Econ 132A Midterm 1 Questions

What did SOX Act of 2002 do?

granted extended powers to the sec, creating the PCAOB

Who are the financial statements the responsibility of?

Management

What is the auditors job?

To express an opinion on financial statements

What standards do the auditors conduct their audits in accordance with

PCAOB/GAAS

PCAOB standards require that auditors

plan and obtain reasonable assurance about financial statements

Auditors make sure that financial statements are free of

Material misstatement

What kind of basis do auditors test on?

Test

What can an auditor offer that management can’t?

Independence

What is a suitable criteria in terms of financial statements?

GAAP

What is the risk at the start of an audit?

That there is a material misstatement

What is a risk based approach cover?

All areas even ones where risk of material misstatement is low

What are routine transactions called?

Internal controls

If not governed by internal controls then what will always be applied?

judgement

Does an audit provide absolute assurance?

No

Is an audit designed to detect fraud?

No

designed to provide assurance to the user that financial statements are free of material misstatement

If you test accounts receivable, what are you simulteneously testing?

Sales

What is a general ledger?

a ledger of all of the activity for a specified period of time

What is a trial balance or summary trial balance?

takes the activity out of the general ledger and shows just the ending balances/ activity, as of a specified date and period

What is sub’ledger/schedules

a detailed level of presenting an item of the general ledger (accounts receivable aging, or detailed A/P listing are examples)

if someone provides assurance what is that

attestation

An attestation engagement is a what

an audit

What are the three categories of attestation

examination - audit where auditor renders an opinion

review - less in scope than an audit. Issues negative assurance which means, nothing came to the attention of the reviewer

agreed-upon procedures - no opinion or report, just a summary of findings based on applying procedures which were agreed upon at the beginning of the engagement

What is a compilation?

putting client prepared data into financial statements without any procedures to verify the accuracy of the information

will only ever provide assurance if a review is done with it

What is the purpose of credibility?

to reduce the amount of “information risk” to a user of the underlying data

What does an audit reduce?

information risk, but does not ever eliminate it

What does an auditors opinion say about fraud

not explicit

What is the auditors responsibility to detect fraud

if it produces a material mistatement

Why do financial statements misstatement arise due to

accidental errors

lack of knowledge of accounting principles

unintentional bias

deliberate falsification or theft

What risk do audits not directly address?

business risk - the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions

What are the different kinds of audits?

financial statement

compliance

operational

integrated - a combination of financial statement with compliance audit

What are the different kinds of auditors?

external

internal

GAO

tax auditors

PCAOB

What is the AICPA’s traditional role?

establishes standards

research and publication

continuing professional education

self-regulation

CPA examination

Who took over the standards setting and regulation roles of public companies?

SEC and PCAOB

What needs to happen for a company to perform attestation and assurance services with any other professional service?

Need BOD approval

What is the typical structure of a CPA firm (bottom-up)

Staff

seniors

managers

partners

When a CPA firm completes an audit of a business and issues a report, does it express an opinion on the client’s accounting records, financial statements, or both?

on the financial statements

What is the AICPA Definition of professional skepticism?

Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence

A more layman explanation of professional skepticism

due professional care

be unbiased

neither assume everything is right or wrong

without bias, substantiate managements assertions

What are the 10 standards under GAAS

General standards - the firm and planning

Standards of fieldwork - performing the audit

Standards of reporting - issuance of the opinion

What are the general standards

Technical training

Independence

Professional care

Adequate technical training and proficiency as an auditor

Independence in mental attitude is to be maintained by the auditor

due professional care is to be exercised

What are the standards of field work

Planned

Internal Controls

Evidential matter

Work is to be adequately planned and properly supervised

sufficient understanding of the company and its environment (including internal controls) is to be obtained

sufficient competent evidential matter is to be obtained to afford a reasonable basis for the opinion

What are the standards of reporting?

Accordance

Consistency

Disclosures

Opinion

Whether the financial statements are in accordance with GAAP

Note any instances where standards have not been consistently applied

If informative disclosures are lacking, the report must state so

render an opinion on compliance with GAAP

Who retains the previous standards of GAAS while the other changed their framework?

PCAOB

What is the new framework the AICPA created in replacement of GAAS?

Statement on Auditing Standards (SAS)

What risk does an audit aim to lower?

Audit risk

What is audit risk

the risk that a material misstatement may go undetected?

What is materiality?

Both quantitative and qualitative measures

When auditors obtain information to assess the inherent risks and fraud risks they question what?

information about the company and its environment

discussion among audit team members

inquiries of management and others

planning analytical procedures, including those involving revenue

What are the two kinds of effects that illegal acts can have on financial statements

direct

indirect

When an illegal act has a direct effect on financial statements what does an audit obtain to do?

obtains reasonable assurance of detecting these types of illegal acts

When an illegal act has an indirect effect on financial statements does an auditor provide assurance that those will be detected?

no

What are the different kinds of opinions

Unqualified - what they all want/expect “presently fairly in all material respects”

Qualified - something aint quite right, but not so bad as to make the financial statements misleading. Could be a departure from GAAP

Adverse - something is so screwed up that auditor believes that the financial statements are not fairly presented (never issued typically)

Disclaimer - for some reason, we could not do the audit (perhaps a piece of information wasnt available)

What is the only opinion in which does not require a fourth explanatory paragraph?

unqualified

What is the AICPA statements on quality control standards (SQCS)?

Human resources

Engagement/Client acceptance & continuance

Leadership assignments

Performance of the engagement

Monitoring

Ethical requirements

HELP ME

Who regulates Nonpublic companies?

AICPA

What is the state boards of accountancy?

registration of all CPA’s and CPA firms

ethics investigations

GAAS is typically a “___” compared to firm standards

minimum

What is eating time?

When you take to much time to do a task and you are faced with the dilemma of recording your actual hours or your budgeted hours

What are some of the results of eating time

short term benefit to you

long term impact to the engagement

impairs business decisions

is dishonest

Under the code of professional practice auditors must always exhibit?

objectivity

integrity

In order to be independent you must be independent in both?

fact and appearance

Who must comply with the code of professional conduct?

a member of the AICPA or anyone who is performing a service in accordance with it

What are the Code of Professional conduct principles

Responsibilities - exercise sensitive and professional judgments

Public Interest - act in a way which will serve the public interest, honor public trust… professionalism

Integrity - maintain and broaden public confidence by performance with highest of integrity

Objectivity & Independence - maintain objectivity and independence

Due Care - exercise due care in discharge of responsibilities

Scope and Nature of Services - observe these principles in determining the scope and nature of services to be provided

What is required in due professional care?

skill relevant to the task

professional skepticism

compliance with GAAS

What should you do when there is no clear principle or rule?

Apply the “threats and Safeguards” approach

1.identify threats

2.evaluate significance of identified threat

3.identify and apply safeguards

What is a covered member?

Staff working on the attest engagement

An individual who may influence the attest engagement

A partner equivalent in the office in which the partner in charge of the attest engagement primarily practices

Partners or managers that provide a specified amount of non-attest services to client

The public accounting firm and its employee benefit plan

Any entity controlled by one or more of the above

Partners and Professional staff cannot own up to what percent of clients outstanding equity or ownership interest?

5%

How long is the cooling off period under SOX

1 year

What kind of investment in a client can a CPA not have?

direct

What is the general rule of thumb when dealing with conflict of interest?

Would a reasonable and informed third party conclude that a conflict exists

What classes of relatives violate conflict of interest

immediate family

close relatives

What consulting services are prohibited by the SOX act

bookkeeping

financial systems design and implementation

appraisal or valuation servies

actuarial services

internal audit outsourcing

management functions or human resource services

investment services

legal services

confidential transactions and aggressive tax position services

Who approves the auditors/fees?

the Audit committee

How often must an audit partner rotate off engagement

every 5 years

How long do audit workpapers need to be retained?

7 years

5 under SAS

If the firm serves an attestation function at the client, then that firm may not perform consulting services which make them a

decision maker

What are the 4 ways that firms can ensure independence isnt impaired when providing consulting services

Designate a management member as responsible for overseeing the engagement

Management to be responsible for evaluation of the CPA’s findings

Management responsible for making decisions relating to the services

Management maintains responsibility for establishing and maintaining internal controls.

What are the technical bodies and there respective standards?

Auditing standards board (ASB) - statements on auditing standards

Management consulting services executive committee (MCSEC) - statements on standards for consulting services

Accounting and Review services committee (ARSC) - statements on standards for accounting and review services

ASB, MCSEC, and ARSC - statements on standards for attestation engagements

FASB, GASB, and FASAC - FASB, GASB and FASAC statements related interpretations

What is CPA information not

privileged and is subject to subpoena

Workpapers cannot be demanded by who

the client

What kind of fees are not allowed for taxes?

contingent fees

What is inherent risk

just how risky are the activities

What is control Risk

What does a company do to manage inherent risks in their business

When identifying risks and areas where internal controls may be relied what do we consider when determining how audit procedures are planned?

Nature

Extent

Timing

When do we tests controls

When we rely on them

What is the AICPA version of management Assertions?

Completeness

Rights and Obligations

Accuracy and Valuation

Existence and Occurance

Classification and Understandability

Cutoff

What of management assertions is the most difficult to test

Completeness

What is the highest risk tests on management assertions?

Valuation

When management makes the CCRAVE CC assertions then it is the auditors responsiblity to what

validate those assertions under the third standard of fieldwork

What is the third standard of fieldwork?

Sufficient appropriate audit evidence is to be obtained to afford a reasonable basis for an opinion regarding the financial statements under audit

relevant and reliable

For evidence to be appropriate it must be what?

Relevent - does it apply to the objective we are testing

Reliable/Valid - is the evidence any good

What are substantive procedures as defined by the AICPA

Recalculation

Analytics

Physical Inspection (counting inventory)

Inquiry

Documents

Confirmation

RAPID C

What is the strongest and weakeast substantive procedures?

strongest: confirmation

weakest: inquiry

What are the internal controls testing

Inquiry

Reperformance (recount inventory)

Observation (watch over someone doing it)

Documents (inspection)

IROD

When testing the ending balance of an account such as sales

You are inherently testing all of the transactions that took place on the account

When testing existence (of something recorded in the financial statements) we

vouch

When testing completeness (to see if something is recorded in the financial statements) we

Trace

When may an auditor rely upon internal controls established by a client?

When they are strong

What must an auditor do in able to rely on those internal controls

Test of Design (TOD’s): would the controls prevent/ detect errors?

Test of Operational Effectiveness (TOE’s): are the controls functioning as designed

If not performing TOD’s and TOE’s to rely upon internal controls then the auditor must perform what?

Substantive procedures