Initial Weak Areas

Question 1

What are the two purposes of reviewing the audit work performed by each assistant?

Answer 1

1. To determine if the work was adequately performed
2. To evaluate whether the results support the conclusions in the auditor’s report

Question 2

How does reporting on internal control under Government Auditing Standards (GAGAS) differ from reporting under other generally accepted auditing standards?

Answer 2

GAGAS requires a report describing the scope of the auditor’s testing of compliance and internal control. This scope description is not required under other generally accepted auditing standards.

Question 3

Can a scope limitation cause an “except for” qualified opinion?

Answer 3

Yes.

“except for” qualified opinions can be used in situations where “issues” and “scope limitations” exist.

Question 4

When is an audit allowed to refer to the auditor of a service provider (and the service provider’s SOC report) in their audit report?

Answer 4

Only when the user auditor’s opinion is modified (e.g., qualified, adverse, or disclaimer) due to findings related to the service organization’s controls.

Question 5

What information would a successor audit want to get from a predecessor before accepting an audit engagement?

Answer 5

• Management integrity concerns
• Disagreements with management on accounting or auditing matters
• Reasons for the change of auditors
• Any identified or suspected fraud
• Noncompliance with laws or regulations
• Issues related to internal control communicated to management or governance
• Understanding of related party transactions and unusual transactions

Question 6

What information would a successor audit want to get from a predecessor after accepting an audit engagement?

Answer 6

• Obtain access to predecessor’s audit documentation (with client permission)
• Understand any significant findings or issues from prior audits
• Clarify matters affecting opening balances and comparative financial statements
• Discuss any unresolved disagreements or fraud concerns
• Facilitate evaluation of financial reporting between periods

Question 7

What is the difference between Type 1 and Type 2 subsequent events?

Answer 7

Type 1: Requires adjustment to FS and disclosure

Type 2: Disclosure only

Question 8

When an audit engagement is downgraded to a review, should the auditor include a separate paragraph explaining the change in the review report?

Answer 8

No.

Mentioning the change could confuse users about the level of assurance being provided

If the reason for the change is not justified and the client insists on limiting the engagement, the auditor can (and should) withdraw.

Question 9

What is the best (most efficient) method to determine if dividend income from publicly-held investments is reasonable?

Answer 9

Use records produced by investment services (like Moody’s Dividend Record).

These services provide comprehensive dividend data in one place.

Question 10

What are the three factors for fraud?

Answer 10

1. Incentives/Pressures
2. Opportunity
3. Rationalization/Attitude

Question 11

What is the formula to find sample interval and sample size using PPS (Probability-Proportional-to-Size) sampling?

Answer 11

Sampling Interval = Tolerable misstatement / Reliability factor

Sample Size = Population book value / Sampling Interval

Question 12

In PPS (Probability-Proportional-to-Size) sampling, what is the Sampling Interval?

Answer 12

Dollar amount range used to select each sampling unit from the population.

Tolerable misstatement / Reliability factor

Question 13

In PPS (Probability-Proportional-to-Size) sampling, what is the Reliability factor?,

Answer 13

A number that reflects the auditor’s desired risk of incorrect acceptance (the chance of wrongly concluding no material misstatement exists).

It’s tied to the confidence level: a lower risk of incorrect acceptance means a higher reliability factor. For example:
* 1% risk → reliability factor around 4.6
* 5% risk → reliability factor around 3.0
* 10% risk → reliability factor around 2.3

Question 14

What should the auditor do when current year (CY) and prior year (PY) financial statements are presented comparatively, and PY FS were not fairly stated and left uncorrected (adverse opinion issued in prior year), and the CY FS are fairly stated?

Answer 14

1. Express an unmodified opinion on the CY FS.
2. Include an other-matter (or explanatory) paragraph in the CY report explaining the PY adverse opinion and that PY FS are presented for comparative purposes.
3. Do not update or change the PY opinion.

Question 15

What should the auditor do when current year (CY) and prior year (PY) financial statements are presented comparatively, and PY FS were not fairly stated (adverse opinion issued in prior year) but all issues leading to the modified opinion have been corrected , and the CY FS are fairly stated?

Answer 15

1. Express an unmodified opinion on the CY FS.
2. Reissue the PY modified opinion to unmodified on the CY audit report
3. Include an emphasis-of-matter (or explanatory) paragraph explaining:
   a. The prior year opinion type and date
   b. The reason for the prior modified opinion (material misstatement)
   c. The correction made
   d. That the opinion is now different.

Question 16

What five items should be included in an auditor’s engagement letter?

Answer 16

1. Objective and scope of the audit: Defines what the audit covers to set clear expectations.
2. Management’s responsibilities: States management must prepare financials and maintain internal controls.
3. Auditor’s responsibilities: Outlines the auditor’s role and limitations.
   Timing of the audit: Provides a general schedule so the client can prepare.
4. Fees and billing arrangements: Clarifies payment terms to avoid misunderstandings.
5. Acknowledgment of management’s responsibility for internal control: Confirms management’s duty to maintain effective controls.

Question 17

What is an auditor responsible when engaged to report on supplementary information to the FS?

Answer 17

Perform audit procedures similar to those for financial statements (e.g., reconcile to records, inquire management, get representations) and may issue an opinion on a separate section of the report (nonissuer/issuer) or an explanatory paragraph (issuer).

Question 18

What is the auditor’s responsibility when supplementary information is provided with the FS but not required and the auditor is not engaged to report on it?

Answer 18

Generally just reads it to check for material inconsistencies with the audited financial statements.

Question 19

What is the auditor’s responsibility when required supplementary information (RSI) (mandated by a standard setter but outside basic financials) is provided but the auditor is not engaged to specifically audit the supplementary information?

Answer 19

Limited procedures (inquiries, comparisons, management reps) but does not express an opinion unless specifically engaged.

Question 20

What are the primary objectives of a client’s internal control framework?

Answer 20

OPERATIONS: Effectiveness and efficiency of operations

RELIABILITY of financial reporting (most relevant for auditors)

COMPLIANCE with laws and regulations

Question 21

What are the elements of COSO?

Answer 21

Control Environment: The “tone at the top” — integrity, ethical values, competence, and accountability set by management and the board.

Risk Assessment: How management identifies and analyzes risks to achieving objectives, including fraud risk.

Information and Communication: How relevant financial information is identified, captured, and communicated internally and externally.

Monitoring Activities: Ongoing or separate evaluations to ensure controls are working and deficiencies are reported and corrected.

Existing Control Activities: Policies and procedures (like approvals, authorizations, reconciliations, segregation of duties) that help mitigate risks.

Question 22

What two issues would be considered so serious that an audit of the financial statements could not be performed?

Answer 22

Management’s lack of integrity — for example, a substantial risk of intentional misapplication of accounting principles or fraud, which undermines the reliability of all information.

Inability to obtain sufficient appropriate audit evidence — due to client-imposed restrictions, missing records, or other scope limitations that make it impossible to form an audit opinion.

Question 23

If a change in accounting principle is made in the current year and will have an immaterial impact on the comparability of the FS, how should the auditor refer to the change on the audit report?

Answer 23

The auditor should not refer to the change in the auditor’s report if the effect on comparability is immaterial. No modification or emphasis-of-matter paragraph is needed.

Why:
Materiality drives whether the auditor alerts users—immaterial changes don’t affect the overall fairness or consistency enough to warrant drawing attention in the report.

Question 24

During an audit, what is the auditor’s responsibility regarding fraud?

Answer 24

1) Obtain reasonable assurance that the financial statements are free of material misstatement due to fraud or error and 2) communicating instances of fraud appropriately, including:

• Assessing fraud risk throughout the audit.
• Maintaining professional skepticism.
• Designing and performing audit procedures responsive to identified fraud risks.
• Communicating any fraud (even immaterial) to management one level above those involved.
• Reporting material fraud or fraud involving senior management to those charged with governance.
• Disclosure to outsiders is generally not required unless legally mandated or if management/governance fail to act.

Question 25

Which of the following best describes what is meant by the term generally accepted auditing standards?

Answer 25

Generally accepted auditing standards ("GAAS") are measures of the quality of the auditor's performance, and guide the auditor in the performance of a properly planned and executed audit.

Question 26

If an auditor decides to name a specialist in the auditor’s report, what specific note must be made?

Answer 26

If an auditor decides to mention the specialist in the report, the report must indicate that the reference to the auditor's specialist does not reduce the auditor's responsibility for the audit opinion.

Question 27

In order to obtain an initial understanding of the system of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which procedures?

Answer 27

Risk-assessment procedures to evaluate the design of relevant controls.

Question 28

Receiving reports are prenumbered and periodically reconciled is a control for which assertion?

Answer 28

Completeness because it allows the auditor to determine whether all goods received have been recorded as inventory.

Question 29

When compiled Year 1 financial statements of a nonissuer are presented in comparative form with audited Year 2 financial statements, the compiled Year 1 financial statements should be clearly marked to indicate their status and either:

Answer 29

1. Reissue his or her report on the compiled statements or, 2. Include a separate paragraph in the current year report describing the responsibility assumed for the compiled statements.

Question 30

How are the following explained in Emphasis-of-matter and Other Matter paragraphs and why - be concise? 1. Change in Accounting Estimates 2. Change in Accounting Principles 3. Correction of Accounting Errors

Answer 30

Change in Accounting Estimates: No emphasis-of-matter paragraph needed. These changes are normal updates based on new information, accounted for prospectively, and do not affect consistency or comparability. Change in Accounting Principles: Requires an emphasis-of-matter paragraph if material. This alerts users to the change because it affects consistency and comparability of financial statements across periods. Correction of Accounting Errors: Requires an emphasis-of-matter paragraph when prior period errors are corrected retrospectively. This highlights the correction and its impact on comparability and reliability of financial statements.

Question 31

In Year 1, Randall, CPA, issued a qualified opinion on the financial statements of Celadon Industries, a nonissuer, due to the improper recording of lease obligations. During Year 2, Celadon restated the Year 1 financial statements to correct the error, and now plans to issue comparative financial statements for Year 1 and Year 2. How should Randall handle the situation?

Answer 31

Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation and including the date and type of the previous opinion, the reason for the previous opinion, the changes that have occurred, and a statement that the new opinion differs from the old.

Question 32

What are the audit procedures for subsequent events (PRIME)?

Answer 32

P - POST Balance Sheet Transactions R- REP Letter I - INQUIRY M - MINUTES E - EXAMINE Interim Financials

Question 33

What is an auditor's responsibility regarding Other Information related to a FS audit?

Answer 33

If not engaged to audit the Other Information, the auditor should READ to make sure there are no obvious material misstatements compared to the FS.

Question 34

What is the auditor's responsibility when engaged to report on supplementary information?

Answer 34

Additional audit procedures with objective to provide an opinion on supplementary information in relation to the FS as a whole (aka derived from the FS)

Question 35

What is the auditor's responsibility regarding Required Supplementary Information, or information outside or with the basic financials and required by SEC, GASB, GAAP, or supplementary information and required by a designated standard setter?

Answer 35

LIMITED procedures

Question 36

Does an auditor's written communication with Those Charged with Governance contain restricted language?

Answer 36

YES

Question 37

Does an auditor's written communication with a nonissuer's management and those charged with governance regarding internal control-related matters identified in a FS audit contain restricted language?

Answer 37

YES - this does not include when an opinion is rendered on internal control in an integrated audited. The opinion on internal control in an integrated audit is NOT restricted.

Question 38

Does reporting on compliance with aspects of contractual agreements or regulatory requirements in connection with audited FS contain restricted language?

Answer 38

YES

Question 39

Do audits on compliance contain restricted language?

Answer 39

YES

Question 40

What six items should a successor auditor discuss with a predecessor before accepting an engagement?

Answer 40

1. Mgmt's INTEGRITY 2. DISAGREEMENTS with mgmt 3. REASON for auditor change 4. Communication with client about FRAUD, NONCOMPLIANCE, and ISSUES WITH INTERNAL CONTROL 5. Issuer's Only: RELATED PARTY transactions 6. Issuer's Only: UNUSUAL transactions

Question 41

Can an auditor's work papers be shared with a 3rd party at the auditor's discretion?

Answer 41

NO - work papers can only be shared with CLIENT'S CONSENT or COURT ORDER.

Question 42

What 4 elements must an auditor consider when deciding to use the work of a Specialist?

Answer 42

1. Field of expertise a. Nature, scope, and objectives of work b. Relevance, reliability, and adequacy of work 2. Competence 3. Capabilities 4. Objectivity

Question 43

Can the auditor divide responsibility of an audit between the auditor and specialist?

Answer 43

No, never. If the specialist is mentioned in the audit report is MUST ONLY because a modified opinion is rendered and the specialist's evidence helped reach that opinion.

Question 44

Define Performance Materiality:

Answer 44

The amount set by the auditor below overall materiality to reduce the risk that the total of uncorrected and undetected misstatements exceeds overall materiality for the financial statements as a whole.

Question 45

Define Overall Materiality:

Answer 45

The dollar amount set by the auditor during planning that represents the maximum aggregate misstatement in the financial statements that would not influence the economic decisions of users. It’s based on quantitative and qualitative factors and benchmarks like profit before tax, revenue, or total assets. Overall materiality guides the audit opinion and is used to evaluate the financial statements as a whole.

Question 46

Define Tolerable Misstatement:

Answer 46

The maximum misstatement allowed in an account or class of transactions during sampling without causing the financial statements to be materially misstated. It applies performance materiality to specific audit procedures.

Question 47

As the likelihood of undetected and uncorrected misstatements goes up, what happens to Tolerable Misstatement? 1. Goes up 2. Goes down 3. Unaffected

Answer 47

Goes DOWN The tolerable misstatement is the application of performance materiality to a particular sampling procedure. The goal of both performance materiality and tolerable misstatement assessment is to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. As such, as the likelihood for undetected misstatements goes up, the tolerable misstatements must go down to keep the overall risk of misstatement to an appropriately low level.

Question 48

In every audit when assessing risks due to fraud, there is a presumption that which two risks exist?

Answer 48

1. Improper revenue recognition 2. Management override of controls

Question 49

In order for a firm to maximize profits in any industry, what needs to be the relationship between marginal cost, marginal revenue, average total cost, and average revenue?

Answer 49

Marginal cost = Marginal revenue Marginal Cost = the cost to make one more unit Marginal Revenue = the revenue gained from one more unit As long as Marginal Revenue >= Marginal cost, it is still worth producing units, and when MR = MC then profit is at its maximum. Average Total Cost and Average Revenue are distractors and irrelevant to the question.

Question 50

What are the four aspects of inherit limitations on internal controls?

Answer 50

1. Mgmt Override 2. Collusion 3. Human Error 4. External Events beyond the firm's control

Question 51

When gaining an understanding of a clients internal controls, which of the the following (if any) must be performed and which may be performed? I. Obtain an understanding of the design of controls. II. Determine whether controls have been implemented. III. Evaluate the operating effectiveness of controls.

Answer 51

I and II are required, III is optional in order to understand the firm's internal control. Explanation: The initial goal is to understand the design and implementation of controls, not to test if they work. Testing operating effectiveness is only necessary if the auditor plans to rely on controls to reduce substantive testing. If the auditor does not rely on controls, substantive procedures alone provide sufficient evidence.

Question 52

What is a combined approach?

Answer 52

A combined approach means the auditor tests both the operating effectiveness of specific controls and performs substantive procedures. If controls work well, the auditor can reduce the amount of substantive testing needed.

Question 53

Who is responsible for preparing and sending the attorney letter of inquiry?

Answer 53

The CLIENT prepares the letter and the AUDITOR mails it.

Question 54

What are the primary characteristics of audit evidence?

Answer 54

SUFFICIENCY: The quantity or amount of evidence obtained. More evidence is needed when risk of material misstatement is higher. APPROPRIATENESS: The quality of evidence, which includes: 1. RELIAIBLITY: How trustworthy the evidence is (e.g., auditor’s direct knowledge > external evidence > internal evidence > oral evidence). 2. RELEVANCE: How well the evidence relates to the specific financial statement assertion being tested and the timing of the evidence.

Question 55

When recording and disclosing a legal matter contingent liability with a range of probable loss given, what amount is recorded and what amount is disclosed in the notes?

Answer 55

Record (accrue) the lowest amount in the range as the liability on the financial statements. Disclose the entire range in the footnotes, explaining that the loss is probable but the exact amount is uncertain within that range.

Question 56

When performing an examination of a client's Compliance, what is the risk formula?

Answer 56

Attestation Risk = (Inherit Risk X Control Risk) X Detection Risk In an examination of an entity's compliance with specified requirements, the auditor should assess attestation risk, which is composed of control risk, inherent risk, and detection risk. For purposes of a compliance examination, control risk represents the risk that material noncompliance will not be prevented or detected on a timely basis by the entity's controls.

Question 57

What is a Performance Audit?

Answer 57

A performance audit is specifically for governmental entities and focuses on evaluating how well they are achieving objectives like effectiveness, efficiency, compliance, or internal control. It’s governed by Government Auditing Standards (the Yellow Book) and is not about giving an opinion on financial statements.

Question 58

Is an auditor perform substantive tests during a Performance Audit?

Answer 58

NO - During a performance audit, the auditor does not perform substantive tests on financial statements like in a financial statement audit. Instead, the auditor focuses on evaluating: Program effectiveness, Efficiency, Compliance with laws or policies related to the program, Internal controls relevant to the audit objectives.

Question 59

Under which two engagements, does an auditor disclaim an opinion by default?

Answer 59

AGREED-UPON PROCEDURES engagements (no opinion or assurance is provided) COMPLIATION engagements (the accountant explicitly states no opinion is expressed)

Question 60

In which engagements is it expected and the default for the auditor to state that that financial statement results may not be achieved?

Answer 60

It is expected and default in attest engagements on PROSPECTIVE financial statements (financial forecasts and projections) that the report includes a statement indicating that the financial statement results may not be achieved. This is because prospective financial statements are based on assumptions and estimates, so the accountant must caution users that actual results could differ. This statement is not required in preparation, compilation, or review engagements on historical financials.

Question 61

Can a review be performed on a pro forma, projection, or forecast?

Answer 61

Pro forma: Review allowed (SSAE) Prospective (forecast/projection): Review not allowed

Question 62

What is expected from the auditor in an Audit of historical financials regarding statements in the report about updating the report in the future for material changes?

Answer 62

MAY explicitly state report will be updated for material changes, but doesn't have to

Question 63

What is expected from the auditor in an Examination of Prospective financial statements regarding statements in the report about updating the report in the future for material changes?

Answer 63

MUST explicitly state NO RESPONSIBILITY to update report

Question 64

What is expected from the auditor in a Compilation of Prospective financial statements regarding statements in the report about updating the report in the future for material changes?

Answer 64

Accountant has no responsibility to update, but report does NOT say so explicitly

Question 64

What is expected from the auditor in any Agreed-upon Procedures engagement regarding statements in the report about updating the report in the future for material changes?

Answer 64

MUST explicitly state NO RESPONSIBILITY to update report

Question 65

When performing an audit of a client's Compliance, what is the risk formula?

Answer 65

Audit Risk of Noncompliance = (Inherent Risk × Control Risk) × Detection Risk Inherent Risk: Susceptibility of a compliance requirement or financial assertion to material misstatement before controls. Control Risk: Risk that internal controls fail to prevent or detect material noncompliance or misstatement timely. Risk of Material Noncompliance: Product of inherent risk and control risk: