far 1
HORIZONTAL ANALYSIS: A horizontal analysis involves a review of the client's ratios and trends over time. Specifically, the auditor is looking at change over time.
(Net sales in 20X2 - Net sales in 20X1) divided by Net sales in 20X1
Under the Statements on Auditing Standards (SASs), the auditor should complete the assembly of the final audit file on a timely basis, but within how many days following the report release date? -30 days -45 days -60 days -90 days
-60 days AU-C 230.16 states that the auditor should complete the assembly of the final audit file on a timely basis, but within 60 days following the report release date (documentation completion date).
Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit? I. Pell reviews Smith's workpapers and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements. II. Pell is unable to review Smith's workpapers; however, Pell's inquiries indicated that Smith has an excellent reputation for professional competence and integrity. -I only -II only -Both I and II -Neither I and II
-II only. If two or more auditors examine a portion of a client's financial statements, the decision must be made as to who the principal auditor is. Normally the auditor who has examined the major portion of the financial statements is the principal auditor, and he or she will issue the audit opinion. If the principal auditor is able to satisfy himself about the quality of another auditor's work and is willing to take responsibility for that work, no mention of the other auditor is necessary. The type of opinion (unmodified, qualified, adverse, or disclaimer of opinion) is not relevant. However, if the principal auditor is unable to satisfy himself about the quality of the other auditor's work, reference quality of other auditor is made and a clear separation of responsibilities is described in the audit opinion.
Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling? -The sampling distribution should approximate the normal distribution. -Overstated units have a lower probability of sample selection than units that are understated. -The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. -The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
-The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. Probability-proportional-to-size (PPS) sampling selects a sample based on dollars, not individual items. If the sampling interval for a particular asset is $12,000, every invoice that has a value of over $12,000 will be selected. Large-dollar-value items have a higher chance of being selected in the testing, and overstatements are more likely to be detected than understatements. Since PPS sampling is used in the test of details, the auditor would consider two types of risk: incorrect acceptance and incorrect rejection. The auditor controls those risks by determining the risk level for the sample.
Which of the following statements is correct about an auditor's required communication with those charged with governance? -Any matters communicated to those charged with governance also are required to be communicated to the entity's management. -The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. -Disagreements with management about the application of accounting principles are required to be communicated in writing to those charged with governance. -Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again.
-The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. The auditor is required to communicate to those charged with governance certain matters related to the conduct of the audit. The matters to be communicated include: -the auditor's responsibility under generally accepted auditing standards, -an overview of the planned scope and timing of the audit, and -significant findings from the audit, including: *the auditor's views about qualitative aspects of the entity's significant accounting practices, *significant difficulties encountered during the audit, *uncorrected misstatements, *disagreements with management, *management's consultation with other accountants, and *significant issues discussed, or subject to correspondence, with management.
In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? -The prospective financial statements depart from AICPA presentation guidelines. -The practitioner was not able to perform certain procedures deemed necessary. -The prospective financial statements fail to disclose significant assumptions. -The significant assumptions do not provide a reasonable basis for the statements.
-The practitioner was not able to perform certain procedures deemed necessary. If the practitioner is unable to obtain sufficient appropriate evidence because he/she was not able to perform certain procedures deemed necessary, the practitioner should disclaim an opinion and describe the scope limitation in the practitioner's report.
OCI or Other comprehensive Items
-Unrealized gains and losses on AFS securities -Unrecognized gains or losses from pension costs -Foreign currency translation adjustments -Unrealized gains or losses from certain derivative transactions Net Income + OCI = COMprehensive Income
To ensure that the audit report for an issuer is prepared in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the report must: -be prepared within 60 days of the end of the issuer's fiscal year end unless extenuating circumstances, as outlined in the act, are publicly disclosed. -attest to and report on the internal control assessment made by the management of the issuer. -be prepared within 60 days of the issuer's fiscal year end, be certified by the Public Company Accounting Oversight Board, and be publicly disclosed. -attest to, and report on, the efficiency and effectiveness of the issuer's system of internal control.
-attest to and report on the internal control assessment made by the management of the issuer. Section 404 of the Sarbanes-Oxley Act of 2002 requires that the audit report attest to, and report on, the internal control assessment made by management. This internal control assessment will not be the subject of any other separate engagement.
An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should: -state that the presentation is a comprehensive basis of accounting other than GAAP. -restrict the use of the report to those specified users within the entity. -be limited to data derived from the entity's audited financial statements. -indicate that the data are subject to prospective results that may not be achieved.
-restrict the use of the report to those specified users within the entity. If the auditor is engaged to report on the selected financial data, the auditor's report should be limited to data that are derived from audited financial statements (which may include data that are calculated from amounts presented in the financial statements, such as working capital). The report should not state that the presentation is a comprehensive basis of accounting other than GAAP, restrict the use of the report to those specified users within the entity, or indicate that the data are subject to prospective results that may not be achieved.
1. The auditor may miss a checking account when testing TWD Company's disbursements. 2. TWD Company utilizes a complicated cash sweep account for which reconciliations are difficult and time consuming. 3. The CFO has obtained the administrative password for the accounting system and can log in as any user. 4. Management of TWD Company does not enforce its policies and procedures. 5. A new law places increased pressure on TWD Company to find environmentally friendly methods of disposal for waste by the end of the current year. 6. The audit team is understaffed due to a recent resignation by a staff member.
1.Detection Risk 2.Inherent Risk 3.Control Risk 4.Control Risk 5.Inherent Risk 6.Detection Risk
Financial Framework
2 Qualitative Characteristics - Faithful Representation Completeness, Neutral, and Free from error - Relevance (PCM) Predictive Value, Confirmatory Value, and Materiality 4 Quantitative Characteristics (CVUT) Comparability Verifiability Understandability Timeliness
Gross Margin Ratio Profit Margin Ratio
=gross profit/net sales This measures the percentage of sales available for expenses and profit after subtracting COGS. =Net Income/net sales This measures the percentage of sales that becomes profit. Hint = Profit usually will refer to "net income"
Reports are considered special reports when issued in conjunction with: -interim financial information reviewed to determine whether material modifications should be made to conform with GAAP. -feasibility studies presented to illustrate an entity's results of operations. -compliance with aspects of regulatory requirements related to audited financial statements. -pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.
An entity's compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements is specifically listed as a special report in AU-C 800.04 and .07. -compliance with aspects of regulatory requirements related to audited financial statements.
Unmodified Opinion QUALIFIED OPINION-Material, NOT pervasive Scope Limitation Depending on $ amount ADVERSE OPINION-Material AND pervasive DISCLAIMER OPINION-Scope limitation, depending on $ amount Note: Disclosure is NOT considered pervasive so, if a disclosure is not provided, usually will depend on the scope limitation whether it is qualified or a disclaimer
An opinion issued when the auditors conclude that the financial statements present the financial condition, results of operations, and cash flows in accordance with GAAP (until recently, known as an unqualified opinion). CLEAN
Multi-Step Income Statement
Sales-COGS =Gross Income -Selling, general and administrative expenses -Depreciation expenses =OPERATING INCOME +/-Misc Revenues, Gains, Expenses and losses such as interest income and misc expenses =INCOME BEFORE TAXES -Income tax expense =INCOME FROM CONTINUING OPERATIONS +/-Income from discontinued operations =NET INCOME
Attribute sampling is used in tests of controls where the auditor desires to answer the question "How many?" and to determine to what extent the control procedures are being followed. In order to determine the sample size for attribute sampling, the auditor must determine:
look at reliability rate, estimated error rate, and the maximum tolerable rate The reliability level - this is the probability of being right in placing reliance on an effective internal control accounting system. If the reliability level is 95%, the auditor has only a 5% risk of placing reliance on internal accounting control when the system is ineffective given a certain tolerable rate. After the auditor determines the reliability level, she can then choose the correct sampling table based on this level. "The risk of assessing control risk too low" is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. The estimated error rate - this is also referred to as the estimated population occurrence rate (expressed in percentage terms). If the auditor does not know what the estimated error rate is, select a sample of 50 to estimate the population occurrence rate. If two errors were discovered, the estimated error rate would be (2/50), or 4%. The maximum tolerable rate - this is the rate above which the auditor would place less than full reliance on the control being evaluated. With these items defined, the auditor would use a table to determine the sample size.
On receiving a client's bank cutoff statement, an auditor most likely would trace:
prior-year checks listed in the cutoff statement to the year-end outstanding checklist. A cutoff bank statement is a record of transactions for a specific period (less than the full-month reporting period) that is requested by the auditor from the bank. For example, the auditor may request a statement of transactions from January 1 through January 21, 20X1, when the client's year-end was December 31, 20X0. Using this statement, the auditor can compare the list of outstanding checks as of December 31, 20X0, to the checks that cleared on the cutoff statement to see if those same checks are still outstanding.
After assessing the risk of material misstatement at the relevant assertion level, the auditor determines that performing only substantive procedures is appropriate for specific relevant assertions and risk. The auditor came to this conclusion because: the auditor's risk assessment procedures have not identified any effective controls relevant to the assertion.
the auditor's risk assessment procedures have not identified any effective controls relevant to the assertion. AU-C 330.A4 states that "the auditor may determine that...performing only substantive procedures is appropriate for particular assertions, and therefore, the auditor excludes the effect of controls from the relevant risk assessment. This may be because the auditor's risk assessment procedures have not identified any effective controls relevant to the assertion or because testing controls would be inefficient, and therefore, the auditor does not intend to rely on the operating effectiveness of controls in determining the nature, timing, and extent of substantive procedures." If the auditor determines that effective controls exist for the relevant assertion level, the auditor might choose to perform tests of controls for operating effectiveness depending on whether such tests would be efficient or not.
The sample size of a test of controls varies inversely with: -expected population deviation rate. -tolerable rate. -both expected population deviation rate and tolerable rate. -neither expected population deviation rate nor tolerable rate.
tolerable rate. In a test of controls, sample size varies inversely with the tolerable (or maximum) rate of deviation. As the number of allowable deviations increases, the sample size decreases. Sample size increases as the expected population deviation rate increases.
