AUD CPA Exam

Using Becker study guide

OBRA

Opinion, Basis for Opinion, Responsibilities of Management, Auditor’s Responsibilities; required sections of Unmodified Audit Report

Opinion and Responsibilities of Management sections

Where is the financial reporting framework mentioned in the unmodified auditor’s report?

Basis for Opinion and Auditor’s Responsibilities sections

Where is GAAS mentioned in the unmodified auditor’s report?

OBC

Opinion, Basis for Opinion, Critical Audit Matters; required sections for unqualified audit report

IPAD

Identify each CAM in report, describe Principal considerations that led to identification of CAM, describe how CAM was Addressed in audit, refer to relevant F/S accounts and Disclosures;

Integrated Audit

reports on both financial statements and internal control; required for issuers but optional for nonissuers

smaller reporting company

companies with less than $100 million in annual revenue; only required to have financial statement audit

Form AP

stands for Audit Participants; shows name of firm, engagement partner, date of audit report, and participation of other audit firms; must be filed by 35th after audit report is filed with SEC

financial statement issues resulting in qualified/adverse opinions

• not following selected reporting framework (except when auditor agrees to departure)

• inappropriate accounting principles

• unreasonable estimates

• providing inadequate disclosures

• incorrect numbers

• no reasonable justification for change in accounting principles

complete set of financial statements

Balance Sheet, Statement of Income, Statement of Changes in Equity, Cash Flow Statement, Disclosures

Audit issues resulting in qualified or disclaimer opinions

• time constraints on audit

• inability to obtain sufficient appropriate audit evidence

audit issues always resulting in disclaimer of opinion

• not independent of client

• unaudited financial statements

• refusal of management to provide written representation or acknowledge responsibility for fair representation of financial statements

auditor requirements for disclaimer on unaudited financial statements

• accountant must read financial statements for obvious errors

• “unaudited” should be clearly marked on each page of financial statements

emphasis-of-matter paragraph required for certain circumstances

• Consistency (lack of)

  • justified change in accounting principle that has material effect on F/S

  • change in reporting entity that results in F/S that are those of a different reporting entity

• audit opinion change

• special-purpose frameworks

disclose the lawsuit

if lawsuit loss is probable but cannot estimate loss amount, or loss is reasonably possible and can or cannot estimate loss

accrue and disclose the lawsuit

if lawsuit loss is probable and can estimate the loss

other-matter paragraph required in certain circumstances

• restrict use of report

• subsequently discovered facts that lead to a change in audit opinion

• comparative financial statements and:

  • prior period F/S were audited by predecessor and they did not reissue

  • current F/S are audited but prior period F/S are compiled/reviewed/not audited

explanatory paragraph required in certain circumstances

• substantial doubt about entity’s ability to continue as growing concern

• auditor divides responsibility with another firm

• material change between periods in accounting principles or in method of application

• change in reporting entity

• auditor performs integrated audit and issues separate reports on F/S and internal control

• change in investee year-end that has material effect on F/S

• prior period report not presented

• prior year opinion is updated

predecessor auditor’s report was qualified but not presented

successor auditor should indicate:

• statements were audited by predecessor auditor

• type of opinion expressed by predecessor and reason for modified opinion, if applicable

• nature of any emphasis-of-matter paragraph included in predecessor report

• date of predecessor’s report

predecessor auditor’s report was unmodified but not presented

successor auditor should indicate in an other-matter paragraph the predecessor report was unmodified

predecessor auditor must do what before reissuing their report

• obtain current comparative financial statements

• compare current financials with prior year

• obtain successor auditor and former client’s management representation letters

component auditor issues unmodified opinion and group auditor assumes responsibility

Group auditor issues an unmodified opinion and no changes are made to any sections of the report

component auditor issues unmodified opinion and group auditor does not assume responsibility

group auditor issues an unmodified opinion and modifies the opinion section only

component auditor issues a qualified opinion and group auditor assumes responsibility

assuming component is immaterial, group auditor issues an unmodified report and no changes are made to any sections of the report

component auditor issues a qualified opinion and group auditor does not assume responsibility

assuming component is immaterial, group auditor issues an unmodified report and modifies the opinion section only

auditor’s responsibility for other information

• read the other information

• consider any material inconsistencies between other information and audited financials

• request management correct any inconsistencies if found (if refused, communicate with governance and consider modifying report)

auditor’s responsibility for required supplementary information

limited procedures and add a separate section to report

if auditor is engaged to report on supplemental information but is unable to obtain sufficient appropriate audit evidence, what type of opinion should they issue?

a disclaimer of opinion and describe the reason and state they do not express an opinion on the information

special purpose frameworks

• cash basis

• tax basis

• regulatory basis

• contractual basis

• other basis

special purpose frameworks requiring description

regulatory basis (both regular and general use), contractual basis, and other basis (if financials are restricted)

special purpose frameworks requiring emphasis-of-matter paragraph

all except regulatory basis - general use

special purpose frameworks requiring other-matter paragraph

regulatory basis - regular, contractual basis, and other basis if for specified users

recognized subsequent event

underlying event existed at or before the balance sheet date; auditor would adjust financials and/or disclose the event

nonrecognized subsequent event

underlying event occurred after the balance sheet date; auditor would disclose the event only

auditor’s responsibility for subsequent events

• post balance sheet transactions

• representation letter

• inquiry

• minutes (board)

• examine interim financial statements

audit committee consists of:

• three to five outside directors or

• non-employee directors with no material financial interest in the company

engagement letter requirements

• addressee

• objective and scope of the audit

• responsibility of auditor

• responsibility of management

• other relevant information

• reporting

• signature

information to request from predecessor auditor

• management integrity

• disagreements with management

• reason for change in auditor

• any fraud, noncompliance, etc

• nature of entity’s relationships and transactions with related parties and significant unusual transactions

• review of working papers

acceptable reasons for changes in engagement

• changes in client requirements

• misunderstanding as to nature of service to be rendered

elements of audit and assurance engagement quality

• human resources

• engagement/client acceptance and continuance

• leadership responsibilities

• performance of the engagement

• monitoring

• ethical requirements

audit documentation should:

• assist the engagement team in planning, conducting, and supervising the audit

• show the accounting records reconcile with the F/S

• be prepared in enough detail so that an experienced auditor has no previous connection with the audit can understand

• show who performed the work and when, and who reviewed the work and when

• document discussions of significate findings or issues with management/those charged with governance

audit documentation retention policy

5 years from report release date for nonissuers, 7 years for issuers

documentation completion date

14 days from the report release date per PCAOB, 60 days per auditing standards

COSO internal control objectives

• Operations (effectiveness and efficiency)

• Reporting (reliability of financial reporting)

• Compliance (with applicable laws and regulations)

COSO internal control components

• control environment

• risk assessment

• information and communication

control environment component (EBOCA)

• commitment to ethics and integrity

• board independence and oversight

• organizational structure

• commitment to competence

• accountability

risk assessment component (SAFR)

• specify objectives

• identify and assess changes

• consider potential for fraud

• idenitfy and analyze risks

information and communication component (OIE)

• obtain and use information

• internally communicate information

• externally communicate informatio

monitoring activities (SOD)

• ongoing and/or separate evaluations

• communicate deficiencies

(existing) control activities (CATP)

• select and develop control activities

• select and develop technology controls

• deployment of policies and procedures

auditor’s understanding of control environment

• management’s establishment and oversight of entity’s culture and commitment to integrity and ethical values

• how those charged with governance oversee the entity’s internal control

• entity’s assignment of authority and responsibility

• how the entity attracts, develops, and retains competent individuals

• how the entity holds individuals accountable for their responsibilities

auditor’s understanding of risk assessment process

• evaluate entity’s use of IT to determine whether and to what extent do the following risks exist:

  • potential reliance on inaccurate systems

  • unauthorized access to data

  • unauthorized changes to data, systems, or programs

  • potential l

auditor’s understanding of information and communication systems

• understand design and implementation of information and communication systems that relate directly to financial reporting

• understand methods used to communicate between people within an entity regarding roles, responsibilities, and significant matters related to financial reporting

auditor’s understanding of monitoring activities

• ongoing and separate evaluations for monitoring the effectiveness of controls and control deficiencies

• entity’s internal audit function

• sources of information used in monitoring process

segregation of duties

authorization, record keeping, and custody

audit strategy includes

• scope of audit engagement

• reporting objectives

• timing of audit

• required communications

• factors that determine focus of the audit

internal auditors cannot be responsible for what types of activities in an audit?

• issuing the report

• audit decisions

• audit judgments

• assessments made as part of the audit

when to refer to auditor’s specialist in audit report

• issuing a modified opinion due the specialist’s findings

• explanatory paragraph added to report

• if it helps users understand a critical audit matter or key audit matter

what level of misstatement should be looked used?

the smallest aggregate level of misstatement that could be material to any one of the financial statements

performance materiality (nonissuer) or tolerable misstatement (issuer)

use an amount that is lowed than materiality while planning audits and testing items because of the possibility for misstatements to go undetected and possibility that client may not adjust records to correct misstatements found

audit risk

risk that the auditor may unknowingly fail to appropriately modify the opinion on F/S that are materially misstated (i.e. risk auditor issues wrong opinion)

factual misstatements

misstatements about which there is no doubt

judgmental misstatements

differences arising from the judgements of management, including those concerning recognition, measurement, presentation, and disclosure in the F/S

projected misstatements

auditor’s best estimate of misstatements in populations, involving projection of misstatements identified in audit samples to the entire population from which the samples were drawn

audit risk model

audit risk = risk of material misstatement x detection risk

risk of material misstatement definition

a reasonable possibility of a misstatement occurring and if it were to occur, there is a reasonable possibility of it being material

risk of material misstatement formula

inherent risk x control risk

inherent risk

susceptibility of an assertion about a class of transactions, account balance, or disclosure to a material misstatement, assuming there are no related controls

inherent risk factors

• complexity

• subjectivity

• change

• uncertainty

• management bias/fraud risk factors

examples of when to assess inherent risk as high

• high-volume, unique, or individually significant transactions

• complex or subjective calculations

• amounts derived from estimates

• cash

control risk

risk that the client’s internal controls don’t catch the material misstatements

examples of when to access control risk as high

• there are no effective controls relative to the specific assertion

• the implemented controls are not operating effectively

• sufficient appropriate audit evidence may be obtained by substantive testing only

detection risk

risk that the auditor will not detect a material misstatement that exists in a relevant assertion

relationship between risk of material misstatement and detective risk

inverse relationship between RMM and DR

effect on audit when risk of material misstatement is high

leads to more assurance required from substantive testing

• change nature of substantive tests from a less effective to a more effective procedure

• change extent of substantive tests (i.e. use larger sample size)

• change timing of substantive tests (i.e. perform tests at year-end rather than at interim)

effect on audit when risk of material misstatement is low

leads to less assurance required from substantive testing

• less effective procedures

• smaller sample size

• perform tests at interim period

relationship between audit risk and materiality

inverse relationship between AR and M

fraudulent financial reporting

intentional misstatements or omissions of amounts or disclosures in the financial statements that are designed to deceive financial statement users

misappropriation of assets

theft of an entity’s assets when the effect of the theft causes the F/S not to be presented in conformity with GAAP

fraud risk factors

incentives/pressures, opportunity, rationalization/attitude

procedures for obtaining information regarding fraud

• inquire of personnel regarding their views of fraud risk

• consider results of analytical procedures

• evaluate fraud risk factors

auditor responses to assessed fraud risk

• at overall level

• response encompassing specific audit procedures

• response addressing risks related to management override

communication of identified fraud

should be discussed with an appropriate level of internal management at least one level above those involved

circumstances when to disclose fraud to external party

• comply with certain legal and regulatory requirements

• to a successor auditor when successor makes inquiries of predecessor

• response to a subpoena

• to a funding agency for auditors of entities that receive governmental financial assistance

• in some circumstances, to authorities

risk assessment auditing procedure

• obtain understanding of entity and its environment

• obtain understanding of internal control of financial reporting

• inquire of audit committee, management, and other personnel about risks of misstatement

• perform analytical procedures to identify inconsistencies, unusual transactions, etc.

• conduct discussion among engagement team regarding risk of material misstatement

• perform other procedures

factors that change supply

• changes in price expectations of the supplying firm

• changes in production costs

• changes in price or demand for other goods

• changes in subsidies or taxes

• changes in production technology

factors that change demand

• changes in income and wealth

• changes in price of related goods

• changes in consumer tastes or preferences

• changes in consumer expectations related to price

• changes in number of buyers served by market

elasticity

measure of how sensitive the demand for, or the supply of, a product is to change in price

consumer price index

measures changes in the average prices of consumer goods and services over time, making it a key indicator of price stability and inflation

business cycle trough

low point of economic activity, profits are at their lowest levels, and firms have excess capacity and must reduce costs and their workforces

business cycles

fluctuations in the level of economic activity, relative to a long-term growth trend

typical sequence of a business cycle

expansion, peak, contraction, trough, recovery

price elasticity of demand

percentage change in quantity demanded driven by the percentage change in price

price elasticity of supply

percentage change in quantity supplied driven by the percentage change in price

cross elasticity

percentage change in the quantity demanded of one good caused by the price change of another good

income elasticity

percentage change in quantity demanded for a product for a given percentage change in income

profit maximization

level of production is such that marginal revenue is equal to marginal cost

expansionary phase

reflects rising economic activity, rising profits, strong growth, increased demand, rising prices, and lower unemployment

business cycle peak

high point of economic activity; profits are at their highest levels, firms face capacity constraints, and input shortages lead to higher costs and higher price levels

contractionary phase

reflects falling economic activity, slowing growth, falling profits, reduced demand, and higher unemployment