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Auditing Test1c

Auditing Test 1 Questions (continued)

QuestionAnswer
What is the AICPA? The American Institute of Certified Public Accountants.
What does the AICPA do? *Writes and monitors compliance with a code of conduct. *Writes and grades the CPA exam. *Private Entity *Division called the Auditing Standards Board.
What is the PCAOB? The Public Company Accounting Oversight Board.
What does the PCAOB do? They are a government entity created by the Sarbanes Oxley Act (SOX). They have the legislative ability to write GAAS. They only have jurisdiction over publicly traded companies.
What is GAAS? Generally Accepted Auditing Standards.
What does the State Boards of Accountancy do? Provide CPA certificate and license
What has the PCAOB changed? We now give 2 opinions: 1. Fairness of financial statements and 2. Effectiveness of the client's internal controls.
What does "due professional care" mean? We follow the standards.
What is fraud? Theft or unauthorized manipulation of financial statements.
What are SAS? Statements on auditing standards
How do you establish a level of materiality? It will be different for each client. If really worried you can establish a lower level of materiality and vice versa.
What are the levels of materiality? *Inmaterial *Material *Very Material (pervasive)
What are the opinions applicable to audit reports on financial statements? *Unqualified Opinion *Qualified Opinion *Adverse Opinion *Disclaimer of Opinion
What is an unqualified opinion? It means the financial statements "are fair".
What is a qualified opinion? It means the financial statements "are fair except for...".
What is an adverse opinion? It means the financial statements "are not fair".
What is a disclaimer of opinion? It means an opinion can not be given.
If departures of GAAP are inmaterial it means... An unqualified opinion can be given.
What does a material (qualified opinion) look like? Intro Para- Same Scope Para- Same Explanatory Para- Add Opinion Para- Modify
What does a very material (adverse opinion) look like? Intro Para- Same Scope Para- Same Explanatory Para- Add Opinion Para- Modify
What is a scope limitation? When we are prevented from looking at evidence.
What if the scope limitation is client imposed? It is always considered very material.
What if the scope limitation is non-client imposed? If it is inmaterial it is still a qualified opinion. If it is material then it is a qualified opinion. The qualified opinion will be laid out as follows: Intro Para- Same Scope Para- Modify Explanatory Para- Add Opinion Para- Modify
What if a non-client imposed scope limitation is very material? Then a disclaimer of opinion will be issued. It will be laid out as follows: Intro Para- Modify (We were engaged to audit...) Scope Para- delete Explanatory Para- add Opinion Para- Modify "We are not giving an opinion".
Lack of Consistency (example: client switches from LIFO to FIFO). Can still issue an unqualified opinion. It will be laid out as follows: Intro Para- Same Scope Para- Same Explanatory Para- Add Opinion Para- Same
What happens if a lack of independence occurs? Issue a disclaimer of opinion.
Do you have to mention if you hire another CPA firm to help you with the audit? If a small part of an audit- make no mention. If a large part of an audit- name the other CPA
What if the client does not follow GAAP and we agree? This would occur when GAAP is misleading. It would still be an unqualified opinion. The layout would be as follows: Intro Para- Same Scope Para- Same Explanatory Para- Add Opinion Para- Modify
What if there is a going concern? It can still receive an unqualified opinion and it should be laid out as follows: Intro Para- Same Scope Para- Same Opinion Para- Same Explanatory Para- Add "substantial doubt" "going concern"
What are the opinions of the effectiveness of internal controls? 1. Unqualified Opinion 2. Adverse Opinion
Rule 101 Independence
What is defined as immediate family? The CPA's spouse or spousal equivalent and any financial dependents.
What is defined as close family? *Children *Step-Children *Parents *Parents-In-Law *Grandparents *Siblings
Independence is impaired if... 1. Stock Ownership 2. No loans unless client is a financial institution. 3. Employment 4. No Litigation 5. No material gifts 6. No unpaid fees from client 7. Consulting Work prohibited, legal work ok.
What defines stock ownership? -No direct ownership (CPA or immediate family) -No material indirect ownership (close family) of 5% or more of outstanding stock.
What if the CPA accepts a key position with a client? The entire CPA firm lacks independence for one year.
PCAOB prohibits.. legal service, book keeping, internal audit, internal control work, AIS design and implementation, appraisal, valuation, actuary, investment management work, expert witness, represent client in tax court.
What does the PCAOB require in terms of partners? Partners must be rotated, 5 years on and 5 years off.
What does "due professional care" mean? We are following the standards.
Must a client always follow GAAP? Yes, unless GAAP is misleading.
What is privileged communication? Communication between 2 entities that can not be repeated.
What does privileged communication mean in terms of accounting? In the majority of states, accountants do not have privileged communication. We can not use client information unless subpoenaed in a court of law. This also extends to peer reviews.
What is a contingent fee and can a CPA accept it? It is a fee based on a certain outcome. We are not allowed to accept a contingent fee.
Can CPAs advertise? Yes, as long as it is not false, misleading, or deceptive.
Can CPAs accept commission and referral fees? Yes, as long as you do not provide test work for that client. We have to disclose and commission and referral fees to the client.
What penalties can the AICPA impose? *May require additional CPE hours. *Slap on the wrist. *Take away AICPA membership. *Can print name so that the state board can take away license.
What is common law? Common law is based on past court cases.
What is statutory law? Statutory law is based on written laws.
Types of Common Law Cases *Breach of contract- maybe a missed due date. *Ordinary Negligence- (absence of reasonable care, no ill-intent) Maybe forgot a warehouse for inventory. *Gross Negligence (a lack of even slight care, no ill-intent)chose not to count any inventory.
Types of Common Law Cases (continued) Constructive fraud- a flagrant or wreckless disregard for due professional care) no intent to deceive. -Fraud (intentionally provide fraudulent information
Ultramares vs. Touche Touche was hired by Fred Sterns to do an audit. Touche failed to look at unusually large scale. Ultramares loaned money to Fred Sterns. Ultramares sues Touche. Court says Ultramares cannot sue b/c they are not the clnt. Court created "constructive fraud".
What can help get you out of a lawsuit? If you can prove you used due professional care. You can do this with documentation.
What is the worst penalty under common law? Monetary is the worst penalty, no jail time.
What is IPO? The first time a company offers it's stock.
Who does the Securities Act of 1933 effect? Only those who bought stock as part of IPO can bring a suit. They must prove a sustained loss and that something was wrong with the financial statements. This means the auditor is being charged. The client cannot bring suit and neither can sec. trader.
What are the penalties of violating the Securities Act of 1933? FInes and jail time (up to 5 years). The burden of proof is on the defendent. It is usually a class action law suit.
Who does the Securities Act of 1934 effect? Ppl bought stock on the secondary market. Must prove the auditor intended to deceive. Penalty is up to $5 mil. and 20 yrs in jail. Normally a class action law suit. It created the SEC. Annually a form 10-K must be filed which includes F/S & audit reprts.
How does SOX impact management? *Must have effective system of I/C. *Must self-assess compliance to I/C. *Sign report saying I/Cs are effective signed by CEO and CFO. *Sign report saying their F/S are fair by CEO and CFO. *Code of conduct be in place. *Must have audit committee.
What is the penalty for fraudulently signing financial statements? They can be signed up to $5 mil dollars and 20 years in jail.
How does SOX impact auditors? *Must give opinion on effectiveness of I/C. *Must get permission from the PCAOB to perform audits. *PCAOB will examine audit work. *Rotation of partners. *Must retain wrkng pprs for at least 7 yrs.
What if someone is found guilty of destroying documents? You will go to jail for 10 years.
What if you are found guilty of falsifying or destroying bankruptcy docs? What if you are found guilty of mail or wire fraud? What about securities fraud? Bankruptcy court- Max 20 yrs Mail or wire fraud- 5-20 yrs Securities Fraud- max 25 years
What is securities fraud? Insider Trading
What are management's responsibilities? *Assertions in the F/S *Fair presentation of the F/S *Sound accounting policies *Effective I/Cs *Certify fairness of F/S and the effectiveness of I/C *Give any evidence requested *Pay us.
What are the auditor's responsibilities? *Use due professional care. *Design the audit to find material misstatements. *Design the audit to find direct effect illegal acts. *Certify effectiveness of I/C & fairness of F/S.
What are misstatements? They can be errors or fraud. The fraud can be theft or manipulation of F/S.
What is an assertion? An implicit or explicit representation made by management.
What are client assertions? 1. Existence or occurence 2. Completeness 3. Rights and Obligations 4. Valuation and Allocation 5. Presentation and Disclosure
What are the categories of client illegal acts? 1. Direct effect on F/S (must specifically look for) 2. Indirect effect on F/S (do not specifically look for.
What must you do if you decide to leave an audit? You must file a form 8. Should consult a lawyer.
What are the audit stages? 1. Planning Stage 2. Field Work Stage 3. Final Review Stage 4. Reporting Stage.
What is the planning stage? Identify assertions and putting plan together.
What is the field work stage? Gathering evidence.
What is the final review stage? Hand off to concurring partner.
Divide audit into cycles. 1. Sales and collections cycle (sales of goods, accounts receivable, cash coll.) 2. Acquisition & Payment Cycle (buying and payments) 3. Payroll Cycle (payment & credentials of employees) 4. Inventory and Warehousing Cycle 5. Capital Acquisition Cycle
What are audit objectives? What we want to prove in an audit.
What are the major types of tests? 1. Tests of controls 2. Substantive Tests = $
Audit evidence Must be appropriate and sufficient
Evidence Mix -Nature -Timing (when we are going to do tests) The closer to year-end the higher the quality. -Extent (how much evidence)
Types of Audit Evidence 1. Physical Examination 2. Documentation 3. Confirmations 4. Analytic Procedures 5. Representations by client 6. Recalculation 7. Reperformance 8. Observation 9. Electronic Examination
Tracing *Tests completeness Source doc, then general ledger, then financial statements
Vouching Tests for existance Financial statements, then general ledger, then source docs.
Created by: olinchristy