CPA Exam Flashcards

Auditor's report
Terms Definitions
Personnel management
is independence required?
Transaction cycles
"1. revenue/ receipts
Four reporting standards
"1. Consistency
Sufficient Compentent evidential matter to be obtained through inspection, inquiries, observation, and confirmations. A subset of PIE.
five main management assertions
"1. existence/occurrence
following a transaction from origination through the company's processes until reflected in the financial records
Represents the predicted financial statement outcome
The level of information risk associated with small, privately held companies is usually lower than the level of information risk associated with large, publicly held companies. True or False?
compilation procedures
read the compiled financial statements; and consider whether their format is appropriate and whether any obvious material errors exist
two general approaches to sampling
"1. statistical
types of physical safeguards
"1. file labels
identified by the terms "may," "might," or "could"
explanatory material
A+C of C+E?
Acceptance and continuation of clients and engagements?
an overstatement of the true cash balance at year-end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between cash accounts
a positive expression of opinion and, therefore, a low level of 'attestation risk'
two parameters of a normal distribution
"1. mean
cash basis
an accepted type of comprehensive basis of accounting other than GAAP
explanatory paragraph
identifies basis of presentation and notes that the basis is a comprehensive basis other than GAAP
Risk Assessment Procedures
"Procedures performed to obtain an understanding of the entity and its environment, including internal control
reasons for qualified opinion
"1. minor GAAP departure
Audit risk
the probability that the auditor fails to modify the opinion on the financial statements that contain a material misstatement
date of completion of the examination procedures
report date
Internal control consideration
"1. obtain an understanding for planning purposes as required
elements of testing operating effectiveness
inquiry, observation, inspection, re-performance
Items affecting risk assessment
"1. changes in operating environment
self-regulation of accounting profession
practice ended by Sarbanes-Oxley Act
qualified for inadequate disclosure report - explanatory paragraph
additional paragraph describing omitted or inadequate disclosure and effects on financial position, results of operations and cash flows, if practicable, or indicating that information is not reasonably determinable
report file
where prior years' audit reports and management letters are organized (by client) so that the audit team can conveniently review formal reports previously issued for each client
analytical procedures in planning
aids in understanding client activities and in targeting risky areas where material misstatements are more likely
Management's Financial Statement Assertions - Presentation and Disclosure
C ompleteness
U nderstandability and Classification
R ights and Obligations & Occurrence
V aluation and Accuracy
built in controls for hardware and systems software
"1. parity check
aplicability of GAAS
all except for 4th reporting standard - opinion on financial statements as a whole does not apply
factors affecting use of analytical procedures as substantive evidence
"1. nature of assertion
third attestation standard of reporting
reservations about engagement or assertion
third standard of reporting
when the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report
valuation or allocation
that the dollar amounts attributed to the elements of the company's financial statements are appropriate and in accordance with GAAP
general sufficiency of evidence
evidence is usually persuasive rather than compelling
fraud for which auditor must specifically assess risk
"1. fraudulent financial reporting
Objectivity of Internal auditors
level to which internal auditors report (organizational status)
standard setting responsibilities of PCAOB
auditing and related attestation, quality control, ethics and independence standards
What is stratification?
Items may be separated into relatively homogeneous groups. Generally results in a smaller sample size. Commonly used when population has high variance.
Auditor Findings - Primary Assertion
Whether the statements are "presented fairly" in accordance with GAAP (Generally Accepted Accounting Principles)
What is the correspondence between assertions and established criteria?
GAAP represents the established criteria upon which assertions are evaluated.
type of engagement
an engagement to report on an element, accont, or item of financial statement can be a separate engagaement or in conjunction with audit of financial statements
interim standards adopted by PCAOB
range from revocation of firm registration or barring persons from participating in audits of public companies to monetary penalties or remedial measures
references in auditor's report to the standards of the PCAOB
auditing standard no. 1
Statements on Auditing Standards (SASs)
Pronouncements issued by the Auditing Standards Board of the AICPA that serve as interpretations of GAAS
limited reporting engagement- audit report
report refers only to specific financial statement audited
Ways of Documenting Understanding of Internal Controls
"1. Flowcharts of transaction cycles
audit procedures for accounting estimates
"1. inquire of personnel to obtain understanding of how estimate developed
Three Categories about which Internal Control is to provide reasonable assurance
"1. reliability of financial reporting
particular internal control considerations in an EDP environemtn
"1. segregation of duties may be undermined
audit procedures for completeness of accounts payable
"1. review cash disbursements after year end for unrecorded liabilities
items inversely related to variables sample size
"1. allowance for sampling risk
items directly related to variables sample size
"1. estimated population standard deviation
prior year unqualified, current year qualified - rules regarding comparative financial statements
no prohibition against issuing different reports on one or more comparative financial statements presented
What are the components of the Standards of Field Work?
-) Adequate planning and supervision-) Sufficient and competent evidence-) Understand internal controls
What is the purpose of PCABO?
PCABO is empowered to establish auditing standards for the audits of publicly traded companies. These standards will remain effective untill superseded by another standard issued by the PCABO.
What are the responsibilities of the CPA?
1-Establishing and understanding with the client reguarding the servi ces to be performed for each engagement and documenting the communication through a written communication with the client.

2-Conducting the audit in accordance with GAAS

3-Ensuring that those charged with goverance are aware of any significant deficiencies that come to their attention.

4-Either expressing an opinion reguarding the FS, taken as a whole, or stating that an opinion cannot be expressed.
Two approaches to evaluate reasonableness
"1. review and test process used by management to develop estimate
Why group by transaction cycle?
control risk is generally assumed to be contant within a category of transactions as all transactions are processed the same way.
audit procedures when there is evidence of illegal acts
"1. obtain an understanding of the nature of the act, the circumstances surrounding it, and the effects on the financial statements
procedures to test rights and obligations
"1. inqnuire of applicable client personnel
successor auditor's actions when predecessor has reported on misstated financial statements
successor should ask the client to inform the predecessor of the situation and try to arrange a meeting with the three parties involved for resolution
Internal matters raising doubts about 'going concern' issues
labor problems, dependence on single projects or customers, or harmful long-term commitments
disclaimer of opinion report - explanatory paragraph
paragraph added to describe the substantive reasons for the disclaimer
predecessor's prior year report not presented - restatement of prior period financial statements
if prior period financial statements restated, introductory paragraph of audit report must indicate that a predecessor auditor reported on the financial statements before restatement
reports on application of accounting principles - prohibition
cannot issue written report on application of accounting principles to hypothetical transaction
Four Steps to Audit Sampling?
#1 - always assume a normal distribution.
#2 - random sample
#3 - sample is representative of the population
#4 - standard deviation/sampling risk
Five reasons for an unqualified opinion with explanatory paragraph / modified wording:
-) lack of consistent application of GAAP-) substantial doubt about going concern-) auditor agrees with departure from promulgated accounting principles-) emphasis of a matter-) reports involving other auditors
What is the definition of the General Standard 1?
AU 210--Technical training and proficiency--all persons must have proper education and experience in the field of auditing and be well educated on current developements in business
opinion paragraph reference change - accounting principles
Changed wording to : US generally accepted accounting principles
audit procedures for interest payable
the auditor can compute an estimate of accrued interest for the time period involved, based on the interest rate (and payment dates) specified in the underlying debt agreements
audit procedures for wages and salaries payable
the auditor can compute the estimated acrual, in view of the number of days to be accrued relative to the whole pay period
audit procedures when no evidence of illegal acts
"1. make inquiries of management about compliance with laws and regulations
qualified for scope limitation - causes of scope limitation
client imposed or due to other circumstances
objective of output application controls
that the output of data (and the distribution of any related reports) is accurate and as authorized
What two types of reports affect the introductory paragraph?
The unqualified shared report with other auditors and the disclaimer due to scope limitation entail modifications to the introductory paragraph.
What are the general reasons for a qualified report?
Assume both don't materially impede on making a statement on the fairness of the statements.-) The scope of the audit has been restricted-) the statements have not been prepared in accordance with GAAP
What is the procedure for establishing predecessor and sucessor auditor communications?
Since the Code of Professional Conduct precludes an auditor from disclosing confidential information obtained in an audit unless the client consents, the successor auditor must ask the prospective client to authorise the predecessor auditor to repond fully to the successor's inquiries.
When Control Risk Should be Assessed at the Maximum
"1. when controls are not very strong
What is the purpose of the application of the standards of reporting?
The standards of reporting apply to the preparation and communication of the auditor's report.
two types of service auditor reports on internal control
"1. on the adequacy of design of internal control
What are the GAAS General Standards?
1) The audit must be performed by a person having adequate training and proficiency as an auditor

2) The auditor must maintain independence in mental attitude in all matters relating to the assignment

3) The auditor must exercise due professional care in the performance of the examination and the preparation of the report
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