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22 Cards in this Set
- Front
- Back
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What audit risk model is applicable to classes of transactions or to account balances? |
The risk assessment procedures performed The responses to the assessed risks of material noncompliance The basis for materiality levels The compliance with applicable "supplementary audit requirements" |
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Give an example of the language used for an adverse opinion. |
"In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements referred to above do not present fairly..." |
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Which special-purpose frameworks require an emphasis-of-matter paragraph (labeled "Basis of Accounting") in the auditor's report pointing out the special-purpose framework to readers? |
The cash basis, tax basis, contractual basis, and regulatory basis (only if restricted). Such a paragraph is not required if prepared on a regulatory basis intended for general use. |
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If the engaging party (who is the responsible party) refuses to provide the requested written representations in an AUP engagement, what should the practitioner do? |
The practitioner should withdraw from the engagement (when that is permitted by applicable laws and regulations). |
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What is in attribute sampling |
Attribute sampling means that an item being sampled either will or won't possess certain qualities, or attributes. An auditor selects a certain number of records to estimate how many times a certain feature will show up in a population. ... Auditors typically use attribute sampling to test internal controls. |
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What is meant by the term "other-matter paragraph" in an auditor's report? |
A paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report |
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How might the auditor's decisions about the timing of audit procedures lower detection risk? |
Moving the auditor's important substantive procedures away from an interim date (before year-end) to year-end will lower detection risk. |
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What’s An integrated audit. |
means both auditing an entity's financial statements and auditing the entity's internal control over financial reporting? |
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Audit data analytics |
Audit data analytics involves the analysis of complete sets of data to identify anomalies and trends for further investigation, as well as to provide audit evidence. ... Better advance planning, since analytics can be used early in an audit to identify problem areas. |
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Data Analytics in the Accounting Profession |
Data analytics is essentially taking raw data and putting it together in a specific way to form conclusions. Often the data is put together in a meaningful way, and as technology has advanced, data analytics have become more automated and based on algorithms for easier analysis. This information can then be used to improve processes and increase efficiency within a business. |
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Another name for a qualified opinion |
Except-for opinion |
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Engagement letter |
The engagement letter is a written agreement between the client and the CPA firm performing the audit, and some components of the engagement letter may be confusing to exam candidates.
An auditor uses judgment when selecting the audit procedures to be performed, and there is not one set of procedures performed for every audit. The client is responsible for implementing a system of internal controls, but the auditor must comment on any internal control weaknesses noted during the audit. Finally, the financial statements are the responsibility of management, and not the auditor.
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Obsolete inventory |
Keep an eye out for obsolete inventory, or items that have been in inventory for a long time and are not selling. Obsolete inventory should be expensed by writing off the value of the inventory to cost of goods sold. Every inventory audit program requires the auditor to ask company managers about obsolete inventory. |
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Sales and receivables |
When an auditor performs an analytical review, the accountant compares balances in the financial statement to see if the relationships are reasonable. This analysis includes a review of trends from one year to the next. It’s very likely that you’ll see questions on the relationship between credit sales and receivables.
Credit sales are transactions that are not immediately paid in cash, and credit sales increase the accounts receivable balance. If your firm increases credit sales to new customers, you may find that new customers don’t pay as quickly as your existing client base.
What’s the bottom line?
If the accounts receivable balance grows at a faster percentage rate than credit sales, you may not be able to generate enough cash to operate each month. Growing credit sales by 10% will increase profits, but if the accounts receivable balance grows by 30%, if may create a cash shortage. |
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Sampling |
Sampling is defined as applying an audit procedure to less than 100% of the items in a population. Keep in mind, however, that if exceptions are found as samples are tested, the auditor will expand the audit work by testing more items.
Assume, for example, that an auditor pulls a sample of client checks with a dollar amount of $1,000 or more. The client’s internal controls require two signatures on every check of $1,000 or more, and the auditor selects 50 checks for test work. If the auditor reviews checks that do not have two signatures, the sample size will be expanded. An auditor cannot rely on a sample that contains errors, because the same error rate may apply to the entire population. |
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types of duties that must be segregated among different employees: |
Physical custody of assets: One worker should have physical custody of assets, such as the checkbook, or the keys to the warehouse. Authorization: A second person, usually the owner, should have authority to move assets. An authorized check signer, for example, has the ability to move cash by signing a check. Recordkeeping: If possible, a third worker should be responsible for posting accounting activity. That would include the task of reconciling the bank accounts, for example. Ideally, three separate people should handle these duties. The Audit CPA exam asks many questions on this topic, so make sure that you’re clear about segregation of duties. |
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Audit engagement |
March 14, 2019 An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client's accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client. The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated. This letter is useful for setting the expectations of both parties to the arrangement.
The term may also indicate all of the work performed by an auditor for a client under the terms of an engagement letter. In this case, an audit engagement spans the full range of audit procedures that may be used, including the examination of the client's financial statements and the preparation of an audit report. |
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Engagement letter |
Name of Client Address City State Zip Dear (Client): SAMPLE AUDIT ENGAGEMENT LETTER This letter will confirm the terms and limitations of the audit services our firm has agreed to perform for (Client Name) for the year ending (Balance Sheet Date). We will audit the consolidated balance sheet of (Client Name) as of (Balance Sheet Date), and the related consolidated statements of income, retained earnings (deficit), and cash flows for the year then ended, for the purpose of expressing an opinion on them. The financial statements are the responsibility of the Company management. Encompassed in that responsibility is the establishment and maintenance of effective internal control over financial reporting, the establishment and maintenance of proper accounting records, the selection of appropriate accounting principles, the safeguarding of assets and compliance with relevant laws and regulations. Management is also responsible for making all financial records and related information available to us. Our responsibility is to express an opinion on the financial statements based on our audit and is limited to the period covered by our audit. If circumstances preclude us from issuing an unqualified opinion, we will discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or decline to issue a report as a result of the engagement. We will conduct our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The term “reasonable assurance” implies a risk that material monetary misstatements may remain undetected and precludes our guaranteeing the accuracy and completeness of the financial statements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures will include obtaining an understanding of the company’s internal control structure and testing those controls to the extent we believe necessary. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, tests of physical inventories and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected customers, creditors, legal counsel, and banks. At the conclusion of our audit, we will request certain written representations from you about the financial statements and matters related thereto.
Although the audit is designed to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements, it is not designed and cannot be relied upon to disclose all fraud, theft, embezzlements or other illegal or dishonest acts. However, we will inform you of any material errors, and all irregularities or illegal acts, unless they are clearly inconsequential, that come to our attention. If you intend to publish or otherwise reproduce the financial statements and make reference to our firm, you agree to provide us with printers' proofs or masters for our review and approval before printing. You also agree to provide us with a copy of the final reproduced material for our approval before it is distributed. As part of our engagement for the year ending (Balance Sheet Date), we will review the federal and state income tax returns for (Client Name). Further, we will be available during the year to consult with you on the tax effects of any proposed transactions or contemplated changes in business policies. Assistance to be supplied by your personnel, including the preparation of schedules and analyses of accounts, is described in a separate attachment. Timely completion of this work will facilitate the completion of our audit. Our fees will be billed as work progresses and are based on the amount of time required plus out- of-pocket expenses. Invoices are payable upon presentation. We will notify you immediately of any circumstances we encounter that could significantly affect our initial estimate of total fees, which will range from $XX,XXX to $XX,XXX. The working papers for this engagement are the property of (Firm Name) and constitute confidential information and will be retained by us in accordance with our policies and procedures. If any dispute arises (between/among) the parties hereto, the parties agree first to try in good faith to settle the dispute through non-binding mediation. The costs of mediation shall be shared equally by the parties. The parties agree that, if any dispute cannot be settled through mediation, the dispute may then be brought before a court of competent jurisdiction, but the matter will ultimately be decided by the court, sitting without a jury. The parties recognize they have knowingly and voluntarily agreed to waive all rights to have any such dispute determined by a jury, but otherwise retain all rights afforded under the applicable civil justice system. This Agreement, and the rights and obligations of the Parties hereunder, shall be governed by and construed in accordance with the laws (enter state or other jurisdiction) (without giving effect to its provisions on conflict of laws).
This Agreement is fully and voluntarily entered into by the Parties. Each Party states that he, she, or it has read this Agreement, has obtained advice of counsel if he, she, or it so desired, understands all of this Agreement, and executes this Agreement voluntarily and of his, her, or its own free will and accord with full knowledge of the legal significance and consequences of this Agreement. If this letter correctly expresses your understanding, please sign the enclosed copy where indicated and return it to us. We appreciate the opportunity to serve you and trust that our association will be a long and pleasant one. Sincerely, ______________________________ Signed on behalf of (Firm Name) ACCEPTED AND AGREED TO BY: (Insert Client Name) ______________________________ [Client Signature] Date: ____________________ Please be advised that this sample letter/information is provided as a service from your insurance carrier. These are risk management suggestions from your insurer and are not to be construed as legal advice from an attorney to a client. We strive to provide sound risk management advice and suggestions and hope this information is helpful to you in this matter. Please be further advised that neither Markel nor All Risks, Ltd. can be responsible for material changes to this document or information supplied in the blanks currently provided. If you would like to have a proposed finished product reviewed in advance of utilization of this document please contact our Accountants' Professional Liability Advice "Hotline" at 866- 306-3607. |
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A compilation |
A compilation report should include the following statement: "I (We) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management." |
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Who is a MIB |
Government auditor |
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Can you eliminate audit risk? |
No an auditor cannot eliminate the audit risk; he can only minimize it. |
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Major roles in code of professional conduct |
Major roles in code of professional conduct 1. Members in Public Practice (MIPP) 2. Members in Business (MIB) 3. Other Members |
