D215 Auditing

Identify a service that falls under audit services.

Examination of historical financial statements

Examination of internal controls is a service that comes under _______ services, which fall under _______ services.

attestation; assurance

Within a U.S. context, the applicable financial reporting framework is typically _______.

Generally Accepted Accounting Principles (GAAP)

Which two audits does an integrated audit combine?

A financial statement audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR)

Who among the following users of the financial statement of a company may be particularly interested in evaluating whether the company is paying a fair amount of taxes given its reported earnings, and to gain a better understanding of the company’s activities?

Government

Which items are part of the organizational structure as detailed in the Committee of Sponsoring Organizations' framework?

division

Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on the information contained in the financial statements.

What term captures this problem?

reliability

Which of the following falls within the purview of a financial statement preparer?

Changes in equity

Management is responsible for which of the following?

Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.

Which of the following comes under the purview of the Public Company Accounting Oversight Board?

Auditing Standards (AS)

Which of the following is a private professional membership organization of CPAs representing the accounting profession?

AICPA

Which statement is correct as to financial statement audit reports for public versus private companies?

There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements.

With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is _______.

high, but not absolute

If auditors conclude the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit, it would mean the auditors discovered a/an _______ in the client’s ICFR.

Material weakness

Which of the following is the discovery of material weakness?

Conclusion that the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit

Module 1-LO1.8- Explain the audit expectation gap.

Which of the following beliefs will narrow the audit expectation gap?

There is no guarantee the auditor will find all material fraud, should fraud have occurred.

3 multiple choice options

Economic conditions impact _______.

financial statement user's expectations

In defining a profession or professional, one common characteristic is _______.

concern for the public interest

Which group licenses CPAs?

The state boards of accountancy

What must CPAs complete to obtain licensure?

Required education, pass the CPA exam, and requisite experience requirement.

Susan, a college student, is preparing an essay. Which of the following principles should she use to explain why a Certified Public Accountant (CPA) is defined as a Concern for Public Interest (CPI) professional?

Code of Ethics

Interpretations in the AICPA code provide additional guidance regarding the scope and applicability of the _______.

Rules of conduct

Which of the following components of the AICPA are enforceable?

Rules of conduct

The structure of the AICPA _______________ includes four major sections: preface, rules for members in public practice, rules for members in business, and rules for other members.

Code of Professional Conduct

Which of the following provides guidance to all members of the AICPA with respect to performance of their professional responsibilities?

Code of Professional Conduct

Which of the following is the threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client's interests or too accepting of the client's work or product?

Familiarity threat

If a CPA is unable to implement effective safeguards, what should the CPA do?

Decline the engagement.

A/an ________ threat exists if a CPA performs bookkeeping services for a private company client and that work needs to be evaluated by the same firm in the course of an attest engagement.

Self-review

According to the integrity and objectivity rule, in the performance of any professional service, a member shall not knowingly _______.

Hide activities that could be a conflict of interest

How does a small firm resolve the conflict of interest issue in a divorce case?

Provide tax services to only one of the two parties.

A CPA, who is a staff member on an audit engagement team, has a difference of opinion from her supervisor regarding the application of an auditing standard. She concludes that the difference may result in a material misrepresentation. She discussed her concerns with her supervisor, but the difference of opinion is not resolved.

Which action should the staff member do next?

Bring her concerns to the manager on the engagement.

A CPA works as a staff on an attest engagement. The CPA’s stepbrother is employed on the board of directors of the attest client.

What action, if any should be taken as a result of this situation?

The CPA must be removed from the engagement as he is a covered member and his stepbrother is in a key position.

Interpretation 1.295 indicates that before performing nonattest services, the CPA should establish and document in writing an understanding with the client regarding ______.

The objectives of the engagement, the services to be performed, and any limitations of the engagement

As a general rule, professional employees in a CPA firm who have not covered members and their immediate family members cannot ______.

Be a trustee, director, or officer of an attest client or of the client's pension or profit-sharing trust

Which of the following standards refers to undertaking professional services that can be completed with the appropriate level of professional skill?

Professional Competence

According to the due professional care standard, CPAs should exercise the professional care expected of _______ in the performance of professional services

Other CPAs performing similar work

Which of the following general standards refers to adequately preparing for the engagement and providing the appropriate management oversight of the performance of professional services?

Planning and Supervision

Which of the following standards is used for preparing financial statements with other accounting principles?

Generally Accepted Accounting Principles (GAAP)

Thom is a new member of the audit team. In working on his first audit engagement, he and his supervisor disagreed, materially, on the amount that the client should report for warranty liability. The auditing firm has a policy for this situation in which both auditors document their opinions and the rationale behind them.

This is an example of following which of the aspects of the integrity and objectivity rule?

Subordinating judgment

What should CPAs clarify while preparing financial statements for small businesses?

The financial reporting framework

The risk assessment phase of an audit includes:

gaining an understanding of the client.

Which phase of an audit involves an evaluation of the results of the detailed testing in light of the auditor’s understanding of the client and forming an opinion on the fair presentation of the client’s financial statements?

Reporting phase

When auditors remain independent of the entity, its management, and its staff when completing the audit work, and work with an alert and questioning mind, the auditor is

Exhibiting professional skepticism.

Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error and a critical assessment of audit evidence.

Which condition would require the auditor to apply professional skepticism?

Audit evidence recently gathered is contradictory to other evidence previously gathered

Obtaining positive results from testing controls means that:

The auditor can plan to reduce the reliance on detailed substantive testing of transactions and account balances.

The audit strategy is known as the predominantly “substantive approach”:

Means the auditor will spend minimum effort testing the client's system of internal controls.

John West, President of Alliah Company, has just engaged a CPA firm to perform an audit of their financial statements. Because Alliah Company is a new client, the CPA firm must gain an understanding of the client, identify risk factors, develop an audit strategy, and set planning materiality.

Which of the following best describes this phase of audit planning?

Risk Assessment Phase

In an audit strategy, the first step is to identify ________ risks during the ________ phase.

inherent; risk assessment

An example of an incentive or pressure that increases the risk of fraud is:

The client operates in a highly competitive industry.

In the context of identifying fraud, which of the following describes the theft of inventory by employees or others?

Misappropriation of assets

If a prospective new audit client does not allow the auditor to contact its existing auditor:

the new auditor should consider that a negative factor on the integrity of client management.

An auditing firm is considering the acceptance of a new client. Before accepting the client, the firm communicates with the client's previous auditor, personnel, and industry peers. The firm is

assessing the integrity of the proposed client's management.

In January 2020, Chestnut Accountants, LLC interviewed John Wales, President of Bullzai, Inc., who requested an audit of his financial statements in order to obtain a bank loan. During the interview, Mr. Wales stated that he, alone, performs the accounting functions of the company. Because he dislikes technology, Mr. Wales performs the accounting functions on notepads and admits to having misplaced one or two of the notepads.

Which acceptance and retention factor should influence Chestnut's decision to accept Bullzai as a new audit client?

Special circumstances and unusual risks

A CPA, who is a partner in an accounting firm, is reviewing his audit engagement clients for continuation decisions for the upcoming audit season. One of the clients is in the restaurant industry and has been impacted by their state’s mandatory 5-month shutdown for restaurants due to COVID 19. The client failed to meet two of the last two quarter’s debt covenants, and their negotiations to renew the line failed.

Which factor would negatively influence retention of the client?

Management is preoccupied with meeting specific accounting numbers.

Subre & Co. have decided that an insurmountable conflict of interest exists regarding a potential new client that they were considering accepting.

What should they do?

Subre should decline the offer to be the auditor of the prospective client or resign from the audit of the existing client.

Luke's Fish Emporium is being audited by Dunn Hollow Firm. Luke's annual net income is $10,250,000. Dunn Hollow has determined that 10% of net income is the planning materiality for accounts found on the income statement.

Which of the following accounts is material?

Other Income of $1,425,000

Figuly & Wiggins, Inc. is auditing a client that has $100,000 in net income. After determining the planning materiality as 10% of net income, the auditing team has discovered several issues.

Which of the following represents qualitatively material information?

Suspected theft of cash by the controller of $1,250

Jerdana Accounting Firm is auditing Endothon Company. Jerdana has determined that $5 million is the planning materiality and $1 million is the performance materiality for each account. When Jerdana starts the audit, they find that none of Endothon's accounts are above the $1 million performance materiality.

What should Jerdana do?

Continue to perform the detailed audit procedures on every account because if any misstatements exists, they may still be material in aggregate.

DFG, PC is auditing Plairtrack, Inc., a long-term audit client. Plairtrack has devoted substantial resources into it's new division as it enters the high-tech pharmaceutical industry. DFG has determined that the inherent risk, due to Plairtrack's new arrival to the industry is 80%, but it's control risk is a low 10% because they've been in business for 20 years. Due to DFGs familiarity with both the industry and Plairtrack, they have set the detection risk at 2%.

What is Plairtrack's risk of material misstatement?

8%

Spaglin, Inc. is auditing Synesthor. Spaglin has determined that the inherent risk is 20%, the control risk is 35%, and the detection risk is 1.8%.

What is Synesthor's overall audit risk?

0.126%

An audit client is upset about the auditors’ overall audit risk assessment. The client states that they govern efficiently and that the audit risk should be set to zero. Therefore, the amount of testing that needs to be done should be minimal.

Which risk factors can be reduced to zero?

Neither detection risk, inherent risk, nor control risk

Autojor is being audited by Dinnegel, Inc. Dinnegel has determined that the overall audit risk is 1.67%. During the course of the audit, however, Dinnegel finds that Autojor's internal controls have improved significantly since the previous audit. As a result, the risk of material misstatement decreases, but Dinnegel has determined that the overall audit risk remains the same.

Why has Dinnegel determined that the overall audit risk remains the same?

The detection risk increased.

During a brainstorming sessional, members of the audit team discussed thoughts and ideas about how fraud might be conducted and concealed.

Which incentive or pressure might increase the risk of fraud?

The company plans on listing its stock.

Kathy is a member on the audit team from Bones Simon, LLC auditing Paddleboards, Inc. During their brainstorming session the team chose Kathy to investigate fraud associated with misappropriation of assets.

Which potentially fraudulent activity will Kathy investigate?

The controller used the company credit card to purchase a home computer.

During the course of an audit, Cragson, LLC found that employees of Lyenon Construction removed tools and supplies from the company warehouse but, in a hurry, forgot to record the use of the materials in the job. After the financial statements were prepared, the tools and supplies were billed to the client.

What is this situation characterized as?

Error

While auditing Zegy, Inc, a computer component manufacturer, Kaper Independent Auditors (KIA) found that Zegy was made aware that approximately 75% of its most popular hard drives that were sold in the past 10 years could fail due to a catastrophic failure. Zegy's lifetime warranty requires a full replacement upon failure of a drive. Internal memos indicate that the CEO and CFO knew of the risk prior to the date of the financial statements. No disclosure or estimate for the contingent liability was included in the financial statements or notes.

In the context of identifying fraud, which of the following describes Zegy's misstatement or omission of the contingent liability?

Fraudulent financial reporting

The three categories of management assertions are:

classes of transactions, account balances, and presentation and disclosure.

The assertion related to recording transactions in the correct accounting period is:

cutoff.

The quantity of evidence that an auditor will gather:

varies with the assessed risk of material misstatement.

Which is generally the most reliable form of evidence?

Externally generated evidence sent directly to the auditor.

Which type of analytical procedure uses the auditor’s professional judgment to review accounting data to identify unusual or significant items that may be an indication of a material misstatement?

Scanning

When an auditor inspects a tangible asset to support a balance in the client’s records, the auditor is gathering evidence to support the:

existence assertion.

The working papers for a client contain both a permanent and a current file. The difference between the two files is that:

the permanent file includes documents that relate to the client and are relevant for more than one year's audit, and the current file includes the details of work completed in the current audit.

At the front of every audit file is the client’s _______ supporting the financial statements.

trial balance

Module 8-LO6.1-Define internal controls.

Internal control is defined as:

a process designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance.

3 multiple choice options

It is important for an auditor to understand a public company’s system of internal control in order to:

audit internal control over financial reporting, assess risk, and develop an audit strategy.

The objectives of internal control include:

operations objectives, reporting objectives, and compliance objectives.

What does COSO define as a process effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance?

Internal control

Module 8-LO6.2- Describe the components of the Committee of the Sponsoring Organization of the Treadway Commission (COSO) framework.

One of the seventeen COSO principles of internal control states that “the organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.”

To which component of internal control does this principle belong?

Control Environment

3 multiple choice options

Module 8-LO6.2-Describe the components of the Committee of the Sponsoring Organization of the Treadway Commission (COSO) framework.

The control environment ________.

sets the tone of an entity and influences the control consciousness of its people

3 multiple choice options

Module 8-LO6.2- Describe the components of the Committee of the Sponsoring Organization of the Treadway Commission (COSO) framework.

The COSO Framework identifies three objectives of internal control that allow organizations to focus on the differing purposes of internal control. One of these is ________.

compliance objectives relating to laws and regulations to which the entity is subject

3 multiple choice options

Module 8-LO6.2-Describe the components of the Committee of the Sponsoring Organization of the Treadway Commission (COSO) framework.

Internal control ________.

is a very broad concept and can encompass all of the elements of an organization

3 multiple choice options

Module 8-LO6.3-Explain the characteristics of internal controls at the entity level.

The control environment:

sets the tone of an entity with respect to internal control and influences the control consciousness of its people.

3 multiple choice options

Module 8-LO6.3-Explain the characteristics of internal controls at the entity level.

An entity’s risk assessment process:

is the entity's process for identifying and responding to business risks and the results of those risks.

3 multiple choice options

Module 8-LO6.3- Explain the characteristics of internal controls at the entity level.

The internal control component that addresses how an organization holds an individual accountable for his or her internal control responsibilities in pursuit of objectives is related to:

the control environment.

3 multiple choice options

Module 8-LO6.3- Explain the characteristics of internal controls at the entity level.

Which of the following represent a common categorization of control activities?

Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties.

3 multiple choice options

Module 8-LO6.4- Explain the importance of identifying strengths and weaknesses in a system of internal controls.

When an auditor identifies internal control deficiencies, what levels of internal control deficiencies must be reported to those charged with governance of the entity?

Significant deficiencies and material weaknesses in internal control.

3 multiple choice options

Module 8-LO6.4- Explain the importance of identifying strengths and weaknesses in a system of internal controls.

Which of the following is a deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented on a timely basis?

Material weakness

3 multiple choice options

Module 8-LO6.4- Explain the importance of identifying strengths and weaknesses in a system of internal controls.

Upon consideration of a client’s system of internal control, when an auditor identifies areas with weaknesses, ________.

increased substantive testing in this area will be appropriate to reach the desired level of assurance

3 multiple choice options

Module 8-LO6.4- Explain the importance of identifying strengths and weaknesses in a system of internal controls.

When the auditor identifies internal control weaknesses, ________.

control risk is increased

3 multiple choice options

Module 8-LO6.5-Explain how to communicate internal control weaknesses to those charged with governance.

A management letter:

contains recommendations for improving significant deficiencies and material weaknesses in internal control discovered during the course of the audit.

3 multiple choice options

Module 8-LO6.5-Explain how to communicate internal control weaknesses to those charged with governance.

The management letter should ________.

be prepared by the audit team, be provided to the client, and discuss internal control weaknesses and other matters discovered during the audit

3 multiple choice options

Module 8-LO6.5- Explain how to communicate internal control weaknesses to those charged with governance.

The purpose of the management letter is to ________.

communicate internal control matters in writing on a timely basis with those charged with governance

3 multiple choice options

Module 8-LO6.5- Explain how to communicate internal control weaknesses to those charged with governance.

Those charged with governance of an organization ________

have an obligation to be concerned with the entity's financial reporting to shareholders and the investing public

3 multiple choice options

Module 9-LO7.1-Describe the steps in assessing control risk.

Strong entity-level controls _______.

make it more likely that transaction-level controls will operate effectively

3 multiple choice options

Module 9-LO7.1- Describe the steps in assessing control risk.

Once auditors understand the flow of transactions, _______.

they will use their knowledge of assertions to understand what can go wrong

3 multiple choice options

Module 9-LO7.1-Describe the steps in assessing control risk.

Entity-level controls involve _______.

all five components of internal controls

3 multiple choice options

Module 9-LO7.2-Identify the different types of controls that an auditor might encounter.

A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of a(n):

preventive control.

3 multiple choice options

Module 9-LO7.2-Identify the different types of controls that an auditor might encounter.

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor.

This is an example of a(n):

detective control.

3 multiple choice options

Module 9-LO7.2-Identify the different types of controls that an auditor might encounter.

IT General Controls (ITGCs) are important because they:

prevent unauthorized personnel from having access to data and applications.

3 multiple choice options