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AUD CPA Exam Notes SU 1 correct answer Engagement Responsibilities Nature of an Attest Engagement correct answer Gives an assertion or opinion on the material of the responsible party. They only apply to a CPA operating in public practice. Some services require a CPA to disclaim assurance. Attestation Standards correct answer General Standards (training, proficiency, knowledge). Should be measurable. CPA must maintain independence. Field Work Standards (planning and supervision & sufficient appropriate evidence) Reporting Standards (Character of Engagement, conclusion, reservations, restrictions) Acronym: TIPSC PE CCRR Generally Accepted Auditing Standards and the International Auditing Standards correct answer The General Standards were codified between GAAS and the AICPA's ASB. They basically converge with international standards but still differ in some areas. Who regulates issuers versus non-issuer audits? correct answer Issuers Audit = PCAOB, Non- issuer = ASB Standards Who issues Government Audit Standards? correct answer The yellowbook is the government standards and is issued by the Governmental Accountability Office. It is ASB unless modified. Federal Awards may require a single audit which falls under the OMB Single Audit Act. Purpose of an Audit correct answer To provide financial statement users with an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework and free from material misstatement whether due to fraud or error. Professional Skepticism correct answer Required by auditors when performing an audit.
Audit Risk correct answer The risk that an audit will not detect a material misstatement. There will always be audit risk, but the goal is to get that risk as close to zero as possible. Managements Assertions correct answer CAVE CROC Completeness Accuracy Valuation and Allocation Existence Cutoff Rights and Obligations Occurrence Classification and Understandability Assertions about Transactions and Events (P&L and Cash Flows) correct answer Occurrence, Completeness, Accuracy, Cutoff, Classification Assertions about Account Balances (B/S) correct answer Existence, Rights and Obligations, Completeness, Valuation and Allocation Assertions about Presentation and Disclosure (Mainly notes to financial statements) correct answer Occurrence and Rights and Obligations, Completeness, Classification and Understandability, Accuracy and Valuation PCAOB Assertions correct answer Same as above but they do not explicitly address accuracy. Professional Responsibilities of Auditors correct answer Must comply with unconditional requirements (i.e. independence).
How is independence impaired? correct answer If a covered member has a direct financial interest in an attest client during engagement. Covered member has loans to or from an attest client during engagement. Covered member has indirect material financial interest. Covered member is a executor of trust. Covered member owns 5% or more of an attest client during period or engagement. Immediate family of a covered member is subject to independence rules. Close relatives can result in impairment but are less strict than immediate. May be impaired by actual or threatened litigation. What services impair independence? correct answer Covered member should not assume management responsibilities. Expert witness services, managing internal audit, tax advocacy services, appraisals all impair independence. NOT impaired by preparing taxes, business risk consulting, advisory services. NOT impaired for non-issuer bookkeeping, payroll processing. Integrity and Objectivity correct answer Must be objective and act with integrity and be free from conflicts of interest, not knowingly misrepresent facts, and not subordinate his or her judgment. Can conflicts of interest be permitted? correct answer Yes, if disclosed, and consent is obtained from appropriate parties. This does not apply to independence. Ex. Performing litigation for plaintiff when the defendant is a client. General Standards correct answer Professional Competence, due professional care, plan and supervise, sufficient relevant data. You are allowed to do research to ensure competence.
Accounting Principles Rule correct answer Any material departure from an accounting principle issued by an AICPA designated standards prevents a member rom expressing an opinion in the affirmative or stating that he/she is unaware of material modifications. Commissions and Referral Fees Rule correct answer Cannot get referrals or commissions for clients that you are performing an audit. SOX Professional Responsibilities correct answer Must disclose fees in proxy statement. Mandatory auditor rotation. Retain working papers 7 years. Offers of Employment while being a covered member correct answer This will impair independence What is the cooling off period to work for a client in a key position? correct answer 1 Year SU 3 correct answer Planning and Risk Assessment Preconditions correct answer Management uses acceptable financial reporting framework, is responsible for F/S and internal control and to give auditors necessary documents. Client Acceptance correct answer Auditor should communicate with predecessor auditor. Auditor should NOT take audit if mgmt lacks integrity. Auditor should ask why they want to change auditors. Terms of Engagement correct answer Only accept if preconditions are met and a common understanding of terms has been reached. Terms = Objective and Scope, Responsibilities of auditor and mgmt, inherent limitations, financial reporting framework, expected form and content of audit reports.
Types of Misstatements correct answer Factual (Real, no doubt) Judgmental Misstatements (unreasonable accounting estimate or inappropriate accounting policy) Projected (auditor estimate of the misstatements in the populations based on audit samples) Analytical Procedures correct answer Studies plausible relationships among financial and nonfinancial data. Develop an expectation and compare to management balance. Can be used as risk assessment (planning) or as a substantive procedure to eliminate the need for substantive tests of details in a low risk account. Five Sources of Information for Analytical Procedures correct answer 1. Financial Information from Comparable Prior Periods
- Anticipated Results
- Relationships among Elements of Financial Information (ex. Sales and A/R should increase/decrease by similar amounts)
- Comparable information from client's industry
- Relationships between financial and relevant nonfinancial information (Ex. # of hours worked and labor cost) When are analytical procedures alone enough? correct answer When tests of details may not indicate a potential misstatement (ex. completeness assertion) In stable environments and predictable environments When gathered from reliable sources Consideration of Fraud in Audits correct answer Fraud happens when there is pressure, opportunity, and rationalization. Fraud is intentional. Auditors should apply analytical procedures to Revenue accounts. Compare recorded sales to production capacity.
Fraud Risk correct answer Increased by the opportunity for management override. Increased by improper revenue recognition. Responses to Fraud Risk correct answer Assign more experienced personnel. Make unpredictable audit procedure choices. Auditor responsibility for consideration of laws and regulations correct answer Should consider law and regulations recognized as having a direct effect on the determination of material amounts and disclosures. Other indirect effects of laws may be material in the future due to penalties or the business continuing as a going concern. SU 4 correct answer Strategic Planning Issues Internal Auditors correct answer Their goal is to evaluate and improve an entity's effectiveness and processes. This can help external auditor understand internal and the entity and its environment. Can use for audit evidence or as assistance. External auditors still have all responsibility for opinion on engagement. Systematic and Disciplined Approach for Internal Auditors correct answer Required for internal auditors. Plan, supervise, review, document, etc. Using Internal Audit as Direct Assistance correct answer Obtain written acknowledgement that the internal auditors can follow instructions and that management won't interfere. External auditor should supervise internal auditor. Internal auditor should NOT perform critical procedures. Key Points of Using Internal Audit Function correct answer Internal Audit should be objective, competent, systematic and disciplined.
Control Activities for Internal Control correct answer Policies and procedures helping to ensure that management's directives are followed. Authorization, performance reviews, information processing, segregation of duties, etc. Information Systems for Internal Control correct answer Identifies and records all valid transactions, classifies properly, measure properly, and presents and discloses properly. Monitoring of Control correct answer This is management's responsibility. It is ongoing. Flowcharting correct answer Tool for documenting internal control. SU 6 correct answer Internal Control: Sales-Receivables-Cash Receipts Cycle Segregation of Duties correct answer Organizations should segregate duties so that there is a segregation of authorization, recording, and custody. If not possible, then more supervision and or owner involvement. SU 7 correct answer Internal Control -- Purchases, Payroll, and Other Cycles Management's Responsibility over Purchases, Payroll, and Other Cycles correct answer 1. Proper authorization 2. Proper order quality and quantity 3. Acceptance of goods 4. Proper terms 5. Payment of authorized goods 6. Timely payment Responsibility of personnel in purchases, payroll, and other departments correct answer Inventory control provides authorization and performs accountability. Purchasing Agent issues POs. Receiving department receives approved purchases. A/P records payment. Controls for Purchases/Cash Disbursements correct answer Documents are prenumbered. Receiving doesn't accept merchandise without PO. See page 225.
Considerations when using Purchases Technology correct answer Computers are replacing clerks so need to have proper controls. Consider passwords, field checks, and validity checks and preformatted screens. Electronic Data Interchange for Purchases correct answer When computers at one business communicate via computers with another business. Make sure there are appropriate signatures and reviews for orders. Payroll Responsibilities for Internal Control correct answer Management should ensure that there is a proper authorization of payroll, calculation, safeguarding, distribution and accounting of payroll. Controls: HR only authorizes employees and pay rates. Supervisors approve work executed. Basically every function is segregated and only does their job. Payroll Technology Considerations correct answer Objectives for controls are the same as manual. Controls are access controls, preformatted screens, validity checks, time records were automatically reconciled. Exceptions for reasonableness are investigated. SU 8 correct answer Auditor's Response to Assessed Risk How to assess RMM correct answer Assess at financial statement and assertion level. Consider transactions, balances, and disclosures. To do this, auditor uses evidence gathered from risk assessment procedures. This determines nature, type, and extent of further audit procedures. Significant Risks correct answer It will be significant if it deals with fraud, economic developments, complexity, related party transactions, high degrees of uncertainty, or a transaction outside the normal course of business. Assessing Risk in a Computer Environment correct answer Objectives are the same. SU 9 correct answer Internal Control Communications and Reports
What approaches are used to test operating effectiveness of controls? correct answer Inquiry, Observation, inspection, Re-performance Deficiency, Significant Deficiency, Material Weakness correct answer Deficiency - control doesn't allow mgmt or employees to perform functions to detect, correct or prevent misstatement on timely basis. Significant Deficiency - same as above but important enough to merit attention by mgmt. Material Weakness - combination or single deficiency in internal control where there is a reasonable possibility that a material misstatement exists in the F/Ss. SU 10 correct answer Evidence -- Objectives and Nature What is Audit Evidence? correct answer Anything used by the auditor to arrive at the conclusion on which the audit opinion is based. Includes but is NOT limited to the accounting records. What is the nature of this evidence? correct answer It is persuasive rather than conclusive. Sufficiency and Appropriateness of Evidence, and Reliability correct answer Sufficiency relates to quantity, appropriateness relates to quality. Reliability relates to how it was obtained. What constitutes substantive procedures? correct answer Tests of details, and Substantive Analytical Procedures. Types of Procedures correct answer Inspection of records, inspection of assets, observation, inquiry, external confirmation, recalculation, reperformance, analytical procedures Direction of Testing correct answer Important when testing certain assertions. For example, go from the proof of financial event to the recorded balance for the completeness assertion. Go the opposite way for the existence/occurrence assertion.
External Confirmations correct answer These provide more reliable audit evidence. Get directly if you need more persuasive audit evidence. External Confirmation of A/R correct answer Required except when not material, would be ineffective, or RMMs are low and other procedures address risk. If not used, document why not used. Does NOT provide useful information about recover-ability of receivables. Types of Confirmation Requests correct answer Positive - asks for a reply in all cases (Can be blank, better assurance) Negative Confirmation Requests - reply only if the information is wrong Direct to appropriate confirming party Management's Refusal to allow Auditor to Perform External Confirmations correct answer Ask why and verify their reasoning. Evaluate their noncompliance with the RMMs and other procedures. Perform other procedures needed to obtain relevant and reliable evidence. Noncompliance and no reason as to why with the effect being material should be disclaimed or withdrawn. Oral Response to Confirmation correct answer Not an external confirmation. Must be in writing. Audit Documentation correct answer Should include what was tested, who did it, and who reviewed it and the date all of the above was completed. Should be assembled in an audit file. Whose property are the working papers correct answer The auditors. Retain for 5 years from report date. 7 years for issuers. SU 11 correct answer Evidence -- Sales-Receivables-Cash Cycle
Receivables/Revenue - Occurrence correct answer Did sales actually occur? Get a sample of recorded sales, also include large sales in sample. Related Accounts for Receivables/Revenue correct answer Sales Returns should be tested but unless material probably not with as much substantive testing as A/R or Revenue. Bad Debt write-offs/Allowance should be tested if the A/R and Revenue testing is NOT sufficient. (Could confirm written off accounts and look for return to sender) Cash - Completeness Testing correct answer Trace daily remittance list to last validated deposit ticket for period. For disbursements, determine last check written and trace to accounting records. Are all outstanding checks on bank rec? Cash - Accuracy correct answer Compare daily remittance lists with deposits, entries, and posting. Cash - Valuation correct answer Not risky. Be aware of FC for this however. Cash - Existence correct answer This is usually a HIGH inherent risk. Count cash on hand. Confirm cash directly to bank, approved by client. Cutoff Bank Statements - This is used to test reconciling items on the year-end bank rec. Search for checks written before year end but not list as outstanding on bank rec. SU 12 correct answer Evidence - Purchases, Payables, and Inventory Cycle A/P Significance correct answer This is generally the most significant current liability A/P Completeness Assertion correct answer The most important assertion for A/P. Test by reconciling ledger with general ledger. Use analytical procedures from prior experience.
Trace subsequent payments to recorded payables. Match payments issued after year end to related payables. Any checks that cannot be matched are probably unrecorded liabilities. Search suspense files for unmatched documents and unvouchered A/P. A/P Accuracy correct answer Obtain a representation letter and compare G/L to financial statements. A/P Valuation correct answer Not a major assertion, usually satisfied by tests of existence and completeness. A/P Existence correct answer Confirmation generally NOT used for this assertion. If done, sample small and large balances. Basis it on activity in account. A/P Cutoff correct answer All goods where titles has passed to client are recorded in inventory and a/p. Keep in mind FOB Shipping point or FOB Destination for when title passes. Check cash disbursements and the offset to A/P. A/P Occurrence correct answer Sample A/P with documentary support. Inventory Completeness correct answer Mainly use analytical procedures to determine this. Inventory Accuracy correct answer Compare ledger to financial statements Inventory Valuation and Allocation correct answer Are goods priced at the lower of Cost or Market? Compare recorded costs with current cost to replace goods. Calculate the inventory turnover ratio. Small turnover might indicate obsolete items. Test manufactured inventory for reasonableness in o/h.
Investments - Accuracy correct answer Recalculate interest revenue. Investments - Valuation and Allocation correct answer For trading securities and AFS securities, make sure they are marked to market and any unrealized gain or loss is recorded. Equity method need to obtain audited financial statements. Make inquiries about non-temporary declines in fair value. Substantive Testing of Noncurrent Debt correct answer Confirm debt for existence. Do analytical procedures for completeness. Vouch recorded debt to instruments for valuation. Examine whether or not entity owns the debt. Substantive Testing of Equity correct answer Make sure net income has been closed to retained earnings. Test for sales of treasury stock. Does treasury stock actually exist? (Inspect it) Do equity balances reflect owner interest? Substantive Testing of Payroll correct answer Controls usually decrease reliance of substantive testing for this account. Specifically, a separate human resources department from payroll. 1.) Does payroll tax expense reconcile with payroll tax returns? 2.) Observe existence by observing distribution of payroll checks. SU 14 correct answer Evidence - Key Considerations What should the auditor obtain evidence with regard to Litigation Claims and Assessments? correct answer 1. Circumstances regarding the possibility of the uncertainty of a loss, probability of an unfavorable outcome and the amount or range of possible loss. What should the auditor do? correct answer Talk with in house counsel and figure out process for identifying LCAs. Obtain written representations from management. Examine documents in entity's possession (legal expense accounts and invoices from and correspondence with external legal counsel.)
Apply related procedures (board minutes, contracts, etc., or guarantees) LCA Communication correct answer If an auditor concludes no actual or potential LCA exists then no communication with the entity's legal counsel is required. Letter of Inquiry correct answer List that describes pending or threatened LCA, also a list that describes or evaluates unasserted claims and assessments. Subsequent Events correct answer Auditors should perform procedures to obtain sufficient appropriate audit evidence to ensure that all subsequent events are noted in financial statements. Written Representations correct answer Required to obtain. They compliment other procedures but do not alone provide sufficient appropriate evidence. Dated as of auditor report date. Letter is drafted by auditor but to auditor. Signed by management. Must disclaim or withdraw without written representation. Going Concern correct answer Period is 1 year after date financial statements are issued. Going concern is the ability to meet obligations as they become due. If substantial doubt exists then auditor needs to evaluate management's plan to mitigate those effects. Consider adequacy of opinion and emphasize matter or disclaim opinion. If entity fails within 1 year after audit, it doesn't mean audit was insufficient. SU 15 correct answer Evidence -- Sampling Sampling - General correct answer Sampling is supposed to represent the population. It also provides a reasonable basis for conclusions about the population. Sample is considered reasonable if, subject to sampling risk, you would come to the same conclusion if you sampled every member of population. Non-statistical Sampling correct answer Uses auditor's subjective judgment to determine sample size and selection. Auditor cannot establish quantitative methods to project results to
