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| What are safeguards that may be applied to reduce the threats to independence? | A. The profession, legislation, or regulation b. The attest client c. The firm |
| What are the threats OF Independence (FAAMUSS)? | A. Adverse interest threats b. Advocacy threats c. Familiarity threats d. Management participation threats e. Self-interest threats f. Self-review threats g. Undue influence threats |
| What are the threats to Independence (CEFF)? | 1. Financial relationships—Example: An attest partner should not own stock in an audit client 2. Employment relationships—Example: Attest partners should not be on an audit client's board of directors 3. Family relationships—Example: An attest partner should not audit a client whose chief executive officer is the partner's spouse 4. Consulting relationships—Example: An attest firm should not provide internal audit services to an attest client |
| Independence rules must be followed when relationships exist during what period of time? | 1. The period covered by the financial statements 2. The period of the professional engagement |
| Which 'covered' members must comply with Independence rules? | 1. An individual on the attest engagement team (team member) 2. An individual in a position to influence the attest engagement (PTI) 3. A partner, partner equivalent, or manager who provides 10 hours or more of non attest services to the attest client within any fiscal year (10-hour person) 4. A partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent practices in connection with the attest engagement (other partner in office) 5. The firm, including the firm's employee benefit plans An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in items (1) through (4) |
| In an Engagement letter, is it an Independence violation for a 'covered member' to indemnify an attest client for losses resulting from the client's own acts? | Yes! A member/firm should be responsible for its own acts and an attest client should be responsible for its own acts. |
| Unpaid Fees - When are you allowed to Not sign an audit report? | You may not sign a current-year audit report if it has unpaid fees from the client for services provided more than one year prior. Exception: client in bankruptcy |
| Is independence impaired if a covered member has or is committed to acquiring any direct (whether material or not) or any material indirect financial interest in an attest client? | Yes, independence is impaired! Only if interests are both indirect AND immaterial is independence not impaired. |
| NOTE: Unsolicited Financial Interests | Unsolicited Financial Interests - If covered members receive or learn they will receive an unsolicited financial interest in an attest client (perhaps through gift or inheritance) that is either a direct interest or a material indirect interest, independence will not be impaired if they: 1. Dispose of the interest as soon as practicable but not later than 30 days after having both knowledges of the interest and gaining the right to dispose of it; and 2. Do not participate on the attest engagement team after learning of the interest and before disposing of it. If the covered member does not yet have the right to dispose of the interest (perhaps a relative who wrote a will is still alive), then independence will not be impaired if: 1. The member does not participate on the attest engagement team. 2. The interest is not material to the member. |
| Name three conditions that allow covered members to maintain a depository account at a bank that is an attest client? | 1. The balance in the depository account is fully insured 2. Any immaterial amounts are not material to the covered members net worth 3. If an uninsured account is material, it must be reduced to immaterial within 30 days |
| What are the two requirements of having a brokerage account of a brokered attest client firm that a covered member must meet to ensure the there is no independent problem? | 1. Services are rendered under normal conditions, procedures, and requirements AND 2. Assets in the account are immaterial to his/her net worth |
| An insurance policy is not a "financial interest" for the purpose of independence rules if it lacks what option? | Investment option |
| Which type of lease presents an independence issue? | A capital lease aka finance lease (lease to own) *a An operating lease does not create an independence issue if the following safeguards are met: - it's Gaap compliant - the terms and conditions are comparable to similar leases - all amounts are paid in accordance to the terms of the lease* |
| Can an immediate family member of an attest client pose a treat to independence, and if so how? | Yes, an immediate family member can pose a threat to independence of a covered member. Immediate family members are bound by the independence rules and must not work for an attest client or have a financial interest in an attest client UNLESS the financial interest is immaterial AND indirect |
| Can an immediate family member of a covered member work for an attest client? | Yes, an immediate family member can work for an attest client but not in a key position |
| Are close relatives of a covered member bound by independence rules, if so, how abs why? | Yes, a close relative is bound by independence rules. If they hold a key position of an attest client or have a interest in an attest client |
| Can a covered member worked for an attest client? | Yes but they cannot serve in a key management position |
| Can a covered member work for an attest client in a staff augmented capacity? | Yes a covered member can work for an attest client in a staff augmented capacity as long as it is not for more than 30 days and and they do not hold a key position and they cannot be in a position that influences attest an engagement |
| Can a covered member work for in a test client in a professor capacity? | Yes a covered member can work for an attest client in a professor capacity as long as it is tenured and they are not in a key position and they cannot influence and attest engagement |
| Are governmental auditors considered independent of the governmental organization? | Yes governmental auditors are considered independent of the governmental organization as long as they are they are appointed by a voting body and or a legislative body and they and they can be removed from position by a legislative body |
| Can a covered member (partner or professional employee ) serve as a director or officer of a Federated Funded Organization that gives funds or exercises control over funds given to a local charity? | No a covered member cannot serve as a member of a Federated bonded organization in a director or officer capacity or have the Federated bonded organization as an attest client |
| What are the five steps of disassociation for a covered member when they were an employee of an attest client? | 1. Cease to participate in all of the attest clients health and welfare plans and pay 100% of the cost for coverage if participation participation in the plan is required 2. Cease to participate in all of the clients benefit plans, contribution plans, investment plans, and seek to liquidate as soon as possible 3. Dispose of all direct and material indirect financial interests 4. Collect or repay all loans to or from the client especially grandfather scenarios 5. Assess other relationships with the client to determine whether or not any independence safeguards should be installed to an acceptable level |
| What what is the length of the cooling off period that a covered member seeking employment with an attest client must take? | 1 year Preceding the beginning of an audit |
| What is a MIPP? | Members in Public Practice |
| Which code governs services performed for private/public Non-Attest clients? | The professional code governs for private Attest clients SOX rules govern for public Attest clients |
| How does SOX limit MIPP's advisory services to public attest clients? (three ways) | 1. Should not audit their own work 2. Should not advocate for an attest client 3. Should not perform management duties |
| SOX list eight (8) services that a MIPP CAN NEVER provide as a service to an attest client, what are the eight (8) services? | 1. Bookkeeping 2. Financial system implementation or design 3. Appraisal or Valuation services 4. Actuarial services 5. Internal Audit services 6. Management or Human Resource services 7. Broker/Dealer or Investment services 8. Legal or Expert services unrelated to an audit *cannot provide any other service that the PCAOB determines as impermissible* You can provide tax services to an audit client, however, independence is impaired under some circumstances |
| How is independence Impaired when MIPPS 's provide tax services to an Audit client? | 1. Contingent fee arrangement 2. Marketing/planning services in favor of a certain tax treatment for a confidential transaction 3. Provides tax services to Management or their immediate families |
| SOX Process - what is the process? | An Audit committee of the client must pre-approve the non-attest services purchased, noy the CEO,CFO of the audit client |
| Under SOX rules, who are considered close family members? | A spouse, spouse equal, dependent, non dependent child, or parent |
| Under SOX, who are considered to be immediate family members? | Spouse, spouse equal, or dependent |
| Financial relationships under SOX, prohibits the firm, shareholders, immediate family and covered family members from having an attest client if direct are? | 1. Owning stock, bonds, options, notes, etc. 2. A nondiversified mutual fund where more than 20% or more of money is invested * Indirect investments cannot be material or exceed 5%* * cannot have ownership at any level in a related entity that have ownership or can influence an attest client* |
| Partner rotation-SOX requires how many years can a Lead Partner engage on an audit for a client? | 5 years (5 years off) |
| Partner rotation-SOX requires how many years can a Other Partner provide more than 10 hours of service to an attest client? | 7 years (7 years on, 2 years off) |
| What are the responsibilities of the PCAOB, in relation to Accounting firms? | 1. Register accounting firms that audit public companies 2. Establish audit, quality controls, ethics, independence, and other standards 3. Inspect firms 4. Conduct annual inspections of firms that audit more than 100 clients a year 5. Conduct inspections every 3 years on firms that audit fewer than 100 clients 6. Investigate and punishes wrongdoings |
| What are the two (2) unique threats to independence under this rule? | 1. Bias - The threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective 2. Structural - The threat that an AO's (Auditor Office) placement within a government entity, in combination with the structure of the entity being audited, will impact the AO's ability to perform work and report results objectively |
| How is a structural threat reduced to an acceptable level? *three (3) ways* | 1. At a level of government other than the one of which the audited entity is a part, i.e., federal auditors may be auditing a state government program, or state auditors may be auditing a county government program 2. If the head of an AO meets any of the following criteria: - Directly elected by voters of the jurisdiction being audited - Elected or appointed by a legislative body, subject to removal by a legislative body - Appointed by someone other than a legislative body, so long as the appointment is confirmed by a legislative body and removal from the position is subject to oversight or approval by a legislative body - Appointed by, accountable to, reports to, and can only be removed by a statutorily created governing body, the majority of whose members are independently elected 3. Appointed by, accountable to, reports to, and can only be removed by a statutorily created governing body, the majority of whose members are independently elected |
| Continuing Professional Education (CPE), how many hours are needed? | Should complete at least 80 hours of CPE in every two-year period: 1. 24 hours of subject matter directly related to the government environment, government auditing, or the unique environment in which the audited entity operates; and 2. 56 hours of subject matter that directly enhances auditors’ professional expertise to conduct engagements. |
| Under DOL, an accountant is considered not independent if they have what two things with an audit client? | 1. Financial ties - direct or material indirect interest during the audit period or at the issuance of an opinion 2. Employment ties - may not be connected to the plan or plan sponsor being audited as the promoter, director, underwriter, voting trustee, officer, or employee |
| Does the DOL focus more on the independence of an entire audit firm or the covered member? | The entire audit firm is the focus |
| What professional services can be offered to an audit client under DOL rules that cannot be performed under AICPA rules? | Actuarial services and Tax services (tax can be performed under AICPA rules with certain exceptions) |
| How many Accounting Standards are there in the U.S.? | There are 3: 1. FASB - For businesses 2. GASB - For State & Local governmental entities 3. FASAB - For Federal governmental entities **International - ISAB** |
| What are the Standard bodies applicable to Auditing? | 1. ASB - For 'Non-Issuers ''private companies'' [GAAS - generally accepted auditing standards] 2. PCAOB - For 'Issuers' ''public companies'' 3. GAO - For governmental entities *IFAC's IASB - issues international standards on Auditing* |
| What are the four (4) primarily theme for the seven (7) standards? *remember acronym:PR-PR* | A. Purpose/Premise b. Responsibilities c. Performance d. Reporting |
| Define Performance Materiality | Less than materiality for the financial statements as a whole to allow for the possibility of uncorrected and undetected misstatements. |
| Define Tolerable Misstatement | In practice, is sometimes referred to as “tolerable error” —This term refers to the maximum error in a population that the auditor is willing to accept. This should be established in such a way that tolerable misstatement, combined for the entire audit plan, does not exceed materiality for the financial statements taken as a whole. |
| Define an Audit Program | It is the nature, timing, and extent of fieldwork planned for an audit engagement |
| What are the two (2) areas of Fraud? | 1. Misappropriation of Assets = stealing/theft 2. Fraud = cooking the books, hiding transactions |
| What is Audit Risk defined? * applicable at the financial statement level* | The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. *Audit risk is really a probability and that audit risk and materiality are interrelated by the definition of audit risk. |
| Define RMM and at what two (2) levels does (RMM) exist? | It essentially is the Combined risk of Inherent Risk & Control Risk at the two levels below: 1. Financial Statement level - This refers to risks that are “pervasive” to the financial statements and that potentially affect many assertions. 2. Assertion level - RMM at the assertion level consists of two components: (1) inherent risk; and (2) control risk - inherent risk, the probability that a material misstatement would occur in the particular audit area in the absence of any Internal Control Policies and procedures. - control risk, the probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable. |
| What is the Audit Risk Model? * applicable at the transaction/audit area level ONLY* | IRxCRxDR * ONLY applicable at the transactional/audit area level, i.e. accounts receivable* |
| What is Detection Risk? *Detection risk” is the only component risk that is specifically the auditor's responsibility* | The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor's substantive audit procedures (i.e., an undetected material misstatement exists in a relevant assertion). |
| What is the purpose of an ADA (Audit Data Analytic) use? *4 purposes* | 1. Assess risk 2. Test controls 3. Access substantive procedures 4. Help evaluate conclusions |
| What are the five (5) steps to carrying out an ADA? PACPE | 1. Plan 2. Access and prepare the data 3. Consider the relevance and reliability of the data 4. Perform the ADA 5. Evaluate the results |
| Define "Critical Accounting Estimate" | Management is responsible for establishing a process for preparing accounting estimates. The auditor's objective when evaluating accounting estimates is to obtain sufficient appropriate audit evidence to provide reasonable assurance that— a. All accounting estimates that could be material to the financial statements have been developed. b. Those accounting estimates are reasonable in the circumstances. c. The accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed. |
| Name and describe the three types of analytical data. | 1. Structured data,Excel 2. Unstructured data, text data such as social media 3. Semi-Structured data, HTML |
| What are the three ways for an Auditor to document their understanding of an entity's Internal Controls? | 1. Flowchart 2. Internal Control Questionnaire 3. Narrative Write-Up *To make sure that the Auditor's understanding is correct - Perform a Walkthrough—The auditor may select a few transactions to trace them through the client's accounting system. The purpose is merely to get some feedback as to whether the auditor has accurately understood (and documented) the way the client entity is processing transactions. The walkthrough is not considered evidence or a form of documentation and should not be confused with tests of control. |
| Internal control consists of five interrelated components, what are they? (CRI-CM) | 1. Control Environment "tone at the top, employee training" 2. Risk Assessments "business risk" 3. Information & Communication systems 4. Control Activities " segregation of duties, reviews" 5. Monitoring |
| When should significant deficiencies and material weaknesses be communicated "in writing" under AICPA or PCAOB guidelines? | AICPA = at the release date or within 60 days thereafter PCAOB = prior to the release date *The auditor may choose to verbally communicate certain significant deficiencies and material weaknesses during the audit (e.g., to permit timely correction)* |
| Define the "Internal Audit" function | A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management, and internal control processes. **Auditors are not required to use the work of an internal auditor* |
| What are the five "internal controls", specifically "control activites", that are used as a tool to analyze internal controls? *SCARE* | S = segregation of duties C = control - physical control A = authorization R = reviews - as in performance reviews E = EDP or IT |
| When are Representations required? | 1. Audit 2. Review (all 3 types) 3. Examination 4. AUP (Agreed Upon Procedure) NOT REQUIRED 1. Compilation 2. Examination |
| What is Kiting? | An 'Overstated' balance, specifically Cash by way of accounting for it prematurely. |
| What is lapping? | Lapping is an attempt to cover up a theft of receipts, where a clerk might try to apply a later receipt to the prior customer's account (and so on) until the scam ends by writing off someone's account as uncollectible. Lapping is a type of fraud (specifically, misappropriation of assets) that is associated with an improper segregation of duties |
| In auditing accounts receivable, the negative form of confirmation request most likely would be used when? (4 conditions need to be met) | The negative form of confirmation can only be used when four conditions are met: (1) the risk of material misstatement (i.e., the combined assessed level of inherent and control risk) is low; (2) a large number of small balances is involved; (3) a very low exception rate is expected; AND (4) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. |
| What are the five (5) procedures used to 'Test of Controls'? | 1. Inquiry 2. Observation 3. Confirmation 4. Recalculation 5. Reperformance |
| Audit Considerations (Framed by “SCARE”), what is the acronym? | SCARE - S- Segregation of Duties C- Controls (Physical Controls) A- Authorizaion R- Reviews E- EDP/IT |
| Assessing control risk at a low level requires that the auditor provide the basis for reducing the assessment, what is the basis used? | Performing Test of Controls and documenting results that support which support a lowered control risk assessment. |
| There are six assertions specific to Account Balances (and related disclosures) at period-end, what are they? | PACCER (acronym) 1. Presentation 2. Accuracy 3. Completeness 4. Classification 5. Existence 6. Rights & Obligation |
| AICPA: Audit Procedures for Obtaining Evidence—The auditor's basis for conclusion is comprised of three categories of procedures, what are they? *AICPA standards apply to non-issuers* | 1. Risk assessment procedures (financial stmt & assertion) 2. Tests of controls (assertion level) 3. Substantive procedures (assertion level) a. Analytical procedures b. Test of details |
| What is a Positive Confirmation Request? | A request that the confirming party respond directly to the auditor by providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request. *A nonresponse is viewed as a “loose end”* Alternative (sometimes called “alternate”) audit procedures are usually required when no response is received for a positive confirmation request |
| What is a Negative Confirmation Request? | A request that the confirming party respond directly to the auditor ONLY if the confirming party disagrees with the information provided in the request. *The use of negative accounts receivable confirmations requires: 1) a low risk of material misstatement; 2) a large number of small balances; and 3) an expected very low exception rate; 4) no reason to believe that the recipients of the confirmations would not review them properly. |
| What is 'Non-Sampling' risk? | Non-Sampling risk is the possibility of selecting auditing procedures that are not appropriate to achieve the specific objective of detecting a misstatement due to fraud or error. OR Non-Sampling risk refers to any error unrelated to sampling risk that the auditor might commit when performing an audit sampling task, such as failing to recognize a misstatement or otherwise misinterpreting the audit evidence. |
| What does 'Statistical Sampling' in an audit accomplish? | Statistical sampling allows an auditor to: 1) design an efficient sample; 2) measure the sufficiency of the evidential matter obtained; and 3) evaluate the sample results. |
| What is 'Incorrect Rejection' in an audit? | When an Auditor decides that the sample results support the conclusion that the balance is materially misstated when it is not is an illustration of the risk of incorrect rejection. As a result, the auditor will perform additional and unnecessary work. |
| What is 'Incorrect Acceptance' in an audit? | The risk of incorrect acceptance is the risk that the auditor will accept the balance as fairly stated when it is not. OR Incorrect acceptance involves concluding that a financial statement element was fairly stated, based on an audit sampling application, when, in fact, the element was materially misstated. |
| What is Attribute Sampling meant to accomplish? | Audit sampling used to ascertain the operating effectiveness of Internal Control |
| What are the 3 key things to consider when determining a sample size? | 1. Acceptable risk of Overreliance (type II error) 2. Deviation risk (error) 3. Tolerable risk |
| Define 'Projected Misstatements'? | The amount of known misstatements identified in a sample that is projected to the population from which the sample was drawn. |
| The use of the ratio estimation sampling technique is most effective when? | Ratio estimation is most efficient when the differences are proportional to book values. If the calculated audit amounts are approximately proportional to the book amounts, a correlation exists between book values and the individual differences, and ratio estimation will be effective. |
| What are the four primary sections of the auditor's 'Unmodified' report? | 1. Opinion 2. Basis for Opinion 3. Managements Responsibility 4. Auditors Responsibility 5. Signature Block *In referring to the auditor's report, the AICPA professional standards have replaced the term unqualified with unmodified. However, the PCAOB auditing standards continue to use the term unqualified.* |
| What is the definition of the 'Emphasis of Matter' paragraph? | A paragraph included in the auditor’s report that is required by GAAS, or is included at the auditor’s discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s professional judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. *Should have an appropriate label, such as “Emphasis of Matter”; presented after the “Opinion” and “Basis for Opinion” sections of the audit report* |
| What is the definition of the 'Other Matters' paragraph? | A paragraph included in the auditor’s report that is required by GAAS, or is included at the auditor’s discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s professional judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report. *Should have an appropriate label, such as “Emphasis of Matter”; presented after the “Opinion” and “Basis for Opinion” and "Emphasis of Matter" sections of the audit report |
| What is considered to be a 'Modified Opinion' in an auditor's report? | 1. A qualified opinion 2. An adverse opinion 3. Disclaimer of opinion. |
| Define a 'Qualified Opinion'. | The auditor should express a qualified opinion when the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material, but not pervasive. |
| Define a 'Disclaimer of Opinion'. | The auditor should express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material and pervasive. |
| What are the three (3) categories associated with the 'Fraud Triangle'? | 1. Opportunity 2. Attitude/Rationalization 3. Incentive/Pressure |
| What are the two types of fraud relevant to an audit? | 1. Fraudulent Financial Reporting 2. Misappropriation of Assets (Theft) *The intent to deceive is an essential aspect of fraud. Fraud may be material or immaterial to the financial statements. In planning the audit engagement, the auditor focuses on detecting fraud that is material to the financial statements. |
| What are the three types of misstatements? | 1. Factual misstatements—Misstatements for which there is no doubt. 2. Judgmental misstatements—Differences due to the judgments of management that the auditor considers unreasonable or to the selection of accounting policies that the auditor views as inappropriate. 3. Projected misstatements—The auditor's best estimate of misstatements in populations as suggested by audit sampling. |
| Define 'Audit Risk'. | The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.” (Source—AU 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with [GAAS]. ) |
| The risk of material misstatement (RMM) is defined as: “The risk that the financial statements are materially misstated prior to the audit.” RMM exists at what two (2) LEVELS: | 1. Overall Financial Statement level 2. Assertion level for classes of transactions, account balances, and disclosures |
| At the assertion level, Audit Risk consists of what three (3) component risks: | 1. Inherent risk 2. Control risk 3. Detection risk |
| What does an increase in Detection Risk represent? | Smaller sample sizes |
| When Inherent Risk or Control Risk increases, what happens to Detection Risk? | Detection Risk decreases = larger sample sizes |
| In determining whether and to what extent analytical procedures should be used, what are the four (4) factors that the auditor should consider? | (1) the nature of the assertion (2) the plausibility and predictability of the relationship (3) the availability and reliability of the data used to develop the expectation (4) the precision of the expectation. |
| Define 'Analytical Procedures'. | (AU-C 520.04): “Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. **Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.” Accordingly, analytical procedures would be useful in identifying unusual year-end transactions. |
| When is Analytic Procedures required for an audit? | 1. Planning stage 2. Final review stage *Optional at the substantive testing stage* |