2013fr aud b simulations

=Remrnder

Auditing B 1 . Oplnlon5 Time Elapse<!

o hours 1 minutu Elm D Ej O

A man., " .xplaonlng to a stall auditor how ¥aIlOlJS s~u"'ions might ..n..ct the audit oplmon For .ach of the foIto-ng K,nllIlOS. ldemlfy Ihe appopnate reportIng optlOll by doubl,<1Ic1ung on. shaded eel and seled",!! the appopnale OptlOll from the hSI plCMde<:i Assume thai any finanelal stalemem tIIea II malenal and that U S auditIng standards are followed.

1 The Kope of the audrtor's eu ... natron rs all'ected by conditrons that pleclude th. appllCatron of II necessary ilUdrtrng procedure .

2 The auditor decides to m.J1te ff*.nce to the report 0( another unqu:;lIified "",nlOll

auditor as I baSIS . rn pall . for ."",usrng 311 opnion.

J The ~nanclal statements .... ;ifecttd by an aIIem3liw accountrng tffatmentthal 15 • depallUfe from GAAP. The us o of GAM> WOIJId

cause the Slalements to be ""sleading

4 Th e cOmp8f'y changed li S method of accoonling fo< long-term cOl1slNCt iOl1 COl1tracIS. but maI"'''9I'ment was jU stifie<! in maki ng the c h!l!1ge The new method IS acceptable under GAAP. and the change was accoonltd lor prospect rve ly ""' ,, " ~ "",, . or C;sc laime r of opiniOl1

5 Doubt aboot th , companys abi lity to continue as a going c once rn is fu lly disc losed in th , not es to th , fin anc ial statements

S The financ ial stSlements are s ubJlCt to an uncertainty that wi ll likely resu~ in a mttenal lon Man"9l'mem has been unable to , , est ,mtte the amount of poIent ,al lon. but has property di sdose<! the details ofth. s~ual.on "' ...... OpinIon 0< disc la,mer of opioOon

7 The company changed ~s method of ""I"'ng i,..."m<><y, but m.Jn"9l'mem d>d not h .... appopl.at, jIlslmcat,on lor Ihe change Th. change It plopelfy disclosed on Ih, finane ",1 slatemems

8 A pledKtSSor audt1or's unqualified opln,on lor a prior yeaf' report 011 comparal"'" financ,aI SlaI,mems OS not plesemed.

9 Requ,red supplementary onformallOll os ommed from Ihe financ,al Slalementa

10 The aud~or ... ,hes to ,mphnlZe the acqurS~1OII 0( newly acquued co",,*,",

, , , 2013

".

1. Qualified opinion or disclaimer of opinionWhen the scope of the auditor’s examination is affected by conditions that preclude the application of anecessary auditing procedure, a qualified opinion or disclaimer of opinion would be appropriate.

2. Unqualified opinion with explanatory language

When an auditor decides to divide responsibility, his or her report will be modified to reflect this division. 3. Unqualified opinion with explanatory language

When there is a necessary and justified departure from GAAP, an unqualified opinion with explanatorylanguage is appropriate.

4. Qualified opinion or adverse opinion

Although management was justified in making the change to an acceptable accounting principle, themethod of effecting the change was not correct. The cumulative effect of a change in accounting principleshould be recognized as an adjustment in the retained earnings statement, not accounted for prospectively.


Doubt about the company’s ability to continue as a going concern results in an unqualified opinion withexplanatory language, as long as the situation is fully disclosed in the notes to the financial statements.

6. Standard unqualified opinion

Since the potential loss is probable but not estimable, the proper treatment is disclosure only. Management has properly disclosed this situation, so a standard unqualified opinion is appropriate.

7. Qualified opinion or adverse opinion

Since management lacked appropriate justification for the change, GAAP has been violated despite thefinancial statement disclosure. Departures from GAAP result in a qualified opinion or an adverse opinion.


When a predecessor auditor’s unqualified opinion for a prior year’s report on comparative financialstatements is not presented, the successor auditor would need to include certain information in theintroductory paragraph of the current year’s report.


When required supplementary information is omitted from the financial statements, an explanatoryparagraph is used to disclose this situation.


The auditor may emphasize a matter while still expressing an unqualified opinion.

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Becker's Final Review - Help

Audiling B 1 . Opinions Time Elapse<!

o hoors 0 mmul es

, R"";ew Notos hltIIonI.MM Lit ... .....

,/!. CuI I .Q Copy I (ft Pasl' I

ChallIS. CPA. aud~e<! th, consolidate<! finano;laI slatements 01 RaIe91lnduslries and all but two 01 U subsKloanlS for the y.ars ended Dec • ..oo.r 31. Vear 1. and Dectmber 31. Vear 2_ TyI.r IS Ihe 51"" accountant asslQIled 10 the RaI.1gh .ngage......., Chall.s eKprtlsed. qualified opnlOll on tht V~,.,. 1 financial starements because RaIIeigh Clpitahz ed cena," research and developonent eKpendrlures that s hould h.,.. been ,xpensed. but RaI~91 has conec\ed this error In Vear 2. The Vear 1 inancl.t slattments h.,.. be.n appropriately reslated. and an unqu~lfied Opinion 15 cunently beUIQ expressed on both sets 01 financIal statements

Karl & Karla. CPAs. audoted Ih, tinanclall SUlemelllS 01 tle'IOIon . Inc_. and 01 CaprICorn ConsuRIJIg, boIh 01 'llllleh ar. consolidated lubsldianes 01 Raietgh Chart" hn c1Klded not to 3Ssume responsilil~y fa< Ihe work 01 Karl & Karl. WIth rlSpect to th, tJ,IOIon el'lg8gemem, but .... 11 assume responsililrty fa< the work 01 Karl & Ka1;o WIth respect 10 Ih. Capncom job

Raleigh IS currenlly beIng I,...,St'9"'ed fa< possible securities law ';oIation. ThIS IS adequately disclosed In Ih. notes 10 the consolidated financIal slatemems . 001 Ih. u~lI"ar. outcome of Ihu@ matt "", cannot pre senlly be deleffnmed Thetefo/ • . no prO'>'lIon for any liabOlrty Ihal may resuR has be,n recorded .

Rale ,g, 'xpen,nc.d, nel loss In Year 2 and I. CUffenlty in def""tt under ." bslanll~ ly ~ I 01 its debt agr •• menIS Mam.gemenfs plans In regard 10 Ih ese matlers 8(e 8dequ llt ely disclosed. a lthough no "nanc i" statement adJUstmenl S hIM been made Th ese matters ra<se subst ant ial doubt aboot Raltlgl1's abO llty to cootlnue as a going concern

Ch3~ es re.;.~d Ty1ets draft 01 th e ~udito<'s report and indicat e<! in his re.;ew nole s that th ere well s_ral deficiencies in tht re port _ Based oo ly on th e r .... ew noles . se lect th ose ite ms wh ich Cha~ e s ha s correctly ide ntifie<l as defic ief">C ies in th e report by clic king th e box

bes ide th e appropri ft e o~ioo s Se lect all that apply_

~ 1 The refer&nce to the subsidiary. Newtoo. and Ihe magn ~ ooe of its ~"af">C ,,1 stft ements s~id be In th @scopeparagraph rat herlhan in Ihe openIng \Introductory) paragraph_

fl 2 Th' other .ndependem avdit",s. Karl & Kalla. s hould be nafllO'd In th' scope paragraph rllther than In Ih~ opening (introduclory) paragraph

rI ) 1M refer....:t .. the scOpt paragraph 10 "the linanc .... stat,melllS are fret 01 matenal"'55tlll.~ment· should be followed by the phrase. "wheTher caused by ,n", Of 1r,.ucL·

" Th. requited referenc, In tht scope paragraph 10 ass essIng · s.gnlficant esllmates mad. by management" has been ormte<l _

~ 5 Th. referenc. In the scope paragraph to "a .. e.sing fraud nst" IS .napproflflil. and should be omitted from th@report_

[] 6 Th. requIre<! referenc. In the .cope paragraph to "muallng the <MIfail ~OancllJl sw.ment pres,ntatlon" has been omitte<! .

~ 1 A separate explll"atory paragraph descn bO ng the i",""stigalioo int o poss ltoe .. ~ft lonS of sec unt les laws is requ ire<! to be pl ace<! bet~en th e scope and Opl nioo pa ragraphs

[] e Th . refere nce in th e . xplanato-ry pa ragraph (betwee n th e scope and opln ioo paragraph s) to th e qualified opin ioo 00 th e Year 1 fi na nc ial stat eme nt s is not prope rty pl ac ed The Year 1 opin ioo sh ould be f. feref">Ced in th e Opl nlOO paragraph_

~ 9 The reference On the expl anat ory paragraph does not expres s our belIef Ihllt the disck/sures .,e adequat e This belief s h<>u1d be specmcalf)' eKpressed In th., paragraph_

~ 10 The reference to the OIher aood",. In Ihe apinioo paragraph IS Incompltte ~ s~1d specmcalf)' Incloo~ Ih~ ...... ds "unqualifie<l OPInIon" to deSC ribe the type 01 OPlnlOll upresse<l by Karl & Karla_

~ 11 Tht OpInlOll paragrlph should "'1.I",d Ihe auditor's oprnlOO beyond fioancl.t posnlOll to IJICludt tht r.suh 01 Rale91's Operat lOllS and u change" stodcholdt,,· " ,lIIIy_

12 Th. referenc, 10 th, unctOalnty .. the OpInloo paragraph IS Incomplel. ~ s~1d d.scribe tht nature of Ih. uncenalnty as peo .. mng 10 Ih. """st'9""on Into possibl ... oIl noo" of Secuntles ,-~ t J Th •• Xj)ianatory paragraph follOWIng the opinion paragraph does not Include Ih. term "substantIal doubt · Thi s term is requlfed to be used ,n Ihll paragraph under thU@Clfcumstances

D 14 Th. uplanalory paragra ph fol lOWIng th e opinion paragraph don oot inc lude th, term "go<ng concern" This term is fe qu ired to be used in tnis paragraph under thest c irc umstances

~ 15 The expl.nft QfY paragraph foj lowi ng th e opin ioo pa ragraph inc ludes I n inappropriate stft eme nt th at "the c ons olidat e<! fin anc ial stft eme"ts do not inc lude any adJU stme nts that migl1t resu lt from the outcome ri th ls u nce ~lInty" Tn is state me nt is mi s leading and s hou ld be Omitt e<!

[] 16 Th. lIIdit or's report. IS nol CO)ffectf)' dale<! sir>ee ~ use. <>of)' <>0. dat e h should be dual dat ed bec aus ~ of lh e noles refe rring 10 Ihe i"""S'"9111011 and the 9O'ng concern ur>e~n ll nty

".

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.. =RerrMlder 1JIrec\ICII'1S 1 III J 4 4 PrIMOUS Next •

2013 (~13.0.0)

1. Charles is incorrectReference to the subsidiary that was not audited by the principal auditor and the magnitude of its financialstatements is included in the opening paragraph.

2. Charles is incorrect

The other auditors can only be named with their express permission and if their report is being presentedtogether with that of Charles, CPA.


An unqualified opinion must state that the financial statements are free of material misstatement, but doesnot state "whether caused by error or fraud."

4. Charles is correct.

There should be a reference in the scope paragraph to “significant estimates made by management.” 5. Charles is correct

Reference to the assessment of fraud risk is not part of the standard report and should be removed. 6. Charles is correct

The audit report should include a reference in the scope paragraph to “evaluating the overall financialstatement presentation.”


Since Raleigh has provided adequate disclosure in the notes to its financial statements, there is no need forthe auditor to make mention of the uncertainty.


The substantive reasons for the different opinion should be disclosed in a separate explanatory paragraphpreceding the opinion paragraph. (This is an exception to the rule on the position of the explanatoryparagraph.)


The auditor's belief that disclosures are adequate is implied in the audit report, and need not be specificallystated.


The type of opinion expressed by the other auditor need not be specifically identified. Rather, the principalauditor provides his opinion on the consolidated financial statements taken as a whole, and simplymentions that a portion of the work was performed by "other auditors."


The opinion should include the results of operations and the cash flows for the appropriate years. Theopinion should not include changes in stockholders' equity (incorrectly suggested by Charles).


An uncertainty that is adequately disclosed in the financial statements does not require the additionalexplanations suggested by Charles.

13. Charles is correct

The term "substantial doubt" is required to be used in situations where substantial doubt exists. 14. Charles is correct

The term "going concern" is required to be used in situations where substantial doubt exists. 15. Charles is incorrect

Tyler's report correctly explains that the financial statements do not include any adjustments that mightresult from the outcome of the going concern uncertainty.


Dual dating is not required based on going concern issues or uncertainties.

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Becker's Fina l Review - Help

Audiling B 1 . Opinion. Time Elaps e<l

o hoors 0 minules

"" .. ". 1 Subs"qtl"nI Evenls ~u .... _ ....... I> '" '''0", (f1 PaSle

On February 12. Ve .. 3. an audnorlSsue<l an unqtlalifie<l audit report on a c~ent's comparalrYe 'nanera! stMement. for the years ,nded December 31. Vur 1. and December 31. '1,,,, 2. The finaocral slatemenls were rssued on February 28 A number of Ind, pend, nt sttu",rons relMed to the engagement .. , dtscnbed below For each sttuation ~sled. oden1r1y the audttor's rtsponsrboltty '" CoIurm A and Ih, proper elll!'C! on the auditor', report rn CoIurm B Anume lhai Ih' client r1ec~ned to make any additron. changes to the financIal statements

t On February 10. Yelll J. the sudrtor disc""",,red Ihat-;t

, -+ • . matenal rece .. able rncluded rn the December 31 . Year 2 Selenlt .... financIal stMIments was worthless due 10 the dtlenorMlng financIal ConditIon of one of Ihe dienfs The mlor hH I responsibOl~y to I"",,,slogale cuSlomers Thl d~nt did not adjusl the financial slatemenlS for Ihos OCCUfflncl . br.rt fully d;sdosed Ihe

Thl mlOf has no aclOVl! responsibilily 10 matler on Ihe "Olts 10 Ihl financi" slalemenls

2 On February 23. Ye .. 3. Ihe aud ilor became aware of "MSltg&II

informal ioo lnding him 10 I:>elieYe Ih;ot Ih e d ien!"s The audilor hes no aclOVl! respor1s ibi lily 10 i11'>'eSlment in markelatNe sec ur~ i es was materially i11'>'esligate . but s hoo ld coos id" ....n . lher Ih. CM! rstate<l in th e Deceml:>e r 31. Yur 2 ba lance s heet. fin anc ial stateme nt s or disc los ures s hoo ld be 3 On February 2. Year 3. th e audilor fin alized his &dJUste<l drvorci from th e CFO of the el ien!"s company_ The drvorci was BITIICBbOe anod the audit or maint ained an appropriatl 1 ..... 1 of profess>onalism . nod inodependence throogllout Ihe aud~

4 On February 11. Ye .. 3. lhe .ud~or disc""",,red Ihat. due 10 I cOmp.lier failure. ail 'ecords 'e-garding lhe payment of inYoocts for th, week of December 8 had bertrl loS! s--r ........ ,ai payments wer. mad. during Ihrs wnk. The auditto' WilS unable 10 perform acceptable ah,,"M'" proc.oure. and WilS unsure wIlelh .. Ih. payments h&d bertrl properly 'ecorded

01( I c.oco I 5 On January 1 • • Ve .. 3. lhe auditor drK""",ed that for a numbtf of .ecunt,,, held '" lhe client·s ,""",slmerrt --,.... .-ponfoiKr, the quoted market pnces had matrtrlaily changed smet Decembe, 31 , Ye", 2 The chent had not &djUsted thl financIal $Iatements for Ihls occunence, nor h&d any disclosure 01 th"e changes been InCluded In thl notes 10 Ihl Manclal statements

6 On January l . Yearl . Ihelludrtor drscowred Ihal Ihe financIal statements had been mat.nally misstated due 10 I per.-IS ... schlme IrwoMng ffaud at Ihe hrghesl levels of management

1 On Ftbruary 2ll . '11" 3. drJnng an Inlemill qtl al~y conl~ ""'tw. ~ was discO'<'lred Ihat Ihe audilor had no1 made iI!1y inqtlln .. or performed any ;tudillng procldures after Flbroary 12. '11'" 3

e On Febru.ry 27. Year 3. during"" inlemal qualily cootrol r!Mew. It was discO'<'Ired Ihal Ih e staff IICcou nt ant on Ihe JOb neYe r a.clu ally ma iled any receivatMes coofirmat ions . bul s imply ass umed Ihat receivatMes were fa" ly sifted How"",. all ool slanoding receivatMes at yea,·end were Pilid wilh in 30 days . and matell al Clsh 'ecerpcs subsequenllo ye ar ... nod were au.dile<l anod Iraced 10 Ihe 'ecelV8bOes worksheet as Pilrt oIlh. aOOil of Clsh

9 On February • . Year 3. the aud~or disc""",,red Ihat lhe cl~nt was the defenodant .. a producl liability lawsun The c~em's management asnned ns Inrrocence. and u attorney agreed wnh thIS assessment Ho ... ,". Ihe atlorney also noted Ihat tt would be Slgr"frcantly less COSily 10 senl, out of court Ihan 10 proceed to Inal. and Ihe c~ent's management was hkely 10 follow \he ar:Mc., of counseL Settlement costs could nOl be ,easonably esllmated at Ihat lime, but Ihey were hklly 10 be matenal The chent had not acuued Ihr. COSI to' marlI mentron 01 thIS matt .. In tts financIal slatements IS. drd IlOl WIsh 10 !1M' an appearancl 01 gul~ In anyway

to On J,nuary t9. Ye .. J. the .udrtor became aware Ihat the chent was recalling onl of ns products due 10 a dtsrgn defect thai posed, potentIal safely hazard The potentIal cost of Ihl recall program was matenal anod could be estImated WIth, renonatM. degree of precISIon Thl ctilnt had lICC",ed Ihls cosl In rts financ ial statements

.. =Ren.rdt, Drrl!'C!ions , , [l] • . .".,... ''"

, 2013 ( .. 13.0.0j

I

1. ' .. ~ Becker's Final Review - Help

Audiling B 1 , Opinions Time Elapsed

o MIl," 0 minutes "- ". , Subse'l"enl Evenls ~ u ... ~<;iiu ___________________ -=:::::::::::: _________________ _ j. CuI .Q Copy . ill Pasi. : I

On February 12. V .. , 3. an audoIor "sued"" un'l"alified audit ,eporl on a c~e"rs comparatNe 'nane,aI SIMeme"', for lhe V'''''' ended Decembe, 31 , Ve31 I, and Decembe' 31 '1'31 2 Th~ finaocral slat~menls we,~ ,ssued on Febru3ry 28 A numbe, of Independe nt sttuat,ons ,elMed 10 Ih •• ngageme", ar, descnbed below For each sttuatoon ~sled. !d~dy the audttor', ,espons,bolttV '" CoIulM A and Ih, prope' eIIed on Ih. aud~or'l "pori ,n CoIulM B Assume lhai Ih. di~nt dec~ned 10 make any addiI,onlll changes 10 lhe finane,,1 SIM,melllS

I On Febru3ry 10, '1./11 3, th, audrtor disc_red Ihat a ,eceoyabi. 'neluded ,n Ih. December 31 , Vear 2

, SlaI.me"'s was worthless due 10 the , :'Rg ~n! condit'on of one oflh. elienfs 'S T".dre"1 did ' th. fin""",01 I' I fu lly d;selosed Ihe .. In. nous 10 the fin anc ial slill ,menls

of lecUnl'ts held '" lhe eI",nfs ","""Slmen! • market pnces had materially

sone. Decembe' 31. '1.31 2 Th. chent had nor: Ih. flnanc'aI SIM.ments for th,s occurrenc • •

Ihes. changes been rncluded I ;~- Ih. nor:es 10 Ih. M3IIC'aI stM.ments

I'

, I •

"".;,.,:,;,;.;;J. Ih. audrtor disclM!red Ihal Ihe : at~" be.n matenJ l1y mrsstated due

sch.me 'rmMRg hud at Ihe hrghesl

~ ~ '", .. m~;C-" +---+----1 I . , ~ ; diSC?, ,d th "audit

~' '~",",: '

, ing I qu ality I ~: ' I · ,d tl stall'

, [~ftoo ~~;e; t I I asi~un;tthat r re f," t il t I , ,

, , ....

On February., Year 3, lhe avd~or disclM!,ed Ihat chent was lhe defend"'" '" a ~odur;1 liability

I The c~ent'. management assened tts , U MlorneV agreed WIth Ih,s

tic *' ,". Ih. Mlom.y also nor:ed Ihat n be srgnrflcarnlv I,ss COSily 10 settle out 01 coon

10 Inal and Ih, c~,nt'$ management ('1y.10 follow lhe ar:Mc' 01 couns.1. Settlement

be re3SonJbiy 'Sllmated at Ihat lime. mat,nal Th. chent had nor:

or mad. mentoon 01 th,s matter '" tt. 1$ tt did nor: WIsh 10 !1M' an

On J'nu~~.ar YJO wa.O .. cy,,,,.C~C,C.C,-<:C:C,_:::cC,C.C,,C.-I chent was recaltrng on. of ft. pmducts due 10 ~

Iha! posed , poIent'aI $afely hazard The I, cost ofth. recalt ~ogr~m was maten31 and be .st,mated WIth J renonabl. degru of

, Th. C~.nl had lICCfYed !h,. cost ,n rt. slateme"' .

,

Drred"",. 1 2 rn 4 4 Prewlus Nelli •

2013 (~13.0.0J

The auditor has an active responsibility to investigate certain subsequent events between the date of thefinancial statements and the date of the auditor’s report (12/31/Y2 through 2/12/Y3, in this case). The auditorwould also be responsible for investigating the effects of any omitted audit procedures discovered after thesubmission of the audit report. The auditor has no active responsibility to make inquiries or perform any further auditing procedures after thedate of the auditor's report (2/12/Y3), but should consider the implications of any information coming to his orher attention. 1. The auditor has a responsibility to investigate | The unqualified opinion issued was inappropriate;

the auditor should have issued a qualified or adverse opinionSince this discovery took place prior to the date of the auditor's report, the auditor was responsible toinvestigate. Additionally, since this condition likely existed at the date of the financial statements, andsince the loss was probable and estimable, a financial statement adjustment was required. Since noadjustment was made, a qualified or adverse opinion would have been appropriate.

2. The auditor has no active responsibility to investigate, but should consider whether the financial

statements or disclosures should be adjusted | The unqualified opinion issued was inappropriate;the auditor should have issued a qualified or adverse opinionThe auditor had no responsibility to make inquiries or perform any further auditing procedures after February12, but could not ignore information that came to his attention. Given the new information, a qualified oradverse opinion would have been appropriate. (At this point, however, the client would more likely beadvised to revise the financial statements, since they have not yet been issued.)

3. The auditor has no active responsibility to investigate | The unqualified opinion issued was

inappropriate; the auditor should have issued a disclaimer of opinionThere is no need or requirement for further investigation of this relationship. As of December 31, Year 2, theauditor was still married to the CFO. Despite the fact the auditor may have been independent in fact, thisrelationship impairs independence because he was not independent in appearance. Lack of independenceresults in a disclaimer of opinion.

4. The auditor has a responsibility to investigate | The unqualified opinion issued was inappropriate;

the auditor should have issued a disclaimer of opinionSince this discovery took place prior to the date of the auditor's report, the auditor was responsible toinvestigate. Since the auditor was unable to perform acceptable alternative procedures and was unsurewhether the payments had been properly recorded, a disclaimer of opinion would have been appropriate.


appropriateThe auditor is only required to investigate certain subsequent events between year-end and the date of theauditor's report. Changes in the market prices of securities are not among these items. Such changes areto be expected and would not require adjustment to or disclosure in the financial statements. Theunqualified opinion issued was therefore appropriate.

6. The auditor has a responsibility to investigate | The unqualified opinion issued was inappropriate,

because the auditor should not have been associated with these financial statementsSince this discovery took place prior to the date of the auditor's report, the auditor was responsible toinvestigate. Additionally, since this situation posed serious concerns about both the financial statementsand management’s integrity, the auditor should have withdrawn from the engagement and should not havebeen associated with these financial statements.


appropriateThe auditor had no responsibility to make inquiries or perform any further auditing procedures after February12. Since no problems had come to his attention, the unqualified opinion remained the appropriate option.

8. The auditor has a responsibility to investigate | The unqualified opinion issued was appropriate

The auditor is responsible for investigating the effects of any omitted audit procedures discovered after thesubmission of the audit report. In this case, it appears that other audit procedures tended to compensate forthe omitted audit procedure, so the unqualified opinion remains the appropriate option.

9. The auditor has a responsibility to investigate | The unqualified opinion issued was inappropriate;

the auditor should have issued a qualified or adverse opinionSince this discovery took place prior to the date of the auditor's report, the auditor was responsible to

investigate. The incurrence of this cost was probable but not estimable, so GAAP requires footnotedisclosure. Since the company neglected to disclose the situation, a qualified or adverse opinion shouldhave been rendered.

10. The auditor has a responsibility to investigate | The unqualified opinion issued was appropriateSince this discovery took place prior to the date of the auditor's report, the auditor was responsible toinvestigate. The cost was both probable and estimable, so the company properly accrued this amount. Since GAAP was followed, an unqualified opinion remains the appropriate option.

=Remondoef

Auditing B 1 . Opinion. Time Elapsed

o hours 1 minutes D E'l O

An audi1 repOll includes tt~ .. n bilSH; ele".,.llIs What gtndance is 1""O¥ided by AlCPA ProfeSSIonal ~andards \IIII1h respe<:t \0 lh, baSIC elemen1. of the audilOf" •• pOII?

Choose a title from the list

~c •

8 PCAOB AT AR ET BL VS •

Do,ed""" 1 2 J

,.

20D

Source of answer for this question:

AU 508.08

Keywords: Standard report

· ,. . - •• 0 X


Auditing B 2 · Other ReporU & Service. Time EI.ps ed

o hours 0 mi nut es

'i' Spec ial Report s AlItl>o<i!a!Ne UNa ur .. Help

.110 Cut I ,Q Copy I ~ Paste I

Fort ier & Yarrow. CPAs . h""" . udited the fi naoci ai st ilt ements 01 {),oef1""d Syst ems foc the year eOOe<l Docember 31. Year 1 o... r1 . nd has • loan agreeme nt with Foo rth Federa l S""; ngs under wh ich it is requ ired to fu mish compl i.nce report s with respect to its JI1Iyments of interest and maintenance of c urrent ratios Fourt h Federa l S""; ngs has reque st ed ass urance from Fort ier & Yarrow. Ila s ed 00 its audit. th.t o... r1 . nd has compl ied with certain C<Ne nants of this loan agreement Whic h of the loll owi ng statements are t rue aboot this engageme nt ? Chock a ll that .ropIy

Ll 1. Fort ier & Yarrow may not pr"",de assu rance with respect to compl iance . s ince th is was not the pu rpose of the ~ n .nc i . 1 statement audit.

o 2. Fort ier & Yarrow mu st perform add it ioo al procedures spec i~cal ly des igned to ""aluate compl iance . beloce issu ing a report 00 compl iaoce .

Ll 3. Fort ier & Ya rrow may pr"",de pos itrve . ssu ra nce reg<l rding compl i. nce.

[] 4. Fort ier & Yarrow may issue a s eJl1l rate report on compl iance

Ll 5. Fort ier & Yarrow may. within the . udit report on the ~nanc i . 1 statements . pr"",de as su rance with res pect to compl i.nce.

o 6. II Fort ier & Yarrow h""e iss ued a qu a l i~ ed opin ioo 00 o... rl and"s ~ nanc i a l stat eme nt s . th ey may not report 00 compl iance with the loan <>greeme nt

".

or =Remindef Oi roctions o;J 2 3 4 ~ p,.. .... oos Next ~

2013 (vI3.0.0)

1. FalseFortier & Yarrow may not provide assurance with respect to compliance, since this was not the purpose ofthe financial statement audit.

Fortier & Yarrow may provide negative assurance relative to loan covenants based on their audit of thefinancial statements.

2. False

Fortier & Yarrow must perform additional procedures specifically designed to evaluate compliance, beforeissuing a report on compliance.

Fortier & Yarrow may provide negative assurance relative to loan covenants based on their audit of thefinancial statements. There is no requirement that additional procedures be performed; however, suchassurance should only extend to covenants that relate to matters that have been subjected to auditprocedures.

3. False

Fortier & Yarrow may provide positive assurance regarding compliance.

Fortier & Yarrow may provide negative (not positive) assurance relative to loan covenants based on theiraudit of the financial statements.

4. True

Fortier & Yarrow may issue a separate report on compliance.

Fortier & Yarrow may provide negative assurance relative to loan covenants, based on their audit of thefinancial statements. This assurance may be given in a separate report or within the auditor's reportaccompanying the financial statements.

5. True

Fortier & Yarrow may, within the audit report on the financial statements, provide assurance with respect tocompliance.

Fortier & Yarrow may provide negative assurance relative to loan covenants, based on their audit of thefinancial statements. This assurance may be given in a separate report or within the auditor's reportaccompanying the financial statements.

6. False

If Fortier & Yarrow have issued a qualified opinion on Overland's financial statements, they may not reporton compliance with the loan agreement.

Fortier & Yarrow may provide negative assurance relative to loan covenants based on their audit of thefinancial statements. While such assurance should not be given if the auditor has expressed an adverseopinion or disclaimed an opinion on the financial statements, there is no prohibition on providing suchassurance when a qualified opinion has been expressed.

_ c x . ,. . .. Becker's Final Review - Help

Auditing B 2 _ Other Reports & Services Time Elapsed

o hours 0 mi nut es D EHIl '"

Interim Financ ial Stat ements G~"'~"~'"~!l~;i£J ________________________________________ . _____ _

Brown & Lawrence . CPA, . have !>een engaged to ,""ew the ~ rst qua rte r !i nane i" stateme nts of Wide World Syst ems . " JlUbl ic company.

r-------------------·-----------------·-----------·-----------------I. Wh id " f th e foll owi ng would Brown & Lawre nce most like ly pe rform with res pect to th e ,,,,,,, nue cyc le?

'-., Send acc ounts ' e<:"""ble confirmat ions .

. -' Troc e from sh i[lpi ng docume nts to sa les jnwKes .

~ V<>uc h mate rial s ales by agree ing to the ,e lat ed s hiJlPi ng documents .

Calculate acc ounts r"".""III. tum""" ,. -~

------_._- .

2. Wh id of th e foll owi ng would Brown & Lawre nc e most like ly pe rform with res pect to th e expenditure cyd e?

• Inquire regarding "JIPI'opriate s"9'egat ioo of dut ies with re sJI""t to JlUrchases .

R"". lc ulate acc ru ed interest paya!>e

Inquire regarding Ove rf ands reve nue recogn it ion JIOlicy_

.-. PerfOfm c utoff test ing for pu rcha ses recOfded just before and just afi er year..,nd. L ___________ ~ ______________ . __________ . ______ . _______________________ "

c----- --~---~--~----- ---~~-----~-

3_ W ith re sJlOCt to intemal c ont roL Brown & Lawrence:

Should obta in a general understand ing of intema l cont rol.

Should retest any c ont rols th at we re not ope rat ing effect ",,1y during the an nual audit.

Should perfOfm test s of cont rols only fOf those c ont rols on which th ey plan to rely _

• Need not obtain an underst anding of intemal c ont roL c________________ _ __ ~ __________________ ~ ______________ _

4_ Brown & Lawrence's r"';ew reJlOrt sh ould include:

Negat"" as surance with resJlOCt to the ~ nanc i a l statements

Pos it"" assu ra nce with resJlOCt to th e ~ nanc i a l statements_

,~ An opinion on the fin anc ial statements _

't =Remindef [l;rectioos 1 III • ; , . - ~ PH"'OOS •

2013 ( )

1. Choice 4 is correct – Calculate accounts receivable turnover

With respect to the revenue cycle, Brown & Lawrence would most likely calculate accounts receivableturnover. A review consists primarily of inquiry and analytical procedures, and ratio calculation and analysisis one form of analytical procedure. Confirming receivables, tracing from shipping documents to salesinvoices, and vouching sales are all audit procedures that would not likely be performed during a review.

2. Choice 1 is correct – Inquire regarding appropriate segregation of duties with respect to purchases

In a review of the interim financial information of a publicly held company, the accountant should makeappropriate inquiries to understand the entity's business and its internal controls. Inquiry regarding WideWorld's revenue recognition policy does not relate to the expenditure cycle, and recalculation of accruedinterest payable and performance of cutoff testing are audit procedures that would not likely be performedduring a review.

3. Choice 1 is correct – Should obtain a general understanding of internal control

The accountant needs to have a general understanding of the entity's business and internal control in orderto determine what types of material misstatements may occur, evaluate the likelihood of suchmisstatements occurring, and select appropriate inquiries and analytical procedures. There is norequirement that the accountant perform tests of controls, nor does the accountant rely on controls during areview.

4. Choice 1 is correct – Negative assurance with respect to the financial statements

The review report should include a negative assurance, such as, "We are not aware of any materialmodifications that should be made to the accompanying financial statements..."

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~\. Audi ting B 2 _ Other Reports & Services Time Elapsed

o hoors 0 mi nutes " D ~ rn 0 Ej OJ S<>~t .. " "- Split HDriz Spl V<ftic. 1 Spr .. d.~ut c..~u~t.,. '"

• Altest Engagements , AutllOOtat;'" litefaill(& .... • Co< I .oil Copy I i& Paste I

As pa rt of its """"a l plann ing process . Bingha m Systems has prepare<! !inanei" statements that reflect its best est imate offinanc ial resu lts f<>r the coming ye ar rae ,t Est imate Financ ial Statements"). In addition , Bingham is cons idering the sa le of Hendrix ComlX"'ents , a sma ll subs idiary that has not been perf<>rming up to company standards _ A second set of financ ial statements has been preJl'l red. to ana lyze eXJI"<'te<l fin anc ial resu lts ~ Hendrix is sold during the secood quarter of the yea, (r inanc ial Statements without Hendrix"). Thaye r & Cox, CPAs , have been engaged to pr""de attestation s"o.ice . on these fina"c ial state me nts .

F<>r eoch of the fol lowing. double·d id on the shad ed ce ll and se lect the best opt ion from the choices prcMded.

~

~

form of En9a9""",nt s<-I..ct Itom , , Thaye r & Cox may compi le the ~nanc ia l state ments . "Best Est imate Financ ial Statements ' on ly , Thaye r & Cox may r"';ew the ~nanc i 1li state me nt • . , Thaye r & Cox may examine the financ ial state me nts . "'F inanc ial Statements without Hendrix' on ly , Thaye r & Cox may perform agreed -u pon procedures with respect to the

financ ial statements . Both sets of~nanc i a l statements ,

form of Report Ne ither set of fi nanc ial statements , Thaye r & Cox mu st include a JI'I ragra pi1 rest rict ing the use of the report .

; Thaye r & Cox may include a paragrapi1 restrict ing the use of the report. , Thaye r & Cox mu st include a statement ind icat ing that the financ ial statement resu lts may not be ach ieved.

8. Thaye r & Cox may include a state me nt indicat ing that the report wi ll be updated for material changes occurring with in a reasona ble period of t ime .

I

" I c.,.c, I

,. =Remindet- Q;rections , ' Ill , , Pr"';oos "'" • ,

" ,

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2013 (vI3.0.0)

Form of Engagement 1. Both sets of financial statements

Thayer & Cox may compile either set of financial statements.

2. Neither set of financial statements

A review of prospective financial statements is not allowed.

3. Both sets of financial statements

Thayer & Cox may examine either set of financial statements.


Thayer & Cox may perform agreed-upon procedures with respect to either set of financial statements.

Form of Report

5. "Financial Statements without Hendrix" only

Thayer & Cox must include a paragraph restricting the use of the report for the financial projection, which isonly appropriate for limited use.


Thayer & Cox may include a paragraph restricting the use of the report for either the financial forecast or thefinancial projection, depending on the client's intended use of the financial statements. Remember thatboth financial forecasts and financial projections are appropriate for limited use.


Whenever they are reporting on prospective financial statements, Thayer & Cox must include a statementindicating that financial statement results may not be achieved.

8. Neither set of financial statements

Whenever they are reporting on prospective financial statements, Thayer & Cox must include a statementindicating that they have no responsibility to update the report. It would therefore be inappropriate for themto express responsibility for updating the report.

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Audi ting B 2 _ Other Reports & Services Time Elapsed

o hours 0 mi nutes

'"

What Quid,,,,, " is prcM<le<l by AlCPA Profes s iOf1al Stoodard. '''9",ding th e s ubJects that may be c""",e<I in a c omfort lett er?

Choose a @efrom the »st

~ "J AU , AU -C PCAOB AT AR ET BL VS

1", . 112 ",roctIOO", ".' • • " .


AU 634.22

Keyword: Comfort letter

, L.~ - [] x ~--.. ~

Audi ting B 3 _ PI~nning Time Elapse<!

o hours 0 minutes

r P1ann ing Auil>ofitat .... Uefatll(e He!

,jr, Cut I Q Copy I "'" Paste I

., =Reminder

Rae & joseph. CPAs. are au o;t i n ~ tne finandal statements of JanOs . Inc .. a nonpul>M c entill'. for t!1 . year ended December 31. Year 2. Rae is tne enQaQement supe "'; sor, and Ke lty is an auditin Q ass istant on tne enQaQement.

Jacob, CPA, audited tne Year 1 finanda l statements of Jan is, Inc. Rae & Joseph h .. e obta ine d permiss ion from Jan is to make inqu iries of Jacob. Rae & Joseph wi ll evaluate inf()l'mation rece illed from jacob. as we ll as otner information. in pl ann i n ~ tne Jan is enQaQement. For earn of tne fo ll owi n ~ items. identify when it would be appropriate for cons ide ration by do u bte-c1icl:: i n ~ on a sha ded ce ll and se l ectin~ the appropriate option fro m tne list prcMded.

I . The numl>e r of yea rs of experience that Jacob had as Se lect Item

Jan is. Inc .'s aud itor.

2. R"';ew of Jacob's aud it documentat ion from his Year 1 , engagement

aud it

3. Recent trends occu rri11g in t he ir<iustry.

4. The abi lity of Jan is. Inc . to increase its level of I ;,~:~:':~::::r. accepl ing the engagement as part piooning

earn ings each year Not an important cons iderat ion

5. Methods use<! by Janis t o gather and process account ing informat ion

6. Situat ions that occurred during the pri()l' year aud it that might l>ear on managemenfs integrity .

7. The risk of material mis st atement surround ing various financ ial statement assert ions .

8. Coordinat ing the ass istance of Jan is" internal aud it deJl'lrtment.

9. Jacob's underst and ing as t o the appropriat e opin ion on the Year 2 financ ial statements

10 Communicat ions l>etwee n Jacob and those charged with the governance of Jan is. Inc .

OK I Cancel I

I Q;rectioos [j]234 ~ Pn"';oos I

'"

2013 (vI3.0.0)

•

1. Not an important considerationThe number of years of experience that Jacob had as Janis, Inc.'s auditor is not an important consideration forRae & Joseph, as it has no bearing on the Year 2 audit.

2. Consider after accepting the engagement, as part of audit planning

Review of Jacob's audit documentation from his Year 1 audit often provides information of continuing accountingand auditing significance. Such review generally would not be performed until the engagement has beenaccepted.


Recent trends occurring in the industry should be considered as Rae & Joseph design audit procedures duringplanning.

4. Not an important consideration

The ability of Janis, Inc. to increase its level of earnings each year does not affect the audit. A company can befinancially stable even if earnings do not grow annually.


Methods used by Janis to gather and process accounting information should be considered as Rae & Josephdesign audit procedures during planning.

6. Consider prior to accepting the engagement

Situations that occurred during the prior year audit that might bear on management's integrity should beconsidered prior to accepting the audit engagement. Rae & Joseph would not want to accept the engagement ifmanagement lacked integrity.


The risk of material misstatement surrounding various financial statement assertions would be used todetermine an appropriate level of detection risk, as part of planning the audit.


As part of planning the audit engagement, Rae & Joseph would want to coordinate any assistance to be providedby Janis' internal audit department.

9. Not an important consideration

Jacob's understanding as to the appropriate opinion on the Year 2 financial statements is irrelevant. Rae &Joseph would need to form their own professional opinion on the Year 2 financial statements.

10. Consider prior to accepting the engagement

Prior to accepting the engagement, Rae & Joseph should make inquiries of Jacob regarding instances of fraud,illegal acts, and matters related to internal control which were communicated to those charged with thegovernance of Janis, Inc.

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Auditing B 3 _ PI~nning Time Elapsed

o hours 0 mi nut es Split Hmiz Split v..rtic.1 SPf .. d.h~ Caicu~tor '"

'f Ris k of Mate rial Misstate me nt Aull>ofitat"", lit",atun, HeI

i Cut l .oil Copy I i& Paste I

Duma m. CPA. is coosi<!ering audit risk at the ooaocial state"'""t 1"",,1 in plarWrlQ the aud it of DML Company' s financ ial state me nts for the ye ar ended Dece mbe r 31 , Yea r I . DML is a jlI';"ate ly-owned ent ity that controct s with outs ide compan ies to jlI'cMde foc iliti es ma nage me nt se".;ces for jlI'ofess ional offic es .

Based 00 oo ly th e information be low. ind icate wheth er eoch of th e fo ll owing foctors would most like ly increase . decrease. or h ...... no effect 00 th e risk of mate rial mi sstate me nt (RMM ). For eoch of th e ite ms in th e ta bie be low, ident ify th e effect on aud it ris k by doubie-c licking 00 • s hooed ce ll and se lecting the approjll'iate opt ion from the list jlI'cMded.

I. Th is was th e ~rst t ime in ""'" ye",s DM L ope rat ed at a jlI'olit beca us e one of its current cl ients relocated its corporate he oo qua rters to a large loc al foc ility. jlI'O"oid ing a s ign ificant increase Increase in RMM In reve nue

2. The intem<li a uditor reports to th e cont",l l", and the control l", reports to Moms , the majority stoc kholder, who also octs as a ch ief

10.",,,,-. RMM

exec ut ;"e officer No effect on RMM

3. The occount ing department ha s experienced a high rate of turn """ r of key pe rsonn el

4. During Year I, DML cha nged its method of jlI'eparing its fi nanc ial state me nts from th e cash ha s is to th e occrual ha s is , in orde r to conform with ge nera lly occepted occounting jlI'inc ipies

5. During Year 1. DM L sold one ha lf of its cont roll ing interest in Lawrence Equ ipme nt Leas ing (LELl. DM L retained a s ign ikant interest in LEL.

6. During December Ye ar I, DM L s igned a controct to lease office equ ipme nt from a company owned by Morris" s ister Th is re lated pa rty tra nsoct ion is not d isclosed in DML's notes to its Ye ar 1 financ ial state me nts

7. During December Yea r 1. DM L completed a ha rte r transoct ion with D"';d's Plu mbi ng Se"';ces DM L jlI'wded D"';d wit h a OK I Cane," I redes igned ~(}()r pla n for his offic e. and in excha nge. D"';d repa ired a major leak in DML's corporate offices

8. Inqu iries about a substantial incre ase in r""e nue recorded by DML in the fou rth qua rt er of Yea r 1 d iscl osed a new policy In an effort to incre ase its cl ient base , DM L bega n jlI'wd ing an uncondit ional money boc k gua r.ntee to cl ients who are not sat isfied with the se"';ces jlI'cMded. Clients may request th is refund for up to three months after th e compietioo of the job.

9. An initi al pul> ic offering of DM L's stock is planned for late Year 2.

., =Remin<let- [)j,ectioos 1 [l] 3 . ~. 5 ~ PH"';OOS Next ~

2013 (v13.0.0)

1. Decrease in RMMSince DML returned to profitable operation, its healthier financial condition leads to a decrease in the risk ofmaterial misstatement.

2. Increase in RMM

The risk of material misstatement increases when the internal auditor reports to top management ratherthan to the audit committee, because it is less likely that the internal auditor will be able to objectivelyperform his or her duties.

3. Increase in RMM

The risk of material misstatement increases when key management positions (particularly senioraccounting personnel) encounter turnover.

4. Increase in RMM

A change to generally accepted accounting principles will increase the risk of material misstatementbecause the change in basis requires management to prepare a number of entries that have not been madein the past. These entries may be made improperly. Also, difficulty in determining beginning accrual basisbalances may increase the risk of misstatement.

5. Increase in RMM

The sale of one half of the company’s controlling interest in Lawrence Equipment Leasing is a transactionthat is outside the ordinary course of business, and accordingly, increases the risk of materialmisstatement.

6. Increase in RMM

The risk of material misstatement increases when significant related party transactions occur, as thesubstance of a transaction may differ somewhat from its form.

7. Increase in RMM

The risk of material misstatement increases where there are unusual and difficult accounting issuespresent. The barter transaction would be considered to be an unusual transaction.

8. Increase in RMM

The risk of material misstatement increases, as it appears that management has taken an aggressiveattitude toward reporting this transaction. In addition, this appears to be an unusual and difficult accountingissue involving revenue recognition.

9. Increase in RMM

Entities may have an incentive to intentionally misstate reported financial condition and operating results insituations in which a public (or private) placement of securities is planned. Accordingly, an initial publicoffering of stock increases the risk of material misstatement.

Audi ting B 3 _ pr~nnirtg Time Elapsed

o hou rs 0 mi nutes SplitHoriz Splltv"rticol , Spr~_h...t C3icu~tor

T Components I AulhOOtatioe litefatu", I Help

,l Cut I .Q Copy I (ft. Paste I

... =Reminoor

Elfown . CPA. is eva luat ing the risk of material misstatement 00 an eflQagemenL For each of tne IoHowir>g. ident ity the risk component most direct ly affected by double-c licking on a shooed ce ll in the RISi< Component column and se lect ing the appropriate opt ion from the list Jll'cMded. Then ind icate what effect the s ituat ion descril>ed would h""" 00 th is risk by double-c licking 00 a shooed ce ll in the Effect 00 R,si< column and se lect ing the appropriate opt ioo from the list Jll'cMded.

Select It~m Risk

Effect on Risk Component

Inherent ris k 1. The ent ity's P'Jrchas ing agent is requ ired to obta in apJII'O"Ia l from sen i", ma nage me nt fO( purchases in excess of$2,OOO.

Control risk 2. A good port ion of the entity's hed asset ha se cons ists of capita lized leasei10ld ite ms . Detect ion risk 3. Brown ~ans to pe rfO(m extens"", tests of detai ls surround ing the payroll !unct ioo

4. The ent ity keeps a large qua nt ity of cash on ha nd.

5. Brown ~ans to perf",m all of its test ing re lated to cash at year-end.

6. The ent ity's computer appl ications are not Jll'otected by password controls .

7. Em~oyees report the hours worked each week without supe"';so-ry ""ers ight

8. Brown wi ll obla in ..;dence prima rily from external sources in test ing the entity's rece ivables .

OK [ C<lOC," I 9. The ent ity's financ ial statements do not re quire use of s ign ificant est imates .

10. Brown pla ns to perform on ly limited tests of deta ils re lated to the pu rc has ing !unct ion .

o;rectioos 1 , ,

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2013 (vI3.0.0)

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1.~ -[] X ~.-.---------. ... ~

Auditing B) _ Pf~nning Time Elaps ed

o hOllfs 0 mi nut es Split HDriz Split v..rtic. 1 Sp'<od._ C3icu~tor '"

'( Components hlIl>OO1at .... Uefatun' Help

i. Cut l .u Copy I Z Paste I

Bfown. CPA. is eva luat ing the ris k of materi al mis state me nt 00 an eflQageme11t For each of the loHowinog. ide nt ify th e ris k compone nt most direct ly affected by double-c licking 00 a sh ad ed ce ll in th e Risk Component c olumn and s elect ing th e appropriat e opt ioo from th e list Jll'cMded. Then ind icate what effect th e s itu at ion de scril>ed wou ld h""" 00 th is risk by double-c licki ng 00 a sh aded c ell in the Effect 00 R,sk c ol umn and s elect ing th e appropriat e opt ioo from th e list Jll'cMded.

Ri sk Effect on Risk

Component

s" lect Item

I . The ent ity's p<J rc has ing age nt is requ ired to obt ain apJII'""al Incre as e ri s k

from s eni", ma nagement fO( p",c ha s es in exces s 01 $2.000

2. A good port ion olthe entitys hed asset ha s e cons ists 01 Dec,eas e risk

c apitaliz ed lea s ehold items .

3. Brown " ans to pe rfO(m ext ens .... tests of det" ls su rround ing th e payroll function

4. The ent ity keeps a large qua ntity 01 cash on hand.

5. Brown " ans to perform all 01 its test ing re lat ed to c ash at year-end.

6. The entity s comp<Jter ap" ications are not Jll'otected by password cont rols .

7. Em" oyees report th e hours worked each week with o-ut su pe",;so-ry ",e rs ight.

8. Brown wi ll obl ain ..;dence prima ri ly from ext ern al sources in test ing the entitys receivables

9. The ent ity's fin anc ial stat eme nt s do not require us e of .

s ign ifica nt est imates . OK I ""'-'" Brown "ans to perform only limited tests 01 details

related to th e p<J rc has ing function. •

, , ,. =Remindet- •

I

2013 (vI3.0.0)

•

1. Control risk | Decrease riskRequiring approval for large purchases is a good control that would reduce control risk.

2. Inherent risk | Increase risk

Assertions involving complex calculations (such as lease calculations) have relatively high inherent risk. 3. Detection risk | Decrease risk

Extensive testing reduces detection risk. 4. Inherent risk | Increase risk

Cash is inherently risky as it is easily stolen and not easily identified as to owner. 5. Detection risk | Decrease risk

Testing at year-end (as opposed to during an interim period) reduces detection risk. 6. Control risk | Increase risk

Failure to appropriately limit access to computer applications increases control risk. 7. Control risk | Increase risk

Failure to require supervisory approval of hours worked increases control risk (e.g., the risk that employeesmay deliberately overstate hours worked).

8. Detection risk | Decrease risk

Use of external evidence reduces detection risk. 9. Inherent risk | Decrease risk

Not having to rely on estimates, which often have a subjective component, reduces inherent risk. 10. Detection risk | Increase risk

Performing limited tests of details increases detection risk.

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Auditing B 3 _ PI .. nning Time Elapsed

o hours 1 mi nutes SpI: Horiz SpI: 'krt",. 1 Sp'u d.h...t c..~u~tor '"

~ Fraud Commu nicat ion AulhOOIative UNat",,, ~""""C:L _______________________________________________ _ i Cut I.Q Copy I i& Paste I

., =RemiOOet-

During the aud it. an aud itor disc"","rs the fo ll crMng foor s~ualions The auditor i. re qu~ed to commoo icate any indicat ion of fra ud to appropriate pa rt ies For each of the s e s ituati oos , identify the appropriate pa rty/part ies by double-c licking on the shaded ce ll s and se lect ing from the list pr""'ded.

I . An account ing cl erk has st olen $50 from the petty cash fund.

2. The entity does not h .... e appropriate access cootr,"s in pl ac e to limit access to company ~nanc i a l records . The aud itor be li""es that this is a s ign i~cant defic iency in the des ign of the entity's intern al controL Th is weakness 311 owe<! "" empl oyee to access the payroll syst em and g;." ,"mse~ an u"a-uthori.zed pay mcreas e. The aud itor concludes that th is wi ll not h ..... a materia l effect 00 the entity's financ ial stat eme nt • .

3. A clerk in the acC01.Jflt s payable de[l1lrtment ge nerat ed s everal checks to pay la rge pe rs oo'" debts . Th is had a materia l effect on the current period ~nanc i a l statements .

4. The CEO de libe rat ely ""," rstates c urrent ye ar reven ue by includ ing severa l key sal es that did not occur unti l the next accounting pe riod .

, , ; [); rections . . ;

Sen ior management

Th ose charged with gove rn ance

The s en ior partn er of Duma m's CPA firm

BoIh senior manageme nt and those cha rge<! wit h governance

Both the s en ior pa rtner of Duma m's CPA firm and thos e charged with gove rnance

The sen ior pa rtner of Duma m's CPA fi rm. sen ior manageme nt. and those charged with gove rn ance

OK [ eaocel

•

~ Pr.,,;oos I Next

2013 (v13.o.0)

•

1. An appropriate level of management, at least one level above those involvedGenerally, any indication of fraud (even immaterial fraud) should be discussed with an appropriate level ofmanagement at least one level above those involved.

2. Both senior management and those charged with governance

Although the effect of this fraud is immaterial, it represents a significant deficiency, which should becommunicated to senior management and those charged with governance.

3. Both senior management and those charged with governance

Fraud that causes a material misstatement of the financial statements should be discussed with seniormanagement and reported directly to those charged with governance.

4. Those charged with governance

Fraud involving senior management should be reported directly to those charged with governance.

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Audi ting B) · PI~nning Time Elaps ed

o hours 1 mi nut es

'" r Rese arc h AuthOfiIatMlUefatW& ~' ~'ej'~L====================================================

In eva luat ing th e risk of "",terial mi sstat ement due to hud. th e auditor should cons ider c erta in att ributes of th e ris k. What gu idance is JII'""ded by AJCPA Profess ion <>i Standards about th e attri butes of risk?

Choose a @e from the ~sl.

~C •

~ PCAOB AT AR ET BL VS •

d ll , •


AU 316.40

Keyword: Attributes of risk

l" =Reminder

Auditing B ( _ Evide nce ami CommunicatioM Time Elapsed

o hou r. 0 mi nutes o Ej ' O

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Viclo:y is a first ye ar staff accountant who is unsure of the difference betwee n tests of controls and substant ive test ing. For eoch of the foll owing tests, ind icate whether it is more like ly to be used as • test of controls or as a substant ive test by cl icking th e box in the appropriate colu"", _

r octua l sa les to t

3_ Confi rm <>ccounts receivabl e_

auditots test counts of i

5_ Perform sales cutoff!est

,

, sa les _

,

, cl ient's i schedule_

I , I _

8_ Observe th e us e of t ime clocks and time cards . , '" "

iIN"sl me nt in bonds _

Io; rectioo s , ; . - ..

Select Item

Test of controls

Substant ive test

OK I Car<:," I

~ Pr.,,;oos Next ~

Tests of controls are procedures performed to evaluate the effectiveness of either the design or the operation ofa control. Substantive tests are of tests of the details of transactions and balances, and analytical review procedures. 1. Substantive test

Comparing actual sales to forecasted sales is an analytical review procedure. 2. Test of controls

Verifying that voucher packages indicate agreement of purchase order, receiving report, and invoice allowsthe auditor to determine whether the control is operating effectively.

3. Substantive test

Confirmation of accounts receivable is a test of the details of the receivables balance. 4. Substantive test

Tracing the auditor’s test counts of inventory into the client's inventory schedule is a test of the details ofthe inventory balance.

5. Substantive test

Performing a sales cutoff test is a test of the details of sales transactions. 6. Substantive test

Examining subsequent cash collections is a means of testing the details of the receivables balance. 7. Test of controls

Inspecting checks for restrictive endorsement prior to deposit is a means of determining whether the controlis operating effectively.

8. Test of controls

Observation of the use of time clocks and time cards is a means of determining whether the control isoperating effectively.

9. Test of controls

Inquiring regarding access controls to the client's computer system is a means of determining whether thecontrol is operating effectively.

10. Substantive test

Recalculating interest expense for reasonableness is a test of the details of interest transactions. 11. Substantive test

Calculating interest income as a percentage of average investment in bonds is an analytical reviewprocedure.

1" =Remindef

D El O Time Elapsed

o hoors 0 mi nutes Auditing B' _ Evidence ami CommunicatioM

, I

As po rt of perf()l'mi ng th e audit of a el ienf. c urrent ye ar fin anc ial stat eme nts , Roch el & Shannon , CPA. , c alcu late varioos fin ancial state me nt rat ios For eoch of the foll owi ng rat ios , identify the int erpretat ion al th e rat io by double -d icking 00 • shooed ce ll and se lect ing the .wopriate opt ion from th e list pr"";ded.

Ratio

3_ Debt to it rat io

interest earned

7. Total asset tu m""",

~Item

Th e cl ient's ."' Iity to C<Ner interest charges

Th e el ienf. Jll'ofit rate

Th e cl ient's short -t erm liqu idity

The el ienf. immediat e short -t erm liqu idity

Th e cl ient's """cess in coli ed ing outstanding

' e<: e "" bI e s

Th e el ienf. effici ency in us ing its resources

How qu ickly th e cl ient's inventOf)' is sold during th e year

How effective ly th e cl ient make s use of its

I Cane .. I

".

o;,ectioos 1 , .

~ PnMoos Next ~ ..

'I' =Re,m,der

Auditing B 4 _ Evide nce ami CommunkatioM Time Elapsed

o hoors 0 mi nutes

, I

As part of perf()l'ming the audit of a cl ienfs current ye ar fin anc ial statements , Rache l & Shann on , CPAs , c alcu late , ari oos fin anc ial statement rat ios F()I' each of th e foll owing rat ios , ide ntify th e interpretat ion of the rat io by double -d icking 00 • shooed ce ll and se lect ing th e 'j}JII'opriate opl ion from th e list prcM<led_

Ratio

3_ Debt to it rat io

interest earned

7_ Total asset tu rn ove r

Select Item

The cl ienfs s""cess in coll ect ing outstanding rece""bles

The cl ienfs effic iency in us ing its resources

How qu ickly the cl ienfs inve nt<>ry is sold duri ng the year

How effective ly th e cl ient makes use of its assets

The degree of proted ion afi'()I'ded to the cl ient's cred it()l's in case of ins ,*"" ncy

The retu rn earned by the cl ienfs sh areholders

[ Ca'lCei

'"

I Q;,ectioos 1 , ,

~ Pr.",;oos Next ~

1. The client's immediate short-term liquidity

(Cash equivalents + Marketable securities + Net receivables) / Current liabilities

This ratio provides an indication of Silva’s immediate short-term liquidity. Inventory and prepaids are notincluded.

2. The client's short-term liquidity

Current assets / Current liabilities

This ratio provides an indication of Silva’s short-term liquidity.

3. The degree of protection afforded to the client's creditors in case of insolvency

Total liabilities / Common stockholders' equity

This ratio indicates the degree of protection afforded to creditors in case of insolvency.

4. The client's ability to cover interest charges

(Recurring income before interest and taxes) / Interest

This ratio reflects Silva’s ability to cover interest charges.

5. The client's success in collecting outstanding receivables

Net sales / Accounts receivable (net)

This ratio indicates Silva’s success in collecting outstanding receivables.

6. How quickly the client's inventory is sold during the year

Cost of goods sold / Inventory

This ratio indicates how quickly inventory is sold during the year.

7. How effectively the client makes use of its assets

Net sales / Total assets

This ratio indicates how effectively Silva makes use of its assets.

8. The client's profit rate

Net income / Net sales

This ratio indicates Silva’s profit rate.

9. The client's efficiency in using its resources

Net income / Total assets

This ratio indicates Silva’s efficiency in using its resources.

10. The return earned by The client's shareholders

Net income / Stockholders' equity

This ratio indicates the return earned by shareholders.

" =Reminde r

A"ditir>g B 4 _ Evide nce and CommunicatioM Time Elapsed

o hou r. 0 mi nutes

, I

D"';s & Smith , CPAs, h .... " performed 3 variety of aud it tests as part of the ir audit of Silva Inc and must now ",," II/ate th eir resu lts For eoch of the fo ll owi ng s ituations , identity wheth er th e se lected balance (sh own in pare ntheses ) is merstated, unde rstat ed, or fai ny staled by double-d ic king on , s hooed ce ll and se lect ing th e .wopriate opt ion from th e list prcMded.

I.',,""",',;", ;'," ;';,·'"SU i>Jl! iers s hiwed goods to S ilva 00 Decembe r 2£, Year 1, FOB de st inat ion ,

I """"I date of December 30, Ye ar 1 The goods did not arm.. at Si"a.

ba s ed 00 the schedu led a,,",31 date of Dece mbe r

, ,

One of S i" a's customers is holding goods on coos ignment f<>r S ilva. The goods were I r lothe customer 00 Decembe r 31 , Year 1 S i". has included th e retail . allle of these

its employees (}/1 Fri<!ays Th e

December 31 . ~~~--l-----------! 5. On Dece mber 31 , S i" a sold goods to a re lat ed JI'I rty. The goods were sold abeNe S i" a"s

1 fall s on a Wednesday. oot S i"" r includes all checks writt en t r

t oot be low the norma l retail .alue I

Directioos , , •

s<-Iect It~m

, Understated

Fairly stat ed

OK I Cane .. I

".

•

1. OverstatedTitle does not transfer until the goods have arrived at Silva's receiving dock, regardless of the scheduledarrival date. Therefore, these goods should not be included in Year 1 inventory.

2. Fairly stated

Silva properly excluded the goods from inventory as title transferred to the buyer as soon as the goods wereshipped.

3. Overstated

Silva's sales will be overstated. Goods held on consignment (which have not yet been sold) still properlybelong to Silva. No sale has taken place.

4. Understated

Payroll expense should properly be accrued for the last three days of the year, even though no money willbe paid until January Year 2.

5. Fairly stated

Related party transactions are by definition not considered to be consummated at arm's-length, and suchtransactions must be disclosed in the financial statements. However, this does not imply that there is anerror in sales.

,

" =RelTffider

Auditing B 4 _ Evidenc~ ami Communication. Time Elapsed

o hou r. 0 mi nutes

An aud itor may dec ide to make use of a spec ialist in obta ining .uffic ient apJII'opr;<lte audit ""de nee in certain c ircu mstances that are material to the fair p<e sent<lt ioo of the fi nanc ial st<lte me nts Wh at gu idance is p":Mded by AJCPA Profess iooal Slandards regarding the types d matters that the audit", may dec ide requ ire him Of her to cons ider us ing the work of 3 spec ialist ?

Choose a@efromthe list

~ ~ AU , AU-C PCAOB • AT -'I AR ET BL VS

'"

~ PrlMoos llc<1 ~


AU 336.07

Keyword: Specialist

,

" =Reminder

Auditing B 4 _ TrBnsBction Cycles Time Elapsed

o hours 0 minutes o Ej !CJ 5F>111Hori, 5F>111Verticol ! 5~e_h"," ~~u~tOf ! h i

, A CPA nrm uses an audit mecklist to cons ider potential mi sstatements and identify contro ls wh im miQht prevent or detect sum errOrS . The enQaQement SUpeM SOr has instructe d the au dit ass istant to use tn is mecl<l ist to evaluate a a ienfs internal controls. For eam of tne fo ll ow; n ~ potential errors, identify a control procedure tnat would most likely be enect",e in pr""e nt i n ~ or detectinQ tne problem by doubie-d ickinQ on a sha ded ce ll and se l ec!in~ the appropriate option fro m tne list prc,.,;ded Contro l procedures may be se leded once more tn"n once or not at all • •

S~I..ct It~m

:',: I . Cred it sa les are made to indMduals with are requ ired for goods

unsat isfoctory credit rat ings. warehouse

-1 2. Employees rece"" unauthorized rate irlCreases . ~h'::;'~~~ mailed to all

3. Vendor irl'VOice s are paid for more goods than were t with outstanding balances rece ;"ed.

4. Fictit ious employees are added to payroll. i ~~i J>Ping clerks compare goods receiwd from

5. Sales invoices for goods are posted to incorrect warehouse with appr<>"le<! sa les orders •

customer occounts .

6. Goods sh ipped to customers do not agree with goods , are compared with the

approved customer list ordered by customers .

7. Customer checks are misappropriated before be ing Supe"';sors approve t ime cards forwarded to the cash ier for depos it

8. The receMng clerk fa ils to count the goods rece ""d. • personne l department authorizes all new

9. Customer checks are rece""d for less than the hires

customers" fu ll occount balances , oot the customers" fu ll occount balances are credited. . • • • . • 10. Terminated employees re ma in on the payroll.

" I ""'- I

,

I o;rectioos , , . ~ Pr.,.,;oos I •

,

?' =Reminde,

Auditing B 4 _ T'Bn ... ction Cycle. Time Elapsed

o hoors 0 minutes

, A CPA nrm uses an audit rnecki ist to cons ider potenti al misstatements and identify contro ls wh irn miQht pre.ent or detect surn errors. Th e enQaQement supeMso< has instructed the audit assistant to use tn is rne ci<t ist to evaluate a a ienfs intern al controls. Fo r earn 01 tne lo ll ow; n ~ potential errors , identify a co ntrol procedure lt1 at woo ld most liketJ be enect",e in pre.e nti n~ or detectinQ lt1 e problem by doubie-d ickinQ on a shaded ce ll and se l ecti n ~ the appropri ate option tro m tne list prc,.,;ded Contro l procedures may be se leded once, more tna n once, 0< not at all

I . Cred it sa les are made to indMdua ls with unsati sloct o.ry c redit ratings.

2. Employees rece"" unautho<ized rate inc rea ses

3. Vendor irNOices are paid 10< Il)()(e goods than we re rece;"ed.

4. Fictit ious employee s are added to payroll.

5. Sa les invoices 10< goods are posted to incorrect customer occoonts.

6. Goods sh ipped to customers do not agree with goods o<dered by cu stomers

7. Customer checks are misawopriated belore be ing Io<warded to the ca sh ier 10< depos it

8. The receMng cl erk la ils to count the goods rece""d

9. Customer checks are received 10< less than th e customers" fu ll occount ba lances , oot th e customers" fu ll occoo nt ba lances are c redited.

10 Terminated employee s rema in on the payroll

I [);,ectioos , . -

I ~~ ,r'rsonne l SUpeMSor'S password is requ ired to make rate changes

I:,:,;":,:",;,,;",,,'; ew, s are requ ired by th e pe rsonne l

t , wh ich Io<wards documents to

I" , ve ndor invoice. receMng report . and purchase o<der are matched belore th e I ~'"""r is appr<>"<e<! 10< payment

voucher pacbge and suwort ing t are cance ll ed when checks are

signed

, a "bl ind" . without th e

, , I c.". I

•

,

" =Reminder

Auditing B 4 _ TrBn'Bction Cycle . Time Elapsed

o hours 0 minutes D El iO 5~e_""," Cakou~t", I h i

, A CPA nrm uses an audit rnecklist to consider potenti al mi sstatements and identity controls wh irn miQht pre. ent or detect surn errors. The en QaQement supeM sor has instructed the audit assistant to use tn is rne cl<:t ist to evaluate a a ienfs intern al controls. Fo r earn 01 tn e lo ll ow; n ~ potential errors, identity a co ntrol procedure tn at would most likety be enect",e in pr .. e ntin ~ or detect i n ~ tn e problem by do u bl e-d i ck i n ~ on a shaded ce ll and se l ec1i n ~ the appropri ate option tro m tne list prc,.,;ded Control proce dures may be se led ed once more tn an once or not at all

•

Select Item

!Th" "' I . Credit sales are made to indMduals with , . .

unsati sfact ory c redit rat ings.

-1 , ",' 2. Employees receive unauthorized rate irlC rea ses .

3. Vendor i""""es are paid for more goods than were voucher pacbge and support ing rece ;"ed. a<e c oocel led wh en checks are

4. Fictit ious employ ee s are 1tdded to Jl'lYl'olL signed

5. Sa les invoices for goods are posted to incorrect pu rchas ing depa rt ment sends a "bl ind"

customer accounts. purchase order (e.9 .. without th e

6. Goods sh ipped to customers do not agree with goods quant ity ) to th e receMng clerk ordered by customers.

7. Customer checks are misappropriated before be ing , , posted to the accounts forwarded to the ca sh ier for depos~ . rece ;"able ledger from remitt arlCe il<Mces are

8. The receMng cl erk fa ils to cou nt the goods received. with the , alidated bank deposit slip

9. Customer checks are received for less than th e customers· lu ll account balarlCes . oot th e customers" lu ll account ba larlCes are c redited. .

10. Terminated employ ee s rema in on the payroll. 0' I """ I

,

I [); rect ioos , ; .

. ., ' .. ~ Pr.,.;oos I Next •

1. Customer orders are compared with the approved customer listCredit approval should be received before sales are made, to ensure that customers are on an approved list. This should reduce the risk of sales to customers with unsatisfactory credit.

2. The personnel supervisor's password is required to make rate changes

Using password controls reduces the likelihood of unauthorized rate increases. As long as the password is notshared, only the personnel supervisor would have the ability to make such changes.

3. The vendor invoice, receiving report, and purchase order are matched before the voucher is approved for

paymentMatching these documents ensures that payment is only made for goods that were ordered and received.

4. The personnel department authorizes all new hires

Requiring authorization for new hires helps prevent the addition of fictitious employees to the payroll. 5. Monthly statements are mailed to all customers with outstanding balances

If sales invoices are posted to incorrect customer accounts, customers who are erroneously billed are likely tomake inquiries regarding these invoices.

6. Shipping clerks compare goods received from the warehouse with approved sales orders

Requiring shipping clerks to compare both the amount and the type of goods received from the warehouse withapproved sales orders assures that goods shipped agree with goods ordered by customers.

7. Monthly statements are mailed to all customers with outstanding balances

Checks misappropriated prior to forwarding to the cashier are not posted to customer accounts (assuming thatthe remittance advices were stolen as well). A customer would likely question why his or her account hasn't beenappropriately credited.

8. The purchasing department sends a "blind" copy of the purchase order (i.e., without the quantity) to the

receiving clerkWhen the receiving clerk only receives a blind copy of the purchase order, he or she is forced to actually count thegoods received.

9. Total amounts posted to the accounts receivable ledger from remittance advices are compared with the

validated bank deposit slipThe total receipts credited to customer accounts in the subsidiary ledger should equal the total receiptsdeposited, given that daily receipts are deposited intact.

10. Exit interviews are required by the personnel department, which forwards documents to payroll

Requiring exit interviews and forwarding the related documents to payroll minimizes the risk that departingemployees will remain on the payroll.

T =Reminder

Auditing B 4 _ TrBn..,ction Cyd ... Time Elapsed

o hours 0 minutes

, An enQaQement supe ,.,; sor has asked the au<l;t ass istant to pe~orm the fo li owi nQ procedures re lated to an enQaQement. For earn procedure listed, identity the nnanctal statement assertion be i n ~ tested by dou bl e-d i cld n ~ on a sha ded ce ll and se l ect i n ~ the appropriate opUon from the list prc,.,;de d.

Select Item I . Examine cons ignment agreements

2. Examine check regster for the month foll owing ye ar- Compieteness (account ba lances )

end for disoorsements re lat ing to the current pe;ioo.

3. Re";ew bond indenture agreement and ascertain that Compieteness (transoct ions and events )

the cl ient has compl ied with any restrictive covenants .

4. Inspect major new add it ions to fumrture and fixtures Compieteness (pre sentat ion and disclosure )

during the current period

5. Ascerta in that the financ ial statements comply with Existence

GAAP re quire ments surround ing the class ificat ion of i""estment securit ies as current or noncurrent assets . Occurrence

6. Test the ag;ng of occounts rece ivable . discuss ing long-ove rdue occounts with the cl ient's credit manager Al locat ion and ""Iuat ion

7. Obse",e procedures , includ ing segregat ion of dut ies , f", awo.,;ng sa les orders .

Rights and obl igat ions

" T roce sh ipping documents to sa les inwices . Understanda bi lity and class ificat ion , Reper/orm check (}1'1 occurocy of , endor inwice

Jlf1C '"g ------- ------ ----------10 Troce beginn ing Ila lance for inventory to prior ye a ~s

audit documentat ion . I ""'" I

, , ~ Pn",;oos I Next I o;rectioos;, -. -

'"

•

1. Rights and obligationsKelly would examine consignment agreements to ensure that Janis has legal title or similar rights of ownership toinventory, and that inventory excludes items owned by others.

2. Completeness (account balances)

Kelly would examine subsequent cash disbursements to determine whether any such disbursements relate toliabilities that should have been included in the current period financial statements.

3. Completeness (presentation and disclosure)

GAAP requires disclosure of noncompliance with restrictive debt covenants. 4. Existence

The auditor's direct personal observation of assets provides reliable evidence corroborating management'sassertion about the existence of those assets.

5. Understandability and classification

GAAP requires that investment securities be classified into one of three categories, and as current or noncurrentassets, depending on the intent of the company.

6. Allocation and valuation

Overdue accounts should be considered for write-downs or write-offs. 7. Occurrence

The auditor's direct personal observation regarding the approval of sales orders provides evidence that salesreally occurred.

8. Completeness (transactions and events)

Tracing from shipping documents to sales invoices tests whether all shipments have been properly recorded inJanis' Year 2 financial statements.

9. Allocation and valuation

Reperforming mathematical computations verifies that inventory is properly valued. 10. Allocation and valuation

Agreeing the opening balance of inventory to the prior year's (audited) ending balance provides evidenceregarding valuation of the opening balance.

" =Reminde r

Auditing B 4 _ TrBn..,ction Cycle. Time Ela psed

o hours 0 mi nutes

, I

An audit ass istant encountered tn e fo ll owi n ~ enors du r i n ~ an audit. Ide ntity tne nnan"al st. teme nt asse rtion .necled by earn enor by cIo ubie-d icki ng on a s haded ce ll and se l e cti n ~ the appropri ate option from tn e list prc,.,;ded.

S<-I=! Item

I. The ass ist ant noted on a cas h confirmat ion from a ba nk Compieteness (occou nt ba lances ) th at th ere was . n outstanding s hort -term loan at Decembe r 31. whic h was not recorded by th e cl ient Compieteness (trans octions and ""ents ) 2. The c unent port ion of loog--Iefm deb! was excl uded from th e c unent li."' liti es sect ion ol th e ba lance s heet. and was Compieteness (prese ntation and disclos ure) inc luded with long term lia"' lities insteoo.

3. The ass istant loon<!. numlle; 01 .hipp;ng doc u'"""ts for Exist ence wh ic h th ere we re no related sa les invoic e" .

4. Du ri ng th e year th e cl ient pu rc hased. truck from a Occ urrence private indMd ual. but legal title was not obla ined.

5. Du ri ng her obs ervation ol the cl ienfs irrve ntory, th e AJ locat ion and valuat ion

ass ista nt noted a lew items in the boc k ol the storeroom th at appeared to be rath er old. UIX'" fu rth er irrve stigation , Rights and obl igati ons th e items we re deemed to be obs olete and worth less .

6. The ass istant se lected seve ral olde r assets from th e Proper pe ri od (c utoff) cl ient's asset ledger. but was unable to locate th ose assets lor pi1ys ical inspection . The occounting manage r indicated th at th e assets had bee n disposed 01 during th e yea r

7. The cl ient bought a "ece 01 prope rty!Ne years "90 lor inve stme nt pu rposes . The prope rty has quooru pled in va lue

Acwracv

<>< I ""'" I s ince th at time , so th e cl ient has writt en up th e inve stme nt to more close ly reflect its c unent ma rket va lue. The cl ient uses U.s GAAP.

8. The as s istant noted th at th e occounts receivable s ubs idiary ledge r does not reconc ile with the control occou nt due to a tra nspos ition enor. In posting to th e s ubs idiary ledger. $4.293 was ina<tve rt ently posted as $4.239.

I o;rectioos , , •

h .

f

• ~

•

•

T =Re minde r

Audit ing 6 4 _ TrBn..,ction Cycl e . Time Elapsed

o hours 1 mi nutes DElITl ! D Ej IO 5F>i11 Horiz 5F>i11 Vertical : 5~e_h....t ~~"~t", I h i

, An audit ass istant encou ntered tne fo ll owin~ enors dur i n ~ an aud;t Ide ntity the nnan"a l st. teme nt assertion ane cled by earn enor by double-d i cki n ~ on a s h.ded ce ll and se l ecti n ~ the appropriate option fro m tne list prc,.,;ded.

~ltem

I. The ass istant noted 00 a cash confirmat ioo from a ba nk Completeness (pre sentation and d isclosu re) that th ere was an outst anding short -term loan at Decembe r 31 , which was not recorded by th e cl ient Existence

2. The cu nent port ion 01 Iong--Iefm debt was excluded from th e cu nent lial> lit ies sect ioo ol th e ba lance sheet. and wa s Occ une nce ml includ ed with long term lial> liti es insteoo.

3. The ass istant loond a n"mlle.- 01 sh ipping docume-nts IOf Al locat ioo ood valuat ion wh ich there we re no related sales invoic es .

4. During th e ye. r the cl ient purchased a truck from a Rights and obl igat ioos private ind;";dual. but lega l tit le wa s not obta ined. • 5. During her observation olthe cl ienfs irrventory, th e Proper period (c utoff)

ass istant noted a lew items in the boc k olthe store room that appe ared to be rather old. Upon fu rther ifflest igation , Acc urocy th e ~ems we re deemed to be obsolete and worth less .

6. The ass istant se lected s eve ral o lder assets from th e Understandal> lity and class ific at ion cl ienfs asset ledger. but was un able to locate those assets lor pi1ys ical inspect ion . The occount ing manager indicated th at th e assets had bee n d ispos ed of during the yea r.

7. The cl ient bought a piece of prope rty five ye ars "9" for

1-------- -------~ j l OK [ Cane.. I

inve st me nt pu rposes . The prope rty has quooru pled in value s ince that t ime , so th e cl ient has writte n up th e inve st me nt to more cl ose ly reflect its cunent ma rket value . The cl ient uses U.S . GAAP.

8. The ass istant noted that the occou nts receivable su bs id iary ledge r does not reconc ile with the contro l occount due to a t ra nspos it ion eno,- In posting to th e su bs id iary ledger. $.4.293 was inadvertent ly posted as $.4.239.

I [);rections • ~ Pr..,;oos I , , • •

1. Completeness (account balances)Failure to record a loan means that payables are incomplete.

2. Understandability and classificationGAAP requires that the current portion of long-term debt be included in the current liabilities section of the balancesheet.

3. Completeness (transactions and events)Shipping documents that lack corresponding sales invoices may be indicative of a situation where goods wereshipped but not billed. Sales would therefore be incomplete.

4. Rights and obligationsIf legal title for the truck was not transferred to the client, then the client does not technically have ownership rightsto that asset.

5. Allocation and valuationObsolete or worthless assets should be written down to net realizable value or written off, as appropriate.

6. ExistenceAssets which are included in the client's books and records, but which have actually been retired, are notconsidered to "exist" for financial statement purposes as of year-end.

7. Allocation and valuationGAAP requires that land held for investment purposes be shown at historical cost.

8. AccuracyThe transposition error means that the amount posted to the subsidiary ledger was not recorded appropriately.

Auditing 64 _ TrBn..,ction Cyd". Time Elapsed

o hoors 1 minutes

,

Wl1at \1U idance is pfCMded by Alep" Profess iona l Standards re gard;n g tne five compooents of interna l cootrol?

Choose a@efrom the ust

~C •

~ PCAOB AT AR ET BL VS •

" =RerrOnde r o;,ections .~ ~ , ~ ~ PrlMoos llc~1 ~

,

" =Re minder

Auditing 6 4 _ TrBn5Bction Cyd ... Time Elapsed

o homs 1 mi nutes

Wl1 . t \1U idance is p«",;ded by Al CPA Profess iona l Stan dards re gard;ng tn. live compooen!. of interna l contr'" ?

Choose a@efromthe list

~ ___ __ ~VS

, CS QC PR TS

"-~~~~~~ __ ~PFP

-----"

o;,ectioos : , 2 3

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~ p,.,.;oos I 11l'~1 ~


AU 314.41

Keyword: Internal control

_ [] - x . ,. ~ ., . --Becker's Final Review - Help

Auditing B 5 _ Sta t i .tic~1 S~mpling Time Elapsed

o hoors 0 minutes Split H<>riz Split V. rtoool Spr~od.heet Calcu~tor

'i Stat ist ica l Sampl ing AlIll>afiIaliw liI...-atlife He!

i Cut I .Q Copy I ia Paste I

or =Remiflder

In discuss ing his des ire t o make use of stat ist ic al sampl ing meth ods . a neYAy-l1 ired staff accountant made th e foll owing statements t o the sen iOf on th e job_ Wh ich of these statements are correct? Check all that apply

I"'J 1_ Stat ist ic al sampl ing wi ll always result in a sma ll er sample size than nonstat istic al sampl ing.

D 2 Stat istical sampl ing all ows a greater quant ificat ioo of f isk and re liabi lity than does noost<Jt ist ic," sampl ing_

I"'J 3 Stat ist ical sampl ing is requ ired by generally accepted audit ing standards

D 4 Stat istical sampl ing eliminates subJectMty in ""aluat ing sample resu lts

I""J 5_ Stat ist ic al sampl ing requ ires th e use of mathemat ic al formu las and/or tables _

D 6 Stat ist ical sampl ing shou ld not be used when th ere is a sign ifica nt amount of popu lat i"" varia bi lity

, ,

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•

1. FalseStatistical sampling will always result in a smaller sample size than nonstatistical sampling.

While statistical sampling methods can aid the auditor in finding the smallest sample size that achieves thedesired level of risk, there is no guarantee that statistical sampling will result in a smaller sample size thannonstatistical sampling.

2. True

Statistical sampling allows a greater quantification of risk and reliability than does nonstatistical sampling.

With statistical sampling, auditors specify the sampling risk they are willing to accept and then calculatethe sample size that provides that degree of reliability. Nonstatistical methods use qualitative rather thanquantitative judgments of risk and reliability.

3. False

Statistical sampling is required by generally accepted auditing standards.

Either statistical or nonstatistical sampling methods are acceptable under generally accepted auditingstandards.

4. False

Statistical sampling eliminates subjectivity in evaluating sample results.

Statistical sampling does not eliminate subjectivity in evaluating sample results. For example, the auditormust still use judgment to evaluate the appropriateness of audit evidence, determine whether a givensituation constitutes a deviation, etc.

5. True

Statistical sampling requires the use of mathematical formulas and/or tables.

Statistical sampling involves the use of mathematical formulas and/or tables to determine the sample sizethat achieves an acceptable level of risk, to evaluate results, etc.

6. False

Statistical sampling should not be used when there is a significant amount of population variability.

Statistical sampling may be used when there is a significant amount of population variability, although theauditor may choose to stratify the population in such cases. Population variability may also affect thedetermination of sample size.

~-------- ~-------~ ~- ---- --- ~-~ ~ --- -- --------- -


Auditing B 5 _ Stati .tic~ 1 Sampling Time Elapse<J

o hou rs O"""utes Sokltion Split Horiz Split 'hrtOo.1 Spr~od.""'" Calcu~tor '"

'( Aitri ixJte Sampl ing AutIIofitative litefatUf& ~"'~C:L ________________________________________ _ 10 Cut I i.Q Copy Ib. Paste

An auditor has aJlPl ie<! stat ist ;,;.1 sampl ing method s in eva luat ing controls 8U "OU"""9 a cl ient's eXJI"nd iture cyc le Th e cl ient's comJl'lny JIOI icy indicate s that all pure), . se. ave< $500 require two s ignatu res . tI1at the accounts JI3Y.l>e cl erk matc h th e [lUrc h. s e order. ' e<:e Mng reJlOrt . and ve ndor i"","ce before "w""ng th e i",,"ce!of Jl'lYme nt. and th at voucher Jl"Ckages be c a"celle<l uJlOO [l3yme nL The auditot'. tole r.!>. d"';at ion rate f<>r all tests of cootrols is 5%. and his all owance f<>r sampl ing risk is 2%

, The auditor s el""!s a sample cons isti ng of fifty purc hases exceed ing $500. and notes th at two purc hases h ..... only one aw"",,1 signature. Both purchases occurred duri ng the same week. Management states th at th e second signature was not obtained due to th e unexpected ill ness of the awoJll'iate manager th at week. but that th e purchases we re still awoJll'iate. Which of th e followi ng is t ru e?

The auditor may rely on this controll>ecause th e two purchases we re apJII'oJll'iate. and th erefore th ey shoo ld not be cons idered d"';atioos .

The auditor may rely on th is cont roll>ecause th e sample d"';ation rate is less than th e tolerable rate

0 The aud itOf did not s,"ect an 3woJll'iate popu lat ion fOf this aLXIit test.

0 The auditor shoold not rely on th is control

, The auditor selects a sample cons isti ng of forty aw<NOO voucher packages . and notes that one is missing the ass oc iated pu rcha se order. The auditor may concl ude th at

, The control is fu nct ioning adequate ly

The purchase wa s unauthOfized.

, The ve ndor has sent and bi ll ed for unsolic ited goods.

ThirtY-<1 ine of the sample pu rcha ses we re Jll'oJl" rly recorded

, The auditOf selects a sample cons isti ng of one hundred paid inwices. and notes th at twe nty of th e ass oc iated voucher packages are not Jll'oJl" rly cance ll ed aft er payment Wh ich of the following is lea st like ly to resu lt?

" The auditOf wi ll Jl"rfOfm more substant"e testi ng in th is area.

" The auditOf wi ll pl ac e less reliance on th is control .

" The auditOf wi ll qualify his opin ion on th e fin ancial statements

" The auditOf wi ll communic ate th is weakness to manaqement

, Which of th e following is tru e about th e audit ""s tolera ble rate of d"';atioo?

" It is determined using mathemat ic al fOfllllJ las and ta ble s

~ , It is th e maximum errOf that can ex ist in an accoont ba lance (}I' cl ass of transact ioo s without c ausing th e fi nancial stat ements to be mate ri ally misstated.

" It is used in drawing concl usions about th e oJl" rat ion of intem al controls

-, It is compa red to th e sample d"';at ion rat e in f(}l'ming concl usions .

Io; roctioos 1 [l] 3 4 , , •

1. Choice 4 is correct (the auditor should not rely on this control)

The two purchases that lack appropriate signatures should be considered deviations, despite the fact thatthe purchases may have been appropriate. In addition, the allowance for sampling risk (2%) must be addedto the sample deviation rate (4%) before comparing to the tolerable rate (5%). In this case, 4% + 2% > 5%,so the auditor should not rely on this control. Note that the auditor has selected an appropriate population(purchases exceeding $500) for this audit test.

2. Choice 1 is correct (the control is functioning adequately)

The sum of the sample deviation rate (one divided by forty, or 2.5%) and the allowance for sampling risk(2%) is less than the tolerable deviation rate of 5%, so the control is deemed to be functioning adequately. The lack of a purchase order does not necessarily mean that the purchase was unauthorized, sinceauthorization can occur even if the appropriate documentation is missing. Similarly, although it is possiblethat the vendor sent unsolicited goods, the auditor would need to investigate further to see if this wereactually the case. Finally, although thirty-nine of the voucher packages were complete, this does notnecessarily mean that the associated purchases were properly recorded. Remember that a test of controlsprovides information about the functioning of those controls, not about the proper recording of theassociated transactions.

3. Choice 3 is correct (the auditor will qualify his opinion on the financial statements)

The sample deviation rate of 20% clearly represents a control that is not functioning effectively. The auditorwould be unlikely to rely on this control, and might choose to perform additional substantive testing in thisarea. In addition, the auditor would probably let management know that this control was not functioningcorrectly. However, control deviations do not necessarily result in financial statement misstatements, sothis situation alone would be unlikely to result in a qualification of the audit report.

4. Choice 3 is correct (it is used in drawing conclusions about the effectiveness of controls)

The sum of the sample deviation rate and the allowance for sampling risk is compared to the tolerabledeviation rate in drawing conclusions about the operation of internal controls. Note that the tolerabledeviation rate represents the maximum rate of deviation from prescribed controls that the auditor is willing totolerate without modifying planned reliance on internal control. This amount is usually determined based onauditor judgment (and not by using mathematical formulas and tables), and it is compared to the upperdeviation rate (not the sample deviation rate) in forming conclusions. Note too that the maximum error thatcan exist in an account balance or class of transactions without causing the financial statements to bematerially misstated is tolerable error or tolerable misstatement, not tolerable deviation.

R E V I S I O N S TO TH E A / R P L A N 1. Indeterminate effect on sample size

A reduction in tolerable misstatement causes an increase in sample size, whereas a reduction in expectedmisstatement causes a decrease in sample size. The overall effect on sample size is therefore indeterminate.

2. Decrease in sample size

The assessed risk of material misstatement is directly related to sample size, so a decrease in the assessedlevel of risk results in a smaller sample size.

3. Increase in sample size

Population variability is directly related to sample size, so an increase in population variability causes sample sizeto increase.

4. No effect on sample size

Changing the form of accounts receivable confirmations has no effect on sample size.

R E V I S I O N S TO TH E A / P P L A N


Tolerable misstatement is inversely related to sample size, so an increase in tolerable misstatement results in adecrease in sample size.


Since both the expected misstatement and the assessed risk of material misstatement vary directly with samplesize, a decrease in these two parameters will result in a decrease in sample size.

7. No effect on sample size

The number of items in the population has virtually no effect on sample size, unless the population is very small. (Note: On the CPA exam, if the question doesn't clearly indicate an unusually small population, assumepopulation size has no effect on sample size.)


Population variability is directly related to sample size, so a decrease in population variability causes sample sizeto decrease.

_ [] - x • ,. l., . ,._


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Auditing B 5 . St~ ti.tic~1 Sampling Time Elapsed

o hoors 1 min utes Split H",iz Split 'hrtoool Spr~_heet Calc","!or ".

An auditor has dec ided to apply stat istica l sampl i"9 technjque. to t~e aud~ of purchases . a nd has randomly se lected spec ik pu rchase orde r nu mbe rs lor furthe r test ing. How",,";. lor some pu rchase orde r nu mbe rs s upport ing doc ume nt at ion ca nn ot be located. Whe re in the AJCPA Proless iOl1a l Standards wi ll the auditor fi nd gu ida nce appl icable to this s itu at ion?

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o hoors 1 mi nutes Split H<>riz Split V. rt>OO1 Spr~_1leet CaIc, 14!or

An auditor has dec ided to apply st at istica l s ampl i"9 ted"'que. to the al.'d~ of purc hases . a nd has randomly se le<:t ed spec ik pu rchase orde r nu mbe rs !of furthe r testing How",,";. !of some pu rchase orde r nu mbe rs s upport ing doc ume nt at ion ca nn ot be located. Wh ere in th e AlCPA Profess iona l Standa rds "'; l1 the auditor fi nd gu ida nce appl icable to this s itu at ion?

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Source of answer to this question:

AU 350.25

Keywords: Unexamined items

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l !SeeKer-s rlnal Review N'''I> I

Aud iting B 6 _ Government Audi ting Time Elapsed

o hours 0 minutes

'( Aud it Standards NlIl>otitat .... lit"'atun' Hel

i. Cut I ~ Copy I i& Paste I

Changes to the fina nc ial sUJIPOrt of Ka nine Ken nel Dog She~ " , . Inc . may create add i!ioo.1 requ irements fOf Smith . Smythe & Smathers as they complete the ir audiL For each of th e add iti oo.1 c irc umst .",,", Of res[lOns ibi lities deseril>e<l be low. ide ntity the most like ly combination of audit lyres by dooble-d id ing on th e s haded ce ll s and ,e l""t ing the appropriate opt ions from th e lists Jll'wde<l Ass ume eac h item is indepe nde nt of th e other items and all items are materi al

I . The auditors disc,""" th at Kanine Ke nne l Dog Shelter has r""e~

<>"Ie ' $500.000 in fe<le ral fi nanc ial ass ist 'rK" .

2. The auditors disc"""" that Ka nine Kenne l Dog She lter has eXJI"nded O"Ier $300,000 in fede ral fina nc ial ass ist"",, " .

3. The auditors are obl igated to eva luate materi ality based uJlOO major programs

4. The auditors are obligated to reJlOfl 00 intemal controj O"Ie r and Single A udit

compl iance ai>Jll icabie to eoc h major program.

S. The auditors must reJlOrt on the fair prese nt at ion on the fina nc ial stateme nt s of Kanine Ke nne l Dog Shelter. Inc take n as a whole.

6. The audit",s mu st expa nd the ir reJlOrt to incl ude whether fede ral fi na nc ial ass istance has been admin istered in occorda nce with laws and regu lat ioos .

7. Fi rm st anda rds s hould include a mandatory pee r r"';ew every th ree years .

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,. =Remiooef , ,

~ Pr"';oos

2013 (vI3.0.0)

•

1. GAAS and GAGAS Audit

An entity that receives in excess of $500,000 of federal financial assistance would likely be required to havean audit in accordance with GAGAS. If the entity spent $500,000 in federal financial assistance, it wouldqualify for a single audit.


An entity that spends in excess of $300,000 of federal financial assistance would likely be required to havean audit in accordance with GAGAS. If the entity spent $500,000 in federal financial assistance, it wouldqualify for a single audit. The $300,000 threshold relates to the selection of major grants upondetermination that a single audit is required.

3. GAAS, GAGAS, and Single Audit

Evaluation of materiality for each major program is a characteristic of single audits.

4. GAAS, GAGAS, and Single Audit

Reports on compliance associated with major programs is a characteristic of single audits.

5. GAAS Audit

Reporting on fair presentation of an entity's financial statements taken as a whole is a characteristic of aGAAS audit.


Expansion of reports to include representations regarding whether federal financial assistance has beenadministered in accordance with laws and regulations is a characteristic of a GAGAS audit.


Additional peer review standards are a characteristic of a GAGAS audit. GAGAS sets peer review, CPE,and independence standards that are in excess of GAAS audits.

. ,. . _., e _. Becker's Final Review - Help

Re s pon s ib; lit ies

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Auditing B 6 . Govom"",m Audi~ng Time Elaps ed

o hours 0 mi nut es

Wh id 01 th e 101l O'M ng coned ly Kjenti/y th e eX[I"I1ded re spoo. ilW lities that a CPA "rm wi ll lace wilen auditi r.g 9"""'rnme nt " nanc ial ass istance programs requ iri ng th e appl icat ion 01 gene rally accepte<! gove rn me nt aud it st andards? Check all th at apply

~ I . Identificat ion of appl ica ble laws and regu lat ions with compl iance requ ire me nts .

~ 2. Obtaining absolut e as surance that the fin anc ial stateme nts are completely free 01 any ""sstateme nt re su~ i ng from ";o lat ion s <X laws and regu lat ions .

~ 3. Obta ining and underst anding ", th e pos s ibte effects 00 the "nanc ial statements 01 laws and regulat ion s that are genera lly recogn iz ed to h""" a direct and "",te ri al effect on the determination of th e "nanc ial stat ements .

~ 4. Preparation of s uppleme nt ary "nanc ial report s . including a ' Sc hedu le of Expe nditures and Fede ra l Awards '

~ 5. Commun Kating to dec is ion "",ke rs of the entity that an audit in conlor""ty with GAAS "",y not be s uffic ient to meet th e ent ity's aud it requ ire me nts if the engageme nt does not addres s 9"""' rn me nt al audit requ ire me nts .

~ 6. Obtain s uffic ient ..;dence to lorm an opi nion on wileth er th e ent ity compl ied in a ll mate rial res pects with th e compl iance re que sts appiKable to their programs

~ 7. Obtain suffic ient ..;dence to lorm an opi nion on the effective ness of int ern al controls <>'Ve r compl iance.

~ 8 Perform appropriate risk as sess me nt relative to compl iance to ensure that detect ion risks are inc rea s ed to meet th e inc reases in risk of "",te ri al noncompl iance to dec rea s e audit ris k of noncompl iance.

~ 9. Obtain a writt en "", nage me nt repre s entation lett er.

~ 10 P repa re sepa rat e report s on compl iance and int ern al control """ r compl iance and take appropriate meas ures to ensure they are neve r c omlW ne<!.

Directions 1 [l] 3 , •

2013

1. FalseResponsibility for identification of laws and regulations with compliance requirements rests withmanagement. Management is then charged with designing appropriate controls to ensure compliance. While the auditor is responsible for obtaining an understanding of laws and regulations generally recognizedto have a direct and material effect on financial statements, the auditor is primarily charged with assessingif management has properly identified applicable laws and regulations with compliance requirements.

2. False

The auditor is charged with obtaining reasonable (not absolute) assurance that the financial statements arefree of misstatements that have a direct and material effect on the financial statements (not completely freeof any misstatements). This selection overstates the auditor's responsibilities.

3. True

The auditor's responsibilities include obtaining an understanding of the possible effects on the financialstatements of laws and regulations that are generally recognized to have a direct and material effect on thedetermination of financial statement amounts.

4. False

Preparation of supplementary financial reports, like the financial statements, is the responsibility ofmanagement, not the auditor.

5. True

Upon discovery that an entity requires the expanded auditing procedures and reporting that result from theentity's receipt of government financial assistance, the auditor must communicate to management and theaudit committee that an audit in accordance with GAAS may not be sufficient.

6. True

The auditor must obtain sufficient evidence to form an opinion on compliance when performing an audit inconformity with GAGAS.

7. False

The auditor will not express an opinion regarding the effectiveness of internal control over compliance.

8. FalseAs risk of material risk of noncompliance increases, the auditor should take measures to reduce, notincrease, detection risk.

9. True

The auditor should obtain a written management representation letter.

10. FalseThe report on compliance and report on internal control over compliance may be either separate orcombined.

· ,. . -


... =RemiOOet

Auditing B 6 . Government Auditing Time Elapsed

o hours 0 mi nutes Spllt H",iz SplltV< rtc.1 Spr~_~ C.lcu~tor ".

Although th e scope and report ing requ ireme nts re lated to an . udit of a rec ipient of federal ~""nc i al ass ist.""e may vary. these audits ge nera lly have ce rt ain eleme nts in common Wh at gu ida nce in the AlCPA Profess ional Sloodafds i<j""t ine. these common elemoots?

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Auditing B 6 . Government Auditing Time Elaps ed

o hours 0 mi nutes Split H",iz Split 'hrtOooI Spr~od.h<>et C.lcu ~tor

Although the score and report ing requ irements re lated to an audit of a rec ipient of fede ral ~""nc i al ass istanc e may vary. the s e audits ge nera lly have ce rt ain eleme nts in common Wh at gu idance in th e AlCPA Profes s iona l SI<>fl<ia<ds ide nt i~e" the s e common elemoots?

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Directioos 112 1[1]

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AU 801.10

Keywords: Federal financial assistance

2013fr aud b simulations

Documents

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