Audit Flashcards

Question

# Section 3.1: Pre-Engagement Acceptance Activities Why is it important for an auditor to detect illegal acts?

Answer 1

Because the illegal acts may prevent the auditor from relying on the representation from management

Answer 2

* Objective and scope * Responsibilites of auditor and management * Inherent limitations * Internal Control * Involvement of internal auditors * The financial reporting framework * The expected form and content of audit reports * Management will not intervene in the auditor's work

Answer 3

* After the overall audit strategy is developed by the auditor * After preliminary judgments about materality

Answer 4

* Nature, timing and extent of procedures * Extent of risk of material misstatement * Planned further audit procedures * Procedures that relate to the financial statement assertions * Other audit procedures required by GAAS and PCAOB The auditor does not discuss the nature and timing of **detailed** procedures

Answer 5

By reviewing the prior-year financial statements, the auditor is obtaining assurance that * Opening balances do not contain misstatements that may have an affect on the current year's financial statements * Accounting policies that are reflected in the opening balances are consistently applied to the current period's financial statements

Answer 6

The auditor should review the risk assessment on the opening balances of the financial statements.

Answer 7

* Compliance with laws and regulations * Safeguarding of assets * Reliability and integrity of financial information

Answer 8

* Audit Risk: The risk, which is assessed by the auditor, that the auditor will fail to modify an opinion on the financial statements when they are actually materially misstated. * Control Risk: Assumes the risk will not be prevented or detected on a timely basis by internal controls. * Inherent Risk: Assumes no internal controls exist. Also, complex calculations are more likely to be misstated than simple ones. * Detection Risk: Detection risk is the amount that the auditor is willing to accept.

Answer 9

Audit risk is an aggregate of risk of material misstatements and detection risk A material misstatement: * May happen in the company's accounting process * Will not be detected or prevented by the company's own internal control * Will not be detected by the independent auditors, which will then be inadvertently reported in the audited financial statements.

Answer 10

Inherent risk is the suspectability that there may be a material misstatement to a financial statement assertion before the auditor considers related controls

Answer 11

Audit risk is based on the risk of material misstatements and detection risk. Audit Risk = Risk of Material Misstatement (RMM) x Detection Risk Risk of Material Misstatement = Inherent Risk x Control Risk Detection Risk = Auditor's Risk

Answer 12

The acceptable level of detection risk is inversely related to assessed risk of material misstatement Greater assurance of substantive testing needs to be done: * Planned audit procedures should be performed at year-end instead of interim * Selecting a more effective audit procedure * Increasing the extent of particular tests

Answer 13

* Reported income categories * Total Equity * Net Asset Value

Answer 14

* Pre-tax profit from continuing operations * Prior-period information * Period-to-date information * Budgets * Forecasts

Answer 15

Judgmental misstatements are differences arising from the judgments of management about recognition, measurement, presentation and disclosure that the auditor may consider unreasonable or inappropriate

Answer 16

* Missapplication of accounting principles * Inaccuracy of processing data * Classification difference of a reported financial statement element to a classification according to GAAP

Answer 17

A projected misstatement is the auditor's best estimate based in populations from the audit sample

Answer 18

* Prior years and misstatements detected in the current year that relate to prior years * Possible undetected misstatements * Accumulated uncorrected misstatements could exceed materiality

Answer 19

* Internal audit reports * Interim statements * Quarterly reports * Minutes of board meetings

Answer 20

* Inquiries of management and others in the new engagement * Analytical procedures * Observation and inspection

Answer 21

* Improve the auditor's understanding of the client's business * Improve the auditor's understanding of significant events and transactions * Identify unusual transactions or events and amounts

Answer 22

The determination is whether the audit risk can be sufficiently reduced

Answer 23

* Analytical procedures alone may be enough to provide a level of assurance for some assertions. * Relationships within the data is expected to exsist, even if there certain conditions not present. Examples include: * Unusual events or transactions * Business or accounting changes * Misstatements * Fluctuations in the data

Answer 24

* Income statement accounts * Income statement accounts may be more predictable because they represent transactions over a period of time

Answer 25

* Analytical procedures focus on the relationships between financial and nonfinancial data at a high level using simple and complex models * The precision of the data is important to the auditor in determining on how to use analytical procedures as substantive procedures. * Study of how elements of the financial data is expected to conform to a pattern that is based on the entity's experience * The auditor will determine the best analytical procedure to use for testing the nature of an assertion

Answer 26

* Differences between the auditor's expectation and management's reported amount are more likely to be caused by material misstatements * The more detailed information, the more precise the expectation

Answer 27

* Consider the adequacy of evidence gathered in response to unusual or unexpected balances identified * Unusual or unexpected balances or relationships not previously identified

Answer 28

Assess the risks of material misstatement due to fraud

Answer 29

* Inaccuracy of processing or obtainin financial data * Omission of an amount or disclosure * A disclosure is not presented * Incorrect accounting estimate is made by misstake * Unreasonable management judgments about accounting estimates * Inappropriate selection or application of accounting policies that the auditor considers inappropriate

Answer 30

* Management overide of controls * The auditor's procedures should address the risk of management override of controls apart from any possible existence of more identifiable risks

Answer 31

Evaluating whether the entity's related controls have been suitably designed and implemented

Answer 32

* The auditor should obtain reasonable assurance about whether the financial statements are free from material misstatement **It is not the auditor's responsibility to parties that are not members of governance or the audit committee that the auditor discovered fraud**

Answer 33

* Incentives are reasons for management to feel motivated to commit fraud * Rationalization can relate to a person frequently justifying reasons for committing fraud * Opportunities occur when company management will have the opportunity to take advantage of ineffective internal control procedures or override those controls in order to take advantage for their own self-interest

Answer 34

Management may feel pressure to maintain financial stability while changing to the new accounting requirements

Answer 35

* Incentives or pressures from management * Opportunity to override controls * Ability to rationalize the fraudulent act

Answer 36

* Altering accounting records or documents * Misrepresenting or omitting significant information * Misapplying accounting principles

Answer 37

* Theft of physical assets * Embezzelment * An action that causes a payment not to be received * Using entity assets for personal reasons

Answer 38

* The auditor should consider the implications in relation to other representaions of management * If the illegal act is questionable * Management cannot be trustedin the matter * Serious doubts arise about management's representations

Answer 39

* Noncompliance by the client often includes operating aspects, as well as accounting aspects * The auditor has the responsibility to detect noncompliance that has a direct effect on the financial statements * Since the client's operating activities are not part of the audit, the auditor will not find the compliance

Answer 40

The auditor should apply audit procedures specifically directed to determine if act of compliance has occurred

Answer 41

* Obtaining and understanding of internal control * Performing tests of controls * Performing substantive testing * Perform tests of internal controls * Procedures performed in assessing risk of material misstatement

Answer 42

* External quality reviews of the internal auditor’s activities * Discussions with management personnel * Previous experience with the internal auditor

Answer 43

* A management's specialist possess expertise in a field other than accounting or auditing. * The work in the management specialist's field is used by the entity to assist in preparing the financial statements

Answer 44

* Related party transactions are disclosed in the financial statement * Assessing the risk of material misstatement of related party transactions

Answer 45

* Loans with no scheduled terms for payment * Borrowing or lending at either interest-free or low rate * Selling real estate below the appraised value

Answer 46

Focus on substantive testing of the transactions * Analyze account records for transactions * Evaluate the business purpose of the transaction * Verify the terms and conditions of the transaction

Answer 47

* The auditor considers that management bases its judgement on both subjective and objective factors. * Controls over estimates may be difficult to establish * There may be potential bias in the subjective factors * The auditor should maintain professional skepticism towards both subjective and objective factors

Answer 48

* For financial statements, if the amount is not reasonable, then it should be treated as an identified misstatement. * For estimates, the amounts may be possibly bias and the auditor should reconsider the estimate as a whole

Answer 49

* Economic conditions * Management's selection of the assumptions of market participants * The result of modifications from management's assumptions * The entity's plans * Past experience * Prior-period assumptions

Answer 50

* The auditor will test the data to arrive at the fair value of the interest rate swap contract * The auditor should test how management made an accounting estimate and the data on which it is based, including evaluation of the method of measurement and the assumptions used

Answer 51

The information used in monitoring may be correct, but the subject tested may be ineffective to control

Answer 52

* Faulty human judgment * Simple errors or misstakes * Management override * Cost-benefit considerations * Losses * Lawsuits and other contingencies * Violations of laws and regulations * Warranties * Theft Override by a **low-level employee is not considered** an inherent limitation

Answer 53

"CRIME" **C**ontrol Activities **R**isk Assessment **I**nformation Services **M**onitoring **E**nvironment of Control

Answer 54

* Participation of those charged with governance (aka Tone at the Top) * Integrity and ethical values (including hiring personnel) * Organizational structure * Management's philosophy and operating style * Assignment of authority and responsibility * Human Resources polices and practices * Committment to competence * Removing incentives that increase the probability of dishonest or unethical acts (i.e. bonuses for high rate of growth revenues)

Answer 55

* Performance reviews * Information processing * Physical controls * Authorization * Segregation of Duties

Answer 56

* Identify risks relevant to the preparation of the financial statements * Estimate their significance * Assess the probability * Decide about responses to them

Answer 57

* Monitoring ongoing activities (i.e. supervision) * The actions of internal auditors * Consideration of communications from external parties (i.e. customer complaints)

Answer 58

* Physical and hardware components * Software * People * Procedures * Data

Answer 59

* The entity and its environment * Sources of information given about the understanding * Risk assessment procedures performed **Identifying specific controls relevant to management assertions is not part of the documentation**

Answer 60

The auditor is required to have an understanding of each of the five components of internal control when evaluating the design of controls

Answer 61

* Operating effectiveness evaluation * Test of controls are used primarily for an audit of an issuer

Answer 62

Substance rather than form because management may establish the internal control, but not enforce them.

Answer 63

* Inquiries * Observations * Inspection of documents and reports * Tracing transactions

Answer 64

* Determine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented * Assess the risks of material misstatement * Design further audit procedures * Evaluate the operating effectiveness of relevant controls.

Answer 65

* Processes used to prepare significant accounting estimates * Classes of significant transactions * How the transactions are recorded * If the transactions are electonric or manual * How the transactions are captured * Controls over journal entries

Answer 66

* A system flowchart shows the overall view of inputs, outputs and processes of a system * A program flowchart shows specific steps in regarding to a computer program

Answer 67

* Controls over operations are effective and efficient * The procedures used to acquire, test, develop, etc. * Access of the equipment and data * Documenting and approving programs and changes to programs * Control over data center and network operations * Systems software acquisition and maintenance * Access security * Application system acquisition, development, and maintenance.

Answer 68

* Understanding of internal control to evaluate the design of relevant controls and determine if they have been implemented. * Knowledge about the design and implementation of relevant internal controls should be used to identify types of misstatements that could occur * The auditor is interested in the design of the control and whether the control has been placed into operation at the entity

Answer 69

* The auditor is not attempting to determine whether the control is effective * The auditor's understanding is not established to design risk assessment procedures * Analtyical procedures are not used to demonstrate an auditor's understanding of the client's internal control * The auditor does not search for significant deficiencies

Answer 70

* Flowcharts are useful for systems development * For understanding, evaluating and documenting an entity's internal control

Answer 71

1. Customer: Places Order 2. Sales: Sends order for credit approval 3. Credit Department: Approves credit for order 4. Sales: Sends acknowledgement of approved order to customer 5. Inventory Warehouse: After receiving approved credit, sends goods to shipping. 6. Shipping: After receiving approved credit order, ships the product, with a BOL and packing slip to the customer. 7. Billing: After receiving the approved credit order, BOL and packing slip, creates an invoice. 8. Accounts Receivable: Records the invoice in the A/R file 9. General Ledger: The invoice is recorded in the Daily Invoice Summary and posts the General Ledger File 10. General Ledger is reconciled with the A/R file and inventory records.

Answer 72

1. Customer: Sends a check for payment with the remittance advice. 2. Mailroom: Creates a remittance listing 3. Cash Receipts: Receives the remittance listing and checks and prepares the deposit slips and deposits the checks at the bank. 4. Accounts Receivable: Receives the remittance listing and records in the A/R file. 5. Controller: Receives the remittance listing and updates the General Ledger File. 6. Bank: Deposits the checks and provides a validated deposit slip. 7. Controller: Compares the remittance listing with the validated deposit slip

Answer 73

* Confirms valuation, accuracy and allocation * The credit approval provides proof that the account receivable is collectible.

Answer 74

* Cash * Trade Receivables * Other Receivables * Allowance for Credit Losses * Sales * Sales Returns * Credit Loss Expense

Answer 75

* The billing department supervisor matches prenumbered shipping documents with entries in the sales journal * Compare shipments with the sales journal

Answer 76

* Because the shipping file or shipping documentation would provide the best evidence of a sale or transaction occurring * All other areas (i.e. customer file, invoice) occur after a shipment was made

Answer 77

* The open accounts receivable records are maintained in the customer's account ledger * Reviewing the customer's account ledger will provide evidence that uncollected items in the customer's account are valid receivables

Answer 78

Whether all cash receipts are kept and recorded.

Answer 79

* Bank lockbox system * Daily reconciliation of cash discounts and cash receipts * Surveillance system over the cashier

Answer 80

* A field check tests the characters to verify that they are the correct type for that field * A validity check tests the relationships among other items and other parts of the system (i.e. Customer #1272 is included in the customer file)

Answer 81

1. Inventory Control: Authorizes a purchase requisition to the purchasing and accounts payable departments. 2. Purchasing: Creates a purchase order based on the requisition with the approved vendor. 3. Receiving: Receives a blind copy of the purchase Order 4. Vendor: Receives the purchase order 5. Vendor: Ships Goods 6. Receiving: Receives the goods and compares the information on the packing slip with the purchase order 7. Receiving: Creates a receiving report 8. inventory Control: Updates inventory records based on receiving report. 9. Accounts Payable (Vouchers Payable): Receives receiving report and enters information in the A/P file for payment.

Answer 82

* The responsibilities of all parties involved * The messages that will be initiated * How the messages will be interpreted * Means of authenticating and verifying the completeness and accuracy of the messages * The effective date of the contract * The required level of security

Answer 83

* The benefits of preventive controls outweigh the costs * The opportunity to apply detective controls is limited once a transaction has been processed * Preventitive controls prevent fraud or error

Answer 84

* Time tickets should specifically identify labor hours as direct or indirect * Compare daily journal entries with the factor labor summary

Answer 85

* Design is evaluated to determine whether a control can effectively prevent, or detect and correct, material misstatements * A deficiency occurs when an unapproved change to the data was made after the data was approved (i.e. changing time worked after timecards have been approved)

Answer 86

* A data dictionary is a file which the records relate to specified data items. * It contains definitions of data records, files and the list of programs used to access and process the data. * Permission is required to retrieve data or modify data items

Answer 87

* The payroll register file because it contains each payroll transaction for each employee. * An entry in the payroll register is reconciled to time cards to test if the recorded transaction actually occurred.

Answer 88

* Written policies for capitalization and expenditure * Review of application and depreciation methods * Proper authority for acquisition and retirement of assets * Detailed property records * Physical controls over assets * Using budget to forecast * Control acquisitions and retirements

Answer 89

* All purchases of factory equipment are required to be made through the purchasing department * It is not made through the department needing the equipment

Answer 90

An approved authorization determines that the materials are obsolete and unusable for normal purposes

Answer 91

* Inquiries of personnel * Observations of activities and operations * Review entity's documentation of controls, including policies and procedures

Answer 92

* Prenumbered requisitions should be examined for proper authorizations, quantities, descriptions and dates * Reperformance of relevant activities and client controls * Examining material requisitions

Answer 93

Compares the securities in the safe-deposit box with the recorded investments

Answer 94

* When the auditor has an expectation of the operating effectiveness of internal control; OR * Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.

Answer 95

* The auditor believes that the controls are likely to be ineffective * Performing only substantive procedures would effectively reduce audit risk to an acceptably low level

Answer 96

* Testing the operating effectiveness of the relevant control may not be efficient * Testing the control may be inefficient * Risk assessment procdures may not have identified effective controls regarding the assertion * Testing the operating effectiveness of control may be inefficient

Answer 97

From Least to Most: * Inquiry (Combined with other audit procedures i.e. observation and inquiry, etc.) * Observation * Inspection of relevant documentation * Reperformance of a control. Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.

Answer 98

Dual-purpose testing involves performing: * A test of details * A test of controls on the same transaction. Tests of controls are used to determine whether controls are operating effectively.

Answer 99

Test of Controls: Testing that controls are operating effectively Test of Details: Testing for specific management assertions

Answer 100

* The auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels to design and perform further audit procedures * Tests of details are substantive procedures * They should be performed for all relevant assertions related to each material transaction class, balance, and disclosure * The auditor’s objective is to obtain sufficient appropriate evidence to form an opinion on whether statements are materially misstated

Answer 101

* Assessment of RMM at the financial statement level * The auditor's overall response

Answer 102

* Test of details * Analytical procedures Substantive procedures should be performed for significant transaction classes. Regardless of the assessed RMM.

Answer 103

Reperformance Observation

Answer 104

* Over a period of time (i.e. a year): The auditor may be able to rely on the control * At a point in time (i.e. interim): The auditor will need to include other tests

Answer 105

Because observation is only for a point in time -- when the auditor is watching the process.

Answer 106

* To restrict detection risk for significant transaction classes * The auditor should design and perform substantive procedures for all relevant assertions related to each material transaction class, account balance, and disclosure

Answer 107

* Professional skepticism * Increased supervision * Assignment of staff with more experience and expertise * Greater unpredicability of audit procedure choices * Changing nature, timing and extent of audit procedures

Answer 108

* Assigning more experienced personnel and individuals with special skills * Increasing supervision * Emphasizing professional skepticism * Modifying procedures to obtain more persuasive evidence.

Answer 109

Advantages * The transactions from throughout the period may be processed and the results can be compared with the client’s results. * Provides Assurance that edit checks have been applied during the period. Disadvantages * Cost of obtaining the program and the coordination effort required to obtain transactions to reprocess.

Answer 110

Advantages * It tests the actual program in operation. Disadvantages * It requires considerable coordination. * The dummy transactions must be purged prior to internal and external reporting.

Answer 111

Advantages * This approach directly tests specific controls. Disadvantages * It Tests Processing at only one moment in time, but not the system used throughout the year.

Answer 112

Advantages * It permits continuous monitoring of online, real-time systems. Disadvantages * Audit hooks must be programmed into the operating system and applications program.

Answer 113

* ITF requires the auditor to create a dummy record within the client’s actual system * Test data approach has the auditor create a set of dummy transactions for testing

Answer 114

* Board of Directors * Audit Committee

Answer 115

* Purpose of the Audit was to report on the financial statements, not to provide assurance on internal control * Definition of Significant Deficiency * Definition of Material Weakness * Report of any significant deficiencies or material weaknesses * **Restricted Report**

Answer 116

* A control deficiency may arise either in the design or operation of a control. * It is the lowest level of deficiency identified in the standards.

Answer 117

* Operating effectiveness relates to how and by whom the control (manual or automated) was applied and the consistency of application. * A control that is not implemented, no matter how well designed, is ineffective absent the mitigating effect of compensating controls. Furthermore, the control risk is high for all other controls. * A properly designed control does not function as designed

Answer 118

* The evaluation of design considers whether a control (alone or with others) can effectively prevent, or detect and correct, material misstatements. * An improper design may be a significant deficiency or material weakness in internal control that the auditor should communicate to management and those charged with governance. * The lack of a control that provides documentation for invoices is a failure of design, not an operating issue.

Answer 119

* Disagreements with management that have been satisfactorily resolved * Initial selection of significant accounting policies in emerging areas that lack authoritative guidance

Answer 120

The auditor should refer any immaterial fraud to the appropriate level of management for their action

Answer 121

* Walkthroughs are the most effective way of achieving the objective of tests of controls * The auditor follows a transaction from origination to being reported on the financial statements

Answer 122

* Inquiry * Observation * Inspection of relevant documentation * Reperformance of Controls

Answer 123

* When a material weakness is discovered * The auditor believes that the internal control is not effective

Answer 124

* The auditor obtains an understanding of the overall risks at the financial statement level * The auditor then performs procedures on significant classes of transactions, account balances, disclosures, and their relevant assertions

Answer 125

* Control environment * Controls over management override * Monitoring results of operations * Controls over period-end financial reporting process * Monitoring other controls * Risk assessment process

Answer 126

* An auditor is not responsible for including a reference to the service provider's report if the service auditor was not responsible for examining any portion of the user entity's financial statements. * If the user auditor’s opinion is modified, the service auditor’s work may be referred to if it is relevant to understanding the modification

Answer 127

If the user auditor is unable to obtain a sufficient understanding of the controls of the user entity, the auditor may use either a SOC 1 Type 1 or SOC 1 Type 2 report.

Answer 128

* A service auditor’s report should be helpful in providing a sufficient understanding to plan the audit of the user organization. * The service auditor’s report may express an opinion on the fairness of the description of the controls implemented at the service organization and whether they were suitably designed. * If the service auditor also has tested controls, the report may express an opinion on the operating effectiveness of the controls.

Answer 129

**SOC Type 1** * Includes a disclaimer of opinion related to the operating effectiveness of internal controls * Reports at a specific point in time * Further audit testing is required by the user auditor **SOC Type 2** * Reports on the design and **operating effectiveness** of internal control * Report is based **over a period of time** * The user auditor can reduce its overall control risk assessment

Answer 130

* The user auditor should not refer to the service auditor if the user auditor issued an unmodified report * The user auditor may refer to the service auditor if the user auditor modifies the opinion because of a modified opinion by the service auditor

Answer 131

* Competence of the engagement team and external specialists * Ability to perform the engagement in accordance with the relevant standards and legal and regulatory requirements. * Ability to issue an appropriate practitioner’s report.

Answer 132

The auditor should determine whether management has adequately described complementary user controls

Answer 133

* Reperformance is the independent execution of procedures or controls * An example of reperformance is developing an aging schedule

Answer 134

* Observation * Inspection * Visits to premises and facilities

Answer 135

* The evidence must be sufficient and appropriate * Appropriate evidence is relevant and reliable in supporting the conclusions to base the opinion

Answer 136

* Direct observation is the most reliable * Inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control

Answer 137

* Income statement audit deals with the verification of transactions * Balance sheet audit deals with verification of account balances

Answer 138

* Obtained from independent sources * Generated internally under effective internal control * Is obtained directly by the auditor * Is in documentary form, whether paper, electronic, or other medium * Consists of original documents

Answer 139

* Unreturned negative confirmation requests rarely provide significant evidence about assertions other than certain aspects of existence. * Unreturned negative confirmations do not provide explicit evidence that the intended parties received the requests and verified the information provided.

Answer 140

* If there are no replies to negative confirmations, then it is assumed that the customer agrees with the balance. * However, this may not be the case the majority of the time because no auditor follow-up occurs. * Unreturned negative confirmation requests rarely provide significant explicit evidence.

Answer 141

* When the acceptable audit risk is high * The assessed risk of material misstatement is low * A small number of accounts may be in dispute * When many small balances are involved * A very low exception rate is expected * The auditor has no reason to believe that the recipients of the requests are unlikely to consider them * The auditor has obtained sufficient appropriate evidence about the effectiveness of relevant controls

Answer 142

* To reduce the risk that recipients will respond without verifying the information * It may be ineffective because of the lower response rate due to additional information needs to be completed by the recipient

Answer 143

* The assessed RMM is high * The auditor should consider confirming the terms of the transaction with the third parties in addition to examining documents

Answer 144

* Rights and Obligations * Existence

Answer 145

Because customers may not report underestimated amounts

Answer 146

* The appropriate audit tasks for personal computer applications * The appropriate software to perform the selected tasks

Answer 147

Information stored on computer files can be accessed by an auditor who does not have a lot of understanding about the client's hardware or software.

Answer 148

* The auditor should determine the effects on the allowance for doubtful accounts * Expand tests of collectibility * The verification of the allowance for doubtful accounts ensures that receivables are fairly presented at their net realizable value in the balance sheet and that credit loss expense is fairly stated in the income statement.

Answer 149

* External confirmation of accounts receivable by sending requests to customers tests for existence. * They must be confirmed unless: 1. They are immaterial 2. Confirmation would be ineffective 3. The assessed risk of material misstatement is low and other procedures address the risk.

Answer 150

The auditor should review supporting documents for new large balances occurring after the interim date

Answer 151

* Completeness: Trace items on the daily remittance list to the last validated deposit ticket for the period * Existence: Counting Cash * Cutoff: Inspecting and tracing items on daily remittance lists for several days before and after period end * Occurrence: Vouching cash receipts to accounts receivable and customer orders

Answer 152

* Kiting is the recording of a deposit from an interbank transfer in the current period while failing to record the related disbursement until the next period. * This fraud exploits the lag (float period) between the deposit of a check in one account and the time it clears the bank on which it is drawn.

Answer 153

To determine if cash balances were overstated because of kiting.

Answer 154

* Preliminary judgments about materiality levels * The smaller the levels of materiality, the larger the sample size

Answer 155

* Cash in bank * Collateral for loans

Answer 156

Vouching accounts payable to supporting documentation

Answer 157

* Inspection of receiving and issuing procedures in order to disclose for unrecorded liabilities * Shipping orders and receiving reports that are not reflected in the records suggest that transactions are not being properly recorded.

Answer 158

* Examining cash disbursements made after the balance sheet date and comparing them with the accounts payable trial balance * Sending confirmations to vendors with small and zero balances * Reconciling payable balances with vendors’ documentation * Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices * Trace subsequent payments to recorded payables is a primary procedure to match payments (checks issued) after year end with the related payables

Answer 159

* Reading of the minutes * Analysis and recomputation of interest expense * Mailing of bank confirmation forms

Answer 160

Review the vendor invoices to trace them to the receiving report

Answer 161

* Tracing from the schedule to the inventory tags and ultimately to the auditor’s count sheet. * Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets.

Answer 162

Reconciliation of detailed inventory records with the inventory count taken.

Answer 163

Vendor invoices because the information includes: * Items purchased * Amount due * Payment terms

Answer 164

If there are large debits to accounts receivables and small periodic credits.

Answer 165

The auditor vouches the quantities recorded in the work-in-process by examining the documents for material requisitions.

Answer 166

* Vertical Analysis * Non-financial information (i.e. volume of goods) * The inventory turnover ratio

Answer 167

* The auditor should become satisfied by performing alternative audit procedures. * Attending a year-end inventory count is obviously impractical when the entity measures its inventory using statistical methods. * The auditor is required to attend and observe at least some counts and should evaluate whether the methods applied and results are appropriate.

Answer 168

* Tracing a sample of tags to the physical inventory listing to ensure that the tagged items are included in the listing * Tracing the details of test counts to the final inventory schedule

Answer 169

* Perform extensive tests of current year property and equipment transactions * The auditor also may not rely on controls after obtaining an understanding of internal control

Answer 170

To obtain evidence that expenditures for property and equipment that should be capitalized are not charged to expense.

Answer 171

Select equipment recorded in the accounting records and locate them on the floor.

Answer 172

* Equipment that was sold or disposed of * The life of an asset has been lengthened

Answer 173

The auditor will evaluate the propriety of the interest rate used in discounting the future lease payments.

Answer 174

The auditor should vouch items from the accounting record and locate the physical assets

Answer 175

* Test for completeness assertion: 1. Inspect the property 2. Inspect insurance and tax records 3. Tour client facilities * Select items from accounting records and locate them during the plant tour

Answer 176

* The auditor should examine the collateral estimate its fair value * The auditor may refer to publish data to obtain current market quotes

Answer 177

* Analytical procedures * Applying an expected rate of return to the net investment amount

Answer 178

* Inspect documents * Physically examine assets * Inspection of deeds, lease agreements, insurance policies, invoices, canceled checks, and tax notices

Answer 179

* An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount. * The transaction to record the amortization is a recurring entry that, if miscalculated, could result in a lower return than expected

Answer 180

Using analytical procedures to estimate the total investment income.

Answer 181

* The auditor should examine the collateral and estimate its fair value to determine the reasonableness of the arrangement. * The auditor may refer to published data such as current market quotations to determine the value of securities.

Answer 182

* Recomputing the interest earned on the basis of face amount, interest rate, and period held * The auditor may use information from bond certificates (interest rates, payment dates, issue date, and face amount) to recalculate bond interest earned * The amount includes uncollected accruals

Answer 183

* Multiply the average outstanding loan balance by the interest rate and Compare the result to the interest expense recorded * The debt-to-equity ratio, which equals total liabilities divided by total equity, also can be calculated and compared with previous periods

Answer 184

The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue, which includes: * Determine that all noncurrent debt has been recorded and constitutes bona fide liabilities * Verify that federal and state laws relevant to financial reporting have been complied with * Determine that premium, discount, interest payable, and interest expense are accurately recorded * Monitor compliance with debt contracts * Review proper presentation and disclosure in the financial statements.

Answer 185

* Confirmation with the bond trustee * The auditor should verify bond-sinking fund transactions with the trustee

Answer 186

* The recorded interest expense should reconcile with the oustanding bonds payable * If the interest expense is overstated, then an unrecorded noncurrent liability may exist

Answer 187

* The auditor should test closing entries to determine whether net income has been closed to retained earnings * This assures that net income was properly closed to retained earnings will help an auditor determine whether retained earnings is valued correctly

Answer 188

* That all capital stock transactions are properly authorized * All entries in the capital stock account should be traced to the minutes of the board of directors’ meetings * The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed

Answer 189

* Apply analytical procedures * Recalculate payroll accruals * Compare payroll costs with entity standards or budgets

Answer 190

* Compare clock cards with shop job time tickets * The job tickets, which contain the total hours worked on each job, should not vary significantly from the employee time cards used to compute payroll

Answer 191

* Recalculating benefits for selected participants based on the plan provisions using relevant service and salary history to support the recorded benefits paid to the participants * Inquiries of management about pension benefit agreements * Comparison of general ledger and financial statement balances * Recalculation of pension costs

Answer 192

* Verify that employees work the hours for which they are paid * Vouch a sample of employees in the payroll register to approved clock data

Answer 193

* Without Merit = No additional clarification necessary * Action will not result = No additional clarification necessary * Nominal in amount = No additional clarification necessary **Problems establishing liability = Clarification needed Settled for less than damages claimed = Clarification needed** **Meritorious defenses to this action = Clarification needed**

Answer 194

To corraborate the information furnished by management about litigation, claims and assessments

Answer 195

* External counsel refuses to respond to the letter of inquiry * Management refuses permission for the auditor to contact legal counsel * The legal counsel response specifically excludes information on a pending legal matter because of publicity concerns

Answer 196

* The response may be limited to matters to which the legal counsel has given substantive attention in the form of legal consultation or representation. * The response may be limited to matters that the entity and the auditor have agreed on materiality limits, and management has stated the limits in the letter of inquiry

Answer 197

* Reading the latest subsequent interim statements, if any * Inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters * Reading the minutes of meetings of owners, management, and those charged with governance * Obtaining a letter of representations from management * Inquiring of legal counsel * Obtaining an understanding of management’s procedures for identifying subsequent events.

Answer 198

* If the account was current in the reporting year, then the bankruptcy would be disclosed and no adjustment needed. * If the account was reported as aged, or already impaired, then the financial statements are adjusted and a disclosure is made

Answer 199

* The auditor should notify management and those charged with governance that the auditor will seek to prevent future reliance on the auditor’s report. * If, despite such notice, management or those charged with governance do not take the necessary steps, the auditor should take appropriate action to prevent reliance on the auditor’s report

Answer 200

A disclosure is made in the pro-forma financial statement presentation in the balance sheet footnotes

Answer 201

* Convertible bonds do affect interpretation of the financial statements * The do not require and adjustment to the financial statements, but they do require a disclosure in the notes

Answer 202

* Obtain certain written representations from management * These written representations confirm certain matters or to support other audit evidence * They do not include financial statements, the assertions in them, or supporting books and records * They complement other audit procedures but do not provide sufficient appropriate evidence or affect the other procedures (i.e. subsequent events)

Answer 203

* Acknowledgment of its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud * Knowledge of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others if the fraud could materially affect the financial statements * Knowledge of allegations of fraud or suspected fraud affecting the entity obtained in communications from employees or others * Aspects of contracts that may affect the statements, including noncompliance (i.e. contractual agreements) * All transactions have been recorded in the accounting records * Discontinuing a line of business

Answer 204

* Materiality limits are usually set by the auditor in order to efficiently perform the audit * Materiality limits would ordinarily apply to related party transactions

Answer 205

* Analytical procedures * Review of subsequent events * Review of compliance with debt and loan agreements * Reading minutes of meetings * Inquiry of legal counsel * Confirmation with related and third parties of arrangements for financial support.

Answer 206

* Plans to dispose of assets * Borrow money or restructure debt * Reduce or delay expenditures * Increase equity * Negotiate reductions in required dividends being paid on preferred stock * An uninsured or underinsured catastrophe * Internal work stoppages * Litigation, legislation, or similar matters jeopardizing operating ability * Loss of a key franchise, license, or patent * Loss of a principal customer or supplier

Answer 207

Using assets as collateral is very common in everyday business (i.e. a building is used as collateral for the mortgage)

Answer 208

**Sampling for Attributes** * Used for testing of controls * Actual deviation rate > Tolerable **deviation rate** = Increased Risk * Overreliance/Underreliance * Effectiveness of Controls * Assessing control risk to low **Sampling for Variables** * Used for testing of details * Actual Misstatements > Tolerable **Misstatements** = Increased Risk * Incorrect Acceptance/Incorrect Rejection * Efficiency of Controls * Assessing control risk too high

Answer 209

* That the auditor's conclusion based on the sample may be different in the population. * This would cause an erroneous conclusion

Answer 210

Produces an estimate having a desired level of precision with a smaller sample size

Answer 211

Does the conclusion only effect the sample? = Sample Risk Does the conclusion effect past the sample? = Non-Sampling Risk

Answer 212

* The deviation rate in the auditor's sample is greater than the tolerable popular deviation rate * The deviation rate in the population is less than the tolerable population deviation rate

Answer 213

The population variability of difference or ratios are less than the populations of carrying amounts or audited values.

Answer 214

Every time in the population has equal, or known, and non-zero probability of being chosen.

Answer 215

Auditor's sample deviation rate > the tolerable misstatement True deviation rate < the tolerable misstatement

Answer 216

* It is not determined mathematically * The auditor's judgment is used to determine sample size and results (i.e. auditor selected inappropriate audit procedures)

Answer 217

When the calculated audit amounts are approximately proportional the the client's carrying amounts

Answer 218

Auditor's sample deviation rate < the tolerable misstatement True deviation rate > the tolerable misstatement.

Answer 219

* Population size * Overreliance Risk * Expected deviation rate * Tolerable deviation of the population rate

Answer 220

The number of times a certain characteristic occurs within the population

Answer 221

Achieved upper deviation limit (Sample deviation rate)

Answer 222

* Variables sampling is used to estimate quantities or dollars in substantive testing * An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling * For example, an estimate whether the dollar amount in inventory is reasonable

Answer 223

* In monetary-unit sampling, the auditor can measure can control risks associated with observing less than 100% of the population. * The auditor can then measure the risk of accepting the recorded amount as fair, even though it may be materially misstated.

Answer 224

Because each invoice has a probability proportional to its **monetary** value of being selected

Answer 225

The auditor may refer to these notes either in the Emphasis of Matter or Other Matter sections of the Auditor's Report

Answer 226

* The first paragraph identifies the titles of the financial statements. * Identifies the applicable financial reporting framework and its origin (i.e. GAAP, OCBOA).

Answer 227

A critical audit matter (CAM) is any matter resulting from the audit of the financial statements that: * Is either communicated, or must be communicated to the audit committee. * Relates to material accounts and disclosures (i.e. possible material loss). * Involves challenging, subject or complex auditor judgement. * A possible material loss due to an uncollectible receivable

Answer 228

When the event occurs after the date of the auditor's original report.

Answer 229

* Those charged with governance (i.e. Board of Directors, Audit Committee) * Audited entity

Answer 230

* The event occurs after the date of the auditor's original report * The auditor does not need to do any additional procedures on the note * The event is included in a separate note and is labeled unaudited

Answer 231

* A subsequent event was discovered after the audit report was released * The auditor is only responsible for the subsequent event that was discovered

Answer 232

There is substantial doubt about the going concern of an entity, and the concern is not disclosed in the financial statement.

Answer 233

A qualified opinion is issued when: * There is a material misstatement related to specific amounts in the financial statement that is not pervasive. * Circumstances not controlled by the entity * Circumstances related to the nature or timing of work due to the late engagement. * Limitations imposed by management. * Unjustifed change in accounting principle * Scope limitation * Omitting a financial statement from the audit (i.e. Statement of Cash Flow).

Answer 234

* The auditor is unable to obtain sufficient appropriate evidence that would confirm that the financial statements, as a whole, are free from material misstatement. * A refusal from the client's attorney to provide a letter of inquiry would cause a qualified or disclaimer to be issued.

Answer 235

* The auditor complies with all regulations of the audit * The audit is feasible * The auditor can perform procedures on unrelated items

Answer 236

* Qualified or disclaimer, depending on pervasiveness * Auditor is unable to obtain sufficient audit evidence

Answer 237

* The basis of opinion changes to "Basis for Adverse Opinion" * The section will include a statement that “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion.”

Answer 238

The auditor should disclose the departure in the disclaimer, including its effects if they have been determined by management or by the accountant’s procedures.

Answer 239

* The auditor cannot obtain sufficient appropriate evidence, which results in the financial statements being materially misstated and pervasive. * A scope limitation that results from circumstances not controlled by the entity. * A scope limitation because of circumstances related to the nature of timing of the work (i.e. unable to confirm beginning inventory). * A scope limitation due to limits imposed by management * The auditor is unable to determine information due to an employee fraud scheme

Answer 240

* An unreasonable justification for a change in accountin principle * Related party transactions are not disclosed in the financial statements * Financial statements contain a material misstatement

Answer 241

* The group engagement team should have an understanding of the component auditor's professional competance and compliance with ethical requirements. * Confirm that the component auditor meets the same ethical requirements as the group engagement team.

Answer 242

* The group auditor should obtain the component auditor's audited financial statements. * The group auditor should make inquiries regarding the component auditor's professional reputation and independence.

Answer 243

* If the auditor concurs with the change, a separate paragraph is required * If the effect of the change is not material to the financial statements, then the change is not referred to in the auditor's report

Answer 244

* The change is reported prospectively as a change in principle. * The change is recognized in the auditor's report as to consistency. * If the change results prior period adjustments that will cause material misstatement in prior financial statements, then the opinion will be either qualified or adverse.

Answer 245

* The new principal and the method of accounting are in accordance with the reported framework. * Appropriate disclosures are made * The entity has justified that the change is preferable.

Answer 246

Either an adverse or qualified opinion

Answer 247

* A change in specific subsidiaries * Correction of a mistake in the application of accounting principle * Change from an accounting principle from non-GAAP to GAAP

Answer 248

If a change in principle is not material to the financial statements, then the auditor does not refer to the change in the current-year report.

Answer 249

Disclosed in the notes to the financial statements

Answer 250

The auditor's report should include an emphasis-of-matter paragraph that describes the change.

Answer 251

Management is responsible for estimating what future effects will have with regard to the financial statements.

Answer 252

If the auditor agrees that there is a remote likelihood of a material loss that was from an uncertainty

Answer 253

A scope limitation involving a recorded uncertainty

Answer 254

* The prior year's financial statement were auditor by another auditor (**do not** provide the auditor's name). * The date of the report * The type of opinion expressed * The reason for any modifications * The nature of any emphasis-of-matter or other-matter paragraph

Answer 255

The auditor updates the report on the previous financial statements, regardless of the opinion previoulsly expressed.

Answer 256

* The date of the report is based on the most recent audit. * The auditor dates the report no earlier than the date the auditor obtained sufficient appropriate evidence for the opinion of the most recent audit.

Answer 257

* An event that has, or will have, a significant effect on the entity's financial position (i.e. a departure from GAAP to prevent missleading reports). * A material change in an accounting principle occurs * An uncertainty related to a future outcome (i.e. litigation) * Significant transactions with related parties * Unusually important subsequent events * A major catastrophe that has a significant impact on the financial position

Answer 258

An Other-Matter paragraph is used for unaudited prior-period statement.

Answer 259

Under PCAOB, an emphasis paragraph is * Never required * Not a substitute for Critical Audit Matters (CAM) * Not referred to in the opinion section

Answer 260

* To determine if there are any material misstatements that should be made to the financial statements. * It provides the auditor with a basis for reporting whether material modifications should be made in order to conform * The review provides negative assurance * Independence in required

Answer 261

A modification of a review of interim financial information would be made if there is a departure due to inadequate disclosure, and the auditor believes that if it's feasible, it should be included in the report.

Answer 262

* Reading documentation of the prior audit and prior reviews * Reading recent annual information and prior interim financial reviews * Consider current audit results * Ask management about any changes in business or internal control. * If it's an initial review, make inquiries of the predecessor auditor and review their documentation. * If it's an initial review, obtain knowledge of the relevant information.

Answer 263

The auditor should request management to revise the letter of transmittal. If management refuses to revise the other information * Communicate the matter to those charged with governance * Include in the description of Other Information section of the auditor's report * Withhold the auditor's report * Withdraw from the engagement

Answer 264

* Read the other information and determine of there are any material inconsistencies with the audited statements. * Determine that the other information is separate from the required supplementary information (RSI) * To respond if there are statements that would undermine the credibility of the auditor's report

Answer 265

Other information contains financial and nonfinancial information that are not reported on the audited financial statements. Examples include * Annual Report to Owners * Management Report on Operations * Selected Quarterly Data * Financial Summaries

Answer 266

The auditor should read the Other Information section to consider if there are: * Any material inconsistencies between the Other Information section and the financial statements * A material misstatement of fact exists * The information is misleading

Answer 267

The RSI is reported in a separate paragraph after the opinion section, and should be added if * The RSI is not omitted * Presecribed guidelines are followed * Required audit procedures are completed * Limited procedures are performed to report any omissions or deficiencies.

Answer 268

A section after the opinion paragraph is added for the RSI * RSI reference and the applicable reporting framework. * Statement that the RSI is the responsibility of Management * Statement that the auditor has applied procedures in accordance with GAAS * Statement that the auditor does not express an opinion or provide any assurance on the RSI

Answer 269

* Inquire if RSI within the prescribed guidelines * Whether methods of measurement or presentation have changed and the reason for the change * Any significant assumptions or intepretations * Compare the RSI for consistency with the basic statements * Obtain management's written representation to its responsibilities to the RSI and compliance with guidelines

Answer 270

The materiality level used for the audit of the financial statements

Answer 271

* Auditor must determine that the supplementary information is based on the underlying records that are used to prepare all of the financial statements * Information relates to the same period as the financial statements. * Financial statements were audited * Auditor's report did not express an adverse or disclaimer of opinion * Supplementary information will be presented with the audited statements or be made readily available without any additional changes made by management. * An auditor is not required to perform subsequent event procedures on Supplementary Information.

Answer 272

* Understand the methods of preparation * Inquiring about the purpose and criteria for the supplemental information * Inquiring about significant assumptions

Answer 273

* Preparing SI in accordance with applicable criteria * Providing written representations * Including the auditor’s report on the SI with the SI and the audited statements

Answer 274

* Determine whether the summary statements agree with the related information in the audited statements. * Determine that information in the summary statements can be recalculated based on the related information in the audited statements * Comparing the summary statements with the related information in the audited statements * Evaluate whether the summary statements are prepared in accordance with the applied criteria applied by management * Obtain a representation letter from management

Answer 275

* The auditor audited the statements from which they are derived. * The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria.

Answer 276

* An emphasis-of-matter paragraph identifying the reporting framework used in the preparation of the financial statements * An emphasis-of-matter paragraph indicating that the framework differs from accounting principles generally accepted in the U.S. * The auditor should report using the U.S. form of report

Answer 277

* Use other professional experts, if required * Obtain an understanding of the conditions that are needed to issue the report * Review the relevant requirements of the framework

Answer 278

* By an accountant in public practice * Applies to an actual transaction given specific facts and circumstances of a specific entity. * Addresses whether a reporting framework applies to a proposed transaction involving facts or circumstances of a specific entity. * Addresses how a completed transaction of a specific entity may be accounted for under the existing reporting framework. * Does not apply to a current, or continuing, auditor * Independence is not required, but must disclose the lack of independence

Answer 279

If the auditor believes that the statements are not suitably titled. * The auditor should disclose any reservations in a basis for qualified opinion section. * The auditor will qualify the opinion.

Answer 280

* Preparation is a service to prepare financial statements without attaching a report or determining whether the accountant is independent. * A preparation of financial statements include preparation of Personal Financial Statements for presentation with a financial plan. (i.e. completing a personal financial statement to obtain a mortgage).

Answer 281

* The other historical or prospective financial information is adapted as necessary in the circumstances * Prospective financial statements may be prepared and compiled, but not reviewed

Answer 282

A disclosure would be placed on the face of the financial statements.

Answer 283

* A preparation service allows the accountant to generate financial statements and release them to the client or third parties without a report. * Each page should stated that the prepare provides no assurance. * Independence is not required, and does not need to be reported to management

Answer 284

* Management's agreement about certain matters * It acknowledges and understands its responsibilities * Accuracy and completeness of records * Significant judgments it provides for the preparation of the financial statements

Answer 285

* A statement on each page that no assurance is provided * The agreed-upon terms of the engagement should include identification of the applicable financial framework to be used * The engagement documentation should include the engagement letter and a copy of the prepared financial statements

Answer 286

* When an accountant in public practice is engaged to prepare financial statements * The determination of whether the accountant has been engaged to prepare financial statements depends on the services requested * Assisting the the preparation is not applicable

Answer 287

* Prospective financial information * Proforma financial information * Other historical financial information

Answer 288

A compiliation report with special wording that notes the accountant's lack of independence

Answer 289

* To apply accounting and financial reporting expertise to assist management in the presentation of financial statements * **No assurance is provided**

Answer 290

* For a review, an accountant expresses a conclusion, not an opinion. An opinion is issued for audits. * The accountant expresses limited assurance on the financial statements * A review is substantially less in scope than an audit * “...not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.”

Answer 291

If the prior-period report is not reissued, a separate paragraph is added to the review report indicating: * The prior-period statements were audited * The date of the previous report * The opinion expressed * The substantive reasons if the opinion was not unmodified * No audit procedures were performed after the date of the previous report

Answer 292

* The accountant would express a modified conclusion. * On the review report, the accountant would create a heading titled "Qualified Conclusion or Adverse Conclusion" * The accountant would describe the matter causing the conclusion under the paragraph, before the conclusion paragraph, titled "Basis for Qualified Conclusion" or "Basis for Adverse Conclusion"

Answer 293

* Read the financial statements to confirm that they conform with GAAP * Reconcile the financial statements with the accounting records * Obtain written representation from management * Comparison of current and prior year account balances * Compare current year budget to forecast * Industry benchmarks

Answer 294

* Business combination * Change in capitalization * Disposition of a signficant portion of a business * Change the form of a business * Proposed sale of securities and the application of the proceeds

Answer 295

* The accountant's objective is to assist management to present the pro forma financial information and to report it in writing withouth provide any assurances. * The PFFI may be compiled only if it is contained in a document that includes the financial statements on which they are based. * The statements must have been reviewed, compiled or audited in order to be included in the document. * No type of assurance is provided

Answer 296

The accountant must include a summary any significant assumptions with the PFFI, in addition to the complete financial statements that were used to compile the PFFI and the accountant's report.

Answer 297

* Complete financial statements * Report on the statements * Summary of Significant Assumptions with PFFI (If applicable)

Answer 298

* A description of the nature, timing and extent of the procedures performed. * Specific items or matters tested are identified * Who performed the work * The date the work was completed * Who reviewed the work * The date and extent of the review

Answer 299

* Independence is required for all attestation engagements * Have unresticted access to information that the practitioner considers necessary * Determine that the subject matter is appropriate * Expect to prepare a written report

Answer 300

* Obtain reasonable assurance about whether the subject matter, as measured or evaluated by certain criteria, is free from material misstatement. * Expresses an opinion about whether the subject matter is accordance with certain criteria, or the responsible party's assertion is fairly stated. * Communication is further required.

Answer 301

* For an assertion-based examination, the subject matter is based on responsible party's assertion. * For a direct examination, the practitioner's conclusion will evaluate directly, using suitable criteria, the subject matter for which the accountable party is responsible.

Answer 302

* The responsible party is responsible for the written letter of representations. * If the engaging party is not the responsible party, then the practitioner should obtain written representations from both parties.

Answer 303

* The auditor is independent * A statement referring to the standards established by the AICPA * All findings based on specific procedures performed on subject matter. * The procedures performed were agreed to by the engaging party * A statement that the report may be not suitable for othe purposes * The subject matter is the responsibility of the responsible party. * Any exceptions identified based on the procedures performed.

Answer 304

* The engagement party agrees that the procedures performed. * The engagement party acknowledges that the procedures performed are appropriate before a report is issued. * The subject matter is reasonably consistent * Evidence is expected to exist in order to provide a reasonable basis for the findings. * Other conditions are met

Answer 305

* Several significant assumptions do not provide a reasonable basis for the forecast. * Significant assumptions, including the summary of assumptions, are not disclosed in the presentation. * A practitioner should not examine a presentation that omits all disclosures

Answer 306

Projection * The practitioner may perform an examination. * The examination is for limited use by the enity and the party that is negotiating directly with the entity. Financial Forecast * General Use

Answer 307

* A financial projection is based on estimates of conditions that are be based on one or more hypothetical assumptions. * A financial forecast is based on assumptions based on conditions that are expected to exist and courses of action expected to be taken.

Answer 308

* Financial forecasts or projections. * Summaries of significant assumptions * Summaries of accounting policies

Answer 309

A presentation omits: * Sales or gross revenues * Gross profit or cost of sales * Unusual or infrequently occurring items * Provision for income taxes * Discontinued Operations * Income from continuing operations * Net income * Basis or diluted EPS * Significant changes in financial position

Answer 310

* Identification of pro forma information * Reference to the financial statements that were used * If the financial statements were audited or reviewed * That the review was made in accordance with AICPA standards * A review is substantially less in scope than an audit * No opinion is expressed * The objective of PFFI and its limitations * The practitioner's conclusion providing limited assurance

Answer 311

Pro Forma financial information uses historical financial information to show what might have been reported if the transaction or event occurred at an earlier date.

Answer 312

* Compliance with specified requirements (i.e. laws, regulations, rules, contracts, grants, etc.) * In an compliance engagement for agreed-upon procedure, effective of internal control over compliance with specified requirements. * Performance of procedures to provide reasonable assurance of detecting material noncompliance.

Answer 313

* Occurrence * Consistency * Completeness * Presentation and Disclosure

Answer 314

* Reported transactions, events and explanations consistent with the financial statements * Historical financial amounts are accurately derived from the statements and related records * Nonfinancial data have been accurately derived from related records.

Answer 315

* The MD&A is a written assertion that may be examined or reviewed by the practitioner. * Whether the historical financial statement amounts are accurately derived from statements and related records. * Reported transactions, events and explanations are consistent with the statements. * Nonfinancial data have been accurately derived from related records.

Answer 316

In relation to MD&A, control risk is the risk that material misstatements may occur because the entity's internal control did not detected the MD&A misstatement in a timely manner.

Answer 317

* Financial statement audit * Written report on internal control over financial reporting **The report on internal control provides does not provide an opinion**

Answer 318

Performance audits include economy and efficiency audits. Groups included in performance audits consist of: * Government entities, programs, activities and functions * Government assistance administered by contractors, not-for-profit entities and other nongovernmental activities.

Answer 319

* Program effectiveness and results * Economy and efficiency * Internal control * Compliance with legal requirements * Providing prospective analysis, guidance and summary information.

Answer 320

* A description of the scope of the auditor's testing of compliance with laws and regulations. * A description of significant deficiencies and material weaknesses in internal control **The report on internal control provides does not provide an opinion**

Answer 321

* Significant deficiencies and material weakness in internal control * Instances of fraud and noncompliance with provisions of laws and regulations that have a material effect on the audit, as well as cause attention to those charged with governance. * Noncompliance with provisions of contracts and grant agreements that has a material effect on the audit. * Abuse that has a material effect on the audit.

Answer 322

* The supervisory review of the evidence that supports the findings, conclusions and recommendations. * Departures due to law * Departures due to regulations * Any scope limitations * Restrictions on access to records * Views of responsible officials if their report discloses fraud * Any other issues

Answer 323

* Operate the audited entity’s information technology system * Perform internal audit services * Prepare accounting records

Answer 324

The falsification is communicated by the auditor to the auditee and the auditee fails to make a required report of the matter

Answer 325

* Reporting on the reliability of performance measures * Internal control over financial reporting * Compliance with requirements of specified laws, regulations, policies, contracts, or grants * MD&A

Answer 326

If the entity still does not report the noncompliance to the outside entity

Answer 327

* Identify the entity's government programs and understanding and complying with the compliance requirements. * Designing, implementing and maintaining effective controls over compliance * Evaluating and monitoring compliance * Taking necessary corrective action to ensure compliance * Consider whether management has identified the applicable compliance requirements

Answer 328

It occurs when a reasonable possibility that material noncompliance with a compliance requirement will not be prevented, or detected and corrected, on a timely basis

Answer 329

* The auditor's risk assessment includes an expectation of the operating effectiveness of controls related to the applicable compliance requirement (ACR) * Substantive procedures alone do not provide sufficience audit evidence. * Tests of controls are required by the governmental audit requirements (GAR)

Answer 330

* The emphasis of the audit is on major programs related to federal awards administered by nonfederal entities that expends $750,000 or more in federal awards in one fiscal year. * Audit is in accordance with GAO and OMB Requirements. * The auditor determines on whether a deficiency in internal control is a signficiant deficiency or a material weakness in relation to the type of compliance. * The auditor should identify all significant deficiences and material weaknesses.

Answer 331

* Activities allowed or unallowed * Allowable costs/cost principles * Cash management * Eligibility * Matching, level of effort, and earmarking * Reporting

Audit Flashcards

(373 cards)