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AUD Final Exam Actual Solution!!
Private company auditing standards - Answers ASB, AICPA professional code of conduct Public company auditing standards - Answers PCAOB, AICPA professional code of conduct, SEC Due professional care - Answers level of care, skill, and diligence that auditors are expected to exercise when performing audit engagements Professionalism - Answers the conduct, aims, or qualities that characterize or mark a profession/ professional person Professional Competence - Answers capable to complete the engagement Commissions and Referral Fees - Answers NOT allowed Usually cannot disclose client info without client consent except for when: - Answers 1. meet disclosure and requirements under GAAP and GAAS
- comply with subpoena
- allow a review of member's professional practice under AICPA authority
- comply with investigative/ disciplinary proceeding
- allow a review of a CPA's professional practice WITH purchase, sale, or merger Responsibility - Answers exercising professional and moral judgements public interest - Answers serve the public interest and honor public trust Integrity - Answers maintain and broaden public confidence Objectivity & Independence - Answers should be independent in fact AND appearance. Free of conflicts of interest Due Care - Answers perform professional responsibilities with competence and diligence Independence issues (relationships not allowed) - Answers - unpaid fees viewed as loan -loans/leases/guarantees -immediate family in key position at firm (financial interest) -no managerial role in entity during FS period -nonattest services- entity is responsible
**auditors are not liable for errors in judgment Negligence - Answers failure to exercise reasonable care in a situation, resulting in harm or injury to another party. Breech of duty To establish negligence must prove: - Answers auditor had a duty to the client auditor breached that duty causation b/w auditor's negligence and client damage resulting damages Tort - Answers wrongful act (other than a breech of contract) where civil action may be taken Fraud (3rd party) - Answers auditor acted with knowledge and intent to deceive Ordinary negligence (3rd party) - Answers and absence of reasonable due care Gross negligence (3rd party) - Answers an extreme, flagrant, or reckless departure from professional standards of due care (AKA constructive fraud)
Scienter - Answers acting with intent to deceive, defraud, or with knowledge of a false representation Statutory Law - Answers written law enacted by the legislative branch of federal and state govt -auditors can be help civilly OR criminally liable Auditor liability - Answers laws that provide basis of legal liability for auditors to relate to auditor's performance Securities act of 1933 - Answers disclosure of info in a registration statement for IPO of new securities Securities Exchange Act of 1934 - Answers regulates documents filed with SEC and addresses new offerings as well as trading of securities after they are issued SOX act of 2002 - Answers main goal was to restore investor confidence in the securities market and deter future corporate fraud. after enron. Created PCAOB Unqualified report - Answers GOOD "present fairly.... in conformity with GAAP" auditors obtained "reasonable assurance"
Disclaimer - Answers insufficient appropriate evidence to form an opinion on the overall FS due to a material and pervasive scope limitation/ failed auditor independence Different reports on comparative FS - Answers issue a qualified opinion and specify the year it relates to Change in report on the prior period FS (company restates and corrects PY FS for comparative purposes) - Answers include explanatory paragraph discussing prior year audit opinion and current year (new) change in opinion Report done by predecessor auditor - Answers reissue audit report/ obtain rep letter from CY auditor OR successor auditor refers to predecessor's audit report in CY audit report Contingent Liability - Answers potential obligation to outside parties (ex. pending litigation, income tax disputes, product warranties/ defects, obligations) 3 categories of CL - Answers Probable: the future event is likely to occur Reasonably probable: more than remote but less than likely Remote: slight chance
when would you need a journal entry - Answers Need JE when probable and reasonably estimable/known dr. loss/expense cr. liability Procedures for ID Contingent Liabilities - Answers -BOD meeting min -review contracts/loan agreements
- review tax returns -confirm docs w/ outside agencies -inspect other docs Subsequent Event - Answers event or transaction that occurs after the balance sheet date but prior to issuance of FS -- and the auditor's reports might materially affect the FS Type 1 Subsequent Event - Answers Recognized Events- provide additional evidence ab conditions that existed at the date of the balance sheet and affects amounts involved in FS prep process
- requires aje in FS Type 2 Subsequent Event - Answers Unrecognized Events- events that provide evidence about conditions that did NOT exist at the date of bal sheet -requires disclosure note
-Accumulated deficits -negative cash flow Auditing standards require that auditors communicate matters with ___ - Answers "those charged with governance"= BOD, aud committee
- auditor retention
- relevant info shared
- communicate results Audit sampling - Answers where auditors select a representative sample from a larger population (less than 100% of pop)
- not economical to examine every one
- only provide reasonable assurance sampling risk - Answers possibility that sample is NOT representative of the whole population
- incorrect conclusion bc says good& actually isn't vv
- can reduce sampling risk by taking a larger sample
- INDIRECT- larger the sample size, the lower the sampling risk Representative Sample - Answers a sample that accurately reflects the characteristics of the population as a whole
Nonsampling risk - Answers risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.
- judgement errors detection risk= - Answers sampling and nonsampling risk Type 1 error - Answers risk of incorrect rejection (aka. risk of under reliance)
- risk that sample supports a conclusion that the control is not operating effectively when in reality, it IS
- EFFICIENCY Type 2 error - Answers risk of incorrect acceptance (aka. risk of over reliance) says control is working but is NOT
- EFFECTIVENESS
- worse error Confidence level - Answers desired level of assurance in the results of a sample
- DIRECT - higher the desired confidence level, the higher the sample size (100-Risk of incorrect acceptance) Tolerable error - Answers acceptable defect rate
- test of controls MU$ (monetary unit sampling) - Answers estimate the dollar amount of misstatement
- substantive testing -test for overstatement errors In order for a control to pass, the tolerable deviation rate needs to be __ than the upper deviation rate - Answers TDR > UDR-- good/ pass TDR < UDR-- bad/ failed control desired confidence level relationship to sample size - Answers direct
- as the confidence level increases, so will the ssz tolerable misstatement relationship to sample size - Answers indirect/ inverse
- as the tolerable misstatement increases, the sample size amount will decrease Expected misstatement relationship to sample size - Answers direct
- as the expected misstatement level increases, the sample size will increase too population size relationship to sample size - Answers direct
- as the population increases, so will the sample size sample size:
of dev: given
sample dev rate: computed upper dev rate: - Answers ssz: chart sample dev rate: (# of dev/ssz) computed upper dev rate: chart if tol dev rate> computed dev rate, pass
