test prep

End of Chapter Questions Chapters 1- 6

Chapter 1 

• Define assurance services.

- A VARIETY OF SERVICES PROVIDED THAT PROVIDE ASSURANCE ( ENHANCED DEGREE IF CONFIDENCE) PERFORMED BY A CPA TO A VARIETY OF USERS     

-> bonding company 

-> bank

-> investor

-> government

• Give 2 reasons a company may require assurance services.

           Fraud and illegal act-related services and customer satisfaction measures. 

• What is meant by financial reporting framework?

The (rules) beign followed for most companies, it is GAAP for international companies it is IFRS

• Explain what is meant by management assertions.

Management representations of the information being evaluated 

• List 3 different management assertions.

->  Existence - observe inventory cost

->  Completeness - look at the terms and shipping cost

->  Occurrence - review cost accounting sheets

• Give a broad explanation of SOX.

It was a result of Enron and World-com events that resulted in increased penalties for corporate fraud and responsibility for company top management. 

It also, changed accounting and auditing oversight to the Public Accounting Oversight Board for all SEC ( Security Exchange Commission) companies

• List 3 different types of public accounting firms.

KPMG 

PwC

Deloitte Touche

• Explain 2 different levels of staffing within a public accounting firm.

Partners - responsible for the overall audits of a company usually deals with highly controversial accounts and accounts

Managers - works concurrently on several engagement - responsible for staffing, timing and overall review of audits work-papers - may have specialization. 

• What are 2 different types of auditors?

Internal Revenue Agents - IRS audits tax returns

GOA- government accountability office auditors provide audits of the governmental agencies and corps. That have government contratcs

• What are the requirements to become a CPA.

1. Pass the CPA exam ( 4 parts within 30 months)

2. Complete ethics exam 

3. Complete required hours of employment under CPA (usually 2,000 hours)

4. Every 3 years complete 120 hours if continuing education

• What makes data analytics useful in an audit?

 It has become a key work as a method to audit large data banks using AI technology 

Chapter 2

• How does the financial reporting framework impact an audit?

providing the set of rules and standards that auditors must use to evaluate whether a company's financial statements are prepared accurately and fairly

• What is meant by a registered public accounting firm?

It has the authority to revoke the registration and bar a CPA from participating in public company audits

• Who oversees public accounting firms?

The SEC ( security and exchange commission )

• List 3 key elements in an audit report.

Qualified Opinion 

Scope Limitation - couldn’t perform audits on a part of the financial statements that is significant 

Adverse Opinion 

Not fairly presented - are not in accordance with GAAP

Disclaimer of Opinion

• If a disclaimer of an opinion is issued what caused this?

The unable to perform the audit, a pervasive scope limitaion

• What are the reasons to issue a modified (qualified) audit report?

the auditor has been unable to obtain 'sufficient appropriate audit evidence' concerning a particular matter

• Why would a public accounting firm issue an adverse opinion?

Not fairly presented - are not in accordance with GAAP (pervasive - throughout the financial statements) 

• What does the term reasonable assurance mean?

An expressed opinion, stating that financial statements are free from material misstatement

• A critical audit matters paragraph may be included in the audit report – what information does it contain? 

Any area that required significant judgement and or elaborate disclosures ( not wrong, but should be aware of it) 

It contains material in amount

• Why is fraud hard to detect?

Frauds is often performed with methods to conceal the actions

• What is an auditor’s responsibility to detect fraud? Errors?

They have 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 ends reporting responsibility

Chapter 3

• Give one reason why professional ethics is important for CPA’s.

Responsibility to the public, complex body of knowledge, standard of admission to the profession, need for public confidence

• Differentiate between independence in mind and independence in appearance.

A independence of mind completes an audit without influence that might impact professional judgement while independence of appearance avoids circumstances that might make a reasonable informed person question on whether the individual is able to maintain integrity and objective. 

• List 2 things that could impair a firm’s independence.

The entire CPA does not need to be independent, but the individuals within the firm are considered a covered member be independent 

• What does sufficient relevant data mean in relation to an audit?

Different meaning based on information gather

• Who has the highest authority to sanction a CPA for a nonpublic client?

State board of accountancy 

• What level of confidentiality does a CPA have for their client?

May gain insider information during an audit - have a legal obligation to disclose illegal acts of SEC 

• Give one example of a covered employee?

ceo

Chapter 4

• Differentiate between common law and statutory law.

common law is based on past judicial opinions, while statutory law is based on current statutes (written laws)

• Who are the plaintiffs for the Securities Act of 1933?

individuals who purchased securities based on a materially misleading registration statement

Protection to investors in the initial offering of a company’s stock

Only need to prove they suffered a loss and that the registration was misleading 

Don’t need to prove auditor’s negligence or that they relied on the registration statements 

• Who are the plaintiffs for the Securities Act of 1934?

shareholders who have lost money due to securities fraud

Protection to all investors of a company’s stock 

Prove they suffered a loss

The financial statement misleading

The financial statement were relied on 

• What is the name of a “contract” between and auditor and client?

Engagement letter

• What is another name for gross negligence?

Constructive fraud

• What audit work is performed for a compilation?

Preparation of financial statements in proper form without obtaining any assurance on those financial statements

• What audit work is performed for a review?

Audit steps include inquiry and comparison of financial data between years “analytical procedures”

Chapter 5   

• List one management assertion and a procedure to test that assertion.

Relevant assertion, cutoff- recorded in the proper period

• What is meant by appropriate sufficient audit evidence?

Not only has the auditor gain “enough” evidence but it “appropriate” tests the necessary management assertions to reduce audit risk to the desired level

• What is the audit risk formula?

Inherent Risk x  Control Risk x Detection Risk

• Explain what is meant by inherent risk?

The risk of the area being tested based on company, external or industry specifications

• Explain what is meant by control risk?

the risk that the company does not have adequate controls to detect errors or misstatements

• What do the results of testing control risk tell the auditor?

To detection adequate controls to detect errors or misstatement

• What does detection risk mean for planning the audit?

the procedures performed by the auditor will not detect a misstatement that exists and that could be material, individually or in combination with other misstatements.

• What are substantive tests?

To test details of balances, transactions, and disclosure 

• When are analytical reviews done?

Usually performed initially (engagement planning) to identify any significant items that may impact the overall audits

• What is a client representation letter do?

It summarizing the most important oral representation that management made 

• When is a client representation letter prepared?

Dated the same as the auditor’s report ( end of fieldwork)

• Name 2 audit procedures that could be performed (there are 8).

Inspection of tangible assets;  reperformance of procedures 

• How do auditors document their findings?

Flowcharts - questionnaire - checklist 

• What is a concern of data analytics?

Legal liability if auditors are looking at larger samples of the population

• What is a lead schedule?

They are sheets that combine several accounts that are presented in the financial statements

• What does a permanent file contain?

House information that can be used for many years 

Chapter 6

• When understanding the client’s business what are 2 things you should be aware of that may impact the audit?

Relevant  assertion and significant risk 

• What is meant by shopping for accounting principles?

basically finding a firm that allows certain things over another firm (may ask for a written or oral report on significant accounting principles)

• Explain vouching and what is it used to identify.

• financial statements to source documents – (overstatement existence or occurrence) AFTER

• Explain tracing and what it is used to identify.

•  source document to the financial statements – (understatement completeness – tracing) BEFORE

• Give an example of something that might cause you to be concerned about fraud.

This is one area where if a client refuses or disagrees with a procedure that your professional judgement

comes into play. Timing of delivery of information can also cause a heightened sense of awareness

• Explain what overall materiality is.

 assumes that each misstatement cannot be found and the aggregate of all misstatements may be higher than materiality – hence performance materiality is lower than overall materiality and is a judgement call (50-75% of overall

materiality) usually applied to a specific account or specific transactions

• Explain what tolerable materiality is.

materiality as it is applied to the specific account or transactions relevant to the assertion being tested (audit procedure)

• What is extrapolation and what is its purpose?

the process of extending a trend into the future, or of applying the results of a sample to an entire population.

• Who establishes and audit program and when? 

an auditor, During the planning phase of an audit

• What is the purpose of an audit program?

Audit does not prepare the financial statements but may make adjustment to ensure that financial statements are reasonably stated for the appropriate financial reporting framework

• What is a dual-purpose procedure?

tests that include both an internal control test as well as a substantive test

• What would be a question that you would ask of a predecessor auditor?

May ask about disagreements – integrity of management – communications – related parties – reasons for change in

auditor