1
Q
There are three levels of guidance for auditing. What are they ranked from most authoritative to least authoritative?
A
1- SAS (Statement on Auditing Standards) for Nonissuers & PCAOB AS for Issuers. 2- Interpretive Publications. 3- Other Auditing Publications
2
Q
GAAS (Generally Accepted Auditing Standards) measure the ___________ of an auditors performance?
A
Quality
3
Q
Nonissuer conducts an audit in accordance with ______ standards. The acronym stands for?
A
ASB ; Auditing Standards Board
4
Q
The following term used within standards indicates a presumptively mandatory requirement
A
“Should”
5
Q
What is NOT an example of excercising professional skepticism?
A
Inquirying about info over a prior year engagement
5
Q
For audited financials the auditor’s responsibilities are confined to?
A
The expression of the auditor’s opinion.
6
Q
In an audit to gain “reasonable assurance” an auditor should
A
Plan the work and then properly supervise any assistants
7
Q
What kind of evidence in an audit are we looking for?
A
“Sufficient Appropriate audit evidence”
8
Q
*** (Important Principle)
When you encounter issues performing an audit you need to determine 1st whether its a _______ _______ issue which could result in a “Qualified” or “Adverse Opinion” or if its a __________ issue and will result in a “Qualified” or “Disclaimer” Opinion (Think Temperature Chart).
A
Financial Statement ; Auditing
9
Q
Is a Unmodified opinion with an emphasis-of-matter paragraph considered modified?
A
No
10
Q
What would cause us to conclude that we should give a qualified opinion. What’s the key that will let us know if we need to push it to an adverse/disclaimer of opinion?
A
Material Misstatement ; Pervasiveness (Not = Qualified, Is = Adverse/Disclaimer)
11
Q
When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is?
A
Unmodified (because they have made them so they AREN’T misleading.)
12
Q
Word “Independent” goes in the _________ title. Identification of the applicable financial reporting framework should go in the ________ paragraph?
A
Report ; Opinion
13
Q
The opinion paragraph in an auditors report will include? (4 parts)
A
Entity that was audited, Nature of engagement, financial statements covered, and dates covered by each financial statement
13
Q
An auditor’s responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is?
A
Explicity called out in the Auditor’s Responsibility paragraph
14
Q
Inadequate disclosure of material information would result in what kind of opinion issuance?
A
adverse
15
Q
Public company, issues financials without the statement of cash flows, what would be the opinion issued?
A
Qualified
16
Q
If we were to issue an adverse opinion for a nonissuer in that paragraph it should include?
A
A direct reference to another section entitled “Basis for opinion”
17
Q
Basis for opinion order wise goes where in the audit report?
A
After (following) the Opinion section
18
Q
If you ever have to report on financial statements for legal reasons and disclaim an opinion you have to?
A
Specifically state that you are not independent BUT you don’t have to provide reasons
19
Q
If you are not independent then you have to furnish what kind of opinion?
A
Disclaimer
20
Q
For the actual wording in the audit report if an opinion (qualified/disclaimer) is being given because of scope limitations then in the actual paragraph itself you should have the following wording
A
Qualification pertains to “Possible effects on the financial statements”
21
Q
Application of accounting principles being ________________ applied is implicitly implied whereas our examination of evidence on a test basis is _____________ stated in the audit report. Because of this we only comment on __________ in an emphasis-of-a-matter paragraph where there is a problem.
A
Consistently
Explicitly
Consistency
22
Q
What kind of opinion or report would you issue for 1) “An unjustified accounting change” & 2) “A material weakness in internal control?
A
1) qualified/adverse opinion 2) SAS 115 letter
23
When will you usually add an emphasis of matter paragraph
When the entity elects to use a financial framework for reporting that has to be specifically explained as a user that wouldn't inherently know that it was different than GAAP or more appropriate from a representation standpoint
24
An emphasis of matter paragraph can also be used to describe? (different than framework used)
Call to attention of the significant transactions with related parties
25
Other-matter paragraph (comparison) example of a time that you'd include it?
You compare audited numbers in one year to financial numbers in another year that were not audited.
26
Purpose of Emphasis of Matter paragraph compared to that of an Other Matter Paragraph
Emphasis draws attention to matters already disclosed in the financials whereas Other Matter draws attention to items not specifically disclosed in financials but important to a user's understanding
27
Consistency is _________ if an audit report is issued?
implied
28
Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was unmodified, the successor should?
add an other matter paragraph and call that the other auditor issued an unmodified opinion in the PY
29
Before reissuing the PY's auditor's report (By the Predecessor) you need to get rep letters signed by?
Successor auditor & Management
30
group engagement partner decides to not to make reference to another CPA who audited a clients subsidiary. This is justified because the group partner is?
Satisfied with the independence and professional rep of the component auditor
31
Had a question on this, but for issuing an adverse opinion what's the general theme for adverse? then what would be an example of that?
1) Financial Statement issue (including notes) 2) Inadequate disclosure of material information
32
For a scope limitation the paragraph discussing the qualified opinion should have the following wording?
"Possible Effects" of the matter described...
33
What is a procedure an auditor would most likely do to obtain evidence about subsequent events (BS) [2 answers]?
Investigate changes in long-term debt after year end for purposes of determining if it should have had a portion classified as a current liability OR changes in Capital Stock
34
What is a procedure an auditor would most likely due to obtain evidence about subsequent events (Financials)?
Compare latest available interim financials and compare those to the financial statements that are being reported on
35
In its annual report if it contains additional info that is not being reported on (via an audit) what should the auditor do?
Read the report and consider whether it contains a material misstatement of fact.
36
You read a transmittal accompanying financials that is materially inconsistent with the financials and the financials do not need revision, what should you do?
Reach out to the client and request them to revise the transmittal
37
What should you as the auditor do to provide an opinion on supplementary info presented with financials?
Inquire of management as to the purpose of the supplementary info and criteria used by management to prepare the info
38
What materiality should you use in supplementary info?
The same that was used in the audit of the financial statements
39
What can kill giving an opinion on supplementary info?
If there was an adverse or disclaimer of opinion
40
How detailed of testing do you do on supplemental info?
Limited Procedures
41
Give me an example of something that is NOT considered a special purpose framework?
IFRS (International Financial Reporting Standards)
42
In an opinion paragraph we should point where to describe the details on a basis of accounting that we are reporting on?
The respective note in the financials
43
Note - When you think about bringing on a new client you should be evaluating your own teams capacity to service that client
44
What would prevent you from accepting a new client engagement?
There are concerns over the integrity of management
45
As part of communicating overall strategy you should communicate?
The extent to which you'll need use the work of company personnel
46
What is not a required part of understanding between client and auditor?
Managements responsibility to correct deficiencies in internal control identified by the auditor
47
What's are two common themes that the EL is trying to get across to my client?
That they will provide me all the support/information I need in order to properly audit AND planning of which personnel of the client will be helping to provide info
48
Before accepting a job to audit a new client what's one thing you are required to obtain?
The client's permission/consent to make inquiries of the predecessor (previous) auditor
49
If you decide to change the requested assurance job from say an audit to a review and there was reasonable justification then with your review report you are...?
Not required to disclose anything about what was originally engaged/agreed upon
50
With prior auditors is it required to communicate with them and is permission required by the client?
Answer is a Yes and Yes on this one
51
If management ever tells you that you can't communicate with the prior auditor then you should withdraw from the engagement
Note this information
52
What is an element of a CPA firm's quality control system that should be considered in establishing quality control policies/procedures?
Assigning personnel to engagements
53
What are the 6 elements of quality control? HELPME
HR (Your people you hire), engagement/client continuance and acceptance (Repeat clients), leadership responsibilities (Partners), Performance of engagement (Senior/Staff), Monitoring (Manager), ethical requirements (Darin)
54
in alignment with GAAS what documentation is required (as it relates to WPs)?
Indication in audit documentation that accounting records agree/reconcile with FS
55
What's true about actions taken after the documentation completion date?
Auditor must not make any deletions
56
According to PCAOB standards what is the # of days that then is equal to the documentation completion date?
14 days
57
According to a Non-issuer what is the max # of days to complete assembly of the final audit file following the report release date? (PCAOB standards require 14 days)
60 days
58
Auditors of Issuers (Public clients) have to retain audit documentation for how many years?
7 years
59
Auditors of Non-Issuers (Private clients) have to retain audit documentation for how many years? (Public is 7)
5 years
60
Most accurate statement regarding audit documentation requirements?
We should document findings that could result in a modification of the auditors report
61
What are the three categories of entity objectives?
Effective and efficient operations, Reliable Financial Reporting, Compliance with Laws/Regulations
62
Under entity objectives on the COSO cube are 5 internal control components. What are they (remember acronym)
CRCIM = Control Environment, Risk Assessment, Control activities, Information & Communication, Monitoring Activities
63
An assistant has a right to?
Document the details of their disagreement and the conclusion reached.
64
One key principle to remember about someone who has a dissenting opinion compared to everyone else on an engagement?
It's not acceptable to just agree and do what your supervisors say if you adamently disagree
65
Audit Strategy does not include what? (This falls under the audit plan)
Nature, Extent, and Timing of audit procedures
66
Which judgements (Assessment of IR & Assessment of CR) can the independent auditor share responsibility for with the internal auditor?
Trick question, none!
67
When working with an internal audit team what's a false statement (principle take away)
for routine procedures you can rely on the judgement of the internal audit team (We always have to use our own judgement)
68
General theme to use internal auditor's findings
You can use the findings If the item is not material and/or it doesn't require a high degree of judgement/is highly subjective
69
For the internal audit team objectivity is reflected by
The organizational level to which the internal auditor reports
70
How does GAAS define a specialist (that is used in an audit)
A person or firm with special skills in a field other than accounting or auditing
71
In comparing an internal audit plan to a "independent auditor financial statement audit plan" what's the difference?
It's gonna be a lot more detailed and cover areas that wouldn't normally be covered in a financial statement audit
72
General theme for what an internal auditor can do/help with on a financial statement audit?
Do testing of internal controls
73
When will you refer to a specialist used in an auditor's report?
If you need to modify your opinion and are using the work of the specialist as part of that opinion development/written opinion.
74
How is materiality defined by the supreme court?
"a reasonable investor says that the incorrect statement significantly altered the total mix of available info"
75
Working with an issuer what's one thing to consider in planning out materiality?
What was the amount of misstatements in a prior period and how does that affect our development of TM
76
If you are doing a materiality calc question and it asks about an annualized amount and what the OVERALL FINANCIAL STATMENT MATERIALITY is what are the two key principles to remember?
1) Annualized is taking the amount dividing by that number of months covered and then multiplying by 12 2) This is just the raw total materiality figure and NOT performance materiality
77
If you get new information about the level for materiality then you should?
Raise or lower it as needed
78
Define an Inherent risk?
Susceptibility of an error/omission occurring due to a factor other than a failure of control
79
Acceptable level of detection risk is inversely related to the?
Assurance provided by substantive tests because if we want to lower our detection risk then we have to do more substantive testing
80
Common theme for timing of audit procedures as it relates to your assessed risk?
The riskier it seems the closer to year end should the procedures be performed
81
According to Module 9 Question #2 on fraud what factor would most likely heighten an auditor's concern about the risk of fraudulent financial reporting?
Overly Complex organizational structure involving unusual lines of authority
82
What is a risk factor that relates to misstatements arising from the misappropriation of assets?
Lack of independent checks
83
Small company with few levels of management. What would NOT help mitigate management's override of controls?
Having 2 officers (need to spread the influence across more individuals and levels)
84
If the government establishes a fixed price what are the effects on consumers & suppliers and why?
Consumers purchase/want more because its affordable but suppliers are likely to produce less because its not as profitable with a fixed selling price but potential variable production costs.
85
What does a "leading indicator" tell you? Give me an example of leading economic indicators of business cycles
Tells you a prediction of economic activity. Example "Order for goods, building permits, and unfilled orders"
86
How is Gross Margin calculated?
Take Revenue and remove COGS and then divide that result by Revenue and compute the respective %
87
What activity should the auditor perform to obtain sufficient knowledge of the Information system as it relates to financial reporting? (Understand x2)
Understand the related electronic records
and
Understand specific accounts involved in initiating, authorizing, recording, processing, and reporting transactions.
88
What are the two characteristics of a trough in a business cycle?
Unused productive capacity & Unwillingness to risk investments
89
Economic fluctuations (or business cycles) are best describe as?
Fluctuations in the level of economic activity, relative to a long-term growth trend
90
Talking Peak business cycle, what condition is most truly to be in place?
Capacity constraints and labor shortages, putting upward pressure on the overall price level, as companies are struggling to keep up with demand
91
Run through the 4 phases of a normal sequence of the business cycle?
(its like a sin or cos wave) so its expanse, peak (highest point), contractionary, trough... repeat
92
Give me two examples of "Lagging" indicators that "Occur as a result of economic activity"?
Average duration of unemployment & prime rate charged by banks and bank loans outstanding
93
When we get projections that the economy is entering a slowdown what's the expected outcome in the near future?
The government and Federal Reserve will consider fiscal and monetary policies (like lowering interest rates) to stimulate economic growth.
94
What is the primary objective of data security controls?
Ensurance that storage media are subject to authorization prior to access, change, or destruction
95
If the reports for a control are generated but no one is reviewing them, then from our perspective?
the controls been implemented, but is not operating effectively
96
What's the biggest factor influencing the amount of documentation we need to gain an "understanding of a client's system of internal controls"?
The complexity of the IT system (degree which IT is used in accounting)
97
You are concerned that there is management override of controls. What could you look at/see that would give you confidence this is or is not happening?
See if spending limits are exceeded (budgets).
98
This change in inventory costing methods is considered a change in accounting principle and requires a retrospective application
Going FROM LIFO to FIFO.
99
before getting substantive tests of details underway at Interim we should?
Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable
100
Whats a great auditing procedure for identifying related party transactions?
review confirmations of loan receivables & payables for indications of guarantees
101
For a going concern what is NOT included in the audit report (talking verbage here)?
the time period i.e. "Reasonable period of time, not to exceed one year
102
you conclude this client's management has been involved in noncompliance with some law but that fact hasn't been properly accounted for or disclosed. You should withdraw from the engagement if?
Client refuses to accept the auditor's report as modified.
103
We care about related party transactions because?
They are not considered "arm's-length" transactions and could make it so financials are fairly presented
104
Who requests the inquiry of the a client's lawyer (trick question)?
The client's management. The auditor is just the one that sends it.
105
For going concern you'll review management's plans and then decided if substantial doubt is alleviated or not. If it is alleviated then you can add what kind of paragraph to your audit report? If it it's than you'll add the "Substantial Doubt About the Entity's Ability to Continue as a Going Concern".
Emphasis of Matter
106
If there is substantial doubt to continue as a going concern and then the doubt is removed in the next year and you present financials on a comparitive basis then ______?
you can just remove any discussion that was on the prior year's report about going concern
107
Which factor would most likely influence how "reliable" we view data for analytics?
If the data was developed under a system of controls
108
(4 tools) fall's under an auditors direct personal knowledge? *Note confrims are second most reliable but still fall below direct personal knowledge
Examination, Re-Computation, Inspection, and Observation
109
An auditor's risk assessment affects the _________, ____, and __________ of audit procedures but doesn't determine the ________ of audit evidence
Nature, Extent, & Timing .... Relevance
110
Examination and _________ are often used interchangeably and represent an auditor examining records or documents
Inspection
111
For audits following GAAS, the use of analytical procedures is required to some extent in?
The final review stage
112
The best way to make expectations (as it relates to use of analytics) is?
Identifying reasonable explanations before talking to management
113
Analytics are best used on which kind of accounts/items because they are more predictable and recorded over time?
Income Statement
114
When an analytical procedure is used as a the principal substantive test then you are required to?
document both your expectation AND factors considered in developing that expectation
115
When we do a test of details we are?
Tracing transactions from the accounting records to the source documents
116
With confirmations what "fails" to meet the definition of an external confirmation?
An oral response
117
What is the Acronym to remember the relevant Audi assertions related to testing Transactions and Events?
COVE UP (Completeness, cutOff, Valuation/allocation/accruacy, Existence, Understandability of Presentation and classifiation
118
What is a financial statement assertion not recognized by PCAOB standards?
Cutoff
119
When you vouch a sample of transactions to supporting documentation you are hitting on which assertion?
Existence/Occurence
120
An auditor's analytical procedures most likely would be facilitated if the entity?
Uses a standard cost system that produces variance reports.
121
What type of audit procedure is being performed when you request certain material containers be opened?
Inspection
122
What type of audit procedure is being performed when you send a legal letter out?
Inquiry
123
What type of audit procedure is being performed when you independently create the aging of certain accounts?
Reperformance
124
What type of audit procedure is being performed when you scan a repairs and maintenance account for unusually large amounts?
Analytical
125
Saying an account balance is materially misstated when it actually isn't illustrates the risk of?
Incorrect rejection
126
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was
More than the deviation rate in the auditor's sample.
127
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the
Sample Size
128
Non sampling erros (actually viewing and interpreting evidence) can arise because?
Auditor failed to recognize misstatement in the documents examined.
129
What is used in statistical sampling techniques to perform a test of controls and influences sample size?
The expected rate of deviation
130
Attribute sampling is used to estimate the rate of occurrence and often involves a _________ question?
Yes-No
131
The sample size of a test of controls varies directly with __________ & then inversely with _______?
Expected population deviation rate & Tolerable rate
132
for sampling when you most likely stratify a population into meaningful groups?
The pop has highly variable recorded amounts
133
When is Ratio estimation most effective?
When there is a correlation between book values and audit amounts
134
TM is 60K, you select every 20th item and you find 3700 of overstatements and 200 of understatements. What's your calc to determine this significance and overall conclusion?
Well you tested 1/20 or .05 or 5% of pop. found a net error of 3500. If we take the error and divide by % tested we get an extrapolation of 3500/.05 = 70K. Since this exceeds tolerable then we've got to go back to the client.
135
What are the 3 benefits of data analytics. What is 1 non-benefit of Data analytics?
Fraud detection, testing of the whole population, & insights via relationships. Simplified work papers (usually more discussion has to be added).
136
What kind of data analytic would we call "aging data" (creating like an AP aging or AR aging?)?
Descriptive (because it decribes and summarizes which bucket each invoice falls into).
137
What kind of data analytic is being used if you created a regression analysis to estimate something using other data points as "independent" variables?
Predictive
138
You are importing a client PBC CSV file and instead of getting the expected 4 columns you got 6. What could have caused this?
The string used had extra commas that broke certain items into multiple attributes
139
Tell me about the relationship between a primary key and a foreign key?
The primary key is the unique identifier in one table and can be pulled in a different table (so as to link the info) which we call a foreign key
140
Give me the components of a relational database?
Tables, made of rows/columns (attributes), and primary keys used to uniquely identify records
141
Whats the general rule for obtaining information and its reliability as it would relate to performing an analytic?
Anything the auditor pulls themselves is going to be more reliable
142
What type of audit procedure is being performed if you, "obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation."?
Inspection (looking at clients documentation)
143
What type of audit procedure is being performed if, "The auditing firm's computer-assisted audit specialist obtained an electronic billing file from the company and checked the accuracy of the summarized billings file."
Recalculation
144
What control would be most helpful in ensuring that all credit sales transactions for the entity are recorded?
Match prenumbered shipping doc's to the sales Journal. (If you have a shipping doc but its not in the GL that would que you in that the sale may be missing).
145
What would be audit evidence for effective operations of controls as it relates to AR?
Watching an employee prepare the schedule of past due accounts receivable
146
One employee gets cash (checks) and prepares the remittance listing that's passed on to the cashier, who else should it be sent to and why?
AR accountant so they can update customer's AR balances
147
What is the best document population to select from and test if there is a matching invoice?
Shipping Doc
148
To have solid internal control when an employee receives checks in the mail they should do what?
Prepare a duplicate listing of checks received (or also called a Remittance listing).
149
If control risk is determined to be low for the occurence assertion (as it relates to Sales Transactions) and gathered evidence to limit substantive testing, what evidence must they have gathered?
Cash receipts and accounts receivable (provides support of completeness and occurence).
150
What procedure would NOT help reduce the risk of errors in the billing process?
Reconciling control totals for sales invoices with the AR GL, because by that point any errors made on the invoices have already carried through to the AR gl.
151
If a cashier receives remittances from the mailroom they can/should also prepare the?
Daily Deposit Slip
152
You are trying to catch if there is an understatement of sales. Whats the best way to do this?
Get a population of shipping documents and trace individual shipping doc's to the respective sales invoice
153
An auditor is worried not all the significant sales were recorded in the current period. The most appropriate test for this would be?
See if Record counts were employed for current-period sales records
154
Tracing bills of lading to sales invoices provides evidence that?
Shipments to customers were invoiced
155
Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?
Unrecorded sales at year-end
156
______ ________ _________ is least likely to be used in an audit data analytical procedure when the auditor is performing substantive testing related to the occurrence of sales transactions and the accuracy of accounts receivable?
Purchase Order Number
157
When would you use a negative confirmation for AR (three situations)?
combinded assessed level of inherent and control risk is low, large number of small balances, and receipients are likely to give them consideration.
158
When should you use a blank confirmation (one that the receipient has to actually fill out)?
When receipients are likely to sign other positive confirmations without careful investigation.
159
To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would?
Request the senders to mail the original forms to the auditor.
160
What is the key principle on AR confirms in terms of what could go wrong and then how we address it?
Client could send an electronic email pretending to be the customer and lie to us that the AR is legit. Instead we need to follow-up and make sure the customer fills out the exact form we sent and get it back to us.
161
In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose?
Individual Invoices
162
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than expected.
163
If you don't get confirmation replies to 2nd requests then you would first?
Inspect the shipping records documenting the merchandise sold to the debtors.
164
An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should?
Verify the account balance by inspecting the client's bank statements and cash receipt records.
165
TBS - When you use the work of a specialist you need to make sure the work is objective but you don't need to?
Ensure NO relationship exists. If it does you can potentially still use the work but will have to use additional procedures to get comfortable.
166
Mailing disbursement checks should be controlled by the who?
The one that signs the check last (usually in the treasury department)
167
The authority to accept incoming goods in receiving should be based on a?
Approved Purchase Order
168
**Who should be responsible for preparing a purchase order, matching the receiving report and invoice with the purchase order, and paying for the related purchase?
Purchase Order = Purchasing Department, Matching receiving report with invoice and PO = AP department, and making payment = Treasurer
169
Purchasing department sends back goods that are messed up. What should be sent to the accounting team?
Debit Memo (To reduce the AP)
170
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also?
Negotiate terms with vendors
171
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be?
Vendors with whom the entity has previously done business
172
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to?
Determine that purchases were properly recorded (Completeness).
173
TBS - When would be a time that it wouldn't be required that you us an analytical procedures?
When you are seeking corroborating evidence to other evidence you got that was circumstantial.
174
**TBS - General theme of examples of type of info and what is required by us as auditors
Names/Persons/Financial Info not required by SEC or GAAP = Other Info = Read info, 4 Key financial Statements = Basic Financial Statements = Audit Procedures, Quarterly Results/SEC specific requirements = Required Supplementary Info = Limited Procedures
175
An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the?
Dates checks are deposited per bank statements with the dates remittance credits are recorded.
176
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether
Cash balances were overstated because of kiting
177
The principle for identifying potential "kiting"?
The receipt date per the bank is recorded in the accounting period BEFORE the disbursement date
178
A bank confirm can have its usefulness limited because?
The bank employee may be unaware of all the financial relationships that the bank has with the client
179
For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the?
Internal Auditor
180
An auditor would be most likely to identify a contingent liability by obtaining a (an)?
Standard Bank Confirmation
181
The primary evidence regarding year-end cash balances in the financial statements is documented in the?
Bank Reconciliations
182
What is a procedure that an auditor would perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?
Examine an analysis of Inventory Turnover
183
What procedure is most appropriate for testing the completeness assertion as it applies to inventory?
Performing cutoff procedures for shipping and receiving
184
If the amount of inventory at a location is not significant than you can do _________ instead of an observation?
Confirmation
185
What audit procedure is most likely related to the understandability of presentation and classification of the financial statements with respect to inventory?
Confirming inventories pledged under loan agreements (which are required to be disclosed in financials)
186
In testing the long-term investments an auditor ordinarily would use analytical procedures assess the reasonableness of?
Completeness of recorded investment income
187
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the?
Trust company doesn't have direct contact with the employees maintaining the investment accounting records
188
In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?
Acknowledgement by client rep that the securities were returned intact.
189
An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the
Completeness of recorded investment income (you want to see how much income relative to the total asset value was generated and compare that to previous years to see if it's reasonable)
190
In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and?
Right and Obligations (you are testing that the security exist and that the entity you are auditing has a right to those securities).
191
An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to?
Dividend record books produced by investment advisory services
192
A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will?
Have bank "seal" the deposit box until the auditor can come count the securities
193
What's the best way to verify interest earned on a bond?
Recompute the expected interest using the basis of face amount, interest rate, and period held (since cash receipts wouldn't capture interest that should be accrued).
194
Which of the following statements is correct with regard to management use of a broker's quotation to support a fair value estimate?
If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and need more supplementation.
195
A nonissuer client has a material investment in the securities of another entity that is valued on the basis of the investee's financial results. The auditor has learned that the investee's financial statements are not audited. What should the auditor do first in this situation?
PER THE BOOK ANSWER reach out and request that the investee be audited.
196
**Which type of audit procedures would an auditor use to test a client’s financial statement assertions at the account, transaction, or disclosure level?
Substantive procedures and test of controls
197
how would you test for unrecorded disposals of PP&E (property, plant & equipment)?
make selection of items recorded and then trace them to the actual facility to see if they are in use
198
if a property acquisition was misclassified as a maintenance expense instead of being capitalized, how would that be caught with an internal accounting control system?
Variance report within a formal budgeting system.
199
What control would most likely prevent the improper disposition of equipment?
separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders
200
What internal control most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions?
Periodic physical inspection of plant and equipment
201
An auditor would analyze repairs and maintenance accounts primarily to?
obtain evidence that expenditures for PP&E that should have been capitalized were immediately expensed
202
Regarding payroll control activities what would most effectively ensure that payment is only made for work performed?
Requirement to have employees time cards approved by their direct supervisors
203
The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an)?
Payroll register entry (because you'll pick some of these and then work yours backwards to evidence that supports the entry that was made).
204
If you were to say that control risk is low for assertions related to payroll your substantive tests would probably include (two of them)?
analytical procedures and Rx of payroll accruals
205
If you are looking at computerized payroll transactions, you'd probably be least likely to use test data to test controls over?
Control and distribution of unclaimed checks
206
What is a bond indenture?
it is a binding legal contract between a bond issuer and bondholders that outlines the terms of the bond
207
If you are looking for restrictions (like retained earnings having restrictions because of a loan/agreement/state law) then you are trying to verify managements assertion over?
Understandability of Presentation and Classification because it'll change how that is reported or disclosed on the financials
208
You are identifying client risks that may result in material misstatement due to fraud. There are 4 attributes you should consider. What are they?
1- Type of Risk
2- Likelihood of the Risk
3- Significance of the Risk
4- Pervasiveness of the Risk
209
If during an audit you become aware of a possible material misstatement in comparative financial statements then you should first?
Do additional procedures as necessary to determine whether a misstatement exists
210
If you are given the value of Inventory and its sold for a 20% profit margin how do you calculate what the Sales Price was?
Start by first doing a proportion comparison. In this case there's a 20% profit margin so the value represents 80% of the cost (if it was 15% profit margin then it would represent 85% of the cost, ect.). So 36000/.80 = X/1(100%) -> cross multiply gives you 36000 = X*.80 -> Solve for X by dividing 36000 by .80 -> Gives you a sale price of $45000. You can double check this by taking the difference of 45K and 36K (which is 9000) and divide that by 45000 which equals 20%
211
There were three big things that came up that may not be quantitativley material but qualitatively could be what are they?
1) An uncorrected misstatement pushes the entity from Net Income to Net Loss, 2) It's an undisclosed related party transaction, & 3) it would result in the entity violating its debt covenants
212
What best characterizes the function of physical access control? (Separates...)
Separates unauthorized individuals from computer resources
213
Note - In the management rep letter one thing that needs to be included is managements representation is that the estimates used were reasonable
214
In terms of the # of periods reported on for the management rep letter and their responsibility for them. What is a key principle takeaway to remember?
Representation should be obtained for all periods being reported regardless of whether or not current management was present during those periods
215
Note - immaterial fraud needs to go on the management rep letter for those in management or individuals with significant roles in internal control. All other fraud for regular employees needs to be material to be included on the letter
216
There was a theme of questions about the management representation letter really hitting hard the fact that it should have managements representation over?
Anything to do with the theme of fraud or design of controls to detect fraud.
217
What does an integrated audit entail?
issuing an opinion on both the financials and then controls (which means you have to test controls)
218
What should be included in an auditor's letter issued on significant deficiencies related to nonissuer's internal control observed during a financial statement audit?
language that says the "audits purpose was to report on the financial statements and NOT to provide an opinion on internal control"
219
Regarding communication with those charged with governance, what is one required component assuming those charged with governance are not involved in management?
The auditor needs to inform those charged with governance of any significant errors found and subsequently corrected by management
220
For disagreements with management and required communication with those charged with governance whats the overriding principle?
If a disagreement came up, regardless of whether it was satisfactorily resolved, it should be communicated to those charged with governance
221
What is NOT a reason that most companies have established audit committees (SEC)?
Because the SEC requires it [NOT a true statement, the SEC recommends but does not require it]
222
In terms of communication over planned scope or timing of a financial statement audit, what should you communicate and what should you NOT communicate?
Should -> approach to internal control, use of internal audit staff, factors affecting materiality. Should NOT make the audit predictable and tell the client the probable high risk procedures you'll be performing.
223
What is one example of a failure in the design of internal controls but not evidence for failure in the operation of internal controls?
Insufficient control consciousness
224
"Evidence of a lack of objectivity by those responsible for accounting decisions" could be considered to be a _________ ________ in internal control and need to be communicated to ______ and ____ _______ ______ _____
Significant deficiency; management; those charged with governance.
225
You have a company you are auditing and you find the CFO misapproprpiated cash with a fraud scheme that's immaterial, what's the level of deficiency and the principle associated with the level?
Material Weakness with the understanding that anytime we find fraud, even when immaterial, by a member of senior management we are gonna call that a material weakness
226
What do you have an option of communication wise with deficiencies related to internal control?
you can communicate them either during the audit as they come up or when the audit is concluded (in practice you'll want to communicate during so there are no surprises).
227
So what will you'll always report to those charged with governance (that aren't a part of management) [2 answers on this on]?
Disagreements had with management (regardless of whether or not they were resolved) & any material corrected misstatements
228
Walk me through the "likelihood" & "magnitude" for a Material Weakness and then contrast that with a Significant Deficiency
Material Weakness will be (likelihood) Reasonable Possibility and (magnitude) Material vs Sig Deficiency will be (likelihood) less than reasonable (magnitude) More than inconsequential
229
If you have control deficiencies that are a repeat from the last year but don't rise to the level of significant deficiency or Material Weakness and they were communicated in the prior year then?
No repeat communication is required.
230
To clarify as it relates to searching for significant deficiencies we?
Do not HAVE to search for them, BUT... if we identify them then we need to report on them
231
You run into a situation where you identify a signficant deficiency and management corrects it during the audit, what/how do you report on this?
Still issue a SAS 115 letter calling it out, have it addressed to both management and those charged with governance, and make sure its issued on the report day or worse case scenario within a 60 day window of the report date
232
When we talk about an integrated audit what is the responsibility of the auditor in regard to testing of controls for a company with multiple business units?
Test specific risks for business units that are material to the company's consolidated financials
233
Alright you've got a private (non-issuer) entity that wants to engage you to audit and then report on it's internal control over financial reporting, what condition would need to be fulfilled before you could accept to do it?
Management's written assessment about the effectiveness of internal control.
234
If you don't get a management rep letter signed and returned back from management (which is the final thing we get on the day we issue) then your two optional responses are either?
Give a disclaimer of opinion or withdraw from the engagement.
235
You are trying to plan an audit to determine the effectiveness of the entity's internal control for an integrated audit of a nonissuer. What are you least likely to consider as part of the planning?
The evaluation (or testing results) of the operating effectiveness of the controls
236
Give me three examples of entity-level controls (these have a pervasive effect on a company's internal control and basically mean they don't just impact one area)?
1) Risk Assessment process controls 2) Biannual distribution of the code of conduct doc 3) Period-end financial reporting controls
237
Top-down approach for selecting which controls to test in an integrated audit, talk me through it (there are 3 of them)
1st Evaluate overall risks at the financial statement level. 2nd Consider what controls are in place at the entity level. 3rd Pick specific controls and evaluate them that have a reasonable possibility of material misstatement (RMM) for specific accounts, disclosures, and assertions
238
Inspection, Reperformance, and Recalculation are all appropriate testing methods for determing operating effectiveness of controls during an integrated audit. What would NOT be an appropriate testing method?
Confirmation
239
For testing of the design of a control there are three methods for testing it, the first is Inquiry, what are the other 2?
Observation & Inspection
240
If you run into a situation where management comes back and say's the cost-benefit to fix the control weakness you found aren't there how do you respond as an auditor to that report?
Read it to make sure there aren't inconsistencies but then disclaim an opinion on it
241
If you test controls then you have to issue your communication letter within XX days of the report release date, whereas for the financial statement audit communication of Significant Deficiencies (SAS letters) are required to be made on the report release date.
60 days
242
Talking significant deficiencies and material weaknessess what do you report/communicate to management and audit committee and what would you report if you gave an adverse opinion on the effectiveness of Internal Control (doing an integrated audit) for a public client?
-> Both Significant and Material Weaknesses; Material Weaknesses alone.
243
Rules about communicating deficiencies are?
-> An auditor has to communicate all deficiencies found and then reports any Sig Deficiencies to management and any Material Weaknesses to both management and audit committee
244
If you are testing controls (hired to give an opinion on them) and you find even just 1 single material weakness you'll be required to issue a _________ opinion AND the company's ________ ________ over financial reporting cannot be considered __________
-> Adverse Opinion; Internal Control; Effective
245
An entity believes it has eliminated a previously noted material weaknesses previously noted in an assessment of internal control and has hired a CPA firm to attest to the improvements, what will be needed by management?
-> written report that accompanies the CPA firms report.
246
A CPA has to comply with Statements on Standards for Attestation Engagements (SSAE) when?
-> engaged to review management's discussion analysis (MD&A) that shows up on a Q or 10-K
247
Explain to me the difference between a positive opinion and negative assurance and the level of project they would be applicable to?
-> Positive Opinion is like an audit where we dig into a bit and come up with our own opinion. Negative Assurance is saying we didn't see anything that came to our attention and would be like when we do a review
248
What standards would govern a "Compilation" of financial statements?
-> Statements on Standards for Accounting and Review Services (SSARS).
249
There are attestation standards (SSAE) and Auditing Standards (GAAS) what is the key difference?
-> GAAS is specific to historical financial statements but Attestation standards can apply to a broader range of engagements
250
Who is responsible for the detection of immaterial errors (Management vs Auditor)?
Neither!
251
Who is responsible for provision of the management representation letter (Rep Letter) (Management vs Auditor)?
Technically it's management. In practice we prepare it and send it to our clients to sign and then take ownership for
252
Who is responsible for Compliance with laws and regulations (Management vs Auditor)?
Management
253
Who is responsible for Coordinating client assistance (Management vs Auditor)?
Both parties are responsible
254
Making Selections without stratification vs with stratification. Talk to me how you'd do each by hand if your sampling interval was $300,000?
W/O you'd take the total $ value of the population and just divide it by your sampling interval.
If you stratified then you'd pick any item above your sampling interval (kind of like what we do with significant items on our sample size calculator) and up there $ value and take that away from the total $ value of the population. Then you'd take the remaining difference and divide that by your sampling interval.
*Key note to remember is that if your answer is digit.23 or whatever you'll ALWAYS round up!
255
If you are going to examine financial projections who would you typically have this distributed to and why?
Usually a bank because these are really "What If's" and have a lot of variables and assumptions that go into that should be asked by a knowledgeable party. One should try to refrain from sharing these with a 3rd party/general party person.
256
Trick Question and important principle to remember when we talk about agreed-upon procedures? What's their main purposes?
1) Provide no assurance, 2) issue a report of findings on specific procedures performed on a subject matter
257
When doing an AUP engagement the practitioner should consider whether?
Any matters came to the attention of the practitioner that significantly contradicted the subject matter referred to in the report
258
Common Principle for something that needs to be disclosed on Financial Projections
There usually will be differences between forecasted and actual results
259
In an accountant's report on a review of pro forma financial info it should include?
A reference to the historical info from previous financial statements and an explanation if they were audited or not
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