1
Q
List the three factors, as indicated by the AICPA Tables, that determine attributes sample size.
A
- Expected error rate (related to the variation in population)
- Tolerable error rate (related to precision)
- Risk of over-reliance (Type II error rate)
2
Q
What matters must be documented by the auditor in connection with the evaluation of misstatements?
A
- The threshold for determining what is viewed as clearly trivial
- All misstatements accumulated during the audit (and whether they have been corrected)
- The auditor’s conclusion a to whether any uncorrected misstatements are material (individually or in the aggregate), and the basis for that conclusion
3
Q
List the general standards regarding audits that are promulgated by the AICPA.
A
Professional competence
Due Professional care
Planning and supervision
Sufficient relevant data
4
Q
Describe the auditor’s requirements for communicating deficiencies in an entity’s internal controls.
A
- The auditor must communicate in writing the significant deficiencies (including material weaknesses) identified in the audit
- The auditor may choose to communicate lesser matters, too
5
Q
Identify several substantive procedures usually performed in every audit area.
A
- Agree financial statements, or trial balance from which financial statement elements are derived, to underlying accounting records (general ledger).
- Scan the entity’s journals and ledgers for any “unusual” items.
- Make inquiries of management and other personnel; document inquiries management’s responses in the management representation letter.
- Perform specific analytical procedures – Consider historical trends and events within the industry.
6
Q
List the factors that directly relate to sample size.
A
- Expected error rate
2. Population size – Not explicitly considered in attributes sampling
7
Q
List the factors inversely related to sample size.
A
- Tolerable error rate
- Risk of over-reliance – Type ll error
- Risk of under-reliance
8
Q
List the four standard-setting boards of IFAC.
A
- The International Auditing and Assurance Standards Board (IAASB)
- The International Ethics Standards Board for Accountants (IESBA)
- The International Public Sector Accounting Standards Board (IPSASB)
- The International Accounting Education Standards Board (IAESB)
9
Q
What is the role of IFAC’s International Auditing and Assurance Standards Board (IAASB)?
A
- In general, to be the global standard-setting body related to auditing, review, other assurance services, and quality control, and to facilitate convergence of national and international standards
- With respect to auditing specifically, to issue International Standards on Auditing (ISAs) applicable to the audit of historical financial information
10
Q
List the three specific elements required by the Securities and Exchange Commission (SEC) in the Management Discussion & Analysis (MD&A) presentation.
A
- Discussion of financial condition – Regarding liquidity and capital resources
- Discussion of changes in financial condition
- Discussion of results of operations
11
Q
Of what does the cutoff test of sales consist?
A
Examine the last few transactions before year-end and the first few after year-end. Agree the entries on the sales journal to the shipping documents (existence); and agree the shipping documents to the sales journal (completeness).
12
Q
List two types of statistical sampling.
A
- Attributes sampling (regarding internal controls)
2. Variable sampling (regarding substantive tests)
13
Q
Define “Type 1 Error”.
A
- The risk of under-reliance on controls (that is, the risk of assessing control risk too high); or incorrect rejection of the fairness of an account balance
- Relates to efficiency of audit
14
Q
List some audit procedures that might be used to assess accounting estimates.
A
- Inquire of management to understand how the estimate was developed.
- Review and test management processes.
- Develop an independent expectation for comparison to entity’s estimate.
- Review subsequent events for additional evidence.
15
Q
List the features of objectivity.
A
- Impartiality
- Intellectual Honesty
- Freedom from conflicts of Interest
16
Q
What are the four objectives of the auditor related to communications with audit committees that are identified in PCAOB Auditing Standards No. 16?
A
- Communicate responsibilities and establish an understanding of the engagement’d terms.
- Obtain information from the audit committee relevant to the audit.
- Communicate information about the strategy and timing of the audit.
- Provide the audit committee with timely observations about significant audit matters.
17
Q
What audit procedures might an auditor perform to evaluate an investment in securities that is based on the investee’s financial results?
A
The auditor would normally read the audited financial statements of the investee.
18
Q
List the standards that the PCAOB is responsible for establishing.
A
- Auditing
- Quality control
- Ethics
- Independence
19
Q
List the two types of engagements related to pro forma information.
A
- Examination
2. Review
20
Q
List the “covered members” outlined in the Principles of the Code of Professional Conduct.
A
- Team members
- Those in a position to influence (PTI) team members
- Other partners in the office (OPIOs)
- Ten-hour people
- The firm
- Any entity controlled by the above
21
Q
What are the three objectives of internal control as identified in the definition of internal control?
A
- Reliability of financial reporting
- Effectiveness and efficiency of operations
- Compliance with applicable laws and regulations
22
Q
Identify two procedures used to assess the relevance of an entity’s internal audit activities.
A
- Inquire about the internal audit function’s organizational status, any limitations applicable to internal audit activities, and adherence to applicable professional standards.
- Review documentation of internal auditors’ processes and selected work products.
23
Q
List the differences in the AICPA Statements on Quality Control Standards (SQCS) relative to the PCAOB’s Auditing Standards No. 7.
A
SQCS do NOT:
- Require an “engagement quality review” for any type of engagement
- Impose a “cooling off” restriction or a requirement that the reviewer must be an “associated person” of a registered public accounting firm
- Require a “concurring approval of Issuance” before issuing a report
- Specifically require that engagement quality review documentation must be retained with other documentation
24
Q
What is the formula for the observed deviation rate?
A
(# of Errors in the Sample) / Sample Sizeq
25
What is the auditor's responsibility for assessing the risk of material misstatement?
The auditor should identify and asses the risks of material misstatement:
1. At the financial statement level
2. At the relevant assertion level related to classes of transactions, account balances, and disclosure
26
What are the auditor's responsibilities with respect to opening balances, and whether they contain misstatements affecting the current period financial statements?
- Determine whether the prior closing balances have been properly brought forward.
- Determine whether the opening balances reflect the application of appropriate accounting policies.
- Evaluate whether audit procedures provide evidence relevant to the opening balances (for example, by reviewing the predecessor's audit documentation).
27
Identify a few audit procedures that might address the valuation assertion for inventory.
- Perform price tests (to evaluate the appropriateness of the inventory's cost/unit -- e.g., agree unit costs to a recent supplier's invoice).
- Test the extensions (quantity times cost/unit) and foot the total.
- Perform lower of cost or market analysis. Might calculate the inventory turnover ratio to identify slow-moving inventory.
28
Describe how the auditor might address the completeness assertion for inventory.
- Test sales cut-off (regarding cost of goods sold, decreases to inventory).
- Test purchases cut-off (regarding purchases of inventory).
29
Identify two audit procedures that address the rights and obligations assertion for fixed assets.
1. Inquire about any fixed assets pledged as collateral for debts.
2. Read the entity's debt agreements for any discussion of collateral, such as fixed assets.
30
Describe how the auditor might address the completeness assertion for fixed assets.
Review repairs and maintenance expense accounts to see if any transactions should have been capitalized instead of expensed.
31
Identify a few audit procedures to address the existence assertion for accounts payable.
1. Compare the general ledger control account to the supporting detailed listing of payables.
2. Agree selected items to vendors' invoices.
3. May choose to confirm payables (but usually do not, since completeness is typically a greater concern than existence with respect to liability accounts).
32
Identify an audit procedure that addresses the rights and obligations assertion for long-term liabilities.
1. Review the loan documents for any restrictive debt covenants to be disclosed.
2. Review the loan documents (or inquire of management) to identify the current portion of long-term debt to be reclassified as a current liability.
33
Identify a few audit procedures that address the valuation assertion for long-term liabilities.
- Trace related cash receipts (for increases) and disbursements (for decreases) from the accounting records to the bank statement for any debt activities.
- Examine underlying loan documents for issuance of new debt and scheduled payments.
- Recalculate the amortization of any discount or premium involved.
34
Identify a few audit procedures that address the rights and obligations assertion for stockholder's equity.
- Review minutes of meetings of those charged with governance for authorization of stock-related transactions.
- Review the entity's compliance with contracts for employee stock plans.
- Inquire of management about any restrictions applicable to retained earnings.
35
Identify an audit procedure that addresses the valuation assertion for stockholder's equity.
1. Review the cash receipts journal and the cash disbursements journal for any changes related to the stock accounts.
2. Compare the subsidiary ledger related to the stock accounts to the general ledger balance.
3. Verify the par value on the stock certificate or the stated value in the minutes of meetings of those charged with governance.
36
What is the engagement objective as prescribed under the PCAOB Auditing Standard No. 4?
- To express an opinion as to whether a previously reported material weakness (one or more) in internal control continues to exist as of a specified date.
- Such an engagement is strictly voluntary, because PCAOB standards do not require reporting on whether a previously reported material weakness continues to exist.
37
List the five conditions required for an engagement to report whether a previously reported material weakness continues to exist under the PCAOB's Auditing Standard No. 4.
1. Management accepts responsibility for internal control over financial reporting.
2. Management evaluates the effectiveness of the specific controls that address the material weakness.
3. Management provides an assertion that the specific control is effective.
4. Management supports its assertion with evidence.
5. Management provides a written report to accompany the auditor's report.
38
Describe the provisions in Rule 102 under AICPA's Code of Professional Conduct.
In the performance of any professional service, a member: shall maintain objectivity and integrity, shall be free of conflict of interest, and shall not knowingly misrepresent facts or subordinate his or her judgement to others.
39
Describe the provisions in Interpretation 203-1 under the AICPA's Code of Professional Conduct.
CPAs are allowed departure from SFAS only when results of SFAS will be misleading.
40
Describe the provisions in Rule 301 under the AICPA's Code of Professional Conduct.
A member in public practice shall not disclose any confidential client information without the specific consent of the client.
41
List the five discreditable acts outlined in Rule 501 under the AICPA's Code of Professional Conduct.
1. Discrimination and harassment in employment practices
2. Failure to follow standards and/or procedures or other requirements in governmental audits
3. Negligence in the preparation of financial statements or records
4. Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies in performing attest or similar functions
5. Solicitation or disclosure of CPA examination questions.
42
Describe the provisions of Interpretation 501-4 under the AICPA's Code of Professional Conduct.
Negligently making (or permitting or directing another to make) false or misleading journal entries is a discreditable act.
43
Describe the provisions of Interpretation 502-2 under the AICPA's Code of Professional Conduct.
CPAs may normally engage in accurate advertising ("commercial speech").
44
Describe the provisions of Interpretation 505-3 under the AICPA's Code of Professional Conduct.
- Majority of financial interests in attest firm must be owned by CPAs
- If CPAs who own the attest firm remain financially responsible, public interest will be considered protected.
45
Describe the provisions of Interpretation 502-2 under the AICPA's Code of Professional Conduct.
- Member may own interest in a separate business that performs non-audit services for clients.
- If member controls the separate business, entity must comply with Code of Professional Conduct.
- If member does not control the separate business, Code applies to member but not entity.
46
What is the required form of the auditor's communications about fraud-related issues?
May be either written or oral, but must be timely.
47
Describe the timing of the required communication of significant deficiencies in internal control.
Under the AICPA professional standards, written communication is required no later that 60 days after the audit report release date (including matters communicated orally during the audit).
48
Describe the PCAOB requirements as to the timing of the auditor's communications with an entity's audit committee.
The required matters should be communicated on a timely basis, and prior to issuance of the auditor's report.
49
Describe the structure of the examination report on compliance attestation.
Very similar to the structure of an audit report:
- Introductory paragraph -- List specific compliance requirements
- Scope paragraph -- Reference attestation standards established by the AICPA
- Opinion paragrahp
50
What is the effect of an adverse opinion on the auditor's report?
- No effect on Introduction paragraph or Management's Responsibility section.
- Modify last sentence of Auditor's Responsibility section to refer to "... basis for our adverse audit opinion".
- Add a Basis for Adverse Opinion paragraph before the Opinion paragraph to describe the effects of the misstatement.
- Modify the Opinion paragraph to express the adverse opinion.
51
What effect does a qualified opinion for a scope limitation have on the auditor's report?
- No effect on Introduction paragraph or Management's Responsibility section.
- Modify the Scope paragraph to reference the scope limitation.
- Add Basis for Qualified Opinion paragraph before the opinion paragraph to describe the scope limitation, before the opinion paragraph to describe the limitation.
- Modify the opinion paragraph to reference the scope limitation.
52
Describe the structure of a separate report on internal control when reporting on internal control under Statement on Standards for Attestation Engagement (SSAE) 15.
- Introductory paragraph
- Scope paragraph -- Reference AICPA attestation standards
- Definitions paragraph -- Regarding internal control concepts
- Inherent limitations paragraph
- Opinion paragraph
- Audit of Financial Statements paragraph -- Cross-reference other report.
53
Describe the structure of an examination report on a projection.
The examination report on a projection typically includes the following four paragraphs:
1. Introductory paragraph.
2. Scope paragraph -- Reference attestation standards established by the AICPA.
3. Opinion paragraph
4. Restricted distribution -- Limit the distribution to the specified parties.
54
How is an auditor's unmodified report structured under the clarified auditing standards?
An unmodified auditor's report is presented in four sections:
1. AN introduction (1 sentence)
2. Management's responsibility section (1 sentence)
3. Auditor's responsibility section (three paragraphs, consisting of 9 sentences)
4. Opinion (1 sentence)
55
What effects on the auditor's report, if any, does a correction of a material misstatement to previously issued financial statements have?
- The auditor's report should include an explanatory paragraph describing the inconsistency.
- The auditor should evaluate the adequacy of the company's disclosure regarding any such restatement.
56
What is the effect on the auditor's report when an entity's financial statements have been restated to correct a prior material misstatement (assuming that disclosure related to restatement is adequate)?
The auditor's report should include an emphasis-of-matter paragraph to describe the restatement end reference the footnote that discusses the correction. The auditor should also state the auditor's opinion is not modified with respect to the matter.
57
Prior to the clarified auditing standards, how was an unqualified audit report structured?
An unqualified audit report was presented in three paragraphs:
1. Introduction (three sentences)
2. Scope (5 sentences)
3. Opinion (one sentence)
58
Is an auditor permitted to comment on an entity's compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit, if the auditor expressed an adverse opinion or disclaimer of opinion on the financial statements?
The auditor is permitted to issue a report on compliance only when instances of noncompliance were identified.
59
What is the basic sample size formula?
Sample size = (Estimated Population Standard Deviation x Coefficient of Reliability x Population Size / Allowance for Sampling Risk) ^2
60
What client relationships should a covered member avoid to ensure independence is not impaired?
- Trustees of trust with financial interest in client
- Trustee of client pension fund
- Director of client
- Officer of client
- Promoter of client stock
- Voting trustee of client
61
List the items that are inversely related to sample size in variables sampling.
- Allowance for sampling risk
- Risk of incorrect acceptance (Type 2 error)
- Risk of incorrect rejection (Type 1 error)
62
Identify three audit procedures that might bring to the auditor's attention noncompliance with laws and regulations that do not have a direct effect on the entity's financial statements.
1. Inquiry of management and those charged with governance about noncompliance with applicable laws and regulations
2. Inspection of correspondence with regulatory authorities.
3. Reading the minutes of meetings of those charged with governance.
63
List the types of audit impairments that are the focus of the Government Accountability Office.
- Personal impairments
- External impairments
- Organizational impairments
64
List the three general documentation requirements under PCAOB Auditing Standard No. 3.
1. Demonstrate the auditor's compliance with PCAOB standards.
2. Support the basis for the auditor's conclusions regarding every relevant financial statement assertion.
3. Demonstrate that the underlying accounting records agree to or reconcile with the financial statements elements
65
What is meant by the term "type 2 report" for a service auditor?
This refers to a report on management's description of a service organization's system and the suitability of the design and operating effectiveness of internal controls at the service organization -- whether the policies and procedures are suitably designed and working effectively to provide reasonable assurance of achieving the stated control objectives.
66
For what type of service is compensation prohibited for auditors of public companies?
Compensation for selling non-audit services is prohibited.
67
What are the two specific matters that affect the auditor's evaluation of consistency of financial statements as prescribed in the PCAOB's Auditing Standard No. 6?
1. A change in accounting principle
| 2. A restatement to correct a misstatement in previously issued financial statements
68
What specific matters should the auditor document regarding the auditor's assessment of the risks of material misstatement?
- The discussion with key members of the audit team about the risks of material fraud and errors
- The major elements of the understanding of the five components of internal control
- The assessment of the risks of material misstatement (at the financial statement and relevant assertion levels) and the basis for that assessment
- The risks identified and the related controls the auditor evaluated
69
When deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what three matters should the auditor consider?
1. The purpose for which the financial statements are prepared
2. The intended users of the financial statements
3. The steps taken by management to determine that the framework is acceptable in the circumstances
70
How should employee responsibilities be allocated to facilitate a proper segregation of duties in the revenue/ receipts (sales of transactions) cycle?
1. Independent employee should review customer statements.
2. Credit to customers is granted by independent department.
3. Returns are accounted for by independent clerk in shipping/receiving area.
71
List two access controls applicable to the revenue/receipts (sales transactions) business process.
1. Computer passwords limit access.
| 2. Cash receipts are handled by someone without access to accounts receivable record-keeping.
72
Identify the key accounting documents in the revenue/ receipts (sales) transaction cycle, each of which should be pre-numbered.
1. Sales invoices.
2. Shipping documents for outbound shipments
3. Receiving documents for inbound shipments including sales returns.
73
Describe management's role in the execution of transactions controls in revenue/ receipts (sales).
1. Management should review terms of sale and note approval.
2. Management should establish general approval of sales within certain limits and specifically approve sales over those limits.
3. Management should approve all adjusting journal entries.
74
What control mechanisms can be used to ensure the appropriate execution of transactions in the Cash Receipts business cycle?
1. Adjusting journal entries should be approved by management.
2. Bank reconciliations should be reviewed by management.
75
What comparison techniques can be used by he auditor to ensure appropriateness of transactions in the cash receipts business cycle?
1. Initial cash receipts listing (remittance listing) compared to total recorded in cash receipts journal and to bank deposit
2. Cash accounts reconciled to bank statements by independent person
76
List some procedures used to ensure segregation of duties in the cash receipts business cycle.
To ensure segregation of duties, the following activities should be handled separately (by separate individuals):
1. Opening Mail, handling checks received, and preparing remittance listing
2. Making deposit (daily)
3. Applying payments received to customer accounts
4. Preparing bank reconciliation on a timely basis
77
List the internal control objectives related to the Cash Receipts business cycle.
1. Access to cash receipts records and accounts receivable records is limited to authorized personnel.
2. Detailed cash and account balance records are reconciled with control accounts and bank statements monthly.
3. All cash receipts are recorded in period received.
78
Describe management's role in the execution of transactions controls over cash disbursements in the expenditures/ disbursements transaction cycle.
1. All adjusting entries should be approved by management.
2. Only authorized personnel should be able to place an order for goods and services on the entity's behalf.
3. The department requesting the purchase should approve the goods or services received before payment is made.
79
What comparison techniques can be used by the auditor to ensure appropriateness of transactions in the Expenditure business cycle?
1. Compare suppliers' monthly statements with recorded payables.
2. Compare purchase order to receiving document to vendor's invoice.
80
List some procedures used to ensure segregation of duties in the Expenditure business cycle.
1. Separate purchasing department
2. Purchasing personnel independent from receiving and recording
3. Bank reconciliations prepared by someone not having involvement in handling cash receipts, disbursements, or record-keeping
81
Describe management's role in the execution of transactions controls in the Payroll transaction cycle.
1. Payroll should be reviewed and approved by a responsible official.
2. Computations should be verified by an independent person.
3. Overtime payments should be approved by management.
4. Payroll for management should be appropriately reviewed and approved.
82
Identify the objectives of internal control in the investing/ Financing transaction cycle.
1. Transactions should be recorded accurately in accordance with management's authorization.
2. Investment assets should be reasonably secure from loss.
3. Supporting detailed records should be maintained and compared to general ledger.
4. Management should approve and adjusting journal entries.
83
Describe management's role in the execution of transactions controls in the Production/Manufacturing Inventory transaction cycle.
1. Acquisition and distribution of inventory should be in accordance with management's authorization.
2. Management should establish general approval of transactions with specified limits and require specific approval for amounts over those limits.
3. Management should approve any adjusting journal entries.
84
How should employee responsibilities be allocated to facilitate a proper segregation of duties in the Production/Manufacturing Inventory transaction cycle?
1. Separate authorization, bookkeeping (recording), and custody of inventory.
2. Sales returns should be counted by receiving clerk, who prepares an appropriate receiving document.
85
What further substantive procedures should the auditor perform in responding to significant risks?
The auditor should evaluate:
1. How management addressed estimation uncertainty in making the estimate
2. Whether management's significant assumptions are reasonable
3. Whether management has the intent and ability to carry out specific actions, as relevant
