Study Sessions 1:1-3

Which of the following actions by a CPA most likely violates the profession's ethical standards?

retaining client records after the client has demanded their return. only reason a client record may be withheld is if the engagement has not yet been completed. and AICPA says withholding is okay until client pays for services, but some state laws ban that practice.

A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:

reviewing engagement working papers and reports Conducting and supervising work at all organizational levels includes reviewing the work that has been completed by the audit team. This would include working papers and reports. wrong answers: Client relationships, independence rules, and personnel files are supervised, but are not associated with the actual work performed on an audit.

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?

seeking a private letter ruling. contingent fees are permitted when they involve a legal proceeding or ruling. When a CPA is receiving a contingent fee for a private letter ruling, it would be allowed and not be considered actually "contingent" because it would most likely be fixed by the legal jurisdiction. Contingent fees are prohibited for a CPA performing an audit, a review of a financial statement, or an assertion-based examination of prospective financial information.

Which of the following rules of the AICPA Code of Professional Conduct must be observed even by a member who is not in public practice?

integrity and objectivity members NOT in public practice: cannot maintain the appearance of independence, but still must be objective.

the standard compilation report includes which statement/phrase?

'The objective of a compilation is to assist management in presenting financial information in the form of financial statements.' wrong answers: 'substantially less in scope that an audit' and 'limited assurance' are review report phrases.

Which of the following statements is correct concerning significant deficiencies in an audit?

An auditor may communicate significant deficiencies during an audit or after the audit's completion. A significant deficiency is a matter that comes to an auditor's attention that represents a significant deficiency in the design or operation of internal control and that merits attention by those charged with governance. Generally, significant deficiencies are reported at the conclusion of the audit. However, because timely communication may be important, the auditor may choose to communicate significant matters during the course of the audit.

Which of the following statements best describes an auditor's responsibility to detect errors and fraud?

An auditor should plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.

Which of the following matters in a financial statement audit is MOST APPROPRIATE to communicate with those charged with governance?

An overview of the planned scope and timing of the audit The auditor is required to communicate certain information to those charged with governance, including the planned scope and timing of the audit, without compromising the effectiveness of the audit by revealing the nature and timing of detailed audit procedures and thereby making them predictable

What is the authoritative body designated to promulgate attestation standards?

Auditing Standards Board (ASB) AICPA board granted the ASB this authority. these standards are issued through due process, including meeting open to the public, public exposure of proposed attestation standards, and a formal vote by an authorized standard-setting body. wrong answers: FASB and GASB: independent authoritative bodies designed to promulgate financial accounting/reporting standards for businesses and governmental entities. GAO is the accounting, auditing, and investigating agency of the US Congress

When relating the identified risks to relevant assertions, the auditor, using professional judgment and materiality, should consider: whether the risks are of a magnitude that could result in a material misstatement of the financial statements. the likelihood that the risks could result in a material misstatement of the financial statements.

Both I and II

Which of the following matters is an auditor required to communicate to an entity's audit committee? I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved. II. Other findings or issues arising from the audit that are significant and relevant

Both I and II

A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and required a single audit for compliance with the terms of this financial aid. Which of the following guidelines should the CPA consider?

GAAS and GAGAS

Which of the following is not a quality control policy or procedure related to engagement supervision?

Hiring and advancement of engagement personnel

Significant difficulties communicated to those with governance responsibilities that were encountered during the audit may include such matters as: I. significant delays in management providing required information. II. extensive unexpected effort required to obtain sufficient appropriate audit evidence. III. the calculation of materiality as it pertains to the audit. IV. restrictions imposed on the auditor by management.

I, II, and IV The concept of materiality is important to planning and executing the audit. The difficulty of calculation of materiality, while sometimes difficult to ascertain, is not a matter to be communicated to those with governance responsibilities. what should be communicated on top of I, II, and IV: An unnecessarily brief time within which to complete the audit, The unavailability of expected information, Management's unwillingness to make or extend its assessment of the entity's ability to continue as a going concern when requested

Which of the following bodies promulgates standards for audits of issuers (publicly traded companies)?

PCAOB --> Public Company Accounting Oversight Board

Which of the following is not a quality control policy or procedure related to engagement supervision?

Scheduling vacations and other paid time off Scheduling vacations and other paid time off is an administrative function, not engagement performance. examples of ... for engagement supervision: Tracking the progress of the engagement, Considering the capabilities and competence of individual members of the engagement team, whether they have sufficient time to carry out their work, whether they understand their instructions, and whether the work is being carried out in accordance with the planned approach to the engagement, Addressing significant findings and issues arising during the engagement, considering their significance, and modifying the planned approach appropriately Identifying matters for consultation or consideration by more experienced engagement team members during the engagement

Which of the following is NOT a quality control policy or procedure related to the review of work performed by other engagement team members?

Significant conclusions reached on the engagement are discussed with the firm's peer reviewer. While the firm may occasionally consult with its peer reviewer, there is no requirement to discuss all significant conclusions with the peer reviewer on each engagement.

North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to review and generate North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

Statements on Standards for Accounting and Review Services SSARS: used by accountants to conduct a review engagement responsibly. requires accountants to perform procedures to obtain limited assurance that material modifications have been made.

which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity's financial statements?

The accountant does not contemplate obtaining an understanding of internal control. AR-C doesn't mention ^ at all. It does mention: independence is required. limited assurance is expressed. required to obtain a written management representation letter for a review engagement (since the report will provide limited assurance)

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?

The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.

A CPA firm just retained a new audit client. The new client's CFO has offered the engagement manager four tickets for personal use to a national, televised sporting event, along with the use of the client's corporate jet to travel to the event.

The engagement manager cannot accept the tickets in order to maintain the appearance of independence and objectivity.

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time?

The coordination of the assistance of the client's personnel in data preparation

While conducting an audit in accordance with Government Auditing Standards (the "Yellow Book"), an auditor determines that fraud has been committed in one of the client's government contracts. The auditor reports the fraud to the client's audit committee, which takes no action to report the fraud to appropriate parties. To which of the following entities is the auditor required to report this situation?

The counterparty to the contract.

A client informed the engagement partner that $190,000 of its inventory is deemed obsolete and is unwilling to adjust the financial statements. Accordingly, the financial statements have not been adjusted. The engagement partner, who has substantial experience in this industry, is aware of the client's position, but has agreed to issue an unmodified opinion on the financial statements. The materiality on the audit is $100,000.

The financial statements are materially misstated, and the engagement partner has not exercised objectivity and integrity.

A CPA firm submitted a proposal to perform agreed-upon procedures for Birch Co. The engagement partner's wife is the administrative assistant to the sales team of Birch Co.

The firm can accept Birch Co. as a new client because the firm is independent and objective.

A new administrative staff member at a CPA firm sits on the board of trustees at a nonissuer audit client. The staff member performs routine clerical functions related to the engagement.

The firm is independent of the client and can issue an unmodified opinion, assuming that no additional issues are identified.

In order to meet the deadline of a client's annual report, the engagement partner issues the final audit report prior to the completion of the fieldwork. The company is the CPA firm's largest client.

The firm's lack of internal quality control procedures suggests that the firm is not exercising due care.

Which of the following representations should NOT be included in a report on internal control related matters noted in an audit?

There are no significant deficiencies in the design or operation of the internal control The report should contain a statement that the "consideration of internal control was...not designed to identify all deficiencies in internal control that might be [material weaknesses or material weaknesses or significant deficiencies] and therefore, [material weaknesses or material weaknesses or significant deficiencies] may exist that were not identified."

How to define 'reasonable assurance?'

a high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. expressing that financial statements are fairly presented in conformity with GAAP. reasonable assurance provides a high level of assurance, but not possible to prevent/detect all material misstatements on a timely basis due to the nature of audit evidence and the risk of fraud. Wrong things: "substantial" and "significant" are NOT generally related to reasonable assurance

The AICPA's Code of Professional Conduct states that:

a member may follow another country's rules if practicing outside of the United States.

The written communication regarding significant deficiencies and material weaknesses identified during the audit should include all of the following EXCEPT:

a paragraph describing management's assertion concerning the effectiveness of internal control. 'wrong answers:' should include: the definition of the term "material weakness" and, when relevant, the definition of the term "significant deficiency." a description of the significant deficiencies and material weaknesses and an explanation of their potential effects. sufficient information to enable those charged with governance and management to understand the context of the communication.

In order for a firm to designate itself as "Members of the AICPA":

all CPA owners must be members of the AICPA based on the AICPA's Code of Professional Conduct

The GAO's conceptual framework for independence includes:

all of the answer choices are correct: identifying threats, evaluating the significance of threats identified, and applying safeguards to eliminate/mitigate threats.

The GAO has identified a number of circumstances that could impact independence, which include all of the following except:

all of the answer choices are threats identified by the GAO: self-interest threats, self-review threats, bias threats. the other 4 threats are: familiarity, undue influence, management participation, and structural threats.

Responsibilities of the PCAOB include all of the following except:

all of the listed items are responsibilities of the PCAOB: to register public accounting firms, to establish/adopt standards relating to the preparation of audit reports for issuers, to conduct inspections of registered public accounting firms PCAOB, in addition to ^, also: conducts investigations and disciplinary proceedings, performs other duties to promote high professional standards, and enforces compliance with the Sarbanes-Oxley Act, rules of the PCAOB, professional standards, and the securities laws.

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?

an appropriate level of management do this in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. (Ordinarily, the appropriate level of management is at least one level above the persons who appear to be involved with the suspected fraud.)

define fraud in an audit of financial statements

an intentional act that results in a material misstatement in financial statements that are the subject of an audit difference between fraud and error: the underlying action was intentional or unintentional.

When threats to independence are identified, the GAO requires that auditors:

apply safeguards. safeguards: include controls designed to eliminate/mitigate threats to an acceptable level.

The specific functions of an audit committee include all of the following EXCEPT:

approving the audit methodology to be used by the auditor The audit committee's function is to set up a means of direct communication between the outside directors and the independent auditor. 'wrong answers:' The committee typically: selects and appoints the independent auditor, assures that the auditor is independent, reviews the nature and details of the engagement, reviews the quality of the auditor's work, reviews the scope of the audit, maintains lines of communication, and helps solve any disagreements.

Which of the following matters does an auditor usually communicate to management?

arrangements involving a predecessor auditor auditor should communicate: planned scope/timing of audit, members of those charged with gov, control deficiencies identified, significant findings from the audit auditor does NOT need to communicate: indications of adverse key financial ratios, agreements about preliminary threshold levels, identification of recurring operating losses.

Which of the following best characterizes an auditor's exercise of professional skepticism?

having an attitude that includes a questioning mind Professional skepticism entails being able to perform critical evaluations of audit evidence, having an inquisitive mind, and being aware of circumstances that may indicate misstatements due to fraud or error. wrong answers: Being nonconfrontational is not a skeptical characterization. Obtaining adequate evidence is a requirement for an auditor to complete an audit. Taking into account past management interactions does not characterize an auditor's exercise of professional skepticism as the management may have never had issues in the past.

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming that any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

compilations CPA is not independent of that entity, can only do compilations

Auditors performing work under GAGAS, in addition to having competence, technical knowledge, skills, and experience to perform the audit, must:

complete at least 24 hours of CPE relating to governmental auditing every 2 years. + Individuals who work on GAGAS audits for 20% or more of their time must complete at least 80 hours of CPE relating to governmental auditing every two years.

Which of the following would be deemed "those charged with governance" who oversee the preparation and fair presentation of financial statements that may be subject to audit?

corporate trustee, board of directors, audit committee, and/or executive management.

In an audit of a nonprofit org under the Uniform Guidance rules, and auditor must comply with all of the following, EXCEPT:

correspond with all individuals/entities that have received/made use of the federal award funds and determine the appropriateness of such distributions. no requirement for ^^

In order to participate on the PCAOB Board, members must:

demonstrate commitment to the interests of investors and the public also have: high integrity, understanding of financial reporting process and responsibilities of accountants

which of the following activities is an accountant not responsible for in review engagements performed in accordance with the Statements on Standards for Accounting and Review Services

developing an understanding of internal control unless it would better help fulfill the objectives of the review. a review engagement under SSARS requires analytical procedures to be performed and independence. auditor provides limited assurance that there are no material modifications that should be made to the financial statements.

During the initial planning phase of an audit, a CPA most likely would

discuss the timing of the audit procedures w/ the client's management early stage where auditor develops general idea of what internal controls and substantive tests will be performed, PY binders are reviewed, and scope is discussed with client.

During the initial planning phase of an audit, a CPA most likely would:

discuss the timing of the audit procedures with the client's management. wrong answers are all procedures that occur after the planning phase: Identifying specific internal control activities that are likely to prevent fraud, evaluating the reasonableness of the client's accounting estimates, and making inquiries of the client's attorney as to whether any unrecorded claims are probable of assertion

"generally accepted accounting principles" is an accounting term that

encompasses the conventions/rules/procedures necessary to define accepted accounting practice at a particular time for financial statements. not broad guidelines. govern how financial statements are prepared/presented. dynamic principles and regularly updated. GAAP comes from: FASB Codification and the SEC GAAP is different than GAAS

in performing an attestation engagement, a CPA typically

expresses a conclusion about an assertion.

For public accounting firms to issue or participate in the issuance of any report of an issuer, they must comply with all of the following requirements EXCEPT:

ignore any other professional guidance in conflict with the directive of the Board. 'wrong answers:' To participate in the issuance of any report of the issuer, public accounting firms must register with the PCAOB, sign a consent statement, and comply with a request for testimony or the production of documents. PCAOB Rule 3100 requires that public accounting firms comply with all applicable auditing and related professional practice standards.

In determining independence, GAO standards refer to:

independence of both mind and appearance Independence of mind means that the auditor's professional judgment has not been compromised (the auditor is able to act with integrity and exercise objectivity and professional skepticism). Independence in appearance means that a reasonable and informed third party would not conclude that the auditor's independence has been compromised.

An auditor's letter issued on significant deficiencies relating to an entity's internal control observed during a financial statement audit should:

indicate that the audit's purpose was to report on the financial statements and not to provide assurance on the internal control. Any report accompanying the basic financial statements and the auditor's standard report should state that the audit is made for the purpose of forming an opinion on the basic financial statements taken as a whole and not to provide assurance on internal control.

audit engagement team members should remain alert for evidence of noncompliance with which relevant ethical requirements?

performing professional responsibilities with the highest sense of integrity integrity is an element of character fundamental to professional recognition. quality where the public's trust derives "Am I doing what a person with integrity would do?"

As compared to the AICPA Code of Professional Conduct, the ethical and independence rules of the SEC tend to be:

more restrictive SEC deals with public companies/issuers, so their rules are more restrictive.

The auditor is precluded from including which of the following statements in his or her communication of internal control related matters identified in an audit?

no significant deficiencies were identified during the audit the auditor may communicate there were no material weaknesses identified during the audit, but don't write that there were none lol.

the procedure, "the accountant should obtain an understanding of the entity's internal control," is:

not required for either a compilation or a review this procedure is only required for audits.

a compilation report is always required when financial statements prepared by the accountant are expected to be used by what?

only required whenever the accountant is engaged to subject the financial statements to the compilation process.

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

professional skepticism this attitude recognizes the risk of material misstatement in financial statements.

The AICPA's Code of Professional Conduct permits CPA firms to organize as:

proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law. in all instances, however, CPAs must have control over the firm's ownership, voting rights, and professional matters

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?

questioning Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. The audit team should not be presumptive or judgmental (indicating that they have made up their minds); they must be open to the possibility that a material misstatement due to fraud could be present, regardless of any past experience with the entity and regardless of the auditor's belief about management's honesty and integrity. Criticizing is different from critical thought. A criticizing mindset would not be a professional one.

A CPA audits the financial statements of a client. T he CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?

the CPA authorizes client transactions and reports them to management. AICPA says that the CPA should not perform management functions/make management decisions for the attest client.

an auditor determines that a client who received a federal grant fraudlently reported information to the federal gov.. The client's management refuses to acknowledge the fraud. WHo should the auditor contact first?

the agency that provided the grant

Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which element in common?

the auditor determines whether the federal financial assistance has been administered in accordance with the applicable laws/regulations other common elements: follow GAAS and GAGAS. internal control compliance with laws. issues report on consideration of internal control.

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

the auditor is required to assess the risk of fraud. auditor provides assurance in an unmodified audit report that the financial statements are free from material misstatement or error/fraud. wrong answers: audit of internal control not required for nonissuers and some others.

A partner is a member of a country club that is a potential new audit client of the CPA firm. The partner has financial decision-making powers at the club, but would not serve as the primary engagement partner.

the firm cannot accept the country club as a new client due to a lack of independence/objectivity.

An auditor would LEAST LIKELY initiate a discussion with those charged with governance concerning:

the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

During the planning phase of an audit, an auditor is identifying matters for communication to the entity's audit committee. The auditor most likely would ask management whether:

there were changes in the application of significant accounting policies

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:

timing of inventory observation procedures to be performed. This is a timing and scheduling issue appropriate to the planning stage

When communicating to those charged with governance, the objectives of an auditor do NOT include:

to provide any pay rate and audit estimations to those charged with gov While timing is important, providing pay rate and estimation information is a part of establishing an understanding with the client through an engagement letter or other written communications.