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Define assurance services.
A variety of services provided that offer assurance (enhanced degree of confidence) performed by a CPA to various users.
What are two reasons a company may require assurance services?
Fraud and illegal act-related services; customer satisfaction measures.
What is a financial reporting framework?
The rules being followed for most companies; it is GAAP for domestic companies and IFRS for international companies.
What are management assertions?
Management representations of the information being evaluated.
List three different management assertions.
Existence - observe inventory cost.
Completeness - look at terms and shipping costs.
Occurrence - review cost accounting sheets.
Explain the broad reason for the Sarbanes-Oxley Act (SOX).
It was a response to the Enron and WorldCom events, resulting in increased penalties for corporate fraud and responsibilities for top management.
List three different types of public accounting firms.
local, regional, national
Describe the role of partners in a public accounting firm.
Partners are responsible for the overall audits of a company, usually dealing with highly controversial accounts.
What are two different types of auditors?
Internal Revenue Agents - IRS audits tax returns. 2. Government Accountability Office (GAO) - auditors providing audits of governmental agencies.
What are the requirements to become a CPA?
Pass the CPA exam (4 parts within 30 months), complete an ethics exam, complete required hours of employment under CPA (usually 2,000 hours), and complete 120 hours of continuing education every 3 years.
How does the financial reporting framework impact an audit?
It provides the set of rules and standards that auditors must use to evaluate whether a company's financial statements are prepared accurately and fairly.
Who oversees public accounting firms?
The SEC (Securities and Exchange Commission).
List three key elements in an audit report.
Qualified Opinion 2. Scope Limitation 3. Adverse Opinion
What causes a disclaimer of opinion in an audit report?
Inability to perform the audit due to a pervasive scope limitation.
What does the term reasonable assurance mean?
An expressed opinion stating that financial statements are free from material misstatement.
What is a critical audit matters paragraph?
It contains any area that required significant judgement and/or elaborate disclosures.
Why is fraud hard to detect?
Fraud is often concealed through various methods.
What is an auditorās responsibility to detect fraud and errors?
To plan and perform an audit to gain reasonable assurance; errors are unintentional misstatements.
What is the audit report date and why is it important?
It marks the end of reporting responsibility.
Why is professional ethics important for CPAs?
It is vital for maintaining responsibility to the public and ensuring public confidence.
Differentiate between independence in mind and independence in appearance.
Independence in mind is about making decisions without influence, while independence in appearance is about avoiding situations that could make others question one's integrity.
What does sufficient relevant data mean in relation to an audit?
means that an auditor has gathered enough data that is directly related to the specific financial statement assertions being tested,
Who has the highest authority to sanction a CPA for a nonpublic client?
The state board of accountancy.
What is the confidentiality level of a CPA for their client?
They may gain insider information during an audit but have a legal obligation to disclose illegal acts.
What is common law?
Legal principles based on past judicial opinions.
List the plaintiffs for the Securities Act of 1933.
Individuals who purchased securities based on materially misleading registration statements.
What is a contract between an auditor and client called?
Engagement letter.
What does gross negligence also refer to?
Constructive fraud.
What audit work is performed for a compilation?
Preparation of financial statements in proper form without obtaining assurance on those financial statements.
What is the audit risk formula?
Inherent Risk x Control Risk x Detection Risk.
What is inherent risk?
The risk related to the area being tested based on external or industry factors.
What is control risk?
The risk that the company lacks adequate controls to detect errors or misstatements.
What do the results of testing control risk tell the auditor?
They assess whether controls are adequate to detect errors or misstatements.
What are substantive tests?
Tests that involve details of balances, transactions, and disclosures.
When are analytical reviews done?
Typically during engagement planning to identify significant items affecting the overall audit.
What does a client representation letter do?
It summarizes key oral representations made by management.
When is a client representation letter prepared?
Dated the same as the auditorās report (end of fieldwork).
Name two audit procedures that could be performed.
Inspection of tangible assets; reperformance of procedures.
What is a concern regarding data analytics?
Legal liability if auditors analyze larger samples of the population.
What is a lead schedule?
Sheets that combine several accounts presented in the financial statements.
What does a permanent file contain?
Information that can be used for many years.
What should an auditor understand about the clientās business?
Relevant assertions and significant risks.
Explain shopping for accounting principles.
Finding a firm that allows certain accounting practices over others.
What is vouching?
Comparing financial statements to source documents to identify existence or occurrence.
What is tracing?
Following source documents to financial statements to identify completeness.
What is overall materiality?
Assumes that each misstatement could go undetected; performance materiality is a judgment call related to specific accounts.
What is tolerable materiality?
Materiality applied to specific accounts or transactions relevant to the assertion being tested.
What is extrapolation?
Extending a trend into the future or applying results of a sample to the entire population.
Who establishes an audit program and when?
An auditor during the planning phase of an audit.
What is the purpose of an audit program?
To ensure that financial statements are reasonably stated for the applicable financial reporting framework.
What is a dual-purpose procedure?
Tests that combine both an internal control test and a substantive test.
What would an auditor ask a predecessor auditor?
Questions about disagreements, integrity of management, and communications.
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