When would it be proper for an accounting firm to sign off on a current year audit report if their client is struggling?
A member in public practice may not sign a current year audit report if it has unpaid fees UNLESS the client files for bankruptcy
How must a CPA justify a departure from GAAP?
- Describe the departure
- Describe the departures approximate effects
- Demonstrate that following GAAP would mislead investors
- Give reasons why compliance would be misleading.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are….?
- Rights and obligations
- Existence
Confirmation of AR provides primary evidence for rights and obligations and existence. I.e. Direct third party responses are proof that AR are valid and that the amounts are owed to the entity
What would be discovered by an auditor’s review of a client’s sales cut off?
- Unrecorded sales at year end
2. Subsequent-year sales that were improperly included in the current year
What determines the effectiveness of detection risk?
- Nature
- Extent
- Timing
To satisfy the valuation assertion when auditing investments accounted for by the equity method, an auditor would most likely…
Examine the audited financial statements of the investee company
Due professional care requires an auditor to…?
Critically review the work completed and the judgments made at every level of supervision
An independent auditor must have…?
Competence and Capability:
- Adequate technical training
- Proficiency in auditing
What are the two AICPA requirement categories?
- Unconditional requirements
2. Presumptively Mandatory
What language is used for:
- Unconditional Requirements?
- Presumptively Mandatory?
- Unconditional Requirements:
- “Must”
- “Is Require” - Presumptively Mandatory:
- “Should”
- Document rare exceptions
What is the primary purpose of establishing Quality Control policies and procedures for deciding to accept a new client?
To minimize the likelihood of association with clients whose management lacks integrity
How are differences between engagement partners and the quality control reviewer resolved?
By following firm’s policies and procedures
What is the rotation timing for engagement/review partners? (According to SOX 2002)
Five (5) years mandatory rotation
What does the PCAOB identify as examples of “Significant Engagement Deficiencies?”
- Engagement team failed to obtain sufficient appropriate evidence
- Engagement team reached an inappropriate overall conclusion
- Engagement report is not appropriate
- Firm is not independent of client
An Auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. What does this include?
- Objective of audit
- Description of an audit
- Management Responsibilities
- Management responsible to correct material misstatements and evaluate immaterial adjustments
- Auditor’s responsibilities
In planning a new engagement an auditor would consider…?
- Nature of the engagement
- Type of report to be issued
- Nature of financial statements, schedules, and other information the auditor is reporting on
- Nature/Condition of client’s records
- The assessed level of control risk - including occurrence rate of attributes
- Needs in particular circumstances for supervision/review of work
What is a Type I Error?
What is a Type II Error?
Type I Error: False Rejection > Efficiency > Under-reliance on Internal Control > Incorrect rejection of $-Balance
Type II Error: False Acceptance > Effectiveness > Over-reliance on Internal Control > Incorrect acceptance of $-Balance
List the factors that directly relate to sample size.
- Expected Error Rate
2. Population size - not explicitly considered in attributes sampling
List the factors that are inversely related to sample size.
- Tolerable error rate
- Risk of over-reliance; Type II Error
- Risk of under-reliance
What is the formula for the observed deviation rate for the sample?
Number of Errors in the Sample / Sample Size
List the three factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application.
- Expected error rate
- Tolerable error rate
- Risk of over-reliance
When is attribute sampling used?
Attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence that is quantifiable.
What three key factors must be considered when determining sample size?
- Risk of Over-Reliance - AKA risk of assessing control risk too low
- Expected deviation rate (related to variability)
- Tolerable deviation rate (related to precision)
Formula for determining sample size.
Sample size = Type II Error x Exp. Dev Rate x Tolerable Error Rate
