Audit 401 Exam 1|105 Questions with Verified Answers,100% CORRECT

Audit 401 Exam 1|105 Questions with Verified Answers User Demand for Reliable Information - CORRECT ANSWER Users must have timely, relevant, and reliable information to minimize business risk and to take advantage of opportunities that arise. Business risk - CORRECT ANSWER the probability that the organization will not achieve the objective to make money Big Data needs for useful and reliable information - CORRECT ANSWER Complexity, remoteness, time sensitivity, consequences Information Risk - CORRECT ANSWER the probability that the information given to us by management will be false or misleading Conflict - CORRECT ANSWER prepares try to look good, but users want reality and truth Auditing - CORRECT ANSWER A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. What do auditors lend? - CORRECT ANSWER credibility / degree of confidence Audit is a type of - CORRECT ANSWER Attestation Attestation Engagement - CORRECT ANSWER a practitioner assesses and reports on "subject matter or an assertion about the subject matter that is the responsibility of another party" Assurance Services - CORRECT ANSWER The independent professional service that improves the quality of information, or its context, for decision makers. Can be internal or external Attestation Engagement #1: Agreed upon procedures engagement - CORRECT ANSWER agree with management on what we are doing/ verify inventory and locations Attestation Engagement #2: Prospective Financial Information - CORRECT ANSWER look into the future, attest to methods and procedures used Attestation Engagement #3: Reporting on pro forma financial information - CORRECT ANSWER what could have been/ "as if" that transaction had occured Attestation Engagement #4: Compliance Atttestation - CORRECT ANSWER make sure client is complying with rules Attestation Engagement #5: Reporting on Controls at Service Organization - CORRECT ANSWER organizations that provide outsourced processes that are likely to be relevant to IC over financial reporting Attestation Engagement #6: Examination of MGMT Discussion and Analysis - CORRECT ANSWER look at reports since mgmt puts spin on what happened; numbers have to match reality for SEC Assurance Service elements: - CORRECT ANSWER -Independence -Professional Services -Improving the quality of information or context. -Being for decision makers Examples of Assurance Services - CORRECT ANSWER -XBRL reporting -information risk assessment -customer satisfaction surveys -internal audit outsourcing -fraud and illegal acts prevention and deterrence -cyber risk assessment and assurance Management's Assertions - CORRECT ANSWER Management makes assertions about economic events during the period. account balances at the end of the period, and statements' presentations and disclosure. 1. Existence or Occurrence - CORRECT ANSWER -do the numbers faithfully represent the actual transaction? -Existence: they all exist -Occurrence: actually did occur in the proper period -Assets = Exist -Revenue= Occur 2. Completeness and Cutoff - CORRECT ANSWER -is everything included? -cutoff: proper period? - Liability= Complete - Expenses= Complete 3. Valuation and Allocation - CORRECT ANSWER -are these accurate values? -Allocation: appropriate percentage of asset/liability being recorded -Depreciation -amortization 4. Rights and Obligations - CORRECT ANSWER -do we own them? -obligated to ensure details of obligation is shown -goods on consignment 5. Presentation and Disclosure - CORRECT ANSWER -everything is presented correctly in accordance with GAAP -all relevant information is disclosed -transactions must be classified to correct accounts -financial statements are transparent and understandable Importance of Assertions - CORRECT ANSWER Poses key questions that must be answered about each assertion Section 302 SOX - CORRECT ANSWER Key company officials must certify the financial statements 1. they have read the financial statements 2. they are not aware of any false/misleading statements 3. they believe that the financial statements re accurate picture 4. make assertion of effectiveness of IC Professional Skepticism - CORRECT ANSWER an auditor's tendency not to believe management's assertions without corroboration; trust but verify Public Assurance Services - CORRECT ANSWER -financial statement audit services, attestation engagements, accounting and review services -compilation of preparing FS but not gathering evidence Public Tax Serivces - CORRECT ANSWER -tax planning and compliance -help find loop holes Public Advisory Services - CORRECT ANSWER -SOX limits what types of services they can apply SOX prohibited services - CORRECT ANSWER -bookkeeping -design/implementation of financial information systems -appraisal/valuation -actuarial servies -internal audit outsourcing -HR services -investment or broker services -legal/ expert advice Internal Auditing - CORRECT ANSWER An independent, objective assurance and consulting activity designed to add value and improve an organization's operations Operational Audit - CORRECT ANSWER study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of company objectives, and compliance with company policies Internal Audit Services - CORRECT ANSWER 1. reviews of IC 2. compliance with laws and regulations 3.Evaluations of economy and efficiency of operations 4. reviews of effectiveness in achieving program results compared to expectations Governmental Auditing - CORRECT ANSWER -US Government Accountability Office (GAO) -external auditors with respect to gov agencies -Performance audits include economy/efficiency audits and program audits -compliance audits with respect to the law Regulatory Auditors - CORRECT ANSWER IRS, bank examiners SOX Act 2002 - CORRECT ANSWER -created PCAOB -registers public accy firms -establishes and enforces auditing standards -inspects audits conducted by public firms -SEC regulated public companies Generally Accepted Auditing Standards (GAAS) - CORRECT ANSWER standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination Purposes of GAAS - CORRECT ANSWER -obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error -issue a report on financial statements Audit Procedures - CORRECT ANSWER the particular and specialized actions that auditors take to obtain evidence in a specific audit engagement Auditing Standards - CORRECT ANSWER the audit quality guides that apply to all audits Public Companies - CORRECT ANSWER -PCAOB -Auditing Standards (AS) -Issuers Non-Public Companies - CORRECT ANSWER -AICPA -SAS -Non-issuers Government Entities - CORRECT ANSWER -GAO -Yellow Book Fundamental Principle: Responsibilities - CORRECT ANSWER -personal integrity and professional qualifications Responsibilities: Competence and Capabilities - CORRECT ANSWER -education -continuance of education -experience Responsibilities: Independence - CORRECT ANSWER -maintain independence in mental attitude -unbiased and impartial -independence in fact -independence in appearance Financial relationship - CORRECT ANSWER owning shares of stock or having loan from client Responsibilities: Due Care - CORRECT ANSWER -level of performance that would be exercised by reasonable auditors in similar circumstances -prudent auditor Responsibilities: Professional Skepticism - CORRECT ANSWER appropriate questioning and critical assessment of audit evidence Responsibilities: Professional Judgement - CORRECT ANSWER application of relevant training, knowledge, and experience in making informed decisions about appropriate course of action Fundamental Principle: Performance - CORRECT ANSWER to express an opinion, an auditor obtains reasonable assurance about whether FS are free from material misstatement Performance: Planning and Supervision - CORRECT ANSWER -prepare audit plan -supervise audit work -obtain knowledge of client's business -deal with difference of opinions Audit Plan - CORRECT ANSWER a list of the audit procedures auditors need to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements Performance: Materiality - CORRECT ANSWER -auditors should focus on matters that are important to FS users -misstatements are material to FS Performance: Risk Assesment - CORRECT ANSWER -asses risks of material misstatements based on IC Inherent Risk - CORRECT ANSWER the probability that a material misstatement (error or fraud) will occur Control Risk - CORRECT ANSWER the probability that a material misstatement (error or fraud) will not be prevented or detected on a timely basis by the entity's internal controls Purpose of assessing risk - CORRECT ANSWER to determine the nature, timing, and extent of further audit procedures Performance: Audit Evidence - CORRECT ANSWER -collect and evaluate sufficient appropriate evidence to provide a reasonable basis for their opinion Appropriate Evidence - CORRECT ANSWER -trustworthy -reliable (external is better) -relevant Performance Hierarchy of Evidence Reliability - CORRECT ANSWER 1. Auditor's Direct personal knowledge obtained by observation and math computation 2. obtained from external source 3. originating outside client but then process by client 4. produces, circulated and stored is client system 5. verbal/written from employees Performance: Detection Risk - CORRECT ANSWER -risk that audit team's substantive procedures will fail to detect material misstatement -high quality of evidence=low detection risk Performance: Reasonable Assurance - CORRECT ANSWER recognizes that GAAS audit may not detect all material misstatements and auditors are not guarantors Fundamental Principle: Reporting - CORRECT ANSWER -based on evaluation of the evidence obtained, the auditor expresses and opinion or states that an opinion cannot be expressed, in the form of a written report. -states whether the FS are prepares in accordance with GAAP Reporting: Unmodifed/Unqualified - CORRECT ANSWER clean opinion, all good Reporting: Qualified - CORRECT ANSWER OK but something minor/isolated is not in accordance Reporting: Adverse - CORRECT ANSWER bad, not in conformity with GAAP Reporting: Disclaimer - CORRECT ANSWER cannot form an opinion or gather evidence System of Quality Controls - CORRECT ANSWER provides the firm reasonable assurance that the firm -complies with professional standards and legal requirements -issues reports that are appropriate QC: leadership responsibilities for quality within the firm - CORRECT ANSWER firm's management takes a lead role in clearly demonstrating its commitment to quality work QC: relevant ethical requirements - CORRECT ANSWER personnel assigned to engagements are independent in fact and appearance QC: acceptance and continuance of client relationships - CORRECT ANSWER -integrity of client -ability to perform with professional competence -comply with legal requirements -avoid association with bad client QC: Human Resources - CORRECT ANSWER Quality of service is based on quality of people QC: Engagement Performance - CORRECT ANSWER internal evaluation of significant judgements made by the audit team QC: Monitoring - CORRECT ANSWER provide firm with reasonable assurance that policies and procedures composing the system are operating efficiently -review records -discuss with personnel PCAOB Inspections - CORRECT ANSWER A periodic inspection of the work conducted by auditors as well as the audit firm's quality control procedures which is conducted by an inspector employed by the PCAOB. Firms auditing 100 public entities - CORRECT ANSWER annual inspection Firms auditing less than 100 public entities - CORRECT ANSWER every 3 years Ethical Problem - CORRECT ANSWER making ethical choices when the right choice is not absolutely clear and the choices affect the well-being of other people ethical behavior - CORRECT ANSWER behavior that produces the greater good, conforms to moral rules , dest demonstrates the virtues that you value most Steps to arrive at a good ethical decision - CORRECT ANSWER -define all facts and circumstances -identifying stakeholders and their obligations -identify alternatives and consequences -choose superior alternative with respect to consequences and or rules Imperative Principle: - CORRECT ANSWER must act in accordance with requirements of an ethical rule; follow rule no matter what Principle of Utilitarianism - CORRECT ANSWER Must examine the consequences of an action, rather than simply following some rule; think about consequences Generalization Argument - CORRECT ANSWER consider the consequences of a decision made by similar persons in similar circumstances; what is everyone did this? Virtue Ethics - CORRECT ANSWER Emphasize the role of character in a decision; more of what I want AICPA Code of Professional Conduct - CORRECT ANSWER Responsibilities The Public Interest Integrity Objectivity and Independence Due Care Scope and Nature of Services AICPA Independence Rule - CORRECT ANSWER -A member in public practice shall be independent in the performance of professional services as required by standards -avoid financial connections and managerial connectios SEC & PCAOB Independence Rule - CORRECT ANSWER CAN'T HAVE: -mutual or conflicting interest btw client and auditor -audit own work -auditor can't act as management or employee -can't act as an advocate SEC & PCAOB Independence Rule Disclosures - CORRECT ANSWER -total audit fees for annual/quarter audit -fees paid for tax/advisory work -whether the audit committee considers it independent -% of audit hours performed by someone outside firm employees Effects on SOX - CORRECT ANSWER -audit committee responsible for determining independence in appearance -rotation of engagement -client hiring former auditors Integrity and Objectivity Rule - CORRECT ANSWER shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others -free from financial and employment relationships General Standards Rule - CORRECT ANSWER professional competence, due care, planning and supervision, sufficient relevant data -follow the rules of GAAP, ASB, PCAOB, Accy and review service committee, Tax executive committee, management consulting committee Compliance with Standards Rule - CORRECT ANSWER A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with applicable standards -must follow GAAS Accounting Principle Rule - CORRECT ANSWER A member shall not 1. express and opinion or 2. state that they are not aware of any material modifications if it is departing from GAAP Confidential Client Information Rule - CORRECT ANSWER A member in public practice shall not disclose any confidential client information without the specific consent of the client. Exceptions to Confidential Rule - CORRECT ANSWER -to remain in compliance with standards -in response to the law subpoena -as part of peer review -as part of investigation of ethics Contingent Fees shall not be given for: - CORRECT ANSWER -audit /review -compilation in which 3rd party can be reasonably expected to use financial data -examination of prospective financial statements -original or amended tax return Prohibited Commissions - CORRECT ANSWER -audit/review -compilation that is reasonably expected to be used by a third party -examination of financial statements *a member who is not prohibited needs to disclose that they are going to get commission Acts Discreditable Rule - CORRECT ANSWER - Failure to return client records - Discrimination/harassment - Negligence -failure to follow government standards - Disclosure/solicitation of exam q&a - Failure to timely file tax, remit returns to others - Disclosure of confidential info - Misleading ads Advertising and Solicitation - CORRECT ANSWER -no false or misleading advertising and must be predominately informational -business cards and letterheads -cannot imply to influence 3rd parties -cannot underestimate fees -direct solicitation-harassing, repetitive, "leave me alone request" Form of Organization and Name Rule - CORRECT ANSWER -cannot practice under a firm name that is misleading -can only practice as a form permitted by law -cannot designate member of AICPA unless call CPA owners are members -Non CPA can own part of CPA firm Self regulatory discipline - CORRECT ANSWER AICPA State Societies of CPAs Public Regulation Discipline - CORRECT ANSWER State Boards of Accountancy SEC PCAOB Referral Fees - CORRECT ANSWER Fees a CPA receives for recommending another CPA's services or a CPA pays to obtain a client.