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- Which method / technique should an auditor use when identifying entity-level controls?
a top-down ap- proach.
The technique starts with finan- cial level focus and requires the audi- tor to identify the overall risk to inter- nal controls over financial reporting. It requires under- standing the over- all risk of internal control over finan- cial reporting.
An auditor uses the information gathered to iden- tify the accounts that present the risk of materi- al misstatements and in determining the controls to be tested.
After the finan- cial level focus, the auditor moves to the entity-level control focus and identifies signifi- cant accounts, dis- closures, and rele- vant assertions.
Which of the following method is used by an auditor to trace data movement from the financial level to the significant account?
3. Elements of a System of Quality control include the following:
a critical data path
A critical data path is essen- tial in evaluat- ing whether man- agement asser- tion remains rel- evant throughout the process of data movement from the initial transaction to the final step.
Tone at the top (leadership re- sponsibilities for quality within the firm) Ethical Require- ments (indepen- dence) Acceptance & con- tinuance of client relationships and specific engage- ments Human Resources Monitoring Engagement per- formance
- 5 components / elements of internal controls CRIME
- Control Activi- ties
- Risk Assess- ment
7. There are two types of reports issued by service orga- nizations.
on prior years con- trol test if he/she is able to verify that automated ap- plications control has not changed since the last audit or minimal change have taken place since an auditor established base- line.
The type 1 report describes the ser- vice organization's system and in- cludes assertions about its design ef- fectiveness.
The type 2 re- port includes ad- ditional assertions about its operating effectiveness.
Both reports in- clude an audit opinion issued by the service orga- nization's auditor. Auditors can use these reports as audit evidence af- ter performing pro- cedures to evalu- ate their appropri-
8. There are two methods you can use to review applica- **tion controls.
- A219 (Management) Assertions used by the auditor** in considering the different types of potential mis- statements that may occur may fall into the following **categories:
- Apply analytical procedures for risk assessment pur-** poses.
ateness and rele- vance.
Business process method. Single application method.
a. Assertions about classes of transactions and events, and relat- ed disclosures, for the period under audit:
b. Assertions about account bal- ances, and related disclosures, at the period end:
Ratio analysis: This involves com- paring financial data from differ- ent periods or with industry averages to identify unusual trends or relation- ships. Trend analysis: This involves look- ing at changes in financial data over time to identify pat- terns or trends that may indicate po- tential problems.
standards.
It also develops and grades the Uniform CPA Ex- amination.
Statements on Standards for Ac- counting and Re- view Services (SSARS) are is- sued by the AIC- PA's Accounting and Review Ser- vices Committee, the senior techni- cal committee of the Institute des- ignated to is- sue pronounce- ments in con- nection with the unaudited finan- cial statements or other unaudited fi- nancial informa- tion of a nonis- suer. Just as how the audit reports refer to GAAS or PCAOB, Au- dit and Compila- tion reports refer to SSARS as promul- gated by the AIC- PA.
The SEC en-
forces and regu- lates security laws, the AICPA dic- tates the profes- sional conduct of accountants, and the FASB devel- ops GAAP.
- Financial Accounting Standards Board (FASB) a private stan- dard-setting body whose primary purpose is to es- tablish and im- prove General- ly Accepted Ac- counting Princi- ples (GAAP) with- in the United States in the pub- lic's interest.
The Securities and Exchange Com- mission (SEC) designated the FASB as the or- ganization respon- sible for setting accounting stan- dards for public companies in the U.S.
The FASB re- placed the Amer- ican Institute of Certified Public Accountants' (AIC-
B A fee paid to the client's tax accountant for recom- mending a computer system to the client C A contingent fee paid to the CPA for preparing the client's amended income tax return D A contingent fee paid to the CPA for reviewing the client's financial statements
14. An accountant can perform, with preapproval of the audit committee of the board of directors, which of the following non-audit services during the audit of an issuer? A Bookkeeping services B Human resource services C Tax planning services **D Internal audit outsourcing services
- Considering only the provisions of the AICPA Code of** Professional Conduct, which of the following services
A CPA may rec- ommend a prod- uct to a tax client, provided the fee paid to the CPA is disclosed to the client. A CPA may not recommend or refer any product or service to an audit client, for a fee. A CPA may not accept a fee con- tingent upon the outcome of an original or amend- ed tax return or claim for refund or an audit or review of financial state- ments.
C Tax planning services
Tax-planning is an acceptable non-audit service that an accountant can perform, with preapproval of the audit term-21com- mittee of the board of directors, during the audit of an is- suer.
B Representation of a non-attest
may a CPA perform for a commission or contingent fee? A Preparation of an original income tax return. B Representation of a non-attest client in an IRS ex- amination. C Preparation of an amended income tax return to claim a deduction that was inadvertently omitted on an originally filed return. D Performance of consulting services for an audit client.
client in an IRS ex- amination.
The AICPA code of professional con- duct stipulates that a CPA can repre- sent a non-attest client in an IRS examination for a commission or a contingent fee.
Under the AIC- PA Code of Professional Con- duct, contingent fees are specifi- cally prohibited for audits and reviews of financial state- ments or examina- tions of prospec- tive financial state- ments. In addition, a member in public practice is prohib- ited from prepar- ing an original or amended tax re- turn or claim for a tax refund for a contingent fee for any client.
However, contin- gent fees are per- mitted where they are based on
financial statements C A contingent fee for preparing a client's income tax return D A contingent fee for representing a client in tax court
be permitted un- der the ethical standards of the profession. How- ever, a contingent fee for represent- ing a client in tax court would be permitted under the ethical stan- dards, because the tax authority initiated the pro- ceedings. A mem- ber who accepts or pays a refer- ral fee in relation to a client must disclose such ac- ceptance or pay- ment to the client. A member is pro- hibited from rec- ommending or re- ferring, for a com- mission, any prod- uct or service to a client when that member or mem- ber's firm performs a financial state- ment compilation where the mem- ber might reason- ably expect that a third party will use the statement. Since the financial statement compi-
17. Which of the following is not a documentation require- ment for an engagement conducted pursuant to the standards of the PCAOB?
A The auditor must identify all significant findings or issues in an engagement completion document. B The auditor must retain audit documentation for at least seven years from the report release date. C Audit documentation must contain sufficient infor- mation to enable an experienced auditor, having no previous connection with the engagement, to under- stand the nature, extent, timing, and results of proce- dures performed; evidence obtained; and conclusions reached. D A complete and final set of audit documentation should be assembled for retention not more than 60 days after the report release date.
18. When considering whether the comparability of finan- cial statements between periods has been materially affected, the auditor should evaluate and report on
A A change in accounting estimate that is inseparable from the effect of a related change in accounting prin-
lation was for in- ternal-use only, it would be permit- ted under the eth- ical standards.
D
A complete and final set of au- dit documentation should be assem- bled for retention not more than 45, not 60, days af- ter the report re- lease date. Ac- cording to GAAS, not PCAOB au- diting standards, the assembly of the final audit file should be completed within 60 days follow- ing the report re- lease date. The al- ternative answers are all audit docu- mentation require- ments for public companies.
A For example, when a change is made to the method of depre- ciation of an as-
ment in previous- ly issued financial statements.
D., when a change in the report- ing entity results in financial state- ments that, in ef- fect, are those of a different report- ing entity, the au- ditor should in- clude an empha- sis-of-matter para- graph in the au- dit report that describes the change in the re- porting entity and provides a refer- ence to the enti- ty's disclosure, un- less the change in reporting en- tity results from a transaction or event. A change in reporting en- tity that results from a transaction or event, such as the creation, ces- sation, or com- plete or partial pur- chase or disposi- tion of a subsidiary or other business unit, does not re-
19. What is a credit memo? (aka credit note, "credit mem- orandum, credit memorandum)
quire recognition in the audit re- port. Examples of a change in re- porting entity that should be recog- nized in the au- dit report because they are not the result of a trans- action or event in- clude (1) present- ing consolidated or combined finan- cial statements in place of financial statements of indi- vidual entities; (2) changing specif- ic subsidiaries that make up the group of entities for which consolidat- ed financial state- ments are pre- sented; and (3) changing the en- tities included in combined financial statements.
issued to a customer when returning goods (hey, i won't give you your cash back but here is some store credit)
21. What is a walkthrough of internal control? What is its purpose?
assertions in the financial statements - E.g., Inspection, Existence/Occur- rence, etc.
...a risk assess- ment procedure to obtain evidence about the de- sign and imple- mentation of inter- nal control. Here the auditor traces transactions from inception through recording in books to reporting in financial state- ments.
Following a trans- action from its origination until it is reflected in the financial state- ments.
- What does it mean when control risk is at maximum? ...defined in SAS 55 as "the greatest probability that a material misstate- ment that could occur in a finan- cial statement as- sertion will not be prevented or de- tected on a time-
ly basis by an enti- ty's internal control structure."
When controls are operating effec- tively, the audi- tors can assess the control risk at less than the max- imum. With con- trol risk less than maximum, audi- tors can leverage controls and re- duce the nature, timing, and ex- tent of audit proce- dures. However, to assess control risk at less than the maximum, the au- ditor must obtain evidence that con- trols were operat- ing effectively dur- ing the entire peri- od of reliance.
- Validation checks, also called edit checks... are programs de- signed to identify flawed data, or dis- crepancies (also called queries). Each one must check for a single problem and ap- ply the same text, state, and action to
