacy of disclosure and consider whether the auditor's report should be modified. 3. A change from an accounting principle that is not in accordance with the applicable financial reporting framework to one that is in accordance is a correction of a misstatement.

assessing control risk

Reperformance and observation. The requirement is to identify the most appropriate procedures for assessing control risk. Auditors perform tests of controls to obtain evidence on the operating effectiveness of controls to assess control risk. Answer (b) is correct because tests of controls include inquiries of appropriate entity personnel, inspection of documents and reports, observation of the application of the policy or procedure, and reperformance of the application of the policy or procedure.

Introduction to Sampling

Sampling Risk—Is the risk that the sample may not be truly representative of the population; in other words, the chance of an erroneous conclusion that the auditor takes by examining a subset of the population, rather than the entire population. A. Type 1 Errors (False Rejection) 1. Tests of controls => the risk of underreliance on internal controls (also known as risk of assessing control risk too high). 2. Substantive testing => the risk of incorrect rejection. 3. Type 1 errors relate to efficiency—the auditor will probably achieve the appropriate conclusions, although not in the most efficient manner (perhaps taking more than one sample, maybe at the urging of the client who has faith in the effectiveness of the internal control or the fairness of the financial statement element). The risk of incorrect rejection relates to the efficiency of the audit. If the auditor incorrectly believes that a material misstatement exists, the auditor will perform extra auditing procedures to try to find the material misstatement. After performing the extra work, the auditor will then reach the correct conclusion that the balance is fairly stated. B. Type 2 Errors (False Acceptance) 1. Tests of controls => the risk of overreliance on internal controls (also known as the risk of assessing control risk too low). 2. Substantive testing => the risk of incorrect acceptance. 3. Type 2 errors relate to effectiveness—now the auditor may have failed to meet the overall objective, which is to limit audit risk to an acceptably low level. (The client will have no incentive to argue about this conclusion, so the auditors will not have any reason to take a second look.) Nonsampling Risk—Refers to any other mistakes by the auditor (i.e., other than sampling risk), not a direct consequence of using a sampling approach: Inappropriate auditing procedures. Failure to correctly identify "errors" or amounts sampled, misinterpreting the results, etc. If there were no variation within a population (i.e., if all items were homogeneous), the auditor would only need a sample of one item to assess the whole population! The variability of the population causes the sample size to increase and is responsible for the sampling risk. Example: If a test of 50 documents results in 3 deviations, the upper error limit will be 8%, which exceeds the tolerable rate of 7%. The upper error limit consists of the sample error rate of 6% (3/50) plus the allowance for sampling risk of 2%. If the upper error limit exceeds the tolerable rate, the auditor will modify the planned assessed level of control risk because the results indicate that the control cannot be relied upon.

Accounting Department

Serves as a recording function

Service Organizations—Service Auditors

Service Auditor: Practitioner who reports on controls at a service organization. User Auditor: An auditor who audits and reports on the financial statements of a user entity. (In other words, the auditor of an entity that has outsourced the processing of its transactions to the service organization for whom such processing may be more efficient; the user auditor must consider relevant internal controls of the service organization in auditing the financial statements of such a user entity.) 1. On the adequacy of the design of internal control (Called a "Type 1 engagement" by AICPA Professional Standards)—Whether the control policies and procedures are suitably designed and placed in operation. 2. On the operating effectiveness of internal control (based on tests of controls) (called a "Type 2 engagement" by AICPA Professional Standards)—Whether the policies and procedures are suitably designed and working effectively to provide reasonable assurance of achieving the stated control objectives. no test of controls, disclaimer of opinion Examples of Such Services —Bank trust departments, mortgage banks that service mortgages for others, IT centers (e.g., processing checks for financial institutions or handling the details of subscriptions for magazine publishers). Management of the service organization is required to provide the service auditor with a written assertion (1) about the fairness of the presentation of the description of the system and (2) about the suitability of the design; and, in a Type 2 engagement , management is also required to provide a written assertion (3) about the operating effectiveness of the controls. Those assertions should either accompany the service auditor's report or be included in the service organization's description of the system of internal control. Responsibilities of Service Auditors (Governed by SSAEs) —Must be independent of service organization, but not necessarily independent of all user entities. Soc 1=Auditors Soc 2=management and user entities Soc 3=users and interested parties A report on controls placed in operation should include a disclaimer on operating effectiveness as this type of engagement does not include any tests of controls. It is not intended to provide a user auditor with a basis for reducing control risk below maximum. Management is required to provide the service auditor with such a written assertion (including an assertion about operating effectiveness for a Type 2 service auditor's report). If management does not provide the required written assertion, the service auditor should withdraw from the engagement if permitted by law.

Service Organizations—Service Auditors

Service Auditor: Practitioner who reports on controls at a service organization. User Auditor: An auditor who audits and reports on the financial statements of a user entity. (In other words, the auditor of an entity that has outsourced the processing of its transactions to the service organization for whom such processing may be more efficient; the user auditor must consider relevant internal controls of the service organization in auditing the financial statements of such a user entity.) 1. On the adequacy of the design of internal control (Called a "Type 1 engagement" by AICPA Professional Standards)—Whether the control policies and procedures are suitably designed and placed in operation. 2. On the operating effectiveness of internal control (based on tests of controls) (called a "Type 2 engagement" by AICPA Professional Standards)—Whether the policies and procedures are suitably designed and working effectively to provide reasonable assurance of achieving the stated control objectives. no test of controls, disclaimer of opinion Examples of Such Services —Bank trust departments, mortgage banks that service mortgages for others, IT centers (e.g., processing checks for financial institutions or handling the details of subscriptions for magazine publishers). Management of the service organization is required to provide the service auditor with a written assertion (1) about the fairness of the presentation of the description of the system and (2) about the suitability of the design; and, in a Type 2 engagement , management is also required to provide a written assertion (3) about the operating effectiveness of the controls. Those assertions should either accompany the service auditor's report or be included in the service organization's description of the system of internal control. Responsibilities of Service Auditors (Governed by SSAEs) —Must be independent of service organization, but not necessarily independent of all user entities. Audits on internal control Soc 1=internal controls for Auditors to understand Soc 2=internal controls for management and user entities to understand Soc 3=internal controls for users and interested parties to understand A report on controls placed in operation should include a disclaimer on operating effectiveness as this type of engagement does not include any tests of controls. It is not intended to provide a user auditor with a basis for reducing control risk below maximum. SOC 1 Report: "To give the auditor of a user entity's financial statements information about controls at a service organization that may be relevant to a user entity's internal control over financial reporting. A Type 2 SOC 1 report includes a detailed description of tests of controls performed by the CPA and results of the tests." [Such a report must be restricted to specified users.] Note The service auditor's report under AT-C 320 is an SOC 1 report. SOC 2 Report: "To give management of a service organization, user entities and others a report about controls at a service organization relevant to the security, availability or processing integrity of the service organization's system, or the confidentiality and privacy of the data processed by that system. A Type 2 SOC 2 report includes a detailed description of tests of controls performed by the CPA and results of the tests." [Such a report must be restricted to specified users.] SOC 3 Report: "To give users and interested parties a report about controls at the service organization related to security, availability, processing integrity, confidentiality or privacy. SOC 3 reports are a short-form report (i.e., no description of tests of controls and results) and may be used in a service organization's marketing efforts." [This is the only SOC report that is appropriate for "general use"; the others must be restricted to specified users.]

Accounting vs. Auditing

Standards Applicable to Evaluating the Auditor's Performance 1. Outside the U.S.—"International Standards on Auditing" (ISAs) are issued by the International Auditing and Assurance Standards Board, an audit-related standard-setting body within the International Federation of Accountants, known as IFAC. 2. Within the U.S.—The nature of the reporting entity determines which auditing standards are applicable to an audit of the entity's financial statements. a. Governmental entities—When required by law, regulation, or agreement, Generally Accepted Government Auditing Standards (GAGAS), issued by the U.S. Government Accountability Office (GAO) are applicable. b. Public companies (companies registered with the Securities and Exchange Commission, also referred to as "issuers," that is, issuers of securities to the public) —The auditing standards of the Public Company Accounting Oversight Board (PCAOB) are Applicable. c. Private companies (referred to as "nonissuers") and other entities —The auditing standards of the AICPA's Auditing Standards Board are applicable; these pronouncements collectively are referred to by the AICPA as generally accepted auditing standards (GAAS). ICPA's "clarity and convergence" project—The AICPA reissued substantially all of their existing Statements on Auditing Standards (SASs) in a clarified format intended to make the SASs easier to understand. In addition, the AICPA substantially converged their auditing standards to be consistent with the requirements of IFAC's International Standards on Auditing. Although some differences in those respective requirements remain (and will be covered elsewhere in CPAexcel®), those standards are now very, very similar. The recent AICPA pronouncements are referred to as "Clarified Standards." The PCAOB adopted the then-existing AICPA auditing standards in April 2003 as "interim standards, on an initial, transitional basis." Since that time, the PCAOB has been issuing its own Auditing Standards. Much of the existing PCAOB auditing standards remain those of the AICPA existing as of April 16, 2003. Purpose of an audit—"The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. An auditor's opinion enhances the degree of confidence that the intended users can place in the financial statements." From the AICPA's Preface to Codifications of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance with Generally Ac cepted Auditing Standards.

acceptable level of detection risk decreases

Substantive tests should increase. The acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. To gain this increased assurance the auditors may (1) change the nature of substantive tests to more effective procedures (e.g., use independent parties outside the entity rather than those within the entity), (2) change the timing of substantive tests (e.g., perform them at year-end rather than at an interim date), and (3) change the extent of substantive tests (e.g., take a larger sample). Nature—The auditor has to decide what specific substantive procedures to perform. This includes determining how much emphasis should be placed on tests of details (which tend to be labor intensive and expensive, but which provide a relatively stronger basis for conclusions for most financial statement assertions) versus substantive analytical procedures (which tend to be less labor intensive and less expensive, but which provide a relatively weaker basis for conclusions for most financial statement assertions). Timing—The auditor has to decide whether to perform the important substantive procedures, at an "interim" date (meaning any date prior to year-end and before the books are closed) or at "final" (at year-end and after the books are closed). Extent—The auditor has to decide how large the samples sizes should be. Since the audit work is performed on a test basis, should the sample sizes be relatively large or can smaller sample sizes be justified?

SSARSs—General Principles

The General Principles retained the two categories of requirements for SSARSs: (1) unconditional and presumptively mandatory. A. Unconditional Requirements—Indicated by the word must, the accountant is required to comply with such a requirement without exception whenever the requirement is relevant. B Presumptively Mandatory Requirements—Indicated by the word should, the accountant is expected to comply with such a requirement, except in rare circumstances. 1. Noncompliance is allowed if a required procedure would be ineffective in achieving the intent of the requirement for a specific engagement. 2. When not complying with such a requirement, the accountant should perform alternative procedures to achieve the intent of the presumptively mandatory requirement. C. Application and Other Explanatory Material (Including Appendices of the SSARSs)—These are not requirements and are presented separately within the SSARSs. Indicated by the words may, might, or could, they may explain what a requirement means or provide examples of appropriate procedures. Interpretive Publications: "Interpretations of SSARSs; exhibits to SSARSs; the AICPA Guide, Compilation and Review Engagements, guidance on reviews, compilations, and engagements to prepare financial statements included in AICPA Audit and Accounting Guides; and AICPA Statements of Position, to the extent that those statements are applicable to such engagements." The Statements on Standards for Accounting and Review Services are not applicable when: 1) preparing a working trial balance; 2) assisting in adjusting the books of account; 3) consulting on accounting, tax, and similar matters; 4) preparing tax returns ; 5) providing bookkeeping or data processing services, and 6) processing financial data for clients of other accounting firms. The standards that address unaudited financial statements are the Statements on Standards for Accounting and Review Services. These standards are issued by the AICPA's Accounting and Review Services Committee. the SSARS apply when a CPA prepares, compiles or reviews the financial statements of a nonpublic entity (which may be an organization or an individual).

Internal auditing standards

The Standards are mandatory requirements consisting of: Statements of basic requirements for the professional practice of internal auditing and for evaluating the effectiveness of its performance.

Accounting principles to prepare financial statements

The accounting principles utilized in the preparation of the financial statements should: 1) be prepared in accordance with the identified financial reporting framework; 2) be appropriate in the circumstances; 3) provide information about matters that may affect the use, understanding, and interpretation of the financial statements; 4) classify and summarize information in a reasonable manner; and 5) reflect transactions in a manner that presents the financial position, results of operations, and cash flows stated within a range of reasonable and practicable limits. The WebTrust seal is designed to provide assurance on website security, availability, processing integrity, online privacy and confidentiality.

Remember

The auditor is only concerned about the financial statement, nothing else, and how certain activities may effect the financial statements there should be no Scope limitations. If there is, then there will be something other than an unmodified opinion. If question talks about profit margin, divide cost basis by 1-profit margin. For example: Profit margin=10% Cost basis=$45,000 Revenue=45000/.9=$50,000 The client should only prepare journal entries, the auditor can only recommend journal entries.

audit specialist

The auditor may refer to the specialist when the specialist's findings result in a modification of the audit report and reference to the external specialist helps explain the nature of the modification. In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor Concludes there is a material misstatement that is not pervasive in the financial statements.

Verifying inventory

The auditor's primary objective in reviewing the perpetual inventory file is to verify the financial statement assertions pertaining to inventory. As a result, the auditor would focus on such fields as warehouse location, date of last purchase, and quantity sold. The auditor would be LEAST interested in economic order quantity, which is not relevant to verifying the year-end inventory.

Dual Dating

The auditor's report is dual dated when a subsequent event occurs after the date on which the auditor has obtained sufficient appropriate audit evidence but before the financial statements are issued.

Attributes Sampling/Variables Sampling

The best estimate of the population deviation rate is equal to deviations / total in sample. In attributes sampling, the rate of purchasing from unauthorized vendors does not involve the dollars of misstatements.

Group Audit

The group engagement team should obtain an understanding of the component auditor's independence and professional competence associated with the ethical requirements relevant to the group audit.

Qualified opinion

The last sentence in the Auditor's Responsibility section would be modified to state, "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion." A qualified opinion resulting from a scope limitation (an insufficiency of audit evidence) also results in the addition of a separate paragraph (Basis for Qualified Opinion, which describes the circumstances involved) and a modified opinion paragraph. No mention would be made in the notes to the financial statements.

Planning and Supervision

The relevant AICPA guidance is provided by AU 300, Planning An Audit. Involvement of Key Engagement Team Members —The engagement partner and other key members of the audit team should be involved in planning activities. 1. The nature and extent of planning varies with the size and complexity of the entity, the audit team's experience with the entity, and changes in circumstances occurring during the engagement. Likewise, the extent of supervision and review can vary depending upon the size and complexity of the entity, the nature of the audit area involved, the assessed risks of material misstatement, and the competence of the audit personnel involved. 2. Planning is an ongoing iterative process, not a one-time activity. Planning encompasses risk assessment procedures, understanding the applicable legal and regulatory framework, the determination of materiality, the involvement of specialists, and so forth. 3. The engagement partner may delegate portions of planning and supervision to other personnel, but a discussion about the risk of material misstatement (including fraud risks) among key members of the audit team, including the engagement partner, is required. 1. The auditor should establish an overall audit strategy dealing with the scope and timing of the audit work, which affects the development of the required audit plan. (An audit plan is more detailed than the overall strategy and deals with the nature, timing, and extent of audit procedures to be performed.) In establishing the overall audit strategy, the auditor should: a. Identify relevant characteristics of the engagement affecting its scope. b. Identify the reporting objectives of the engagement and required communications. c. Consider the factors that are significant in utilizing the audit team. d. Consider the results of preliminary engagement activities. e. Determine the nature, timing, and extent of necessary resources for the engagement. f. The overall strategy affects the auditor's decisions regarding the allocation of audit resources to specific audit areas and how those resources are managed and supervised. g. Communication with those charged with governance—The auditor is required to communicate with those charged with governance about an overview of the planned scope and timing of the engagement. The auditor may discuss planning issues with management, but should be careful to avoid divulging details that might reduce the effectiveness of the audit by making the auditor's procedures and scope too predictable. 2. The auditor should also develop an audit plan. (In practice, the term audit program is often used in place of what the AICPA calls the audit plan. ) The audit plan encompasses (a) the nature and extent of planned risk assessment procedures; (b) the nature, timing, and extent of planned further audit procedures at the relevant assertion level; and (c) other planned audit procedures necessary to comply with GAAS. Note: Because planning is an iterative process, the auditor should make appropriate changes to the overall strategy and to the audit plan as necessary during the course of the audit if unexpected circumstances are encountered.

Accounting Estimates

The relevant AICPA guidance is provided by AU 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures. This pronouncement states that the auditor's objective is to obtain sufficient appropriate audit evidence about whether the accounting estimates (including fair value accounting estimates) are reasonable and whether the related disclosures are adequate in view of the applicable financial reporting framework. Accounting Estimate: An approximation of a monetary amount in the absence of a precise means of measurement. Auditor's Point Estimate (or Auditor's Range): The amount (or range of amounts) derived from audit evidence for use in evaluating the recorded or disclosed amount(s). Estimation Uncertainty: The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. Management's Point Estimate: The amount selected by management for recognition or disclosure as an accounting estimate. Outcome of an Accounting Estimate: The actual monetary amount that results from resolution of the underlying matter addressed by the accounting estimate. Additional Guidance Regarding Estimation Uncertainty A. Nature of Estimation Uncertainty—The nature of estimation uncertainty varies with the nature of the accounting estimate, the extent to which there is an accepted method (or model) to be used, and the subjectivity of any assumptions or the degree of judgment involved. The risks of material misstatement increase when there is high estimation uncertainty. B. Understanding Management's Assessment—In obtaining an understanding of whether and how management has assessed estimation uncertainty, the auditor might consider whether management has performed a sensitivity analysis and monitors outcomes of prior accounting estimates. C. When the Estimation Uncertainty is High—The auditor may consider a combination of responses to the assessed risks, including reviewing outcomes, testing how management made its estimate, testing applicable controls, and developing a point estimate (or range) to evaluate management's point estimate. D. Narrowing a Range—The auditor's range should encompass all reasonable outcomes, not all possible outcomes. A high estimation uncertainty (significant risk) may be indicated if it is not possible to narrow the range to less than or equal to performance materiality. E. Reporting—When there is significant uncertainty, the auditor may add an emphasis-of-matter paragraph to the auditor's report. in evaluating the reasonableness of an accounting estimate, an auditor concentrates on key factors and assumptions that are: 1. significant to the accounting estimate; 2. sensitive to variations; 3. deviations from historical patterns; and 4. subjective and susceptible to misstatement and bias. If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer's letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements. It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.

Change from audit to different engagement

The requirement is to determine whether either or both of (1) the additional audit effort necessary to complete the audit and (2) the reason for the change in the engagement should be considered by a CPA whose client has requested that an audit engagement be changed to a compilation. Answer (b) is correct because SSARS states that additional necessary audit effort and the reason for the change—as well as the additional cost to complete the audit—be considered.

Prior year audit and current year review, stated comparatively

The requirement is to identify the correct statement relating to a CPA's report on comparative statements when the current year has been reviewed and the previous year has been audited. Answer (c) is correct because when a separate paragraph is being added to the CPA's review report the CPA should clearly indicate the difference in the levels of assurance for the two years. In this situation, SSARS require the auditor to indicate that the previous year's financial statements were audited, the date of the report, the type of opinion expressed and if the opinion was other than unqualified, the substantive reasons for that opinion, and that no auditing procedures were performed after the date of the previous report. Answer (a) is incorrect because the review report is not solely intended for management or the board of directors. Answer (b) is incorrect because the prior year's audit report may still be appropriate. Answer (d) is incorrect because this statement does not need to be included within the review report. This answer is correct because the CPA may not report on the comparative financial statements because of a lack of comparability. (If statements in prior years omit required disclosures.

tolerable rate

The tolerable deviation rate is the largest percentage variance experienced in audit sampling that an auditor will accept in order to rely upon a specific control. If the deviation rate is higher than this threshold value, then the auditor cannot rely upon the control.

Attributes sampling vs variables sampling

This answer is correct because variables sampling deals with dollar amounts (or quantities), and accordingly, this answer is correct because it involves the dollar amount of inventory. Attributes sampling addresses deviation rates from various controls. Attribute sampling checks whether an item is defective or not. It's a yes or no answer. that measures the degree of conformity. Variable sampling is about checking "how much", "how good", or "how bad".

Other audit report reference example

Thomas, CPA, has examined the consolidated financial statements of Kass Corporation. Jones, CPA, has examined the financial statements of the sole subsidiary which is material in relation to the total examined by Thomas. It would be appropriate for Thomas to serve as the group engagement partner, but it is impractical for Thomas to review the work of Jones. Assuming an unmodified opinion is expressed by Jones, one would expect Thomas to Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones. This answer is correct because when the group engagement partner finds it impractical to review the work of another auditor, he or she will make reference to the examination of the component auditor and issue an unmodified report. This reference will indicate the division of responsibility between that portion of the financial statements covered by the two CPA firms.

unauthorized expenditures test

To determine whether checks are being issued for unauthorized expenditures, the auditor needs to examine the population of checks issued and trace them to supporting documentation.The correct population for testing is thus canceled checks.

Family Relationships

Two categories of family relationships create potential independence problems: 1. Immediate family members: Spouses, spousal equivalents, and dependents 2. Close relatives: Parents, siblings, and nondependent children. Immediate Family Members A. With substantial exceptions that are about to be spelled out, immediate family members of covered members must comply with the same independence rules as covered members themselves. They may not work for attest clients or own financial interests in them (unless the interests are both indirect and immaterial). B. Irrespective of the exceptions below, immediate family members cumulatively may not own more than 5% of an attest client. C. Immediate Family Members Employed by Attest Client—A covered member's immediate family members may work for an attest client, just not in a "key position" such as one in which an employee has: 1. Primary responsibility for significant accounting functions that support material components of the financial statement; 2. Primary responsibility for the preparation of the financial statement; or 3. The ability to exercise influence over the contents of the financial statement, including when the individual is a member of the board of directors or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accountancy officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position. D. Immediate Family Member Participation in an Employee Benefit Plan—Immediate family members may not only work for an attest client in a nonkey position, they may also participate in an employee benefit plan that is an attest client or is sponsored by an attest client, so long as all of the following safeguards are followed: 1. The plan is offered to all employees in comparable employment positions; 2. The immediate family member does not serve in a position of governance for the plan; and 3. The immediate family member does not have the ability to supervise or participate in the plan's investment decisions or in the selection of the investment options made available to plan participants. E. Immediate Family Member Participation in an Employee Benefit Plan with Financial Interests in an Attest Client—An immediate family member might work for a company that is not an attest client or in a non-key position in a company that is an attest client, but participate in its employee benefit plan and learn that the plan holds stock of an attest client. The general rule is that in this setting an immediate family member may hold a direct financial interest or material indirect financial interest in an attest client if all of the following safeguards are met: 1. The covered member is neither on the attest team nor in a position to influence. (So, the covered member could be a 10-hour person or other partner in the office but not a team member or in a position to influence in relationship to the attest client); 2. Such investment is an unavoidable consequence of such participation; the immediate family member had no other investment options available for selection and 3. If the plan creates an option that would allow the immediate family members to invest in a nonattest client, the immediate family members should select that option and dispose of the attest client shares as soon as practicable but within 30 days. Close Relatives A. Generally, close relatives of covered members must follow the same independence rules as the covered members themselves, but the restrictions are looser than for immediate family members and they are looser for close relatives of covered members who are not on the engagement team. B. Independence is impaired if the close relative of an audit team member has either of the following: 1. A key position with the attest client, or 2. A financial interest in the attest client that: a. The team member knows or has reason to know was material to the close relative, or b. Enabled the close relative to exercise significant influence over the attest client. C. Independence is impaired if the close relative of a person in a position to influence or other partner in the office has either of the following: 1. A key position with an attest client, or 2. A financial interest that: a. The person in a position to influence or other partner in office has reason to believe was material to the close relative, and b. Enabled the close relative to exercise significant influence over the attest client. D. There are no specific restrictions on close relatives of 10-hour people (though the Conceptual Framework should always be kept in mind).

Substantive procedures (or substantive tests)

are those activities performed by the auditor to detect material misstatement or fraud at the assertion level. The different assertions of balances are: 1. existence, 2. rights and obligations, 3. valuation, and 4. completeness.

Mentality

audit team members should discuss the potential for material misstatement due to fraud. And use a Questioning mindset Professional Standards emphasize the importance of "professional skepticism" when considering fraud-related risks. Professional skepticism is described as "... an attitude that includes a questioning mind and a critical assessment of audit evidence."

Corroborate

confirm or give support to (a statement, theory, or finding).

Documentation of audits

engagement completion document- final documentation to discuss all significant findings and issues, under PCAOB-issuer stuff.

Inherent risk and control risk

exist independently of the audit. Detection risk is made only by the auditor

Microcomputer

is a complete computer on a small scale, designed for use by one person at a time. An antiquated term, a microcomputer is now primarily called a personal computer (PC), or a device based on a single-chip microprocessor. Common microcomputers include laptops and desktops.

voucher register

is a journal that records all vouchers once they are approved. Sometimes the voucher register is called the book of original entry because all the vouchers are entered into the voucher register before they are entered into any other part of the accounting system.

Cut off statement

is the statement of transactions that occurred for the 7 to 14 days after the closing date of the financial statements. It is used to check the accuracy of deposits in transit at year end and the outstanding checklist at year end.

Parallel simulation

methods of testing application controls utilizes a generalized audit software package prepared by the auditors. is a process of simulating data processing with a set of data (from client) and comparing the results of simulation with that of client's system results. Integrated testing facility approach-creates a fictitious entity in a database to process test transactions simultaneously with live input. Test data- involves the auditor submitting 'dummy' data into the client's system to ensure that the system correctly processes it and that it prevents or detects and corrects misstatements. Exception report -is a document that states those instances in which actual performance deviated significantly from expectations, usually in a negative direction.

Pro forma financial statements

pro forma financial presentations are designed to demonstrate the effect of a future or hypothetical transaction by showing how it might have affected the historical financial statements if it had been consummated during the period covered by those statements.