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CPA Exam - Aud










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Terms in this set (126)

Independent Auditor's Independent Auditor's Responsibilities:

Responsibilities performing an audit in accordance with generally
accepted auditing standards (GAAS).

Management Responsibilities Management Responsibilities:

responsible for the fair presentation of the financial
statements in conformity with GAAP, even if the
statements are prepared or audited by CPAs

Effective Internal Control Management is also responsible for establishing and

maintaining effective internal control and developing
accounting policies.

Users' Responsibilities Users' Responsibilities:

Financial statement users should recognize that the
accounting process necessitates the use of estimates
and evaluations that affect the fairness of the financial

Vouching Vouching:
Did the transactions summarized in the financial
statements actually occur? From the financial
statements to the accounts and ultimately to the
original transaction documents.

Tracing Tracing:
Have all transactions that occurred during the period
been recorded properly in the accounts and
summarized in the FS? (Completeness) From the
original transaction documents to the accounts and
ultimately to the finanical statements.

Audit Process Steps Audit Process Steps:

1. Establish Understanding with Client

2. Obtain Understanding of the Entity & Its
3. Assess the risks of material misstatement
4. Design & perform procedures to address the RMM
5. Evaluate audit evidence
6. Form opinion & issue audit report

Establish Understanding with Establish Understanding with Client:

Client The auditor should establish and understanding with
the client regarding the engagement services,
including the objectives, scope, and limitations of the
engagement, as well as the auditor's and
management's responsibilities (engagement letter)

Subjective Tests Requirement While tests of controls are optional, substantive

procedures are required for all relevant assertions
related to each material class of transactions, account
balance, and disclosure.

Financial Statement Audit Financial Statement Audit:

objective is to express an opinion on the fairness in all
material respects, with which the financial statements
present the organization's financial position, results of
operations, and cash flows in conformity with GAAP.

Compliance Audit Compliance Audit:

Evaluates an organization's compliance with a defined
set of specifications.

Operational Audit Operational Audit:

Is usually performed by internal auditors, to evaluate
the efficiency and effectiveness of some part of an
organization in achieving its specific goals in relation
to the general goals of an organization.

Audit Program (Plan) Audit Program (Plan)

detailed list of audit procedures to be performed to
satisfy audit objectives

External Auditors External Auditors:

independent CPAs who provide a professionally
competent evaluation (audit) of the finanical
statements of a client.

Independence Independence:
Auditors represent neither the financial statement
preparers (mgt) nor the financial statement users
(investors, creditors, etc.)

Materiality Materiality:
An audit is directed toward the discovery of material
misstatements or omissions in the financial statements.
Materiality involves professional judgement and is
influenced by the auditor's perception of the needs of
a reasonable person relying on the financial

Selective Testing Selective Testing:

Auditors base their opinions on selective testing; they
rarely examine all the items in an individual account or
in the financial statements.

Audit Risk Audit Risk:

Audit risk is a functional of both the risk that the
financial statements prepared by management are
materially misstated and the risk that the auditor will
not detect the misstatement. The auditor should
perform teh audit to reduce audit risk to a low enough
level that is appropriate, in the auditor's judgment, to
allow the expression of an opinion on the financial
statement or if circumstances require, a disclaimer of
an opinion.

Audit Risk Audit Risk:

An auditor's report provides reasonable assurance,
not absolute, assurance as to whether the financial
statements adhere to the established criteria. This is
because audit risk cannot be eliminated due to the
nature of audit evidence and the characteristics of
Overall Opinion The auditor's opinion relates to the financial
statements taken as a while as stated in the fourth
reporting standard.

Presentation An audit is concerned with financial statement

presentation; it is not concerned with the
effectiveness of management, or the advisability of
investing in the client.

Internal Auditors Internal Auditors:

work full time for an organization or entity. They are
not independent. For an internal audit function to be
effective, it is important that it be directed to a level of
the organization that is above the level being audited.

Governmental Auditors Auditors who work for the federal, state, or local
- Government Accountability Office (GAO) Auditors:
conduct audits for Congress
- Internal Revenue Agents: conduct compliance audits
for the IRS

Statements on Auditing 1. U.S. Auditing Standards (AU)

Standards (SASs) 2. Attestation Standards (AT)
3. Accounting & Review Services (AR)
4. Code of Professional Conduct (ET)
5. Bylaws of the AICPA (BL)
6. Consulting Services (CS)
7. Quality Control (QC)
8. Peer Review (PR)
9. Tax Services (TS)
10. Personal Financial Planning (PFP)
11. Continuing Professional Education (CPE)

PCAOB As a result of the passage of the Sarbanes-Oxley Act

of 2002, auditing and related professional practice
standards to be used in the performance of and
reporting on audits of the financial statement of
public companies are now established by the Public
Company Accounting Oversights Board (PCAOB) and
approved by the SEC.

GAAS (AU 150) ...

Generally Accepted Auditing T - Training

Standards I - Independence
P - Performance

S - Supervision & planning

E - Entity & its environment
E - Evidence

A - Accounting = U.S. GAAP

C - Consistency
D - Disclosure
E - Expressing an opinion

SASs Statements on Auditing Standards (SASs)

are detailed statements issued by the Auditing
Standards Board (ASB) of the AICPA. These
statements are the primary body of GAAS.

Procedures Procedures relate to the acts to be performed. Will

vary from engagement to engagement.

Standards Standards provide the objectives that audit

procedures are to attain and measures of the quality
of procedures to be performed. Auditing standards
do not vary from engagement to engagement.

Unconditional Requirements Unconditional Requirements:

the auditor is required to comply with an
unconditional requirement in all cases in qhich the
requirement applies. (Must or Is Required)

Presumptively Mandatory Presumptively Mandatory Requirements:

Requirements The auditor is required to comply with a presumptively
mandatory requirement in all cases in which the
requirement applies. May depart with documented
justification. (Should)

General Standards General Standards:

1. Technical training & proficiency
2. Independence
3. Due professional care

The first general standard The first general standard:

The auditor must have adequate technical training and
proficiency to perform the audit.

The Second General Standard The Second General Standard:

The auditor must maintain independence in mental
attitude in all manners relating to the audit.

The Third General Standard The Third General Standard:

The auditor must exercise due professional care in the
performance fo the audit and the preparation of the
Standards of Fieldwork Standards of Fieldwork:
1. Adequate planning & supervision
2. Understanding the entity & its environment
3. Sufficient appropriate audit evidence

Standards of Reporting Standards of Reporting:

1. Accounting in conformity with GAAP
2. Consistency
3. Adequate informative disclosure
4. Expression of opinion

Professional Skepticism Professional Skepticism

an attitude that includes a questioning mind and a
critical assessment of audit evidence

Reasonable assurance Reasonable assurance

the high, but not absolute, level of assuance that is
intended to be obtained by the auditor is expressed
in the auditor's report as obtaining reasonable
assurance about whether the financial statements are
free of material misstatement

Fraud An auditor commits a type of fraud if the auditor

alleges possessing the degree of skill commonly
possessed by other auditors when that is not the case.

SQCS Statement on Quality Control Standards (SQCS)

applies to quality control for a CPA firm's accounting
and auditing practice.

SQCS Purpose A firm must establish a system of quality control to

provide the firm with reasonable assurance that the
firm and its personnel comply with professional
standards and applicable regulatory and legal
requirements and issue appropriate reports.

Elements of a Quality Control Elements of a Quality Control System:

System 1. Leadership responsibilities
2. Relevant ethical requirements
3. Acceptance & continuance of clients &
4. Human resources
5. Engagement Performance
6. Monitoring

Predecessor Auditor A CPA who performed a review or compilation,

instead of an audit, is NOT a predecessor auditor.
Successor auditor responsibility The successor has the responsibility to initiate the

Permission The AICPA Code of Professional Conduct precludes

an auditor from disclosing confidential information
without the client's consent, so the successor must ask
the prospective client to authorize the predecessor to
respond to the successor's inquiries.

Successor Inquires Successor Inquires:

1. Integrity of Managment
2. Disagreements
3. Fraud or illegal acts
4. Internal control weaknesses
5. Reason for change in auditors

Predecessor Workpapers Ultimately, the predecessor determines what

workpapers the successor may review or copy.

Reference to predecessor's The successor should NOT make any reference to the
work predecessor's work or report as a basis, in part, for
the successor's own opinion.

The First Standard of Fieldwork The First Standard of Fieldwork

The auditor must adequately plan the work and must
properly supervise any assistants.

Engagement Letter 1. The objective of the audit is the expression of an

Requirements opinion on the financial statements.
2. Management's responsibilities
3. Auditor's responsibilities
4. Communicate the nature of an audit

Management's responsibilities 1. The entity's financial statements as well as the

selection and application of accounting policies.
2. Establishing and maintaining effective internal
control over financial reporting.
3. Designing and implementing programs and
controls to prevent and detect fraud
4. Identifying and ensurng compliance with
applicable laws and regulations
5. Making all financial records and related information
available to the auditor.
6. Providing the auditor with a letter at the conclusion
of the engagement that confirms certain
representations made during the audit.
7. Adjusting the financial statements to correct
material misstatements.
8. Affirming to the auditor in the representation letter
that the effects of any uncorrected misstatements
aggregated by the auditor during the current
engagement and pertaining to the latest period
presented are immaterial, both individually and in the
aggregate, to the financial statements taken as a

Auditor Responsibilities 1. Responsible for conducting the audit in accordance

with GAAS
2. Responsible for obtaining an understanding of the
entity and it environment, including its internal
control, sufficient to assess the risks of material
misstatement of the financial statements and to design
the nature, extent, and timing of future audit
3. Not required to search for significant deficiencies in
internal control, however, the auditor is resposible for
ensuring that those charged with governance are
aware of any significant deficiencies that come to the
auditor's attention.

Nature of an Audit 1. GAAS require the auditor to obtain reasonable

rather than absolute assurance about whether the
financial statements are free of material misstatement
2. An audit is not designed to detect error or fraud
that is immaterial to the financial statements
3. An audit is not designed to provide assurance on
internal control or to identify significant deficiencies in
internal control.
4. If, for any reason, the auditor is unable to complete
the audit or is unable to form an opinion, the auditor
may decline to express an opinion or issue a report.

Audit plan Audit Plan

Set of audit programs that addresses the matters
identified in the audit strategy (specific audit

Audit plan should include: 1. Risk assessment procedures

2. Further audit procedures
3. Other procedures

Audit Risk Audit risk is the risk that an auditor may unknowingly
fail to appropriately modify the opinion on financial
statements that are materially misstated.

Risk/Materiality Relationship There is usually an inverse relationship between audit

risk and materiality considerations at the individual
account balance level.

Audit Risk Model AR = RMM x DR

AR-Audit Risk
RMM-Risk of Material Misstatement
DR-Detection Risk

Audit Risk Model 2 AR = (IR x CR) x (AP x TD)

IR - Inherent Risk
CR - Control Risk
AP - Substantive Analytical Procedures Risk
TD - Test of Details Risk

Inherent Risk Inherent risk is the susceptibility of a relevant assertion

to a material misstatement, assuming htere are no
related controls.

Control Risk Control risk is the risk that a material misstatement that
could occur in a relevant assertion will not be
prevented or detected on a timely basis by the entity's
internal controls.

Detection Risk Detection risk is the risk that the auditor will not
detect a material misstatement that exists in a relevant

Risk Relationships IR & CR - I - D

DR - D - I
ST - I - D (Substantive Tests)

Tolerable Misstatement Tolerable misstatement is the maximum monetary

misstatement that the auditor is willing to accept in a
particular account balance or class of transactions.

The auditor normally sets the The auditor normally sets the levels of tolerable
levels of tolerable misstatements misstatements LOWER than the materiality level.
_____ than the materiality level.

Second Standard of Fieldwork The auditor must obtain a sufficient understanding of

the entity and its environment, including the internal
control, to assess the risk of material misstatement of
the financial sstatements whether due to error or
fraud, and to design the nature, extent, and timing of
further audit procedures.

Risk Assessment Procedures The auditor should perform risk assessment

procedures to gain an understanding of the entity and
its environment
Business Risks Business risks result from significant conditions,
events, actions, or inactions that could interfere with
the entity's ability to achieve its objectives and
execute its strategies.

Fraudulant Financial Reporting Misstatements arising from fraudulent financial

reporting are intentional misstatements or omissions
of amounts or disclosures in financial statements
designed to deceive financial statement users.

Misappropriation of Assets Misstatements arising from miappropriation of assets

involve the theft of an entity's assets where the effect
causes the financial statements to be misstated

Conditions Conducive to Fraud 1. Incentive/Pressure

2. Opportunity
3. Attitude/Rationalization

Steps to Assessing the Risks of 1. Identify risks

Material Misstatement 2. Identify potential misstatements
3. Consider Materiality
4. Consider Probablity

Normally, an audit in Normally, an audit in accordance with GAAS does not

accordance with GAAS does not include audit procedures specifically designed to
include audit procedures detect illegal acts.
specifically designed to detect
illegal acts.

If the auditor concludes that an qualified opion or an adverse opinion, depending on

illegal act having a material the materiality
effect on the financial
statements has occurred, and
the act has not been accounted
for or disclosed properly, the
auditor should express a

If the auditor is precldued by the disclaim an opinion

client from obtaining sufficient
audit evidence to determine
whether an illegal act that could
be material has, or is likely to
have, occurred (scope
limitation), the auditor should

Internal Control Internal control is a process - effected by those

charged with governance, management and otehr
personnel - designed to provide reasonable
assurance about the achievement of the entity's
objectives with regard to reliability of financial
reporting, effectiveness and efficiency of operations
and compliance with applicable laws and regulations.

Components of Internal Control C - Control Activities

R - Risk Assessment
I - Information & Communication Systems
M - Monitoring
E - Control Environment

Control Activities Control Activities are those policies and procedures

established to provide reasonable assurance that
management decisions are executed.

Control Activities Control Activities:

-Performance Reviews
-Information Processing
-Physical Controls
-Segregation of Duties

Segregation of Duties -Authorization

-Record Keeping
-Custody of assets

Risk Assessment An entity's (not an auditor's) identification, analysis,

and management of risks relevant to the preparation
of financial statements that are presented fairly in
conformity with GAAP.

Information & Communication This refers to the identification, retention, and transfer
of information in a timely manner enabling personnel
to execute their responsibilities.

Monitoring Monitoring is a process that evaluated the quality of

internal control performance over time.

Control Environment The control environment is the foundation for all other
components of internal control. It sets the tone of an
organization that influences the control consciousness
of its people.

The auditor should perform tests 1. The auditor's risk assessment includes an
of controls when: expectation of the operating effectiveness of controls
2. When it is not possible or practicable to reduce
detection risk at the relevant assertion level to an
acceptably low level with audit evidence obtained
from substantive procedures alone.
The significance of a deficiency The significance of a deficiency in internal control
in internal control depends on depends on the potential for a misstatement, not on
the potential for a misstatement, whether a misstatement actually has occured.
not on whether a misstatement
actually has occured.

Objectives of Internal Control 1. Authorization

2. Validity
3. Proper Recording
4. Accountability & Comparison
5. Protection & Limited Access

Proper Recording - Completeness

- Valuation
- Classification
- Timing

Tracing Tracing from a source document to the recorded

entry tests the completeness assertio by looking for

Vouching Vouching from a recorded entry to the source

document tests the existence assertion by looking for

The Third Standard of Fieldwork The auditor must obtain sufficient appropriate audit
evidence by performing audit procedures to afford a
reasonable basis for an opinion regarding the
financial statements under audit.

Audit Evidence Audit evidence is all the information used by the

auditor in arriving at the conclusions on which the
audit opinion is based, including the infomraiton
contained in the accounting records underlying the
financial statements and other information.

Accounting records alone do Accounting records alone do not provide sufficient

not provide sufficient appropriate audit evidence, the auditor should obtain
appropriate audit evidence, the other audit evidence.
auditor should obtain other audit

Sufficiency Sufficiency measures the quantity of audit evidence.

Appropriateness Appropriatenss measures the quality of audit

evidence, that is, its relevance and reliability.
As the quality of evidence As the quality of evidence increases, the quantity of
increases, the quantity of evidence may be able to be decreased. However,
evidence may be able to be merely obtaining more audit evidence may not
decreased. However, merely compensate for audit evidence of lower quality.
obtaining more audit evidence
may not compensate for audit
evidence of lower quality.

Reliability 1. Audit evidence is more reliable when it is obtained

from knowledgeable independent sources outside
the entity.
2. Internally generated audit evidence is more reliable
when the related internal controls are effective.
3. Audit evidence obtained directly by the auditor is
more reliable than evidence obtained indirectly or by
4. Audit evidence is more reliable when it exists in
documentary form (paper, electronic, or other
5. Audit evidence provided by original documents is
more reliable htan audit evidence provided by
photocopies or facsimiles.

Persuasive Evidence The auditor may need to rely on evidence that is

persuasive rather than conclusive.

Assertions used by the auditor - Classes of Transactions & Events

- Account Balances
- Presentation & Disclosure

Classes of Transactions & Events 1. Occurance

2. Completeness
3. Accuracy
4. Cutoff
5. Classification

Account Balances 1. Existence

2. Rights & Obligations
3. Completeness
4. Valuation & Allocation

Presentation & Disclosure 1. Occurrence and Rights & Obligations

2. Completeness
3. Classification & Understandability
4. Accuracy & Valuation

Occurrence Transactions and events that have been recorded

have occurred and pertain to the entity.
Completeness All transactions and events that should have been
recorded have been recorded.

Accuracy Amounts and other data relating to recorded

transactions and events have been recorded

Cutoff Transactions and events have been recorded in the

correct accounting period.

Classification Transactions and events have been recorded in the

proper accounts

Existence Assets, liabilities, and equity interests actually exist.

Rights & Obligations The entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.

Completeness All assets, liabilities, and equity interests that should

have been recorded have been recorded.

Valudation & Allocation Assets, liabilities, and equity interests are included in
the financial statements at appropriate amounts and
any resulting valuation or allocation adjustments are
recorded appropriately.

Occurence and Rights & Disclosed events and transactions have occurred and
Obligations pertain to the entity.

Completeness All disclosures that should have been in the financial

statements have been included.

Classification & Financial information is appropiately persented and

Understandability described and disclosures are clearly expressed.

Accuracy & Valuation Financial and other information are disclosed fairly
and at appropriate amounts.

Audit procedures for obtaining 1. Risk assessment procedures

audit evidence 2. Tests of Controls
3. Substantive procedures

Risk Assessment Procedures Obtain an understanding of the entity and its

environment, including its internal control, to assess
the risks of material misstatement at the financial
statement and relevant assertion levels.

Tests of Controls When necessary, or when the auditor has determined

to do so, test the operating effectiveness of controls
in preventing or detecting materia misstatements at
the relevant assertion levels.

Substantive Procedures Substantive procedures detect material misstatements

at the relevant assertion level through tests of details
and substantive analytical procedures. The auditor
should design and perform substantive procedures
for all relevant assertions related to each material
class of transactions, account balance, and disclosure
regardless of the assessed risk of material

Types of procedures 1. Inspection of records or documents

2. Inspection of tangible assets
3. Observation
4. Inquiry
5. Confirmation
6. Recalculation
7. Reperformance
8. Analytics

Developing an opinion The auditor should use professional judgment to

conclude hwether sufficient appropiate audit
evidence has been obtained to reduce the risk of
material misstatement in the FS to an appropiately low

If the auditor is unable to obtain If the auditor is unable to obtain sufficient appropriate
sufficient appropriate audit audit evidence, the auditor should express a qualified
evidence, the auditor should opinion or a disclaimer of opinion.
express a qualified opinion or a
disclaimer of opinion.

External Auditor The auditor maintains independence from the entity to

fulfill the responsibility to obtain sufficient appropiate
audit evidence matter to provide a reasonable basis
for the opinion on the entity's financial statements.

Internal Auditor Internal auditors maintain objectivity with respect to

the activity being audited to fulfill the responsibility
for providing analyses, avaluations, recommendations,
and other information to the entity's management and
board of directors or to others with equivalent


Series 7 Top-Off Exam Exam 1 audit combined

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