Acct 427 Final Exam Review

The final exam for Acct 427, Summer 2026, is an online assessment available from Monday, July 27th, until the end of the class on August 6th.
Alternative arrangements for the examination must be discussed and established prior to the scheduled test time. Failure to discuss alternatives before the window opens will result in a grade of $0$ . Bona fide emergencies are the only exceptions to this rule.
The examination window closes strictly at the end of the class period on August 6th. No extensions will be granted beyond this point as the course concludes simultaneously.
The exam duration is approximately $1.5$ hours (intended for a single final class period).
All testing is proctored via the McGraw Hill Connect platform.

The examination is comprehensive and encompasses material from Chapters 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 16, and 17.
The total possible score is $120$ points.
The assessment consists of $56$ multiple-choice questions.
Each question is valued at approximately $1.59$ points.
The distribution of questions is roughly $4$ questions per chapter.

Governance involves the interplay between the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Institute of Certified Public Accountants (AICPA).
The SEC holds legal authority to set accounting standards for public companies but generally delegates this to the FASB.
The AICPA sets standards for audits of private companies and establishes the Code of Professional Conduct for all CPAs.

Attestation is defined as a service where a practitioner issues a report on subject matter (or an assertion about subject matter) that is the responsibility of another party.
Attestation services include examinations, reviews, and agreed-upon procedures.
An audit provides reasonable assurance that the financial statements are free from material misstatement.
Primary services provided by CPAs include audit, attestation, and assurance, as well as non-assurance services like tax and consulting.

Independence is a core requirement for auditors and applies to all attestation engagements.
Auditors must be independent in both fact (actual mental state) and appearance (how a reasonable third party would perceive them).
Audit opinions require specific documentation and evidence to support the chosen reporting outcome.

Joint liability allows a plaintiff to recover the full amount of damages from any one of the defendants, regardless of their individual share of the fault.
Proportional liability limits a defendant's liability to the percentage of the total damages for which they are responsible.
Defenses against liability for CPAs include lack of duty, non-negligent performance (due professional care), contributory negligence by the client, and absence of a causal connection between the auditor's actions and the loss.

Materiality is defined as the magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced.
Material misstatement refers to errors or omissions in financial data that could affect the economic decisions of users.
The Audit Risk Model is defined as $AR = IR \times CR \times DR$ .
Inherent Risk ( $IR$ ): The susceptibility of an assertion to a material misstatement, assuming no related internal controls.
Control Risk ( $CR$ ): The risk that a misstatement could occur and not be prevented or detected by the entity's internal controls.
Audit Risk ( $AR$ ): The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Detection Risk ( $DR$ ): The risk that the auditor's procedures will fail to detect a material misstatement.
Fraud Risk: Specifically relates to the risk of material misstatements due to intentional acts of deception (fraudulent financial reporting or misappropriation of assets).

Analytical procedures involve evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
Substantive procedures are performed to detect material misstatements at the assertion level; they include tests of details and substantive analytical procedures.
Tests of controls are performed to evaluate the operating effectiveness of controls in preventing or detecting/correcting material misstatements.
When accepting an engagement, auditors must evaluate client integrity and independence. Engagement letters are crucial as they establish the contract and scope of the work.

Material Weakness: A deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected on a timely basis.
Significant Deficiency: A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Auditors must understand IT controls and the distinction between client-side and server-side processing.
Technological tools can automate various audit tasks, but there are limitations to what technology can accomplish (e.g., professional judgment and the human element in interviewing/evaluation).

The population is the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.
Types of sampling include statistical and non-statistical sampling.
Sampling risks include the Risk of Incorrect Acceptance (Type II error) and the Risk of Incorrect Rejection (Type I error).

Cash Procedures: Includes bank reconciliations and obtaining bank cutoff statements to verify transactions occurring shortly before and after the year-end.
Accounts Receivable: Procedures focus on risks of overstatement (existence) and understatement (completeness). Confirmations are a primary substantive procedure for receivables.
Capital Assets: Audit procedures for capital assets involve inspecting assets, reviewing capitalization policies, and performing substantive procedures on depreciation and disposals. Controls must also be tested for the authorization of large purchases.

Audit reports are adjusted based on findings:
- Unmodified Opinion: Financial statements are presented fairly in all material respects.
- Modified Opinion: Includes qualified, adverse, or disclaimer of opinion based on the severity of issues.
Going Concern: The auditor must evaluate if there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period (not to exceed one year beyond the date of the financial statements being audited).
Going concern issues have consequences for disclosure requirements and may result in an emphasis-of-matter paragraph in the audit report.