Unit 1: Engagement Responsibilities
Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as:
A discipline that attests to financial information presented by management.
· Overall objectives of auditor include obtaining assurance about whether the FSs as a whole are free of MM, whether due to fraud or error.
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to:
Provide assurance on investment performance statistics prepared by an investment company on established criteria.
· An attestation engagement may be
(1) an assertion-based examination,
(2) a direct examination,
(3) a review, or
(4) a performance of agreed-upon procedures.
In an examination (resulting in an opinion) or a review (resulting in limited assurance) attestation engagement, the practitioner measures or evaluates the underlying subject matter against criteria.
In an agreed-upon procedures attestation engagement (resulting in findings but no opinion or conclusion), the practitioner performs procedures on underlying subject matter or subject matter information. Underlying subject matter is the phenomenon measured or evaluated or upon which procedures are performed. Subject matter information is the outcome of measurement and evaluation of the underlying subject matter. An assertion is an example. Accordingly, an attestation service may provide assurance on investment performance.
Study Unit 2: Professional Responsibilities
Jordan is the executive partner of Cain & Jordan, CPAs. One of its clients is a large nonprofit charitable organization. The organization has asked Jordan to be on its board of directors, which consists of a large number of the community’s leaders. For Jordan to be considered independent, which of the following requirements must be met?
Board Participation Purely Honorary? Yes
Audit Participation by Jordan Prohibited? No
· According to an AICPA Interpretation, the member will be independent as long as the position is purely honorary, it is identified as such in all letterheads and externally circulated materials in which (s)he is named as a director or trustee, the member restricts participation to use of his or her name, and (s)he does not vote or participate in management functions.
· Jordan may directly participate in the audit even though (s)he serves as an honorary director.
Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?
An investment held through a regulated mutual fund.
· Independence is impaired if, during the period of the professional engagement, a covered member had a direct or material indirect financial interest in the client.
· Ownership of fund shares is a direct financial interest in the fund. Underlying investments in the fund are indirect interests.
Which of the following is prohibited by the AICPACode of Professional Conduct?
Prematurely expressing an opinion based on an audit because of time pressures from the client.
Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is:
Unmodified and describe the departure in an other-matter paragraph.
· A material departure from GAAP prohibits expression of an opinion that financial statements are in conformity with GAAP. However, an exception is permitted when the auditor can demonstrate that because of unusual circumstances the statements would otherwise have been misleading. Given these circumstances, and if no other basis for modifying the opinion exists, the auditor may express an unmodified opinion, provided that (s)he describes in an other-matter paragraph of the report the departure, its effects, and the reasons compliance with GAAP would have been misleading.
A member of the AICPA may render which service under a contingent fee arrangement?
A CPA provides investment advisory services, with the fee based on a percentage of the client’s investment portfolio.
According to SEC independence regulations:
Preapproval of accountants’ services may be in accord with detailed policies and procedures rather than explicit.
· Audit committees ordinarily must preapprove the services performed by accountants (permissible non-audit services and all audit, review, and attest engagements).
· Approval must be either explicit or in accordance with detailed policies and procedures.
· If approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed.
Statements on Standards for Tax Services (SSTSs) have been issued by the Tax Executive Committee of the AICPA. The SSTSs:
Are enforceable under the AICPA Code of Professional Conduct.
· The Code’s General Standards Rule and Compliance with Standards Rule require members to comply with the SSTSs.
· Members who depart from the standards are required to justify those departures.
Study Unit 3: Planning and Risk Assessment
An auditor’s engagement letter most likely will include:
Management’s acknowledgment of its responsibility for maintaining effective internal control.
Upon discovering material misstatements in a client’s financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should:
Suggest that the auditor obtain the client’s permission to discuss the reasons.
Discovering patterns and identifying anomalies in audit data using visualization is:
Audit data analytics.
· Audit data analytics is defined as “the science and art of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data underlying or related to the subject matter of an audit through analysis, modeling, and visualization for the purpose of planning or performing the audit.”
An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that:
Fictitious credit sales have been recorded during the year.
· The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increases.
· Fictitious sales increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0.
· For example, adding 1 to both parts of the fraction 3 ÷ 2 decreases it to 4 ÷ 3. The turnover ratio will decrease still more in the next period because fictitious items will continue to increase receivables (a real account) but not sales (a nominal account).
Analytical procedures used to form an overall audit conclusion generally include:
Considering unusual or unexpected account balances that were not previously identified.
· Analytical procedures should be applied near the end of the audit.
· The purpose is to form an overall audit conclusion about whether the statements are consistent with the auditor’s understanding of the entity.
· Procedures ordinarily should include reading the statements and considering (1) the adequacy of evidence regarding previously identified unusual or unexpected balances and
(2) unusual or unexpected balances or relationships not previously noted (AU-C 520).
In an audit of financial statements for which an auditor’s assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?
Perform substantive procedures for all relevant assertions related to each material class of transactions.
· Substantive audit procedures are designed to detect material misstatements at the assertion level.
Which of the following is a true statement about an auditor’s responsibility regarding consideration of fraud in a financial statement audit?
The auditor should assess the RMMs due to fraud.
· The auditor assesses the identified RMM due to fraud at the statement and assertion levels.
· The assessment is ongoing after the initial assessment.
· The assessed risks are treated as significant. Thus, to the extent not done previously, the auditor should obtain an understanding of the relevant controls. The understanding includes evaluating whether they are suitably designed, have been implemented, and reduce the risks.
Study Unit 4: Strategic Planning Issues
The independent auditor should understand the internal audit function as it relates to internal control because:
The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
· To identify internal audit activities relevant to the audit planning.
In using the work of an auditor’s external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist’s work. This agreement most likely should include:
The applicability of the same confidentiality requirements to the auditor and the specialist.
When a management’s specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s work is acceptable if:
The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.
Which of the following statements is true about RPT?
The auditor should consider whether an identified significant unusual related party transaction is appropriately accounted for and disclosed.
Study Unit 5: IC Concepts and Info. Tech.
An auditor should obtain an understanding of an entity’s information system, including:
Process used to prepare significant accounting estimates.
Study Unit 7: IC-Purchases, Payroll, and Other Cycles
Which of the following control activities is NOT usually performed with regard to vouchers payable in the accounting dept.?
Determining the mathematical accuracy of the vendor’s invoice
Having an authorized person approve the voucher
Controlling the mailing of the remittance advice
Matching the receiving report with the purchase order
· The cash disbursements department, which is responsible to the CFO, has an asset custody function that should be segregated from the recording function of the accounting department.
· Consequently, checks for disbursements should be signed by a responsible person in that department after necessary supporting evidence has been examined.
· This individual also should be responsible for canceling the supporting documentation and mailing the signed checks and remittance advices.
· The documentation typically consists of a payment voucher, requisition, purchase order, receiving report, and vendor invoice.
A receiving department receives copies of purchase orders for use in identifying and recording inventory receipts. The purchase orders list the name of the vendor and the quantities of the materials ordered. A possible error that this system could allow is:
Overpayment for partial deliveries
· To ensure a fair count, the copy of the purchase order sent to the receiving clerk should not include quantities.
· The receiving clerk should count the items in the shipment and prepare a receiving report.
· Copies are sent to inventory control and accounts payable.
Study Unit 8: Responses to Assessed Risks
Which of the following statements about the auditor’s response to assessed RMM in a FS audit is true?
RAPs performed to obtain an understanding of an entity’s internal control also may serve as Test of Controls
· Performing risk assessment procedures to obtain an understanding of the entity and its environment involves, among other things, evaluating the design of controls and determining whether they have been implemented.
· Tests of controls evaluate their operating effectiveness in preventing, or detecting and correcting, material misstatements at the assertion level.
· Although risk assessment procedures and tests of controls differ, they may use the same types of procedures. Thus, the auditor may decide that it is efficient to test operating effectiveness and evaluate design and implementation at the same time.
· Furthermore, some risk assessment procedures may provide evidence about operating effectiveness. For example, the auditor may (1) inquire about the use of budgets, (2) observe comparison of budgets and actual results, and (3) inspect reports on the investigation of variances (AU-C 330 and AS 2301)
Test of Controls:
· The purpose of tests of controls is to evaluate their effectiveness in preventing, or detecting and correcting, material misstatements at the assertion level.
· Thus, the auditor performs inquiry and other audit procedures to obtain evidence about such matters as the following:
(1) how the controls were applied at relevant times,
(2) the consistency of application, and
(3) by whom and by what means they were applied.
· The auditor also should determine whether the controls depend on indirect controls and whether such controls should be tested. For example, when an auditor tests user review of exception reports, the controls over information in the reports are indirect controls
Study Unit 9: IC Communications and Reports
Which of the following statements about an auditor’s communication of IC related matters identified in an audit of a nonissuer is true?
The auditor should communicate significant internal related matters no later than 60 days after the report release date.
Which of the following best describes a CPA’s engagement to report on an entity’s internal control over financial reporting?
An audit engagement that results in issuance of a report relating to the effectiveness of internal control.
Study Unit 10: Objectives and Nature
Which of the following is
a false statement
about the relationship of financial statement assertions and audit procedures?
A. The relationship between financial statements assertions and audit procedures should be one-to-one
B. Audit Procedures should be developed in light of financial statement assertions about the financial statement components
C. Selection of Tests of financial statement assertions should depend upon the understanding of internal control
D. The auditor should resolve any substantial doubt about any of the management’s relevant financial statement assertions.
Which of the following statements about audit evidence is true?
The sufficiency and appropriateness of audit evidence is a matter of professional judgement.
· The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level.
· Sufficiency measures the quantity of audit evidence.
· Appropriateness measures its quality (relevance and reliability).
· To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.
Which of the following statements is correct about actions taken after the documentation completion date?
The auditor must NOT make any deletions to the audit documentation before the end of the specified retention period.
· Audit documentation must not be deleted or discarded after the documentation completion date
· However, information may be added.